Heily v. Superior Court

• Decision Date: 20 June 1988
• Docket Number: No. A040522,A040522
• Citation: 202 Cal.App.3d 255,248 Cal.Rptr. 673
• Parties: Kathryn A. HEILY, Petitioner, v. The SUPERIOR COURT of the City and County of San Francisco, Respondent; MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Real Parties in Interest.
• Court: California Court of Appeals Court of Appeals

Page 673

248 Cal.Rptr. 673

202 Cal.App.3d 255

Kathryn A. HEILY, Petitioner, v. The SUPERIOR COURT of the City and County of San Francisco, Respondent MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Real Parties in Interest.

No. A040522.

Court of Appeal, First District, Division 3, California.

June 20, 1988.

Rehearing Denied July 21, 1988.

Review Denied Sept. 1, 1988.

Shand S. Stephens, Patricia H. Cullison, Bronson, Bronson & McKinnon, San Francisco, for petitioner.

No appearance for respondent.

W. Reece Bader, Frederick Brown, Jay M. Cutler, Orrick, Herrington & Sutcliffe, San Francisco, for real party in interest.

MERRILL, Associate Justice.

Petitioner, the plaintiff in a wrongful discharge action, challenges a court order requiring her to arbitrate her dispute under procedures established by the New York Stock Exchange (NYSE hereinafter). She contends both that her agreement to arbitrate was procured by fraud and that it should be set aside as unconscionable because of institutional bias in arbitration conducted under the auspices of the NYSE. We reject her contentions.

Petitioner has filed an action against real parties in interest, Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch hereinafter) and two individual Merrill Lynch employees. The complaint alleges that after 18 years of service as a securities broker petitioner was discharged by real parties for failure to participate in a scheme to conceal from her clients the real reason they sustained losses in a Merrill Lynch sponsored options investment program. Merrill Lynch's position is that petitioner was discharged because she divulged confidential information about the settlement of claims for investment losses.

Shortly after petitioner filed the complaint, real parties petitioned the court for an order compelling arbitration. Real parties cited arbitration provisions in several agreements signed by petitioner during her employment with Merrill Lynch. These provisions called for arbitration under the procedures of either the NYSE or the National Association of Securities Dealers (NASD hereinafter).

Petitioner opposed the petition to compel arbitration on several grounds. She argued that the arbitration agreements were unenforceable adhesion contracts, that they were procured through fraud and use of undue influence, and that real parties could not seek an order compelling arbitration because they were barred by their "unclean hands." She presented declarations from persons who had served as arbitrators for the NASD and the NYSE and who would testify that employer/employee arbitrations are biased in favor of securities industry employers. Real parties filed a reply memorandum, supported by extensive deposition testimony, documentary evidence, and declarations. Real parties also moved to strike petitioner's declarations as "speculative, hearsay, irrelevant or otherwise inadmissible." The court did not rule on the motion to strike.

After hearing, the court granted real parties' motion to compel arbitration. Petitioner then moved for reconsideration. The court heard the motion to reconsider, reexamined its ruling on the merits, and denied the motion.

Petitioner sought a writ of mandate and/or prohibition from this court. We denied the petition. Petitioner then sought review in the Supreme Court. That court granted review and retransferred the matter to this court with the following directions: "to issue an alternative writ to be heard before that court when the proceeding is ordered on calendar. (See Tonetti v. Shirley (1985) 173 Cal.App.3d 1144, 219 Cal.Rptr. 616; Marc Rich & Co. v. Transmarine Seaways Corp. (S.D.N.Y.1978) 443 F.Supp. 386, 388; and Corporate Printing Co. v. N.Y. Typographical Union (S.D.N.Y. [1984] 601 F.Supp. 323, 328, fn. 8.)" We issued the alternative writ and heard the matter. We again deny the petition.

Citing a mixture of state law and federal law decisions, petitioner contends that an agreement to arbitrate may be set aside if the designated arbitrator or arbitral body is biased or not neutral. In order to evaluate this contention we must first determine whether state or federal law controls. Recent case law has provided a clear answer.

