Skip to main content


Reset A A Font size: Print

Court of Appeal, First District, California.

Robert W. HOPE and K. James Pond, Plaintiffs and Respondents, v. DEAN WITTER REYNOLDS ORGANIZATION, INC., et al., Defendants and Appellants.

No. A024870.

Decided: May 23, 1986

Michael J. Korda, Clark & Korda, San Jose, for plaintiffs and respondents. Jay R. Martin, Peter W. Davis, Eric G. Wallis, James C. Martin, Crosby, Heafey, Roach & May, Oakland, for defendants and appellants.

Defendant stock exchange member fired plaintiffs, whom it had employed as stockbrokers. The former employees sued, and defendant petitioned the trial court to enforce the arbitration clause in the employees' contracts of employment. The trial court denied the petition for arbitration.

The order denying the petition is reversed.

Statements of Facts

Defendant Dean Witter Reynolds, Inc.,1 a member of the New York and American stock Exchanges, hired plaintiffs K. James Pond and Robert W. Hope as securities brokers in February, 1979. Both brokers signed agreements pre-printed by the American [Pond] or New York [Hope] Stock Exchanges, bearing the heading “Must be completed by all Registered Representatives ․”

Both agreements provide that the employee (“registered representative”) and stock exchange member will settle any controversy arising out of the employment or the termination of employment by arbitration at the instance of either party in accordance with the arbitration procedure prescribed in the Constitution and Rules then obtaining of the New York Stock Exchange (hereafter, NYSE). The agreements reflect a similarly worded provision in the NYSE Constitution requiring disputes between an exchange member and a non-member to be submitted for arbitration under the NYSE rules. (NYSE Const., art. VIII, § 1.)

Defendant fired plaintiffs in August, 1979.

procedural History

In August, 1981, plaintiffs filed a complaint against defendant in the Superior Court of Santa Clara County, alleging breach of contract and fraud. They claim that defendant hired them in order to get their customers, then fired them. Defendant asserts that if fired plaintiffs after they overspent funds,alienated co-workers, and caused defendant's business to suffer.

On June 8, 1983, defendant petitioned the superior court to compel arbitration, pursuant to 9 United States Code section 3 and California Code of Civil Procedure section 1281.2. Defendant appeals from the denial of the petition.

Standard of Review

The parties dispute whether the trial court's decision should be presumed correct, citing no cases in point. The unverified pleadings contested the enforceability of the arbitration clauses. The trial court decided only a question of law, which is subject to de novo review by this court. (Goddard v. South Bay Union High School Dist. (1978) 79 Cal.App.3d 98, 105, 144 Cal.Rptr. 701.)

Defendant also asserts that the trial court erroneously denied its request for findings of fact and conclusions of law. (Code of Civ.Proc., §§ 1291, 632.) Findings, however, were not necessary, because only legal questions were decided. (Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 29, 136 Cal.Rptr. 378; Charlton Co. v. Aerfab Corp. (1976) 56 Cal.App.3d 808. 813, 128 Cal.Rptr. 878.)

I. Applicable Law

Defendant contends that because employment contracts of brokers involve interstate commerce, the enforceability of the arbitration clauses is governed by the Federal Arbitration Act, 9 United Stated Code section 2 (hereafter, FAA),2 and federal cases interpreting that statute. Defendant's cases are federal Court of Appeals decisions and a United States Supreme Court case declaring that federal law governs the arbitrability issue in federal or state court. (See Moses H. Cone Hospital v. Mercury Constr. Corp. (982) 460 U.S. 1, 23-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765.) Defendant also cites Southland Corp. v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, holding that state courts must apply the FAA preempting contrary state statutes.

Plaintiffs assert that state contract law principles are not displaced by the FAA, due to the language in section 2 that a written arbitration provision “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.) Plaintiffs contend that the arbitration clause is an unconscionable adhesion contract and that unconscionability is a ground for revocation under California law. They argue that this court must look to California law because “[t]here is no federal law on this issue.”

The parties agree that the FAA applies to this case. Our task is to interpret the statute. The FAA and cases interpreting that act constitute a “'federal substantive law of arbitrability․' ․ [a]nd that body of law counsels [¶] 'that questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.”' (Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) --- U.S. ----, ----, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444, 455], quoting Moses H. Cone Hospital v. Mercury Constr. Corp., supra, 460 U.S. 1, 24, 103 S.Ct. 927, 941.) California has a similar policy favoring enforcement of arbitration agreements. (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 831, 171 Cal.Rptr. 604, 623 P.2d 165.)

