Jevne v. Superior Court, No. S121532.

• Court: United States State Supreme Court (California)
• Writing for the Court: KENNARD, J., Acting C.J.
• Citation: 35 Cal.4th 935,28 Cal.Rptr.3d 685,111 P.3d 954
• Parties: Jack JEVNE et al., Petitioners, v. SUPERIOR COURT of Los Angeles County, Respondent; JB Oxford Holdings, Inc., et al., Real Parties in Interest.
• Docket Number: No. S121532.
• Decision Date: 23 May 2005

28 Cal.Rptr.3d 685
35 Cal.4th 935
111 P.3d 954

Jack JEVNE et al., Petitioners,
v.
SUPERIOR COURT of Los Angeles County, Respondent;
JB Oxford Holdings, Inc., et al., Real Parties in Interest

No. S121532.

Supreme Court of California.

May 23, 2005.

28 Cal.Rptr.3d 688

Law Offices of Zilinskas & Woosley, Victor G. Zilinskas and Eric A. Woosley, Santa Barbara, for Petitioners

28 Cal.Rptr.3d 689

Bill Lockyer, Attorney General, Manuel M. Medeiros, State Solicitor General, Andrea Lynn Hoch, Chief Assistant Attorney General, David S. Chaney, Assistant Attorney General, Lawrence K. Keethe and Amy J. Winn, Deputy Attorneys General, for Attorney General Bill Lockyer as Amicus Curiae on behalf of Petitioners

Kate Gordon, Arthur Bryant, Michael J. Quirk; McGuinn, Hillsman & Palefsky and Cliff A. Palefsky, San Francisco, for California Employment Lawyers Association and Trial Lawyers for Public Justice as Amici Curiae on behalf of Petitioners.

No appearance for Respondent.

Miller Milove & Kob, Jeffrey S. Kob, San Diego, and W. Richard Sintek for Real Parties in Interest.

Conkle & Olesten and Eric S. Engel, Santa Monica, as Amici Curiae on behalf of Real Parties Interest.

George R. Kramer; Munger, Tolles & Olson, Marc T. G. Dworsky, Paul J. Watford, Los Angeles, and Anne M. Voigts, San Francisco, for Securities Industry Association as Amicus Curiae on behalf of Real Parties in Interest.

Milbank, Tweed, Hadley & McCloy, Douglas W. Henkin and M. Benjamin Valerio for New York Stock Exchange, Inc., as Amicus Curiae.

Gibson, Dunn, & Crutcher and Mark A. Perry, Washington D.C., for NASD Dispute Resolution, Inc., as Amicus Curiae.

Giovanni P. Prezioso, Jacob H. Stillman, Eric Summergrad, John W. Avery and Meyer Eisenberg for Securities and Exchange Commission as Amicus Curiae.

Horvitz & Levy, David S. Ettinger, Encino, and Mitchell C. Tilner for Judicial Council of California as Amicus Curiae.

KENNARD, J., Acting C.J.

In 2001, the California Legislature enacted Code of Civil Procedure section 1281.85, subdivision (a) (hereafter section 1281.85(a)), which directed the California Judicial Council to establish ethics standards for persons serving as neutral arbitrators under contractual arbitration agreements. (Stats.2001, ch. 362, § 4.) As explained in a legislative report, the Legislature's purpose was "to provide basic measures of consumer protection with respect to private arbitration, such as minimum ethical standards and remedies for the arbitrator's failure to comply with existing disclosure requirements." (Assem. Com. on Judiciary, Analysis of Sen. Bill No. 475 (2001-2002 Reg. Sess.) Aug. 20, 2001, p. 1.)

In response to the Legislature's directive, the Judicial Council adopted the Ethics Standards for Neutral Arbitrators in Contractual Arbitration (Cal. Rules of Court, appen., div. VI; hereafter the California Standards), most of which became effective on July 1, 2002. The stated purposes of the California Standards are "to guide the conduct of arbitrators, to inform and protect participants in arbitration, and to promote public confidence in the arbitration process." (Id., std. 1(a).)

The California Standards are not the only ethics standards to which neutral arbitrators may be subject. The National Association of Securities Dealers, Inc., (NASD) is a self-regulatory organization (SRO) that licenses and regulates broker-dealers in the national securities industry. Through its wholly owned subsidiary, NASD Dispute Resolution, Inc. (NASDDR), it has adopted a Code of Arbitration Procedure (the NASD Code) to govern the arbitration of disputes between its members and their customers. Like the California Standards, the NASD Code contains disclosure requirements and disqualification

28 Cal.Rptr.3d 690

procedures for arbitrators. Under the authority of the federal Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.; hereafter SEA), the United States Securities and Exchange Commission (SEC) has approved the NASD Code. (See Shearson/American Express, Inc. v. McMahon (1987) 482 U.S. 220, 234, 107 S.Ct. 2332, 96 L.Ed.2d 185 (McMahon) ["[T]he SEC has specifically approved the arbitration procedures of ... the NASD."].)

