Cable Connection, Inc. v. Directv, Inc., No. B188278.

• Court: California Court of Appeals
• Writing for the Court: Willhite
• Citation: 49 Cal.Rptr.3d 187,143 Cal.App.4th 207
• Parties: CABLE CONNECTION, INC., et al., Plaintiffs and Appellants, v. DIRECTV, INC., Defendant and Respondent.
• Docket Number: No. B188278.
• Decision Date: 22 September 2006

49 Cal.Rptr.3d 187 143 Cal.App.4th 207 CABLE CONNECTION, INC., et al., Plaintiffs and Appellants,
v.
DIRECTV, INC., Defendant and Respondent. No. B188278. Court of Appeal, Second District, Division 4. September 22, 2006.

[49 Cal.Rptr.3d 190]

Beatie and Osborn and Daniel A. Osborn for Plaintiffs and Appellants.

Reed & Smith and Andrew E. Paris; Kirkland & Ellis, Michael E. Baumann, Los Angeles, and Becca Wahlquist for Defendant and Respondent.

WILLHITE, Acting P.J.

INTRODUCTION

Plaintiffs and appellants Cable Connection, Inc., TV Options, Inc., Swartzel Electric, and Orbital Satellite, Inc., appeal from the trial court's order in favor of defendant and respondent DIRECTV, Inc., vacating an arbitration award by which the majority of arbitrators determined that the parties' arbitration agreement, though silent on the issue, nonetheless permitted classwide arbitration. (Code Civ. Proc., § 1286.2.) The trial court vacated the arbitration award on the grounds that the arbitrators exceeded their authority by writing terms into the parties' agreement; the arbitrators refused to hear material evidence of intent offered by DIRECTV; and the arbitrators exceeded their powers by making errors of law and erroneously relying on California procedural law, even though the arbitration agreement specifically withheld from the arbitrators the power to make errors of law, and provided that errors of law were subject to judicial review.

We conclude that the provision in the arbitration agreement purporting to provide for judicial review of errors of law is void and unenforceable, and must be severed from the agreement. Accordingly, the trial court exceeded its authority when it reviewed the merits of the controversy. We further conclude that the arbitrators did not violate any express provisions of the parties' agreement, and did not refuse to hear material evidence. We shall therefore reverse the order vacating the arbitration award, and shall direct the trial court to enter a new order confirming the award.

FACTUAL AND PROCEDURAL BACKGROUND

Appellants (hereafter, "the dealers") are current and former DIRECTV dealers who sold and installed DIRECTV services and products. In 1996, the dealers were required to enter into DIRECTV's "residential dealer agreement." In 1998, the dealers were required to sign a new contract, the "sales agency agreement."

Both the residential dealer agreement and the sales agency agreement contain a provision requiring arbitration of disputes arising out of the agreement. Both contracts are silent, however, on the issues of class action lawsuits and classwide arbitration.¹

The arbitration provision in the sales agency agreement, which is set forth in section 18.12 of the contract, states as follows: "(a) Any dispute or claim arising out of the interpretation, performance, or

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breach of this Agreement, including without limitation claims alleging fraud in the inducement, shall be resolved only by binding arbitration, at the request of either party, in accordance with the rules of the American Arbitration Association, modified as herein provided.... The arbitrators shall apply California substantive law to the proceeding, except to the extent Federal substantive law would apply to any claim.... The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error. The decision of the arbitrators may be entered and enforced as a final judgment in any court of competent jurisdiction. The parties shall share equally the arbitrator's fees and other costs of the arbitration." (Italics added.)

Section 18.12, subsection (c), provides: "This Section and any arbitration conducted hereunder shall be governed by the United States Arbitration Act (9 U.S.C. Section 1, et seq.). The parties acknowledge that the transactions contemplated by this Agreement involve commerce, as defined in said Act. This Section 18.12 shall survive the termination or expiration of this Agreement."

Appellants initially brought suit in Oklahoma state court, seeking to litigate claims on behalf of a nationwide class. The Oklahoma court apparently directed the dealers to file a demand for arbitration in California state court.