The question is whether, by enacting the FAA, Congress intended state and federal courts to fashing a body of federal contract law, thus entirely displacing state law for the enforcement of arbitration agreements, or intended that the FAA incorporate existing state law for that purpose. There is no binding authority on this question.3 In Wallis v. Pan American Pet. Corp. 91966) 384 U.S. 63, 68 S.Ct. 1301, 1304, 16 L.Ed.2d 369, the Supreme Court discussed the nature of a federal interest sufficient to bring forth the application of federal common law:

“․In deciding whether rules of federal common law should be fashioned, normally the guiding principle is that a significant conflict between some federal policy or interest and the use of state law in the premises must first be specifically shown. It is by no means enough that, as we may assume, Congress could under the Constitution readily enact a complete code of law governing transactions in federal mineral leases among private parties. Whether latent federal power should be exercised to displace state law is primarily a decision for Congress.” (See also Miree v. DeKalb County (1977) 433 U.S. 25, 31-32, 97 S.Ct. 2490, 2494-2495, 53 L.Ed.2d 557.)

The legislative history does not directly address the choice-of-law question. (Metro Industrial Painting Corp. v. Terminal Const. Co. (2d Cir.1961) 287 F.2d 382, 386.) However, the legislative materials show that Congress intended to place arbitration agreements “upon the same footing as other contracts.” (H.R.Rep. No. 96, 68th Cong., 1st Sess., p. 1 (1924).) Enacted during a time when common law did not enforce arbitration agreements, the FAA was meant to overcome judicial hostility to arbitration. (Southland Corp. v. Keating, supra, 465 U.S. 1, 13-14, 104 S.Ct. 852, 859-860, 79 L.Ed.2d 1.) The United States Supreme Court interprets section 2 as “a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” (Moses H. Cone Hospital v.Mercury Constr. Corp. supra, 460 U.S. 1, 24, 103 S.Ct. 927, 941.) Thus, the FAA preempts a state statute or rule of law that disfavors arbitration agreements. (Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852.)

“As the 'saviing clause' in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.” (Prima Paint v. Flood & Conklin Co. (1967) 388 U.S. 395, 404, fn. 12, 87 S.Ct. 1801, 1806, fn. 12, 18 L.Ed.2d 1270.) The Southland court declared that a “party may assert general contract defenses such as fraud to avoid enforcement of an arbitration agreement.” (Southland Corp. v. Keating, supra, 465 U.S. 1, 16, fn. 11, 104 S.Ct. 852, 861, fn. 11.)

Southland left open the question of what source of law provides the “grounds for revocation of any contract” referred to in section 2. The lower federal courts have split. One group of cases interprets the phrase as incorporating generally applicable state law principles. For example, in Hull v. Norcom, Inc. (11th Cir.1985) 750 F.2d 1547, 1551, the eleventh circuit held that the FAA, as interpreted in Southland, did not bar application of general provisions of state contract law. Similarly, in Supak & Sons Mfg. Co., Inc. v. Pervel Industries,Inc. (4th Cir.1979) 593 F.2d 135, 137, the fourth circuit applied state contract law and held that w written arbitration clause was not part of the contract. “Section 2 dictates the effect of a contractually agreed-upon arbitration provision, but it does not displace state law on the general principles governing formation of the contract itself.” (Ibid.) Other cases use a similar distinction, applying state law to decide whether an agreement to arbitrate exists, and federal law to interpret the scope and meaning of the agreement.4 State courts have also applied state contract law principles to determine whether a valid agreement to arbitrate exists. (E.g. Lewis v. Prudential Bache Securities, Inc. (1986) 179 Cal.App.3d 935, 225 Cal.Rptr. 69 [unconscionability]; Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 223 Cal.Rptr. 838 [[incorporation by reference]; Main v. Merrill Lynch, Pierce, Fenner & Smith, supra, 67 Cal.App.3d 19, 33, 136 Cal.Rptr. 378 [undue influence and fraud in the inducement]; Pittsfield Weaving Co. v. Grove Textiles (1981) 121 N.H. 344, 430 A.2d 638, 640 [unconscionability].)

A second group of federal courts has specifically stated that federal law governs all questions of interpretation, validity, and enforcement of arbitration agreements. (E.g., Coenen v. R.W. Pressprich & Co. (2d Cir.1972) 453 F.2d 1209, cert.den. 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 237.) Two California cases, discussed below, have essentially adopted this approach. (Tonetti v. Shirley (1985) 173 Cal.App.3d 1144, 219 Cal.Rptr. 616; Chan v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d 632, 223 Cal.Rptr. 838 [[applying, however, California law to decide the case].)