We granted review in this case to address five issues: (1) Did section 1281.85(a) authorize the Judicial Council to adopt ethics standards for arbitrators appointed by arbitration providers like the NASDDR? (2) Does the SEA preempt section 1281.85(a) and the California Standards for NASDDR-administered arbitration? (3) Are the parties to an arbitration agreement relieved of their duty to arbitrate when their arbitration provider has refused to proceed with arbitration for more than one year? (4) May the parties to an arbitration waive application of the California Standards? (5) Does the Federal Arbitration Act of 1925 (9 U.S.C. § 1 et seq.; hereafter FAA) preempt section 1281.85(a) and the California Standards in arbitrations based on contractual arbitration agreements or disputes affecting interstate commerce?

We conclude that section 1281.85(a) authorized the Judicial Council to adopt ethics standards for arbitrators appointed by arbitration providers like the NASDDR, but also that the SEA preempts section 1281.85(a) and the California Standards for NASDDR-administered arbitration. Under the circumstances of this case, we further conclude that the delay in arbitrator selection and appointment, resulting from uncertainty regarding the applicability of the California Standards, does not relieve plaintiffs of their duty to arbitrate. In light of these conclusions, we find it unnecessary to address the remaining issues concerning waiver and preemption under the FAA.

I. FACTS AND PROCEDURAL HISTORY

In early 1996, Jack Jevne opened an account with JB Oxford & Company (Oxford) in the name of Avalon Investments, S.A. (Avalon), a business entity that Jevne wholly owns, to safeguard funds obtained from the sale of certain securities. Oxford is a licensed securities broker-dealer and a member of the NASD. To open the account, Oxford required Jevne to sign an "account opening statement" in which he agreed that all disputes with Oxford would be resolved by arbitration in accordance with the NASD Code. The account opening statement declared that California law would govern "[t]he agreement and its enforcement."

Jevne has alleged that when he opened the account, he personally instructed Oxford that he was the only person authorized to withdraw funds and securities from the account. He has further alleged that Oxford violated this instruction by allowing $1,026,535 to be taken from the account between April 1997 and September 1999 through a series of withdrawals that he did not authorize.

In August 2000, Jevne and Avalon (plaintiffs) sued Oxford and JB Oxford Holdings, Inc. (defendants) in superior court alleging negligence, breach of fiduciary duty, and conversion. Defendants moved to compel arbitration under the terms of the account opening statement. Plaintiffs did not oppose the motion, which the trial court granted, and in May 2001 the parties signed a uniform submission agreement agreeing to arbitrate according to the NASD Code. After one "non-public arbitrator" and two "public arbitrators"

28 Cal.Rptr.3d 691

were appointed according to the NASD Code, the arbitration proceedings began.¹

After the California Standards went into effect in July 2002, the NASD adopted a rule, designated IM-10100-(f), establishing a temporary waiver program for arbitrations in California. Under this rule, to participate in NASDDR-administered arbitration, California investors were required to waive application of the California Standards (to have their arbitration proceedings held in California) or agree to conduct the arbitration outside of California. The SEC promptly approved the waiver rule as a six-month pilot program.² (See 67 Fed.

28 Cal.Rptr.3d 692

Reg. 62085-01 (Oct. 3, 2002).) The SEC has approved several extensions of the NASD's temporary waiver rule, which is to expire on September 30, 2005. (70 Fed. Reg. 8862-01 (Feb. 23, 2005).)

On July 9, 2002, the NASD arbitration panel granted defendants' motion to dismiss plaintiffs' claim, with leave to amend. Plaintiffs filed an amended claim, and defendants again moved to dismiss. In September 2002, before the panel ruled on this motion, the nonpublic arbitrator disqualified himself for undisclosed reasons. The NASDDR suspended the proceedings and asked plaintiffs to sign a statement waiving application of the California Standards. Plaintiffs refused to sign the waiver and, in February 2003, asked the superior court to set aside the order compelling arbitration and to restore the matter to the active civil trial calendar. In April 2003, the court denied the motions. Plaintiffs then petitioned the Court of Appeal for a writ of mandate directing the trial court to set aside its order denying the motions and to enter a new order granting the motions. The petition named defendants as real parties in interest.

After receiving an opposition from defendants (see Cal. Rules of Court, rule 56(b)), the Court of Appeal issued an alternative writ, and it received briefs from several amici curiae: the NASDDR, the New York Stock Exchange (NYSE),³ the SEC, and the California Attorney General. In lieu of an amicus brief, the California Judicial Council submitted a copy of a brief it had filed in another case, NASD Dispute Resolution, Inc. v. Judicial Council of Cal. (N.D.Cal.2002) 232 F.Supp.2d 1055.

On November 19, 2003, the Court of Appeal denied plaintiffs' petition. Although the court concluded that the Judicial Council had acted within its authority in drafting the California Standards and that they are not preempted by the FAA, it also concluded that the California Standards conflict with, and are preempted by, the SEA. On December 11, 2003, plaintiffs petitioned the Court of Appeal for a rehearing to consider issues not addressed in the original decision. The...