On March 11, 2004, the dealers filed a statement of claim and demand for class arbitration with the American Arbitration Association (AAA). The class is defined as DIRECTV dealers who sold, installed, repaired, or maintained home satellite service for DIRECTV from 1996 until the present. The dealers claimed that DIRECTV unilaterally reduced commissions and assessed "chargebacks," in breach of the parties' agreements. The dealers state claims for breach of contract, unfair business practices, breach of fiduciary duty, violation of California antitrust law, and conversion of commission payments.

DIRECTV served its answer and counterclaim on April 12, 2004.

In keeping with AAA rules, the arbitrators first addressed the issue whether the parties' agreement to arbitrate permits or prohibits classwide arbitration. Those rules provide: "Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration agreement, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the `Clause Construction Award'). The arbitrator shall stay all proceedings following the issuance of the Clause Construction Award for a period of at least 30 days to permit any party to move a court of competent jurisdiction to confirm or to vacate the Clause Construction Award.... If any party informs the arbitrator within the period provided that it has sought judicial review, the arbitrator may stay further proceedings, or some part of them, until the arbitrator is informed of the ruling of the court."

A preliminary conference was held in November 2004, and thereafter the parties submitted briefing on the issue of class arbitration. Oral argument was held in January 2005.

In March 2005, the three-member arbitration panel issued its "first amended clause construction award." Two of the three arbitrators agreed that the arbitration clause was silent regarding the right to bring a class action. Recognizing that the arbitration agreement provided that California substantive law is to be applied,

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the majority construed the agreement as permitting class arbitration, pursuant to Blue Cross of California v. Superior Court (1998) 67 Cal.App.4th 42, 78 Cal.Rptr.2d 779 (Blue Cross), and Keating v. Superior Court (1982) 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 (Keating), reversed on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1, 11, 104 S.Ct. 852, 79 L.Ed.2d 1.² The majority made clear that they were "not yet requiring class arbitration and [we're] not certifying a class. We are simply saying that the clause in question does not forbid class arbitration and therefore find it is permitted."³

The third arbitrator dissented, finding that "[t]here is ample indication in the parties' Agreement that they intended their disputes to be resolved by arbitration between them separately and individually, and not in a class-wide arbitration." The dissenting arbitrator further opined that the jurisprudence established in the Keating and Blue Cross cases permitting classwide arbitration was inapplicable "as a procedural rule" in a case that is to be governed by the Federal Arbitration Act.

DIRECTV then filed in the trial court a petition to vacate the award. The parties submitted briefs, and oral argument was held in June 2005. After the California Supreme Court issued its decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100, the trial court sought additional briefing from the parties and held another oral argument.

The bases upon which DIRECTV sought vacatur were that (1) by writing terms into the parties' silent agreements, the arbitrators exceeded their authority; (2) the arbitrators refused to hear material evidence of intent offered by DIRECTV; and (3) because the arbitration agreement specifically withheld from the arbitrators the power to make errors of law, the arbitrators exceeded their contractually-limited authority by making errors of law and legal reasoning.

On November 11, 2005, the trial court vacated the award, finding that the arbitrators exceeded their powers by rewriting the parties' agreements to allow for classwide arbitration, by applying Keating, supra, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 and Blue Cross, supra, 67 Cal. App.4th 42, 78 Cal.Rptr.2d 779 (finding them to be inapplicable because they establish procedural and not substantive law), and committed reversible error by failing to admit extrinsic evidence offered by DIRECTV.

This timely appeal followed.

DISCUSSION

This appeal is taken from the trial court's order vacating the arbitrators' partial final award establishing that the parties' arbitration agreement permits classwide arbitration.⁴ (Code Civ. Proc.,

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§ 1285 [party may petition court to confirm, correct or vacate arbitration award];⁵ § 1294, subd. (c) [aggrieved party may appeal from order vacating an award].) The parties do not dispute that it was proper for the arbitrators to decide, in the first instance, whether classwide arbitration is permitted under their agreement. Rather, DIRECTV contends that the arbitrators wrongly decided that classwide arbitration is to be permitted even though they found the agreement to be silent on the issue and that, accordingly, the trial court properly vacated the award. An arbitration award may be vacated where the trial court determines that "[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted."...