For several reasons, we believe the FAA should be interpreted as incorporating state law. When determining an issue of “fraud or undue influence in relation to a federal statute or proceeding, the law of the state in which it allegedly occurred applies where, as here, an act of Congress does not otherwise provide.” (Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 67 Cal.App.3d 19, 33, fn. 5, 136 Cal.Rptr. 378 [referring to the FAA].)5 This interpretation comports with principles of federalism and the nature of federal legislation.6 The certainty provided by well developed bodies of state contract law, and the desirability of preserving state substantive policies (that do not conflict with federal goals) give rise to a presumption in favor of applying state law. (19 Wright, Miller & Cooper, Federal Practice and Procedure (1982) Jurisdiction, § 4514, pp. 223-224; see Note, The Federal Common Law (1969) 82 Harv.L.Rev. pp. 1512, 1517-1519; cf. De Sylva v. Ballentine (1956) 351 U.S. 570, 580-581, 76 S.Ct. 974, 979-980, 100 L.Ed. 1514 [applying state law to define “children” who may renew a deceased author's copyright under federal copyright statute].)

The exercise of state authority in a field traditionally occupied by state law will not be deemed preempted by a federal statute unless that was the clear and manifest purpose of Congress. (Ray v. Atlantic Richfield Co. (1978) 435 U.S. 151, 157, 98 S.Ct. 988, 994, 55 L.Ed.2d 179.) And, California courts are reluctant to infer preemption of state law, and the party claiming preemption has the burden of proving Congress intended to displace state law entirely. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 937, 216 Cal.Rptr. 345, 702 P.2d 503.) State law would, nevertheless, be displaced if it stood as an obstacle to the accomplishment of the full purposes and objectives of Congress (Silkwood v. Kerr-McGee Corp. (1984) 464 U.S. 238, 248, 104 S.Ct. 615, 621, 78 L.Ed.2d 443) or if a significant conflict between an established federal policy and the use of state law could be specifically shown. (Wallis v. Pan American Pet. Corp., supra, 384 U.S. 63, 68, 86 S.Ct. 1301, 1304.)

A single body of contract law is not necessary to accomplish Congress' goal of making arbitration agreements “as enforceable as other contracts, but not more so” (Prima Paint v. Flood & Conklin Co, supra, 388 U.S. 395, 404, 87 S.Ct. 1801, 1806), because most “other contracts” are governed by state law. If, in actions to enforce arbitration agreements, the courts were to abandon al state grounds for revoking contracts, contracts to arbitrate would be more enforceable than other contracts. Congress did not intend to elevate arbitration agreements into a class of special, invincible agreements. Contract defenses may be asserted. *Southland Corp. v. Keating, supra, 465 U.S. 1, 16, fn. 11, 104 S.Ct. 852 861, fn. 11.) The incorporation of generally applicable principles of state contract law does not conflict with Congressional purposes.

If Congress were seeking uniformity, it could have clearly defined the grounds for revocation of arbitration agreements in the FAA. (Cf. R.F.C. v. Beaver County (1946) 328 U.S. 204, 66 S.Ct. 992, 90 L.Ed. 1172.) Instead, Congress incorporated existing contract law with the brief words of section 2: “grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) Since there is no general federal law of contracts, we conclude that such “grounds as exist” referred to in the FAA must be state law. This conclusion is consistent with the United States Supreme Court's statement that a party may assert general contract defenses to avoid enforcement of an arbitration agreement. (Southland Corp. v. Keating, supra, 465 U.S. 1, 16, fn. 11, 104 S.Ct. 852, 861, fn. 11.) The court went on to say that the California statute in question was “not a ground that exists at law or in equity 'for the revocation of any contract' but merely a ground that exists for the revocation of arbitration provisions in contracts subject to the California Franchise Investment Law.” (Ibid, emphasis in original.)

Unlike the special statutory basis for revoking arbitration agreements subject to the California Franchise Investment Law (see Corp.Code, § 31512; Keatiing v. Superior Court (1982) 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192, revd. sub nom. Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852), unconscionability is a general defense to any contract. (E.g. A & M Produce Co. v.FMC Corp. (1982) 135 Cal.App.3d 473, 186 Cal.Rptr. 114 [equipment sales contract].) The courts of California and at least 48 other states have the power to avoid unfair and oppressive contractual provisions. (Perdue v. Crocker National Bank, supra, 38 Cal.3d 913, 932, fn. 19, 216 Cal.Rptr. 345, 702 P.2d 503.)

For the above reasons, we disagree with portions of the recent decisions in Tonetti v. Shirley, supra, 173 Cal.App.3d 1144, 219 Cal.Rptr. 616 and Chan v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d 632, 223 Cal.Rptr. 838. Both cases hold that state adhesion contract principles are preempted by the FAA.