In Merrill Lynch, Pierce, Fenner & Smith v. Ware (1973) 414 U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348, decided without consideration of the Federal Arbitration Act (FAA), 9 United States Code section 1 et seq., the United States Supreme Court upheld application of a state law that authorized employees to bring actions to collect wages without regard to private arbitration agreements. (Id., at pp. 134-140, 94 S.Ct. at pp. 393-396.) The Ware decision opened the door to arguments that state law might govern arbitrability of agreements such as petitioner's. However, in Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426, the court directly confirmed that the FAA controls lawsuits brought by employees against securities brokerage firms.

In Perry the employee's action arose from a dispute over commissions on the sale of securities. Relying on a signed arbitration agreement, the employer sought arbitration under the authority of section 2 of the FAA: "A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.) Citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp. (1983) 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765, and Southland Corp. v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, the Perry court concluded that the effect of section 2 is to "... 'create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.' [Citation.]" ( Perry v. Thomas, supra, 482 U.S. at p. ----, 107 S.Ct. at p. 2525, 96 L.Ed.2d at p. 435.)

Prior to Perry, state and federal courts disagreed among themselves about whether federal law governed questions of interpretation, validity and enforcement of arbitration agreements. Through dicta in a footnote, the Perry court shed some light on this question: "We also decline to address Thomas' claim that the arbitration agreement in this case constitutes an unconscionable, unenforceable contract of adhesion. This issue was not decided below, see nn 4 and 6, supra, and may likewise be considered on remand. [p] We note, however, the choice-of-law issue that arises when defenses such as Thomas' so-called 'standing' and unconscionability arguments are asserted. In instances such as these, the text of § 2 provides the touchstone for choosing between state law principles and the principles of federal common law envisioned by the passage of that statute: An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, see Moses H. Cone Memorial Hospital v. Mercury Construction Corp. 460 US 1, 24, 74 L Ed 2d 765, 103 S Ct 927 (1983), 'save upon such grounds as exist at law or in equity for the revocation of any contract.' 9 USC § 2 ... (emphasis added). Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of § 2. See Prima Paint, supra, [Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395], at 404, 18 L Ed 2d 1270, 87 S Ct 1801 [at 1806], Southland Corp. v. Keating 465 US, at 16-17, n 11, 79 L Ed 2d 1, 104 S Ct 852 [at 861-862, n. 11]. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold today the state legislature cannot." ( Perry v. Thomas, supra, 482 U.S. at p. ----, fn. 9, 107 S.Ct. at p. 2527, fn. 9, 96 L.Ed.2d at p. 437, fn. 9; see also Liddington v. The Energy Group, Inc. (1987) 192 Cal.App.3d 1520, 1527-1528, 238 Cal.Rptr. 202.)

Petitioner argued below, and argues here too, that under Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 171 Cal.Rptr. 604, 623 P.2d 165, the NYSE, because of its status and identity, is presumptively biased in favor of real parties in interest, and that the arbitration agreement is therefore unconscionable and should not be enforced. This argument directly affronts the analysis of Perry v. Thomas because Graham is a state law decision weaving together principles of adhesion contracts and state statutes governing the neutrality of arbitrators. (Id., at pp. 820-828, 171 Cal.Rptr. 604, 623 P.2d 165.) Perry teaches that a court may not rely upon anything that is unique to an agreement to arbitrate when assessing unconscionability of an agreement governed by the FAA. State law concerning arbitration or arbitrators cannot form a basis for evaluating state law enforceability of the contract. (Accord Thomas v. Perry (1988) 200 Cal.App.3d 510, 515, 246 Cal.Rptr. 156, on remand after decision in Perry v. Thomas, supra, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426.)

Having concentrated on state law, petitioner has ignored decisions applying federal law to questions of bias in arbitration. The California Supreme Court's retransfer order directed our attention to decisions applying federal law.

The first case cited, Tonetti v. Shirley, supra, 173 Cal.App.3d 1144, 219 Cal.Rptr. 616, a California decision, explains one of...