We conclude that, by enacting the FAA, Congress did not intend to displace state contract principles of general applicability, such as the doctrine of unconscionability. (See Lewis v. Prudential Bache Securities, Inc., supra, 179 Cal.App.3d 935, 943, 225 Cal.Rptr. 69.)

With the state and federal policies favoring arbitration in mind, we now turn to the question whether, under California law, plaintiffs entered into enforceable arbitration agreements with defendant.

II. Enforceability of Agreements to Arbitrate

A. Unconscionability

In the present case, the arbitration clauses were parts of pre-printed, non-negotiable application forms required by the NYSE. Without question, the arbitration clauses were adhesive in nature. (Hope v. Superior Court (1981) 122 Cal.App.3d 147, 153, 175 Cal.Rptr. 851, cert.den. (1982) 456 U.S. 910, 102 S.Ct. 1760, 72 L.Ed.2d 168.) Adhesion contracts are, nevertheless, fully enforceable unless the provisions do not fall within the reasonable expectations of the adhering, or weaker, party or the provisons are unduly oppressive or unconscionable. (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 819-820, 171 Cal.Rptr. 604, 623 P.2d 165.)

Plaintiffs claim that the arbitration clauses are unconscionable. We must determine whether compelling them to arbitrate in accordance with the procedure prescribed by the NYSE will leave them without “any realistic and fair opportunity to prevail in a dispute.” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 825, 171 Cal.Rptr. 604, 623 P.2d 165.)

Freely contracting parties may agree upon a non-neutral arbitral mechanism7 if the arrangement meets a minimum level of integrity, to be determined in each case. (Id., at pp. 824-825, 171 Cal.Rptr. 604, 623 P.2d 165.) In Scissor-Tail the court held that the minimum level is not met by agreements designating as sole arbitrator a party to the dispute or one with identical interests in the outcome. (Id., at p. 831, 171 Cal.Rptr. 604, 623 P.2d 165.)

In contrast to the situation in Scissor-Tail, arbitrators selected by the NYSE do not have interests identical with Dean Witter. The NYSE and the arbitrators it selects (a majority of whom must be from outside the securities industry) do not have the relation to Dean Witter the the union had to its member in Scissor-Tail. (See Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 827, 171 Cal.Rptr. 604, 623 P.2d 165.) A stock exchange does not act as a trade organization for securities firms. A stock exchange registered by the SEC must facilitate free and fair trade in securities. (See 15 U.S.C. § 78f, sudb. (b)(5); Drayer v. Krasner (2d Cir.1978) 572 F.2d 348, 358.) By law, the rules of an exchange may not “permit unfair discrimination between customers, issuers, brokers, or dealers.” (15 U.S.C. § 78f, subd. (b)(5).)

The procedural safeguards provided by the NYSE rules for arbitration8 result in a system of arbitration that differs significantly from that in Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 171 Cal.Rptr. 604, 623 P.2d 165. In Scissor-Tail the court specifically distinguished a case ordering NYSE arbitration, because the union's arbitration procedures, unlike the NYSE's, did not provide for disqualification of biased arbitrators. (Id., at p. 823, 171 Cal.Rptr. 604, 623 P.2d 165.)

The nature of the dispute is also germane to the plaintiffs' contention that NYSE arbitrators are potentially biased. In Lewis v. Prudential Bache Securities, Inc., supra, 179 Cal.App.3d 935, 944, 225 Cal.Rptr. 69, the court assessed the integrity of NYSE arbitration in light of “the potential industry-wide ramifications of the disputes to be resolved.” (Id., at pp. 944, 225 Cal.Rptr. 69.) The court held that a class action by customers, challenging an allegedly fraudulent practice used by virtually every member of the NYSE, involved issues of such widespread concern that the situation raised doubts about the fairness of an NYSE-selected arbitration panel. The court distinguished disputes that would not have an industry-wide impact, such as a conflict “between one disgruntled stockbroker employee and the employing brokerage firm.” (Id., at p. 944, 225 Cal.Rptr. 69.) The instant case is a dispute between two disgruntled employees and one brokerage firm. Here, no industry-wide practice is alleged to be at issue. The nature of the dispute does not cast doubt on the integrity of NYSE arbitration.

We conclude that plaintiffs are afforded a “realistic and fair opportunity to prevail in a dispute” arbitrated under the NYSE rules for arbitration. (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 825, 171 Cal.Rptr. 604, 623 P.2d 165.)

Having applied the rule of Scissor-Tail to this case, we feel obligated to discuss two applications of Scissor-Tail by this court. In Hope v. Superior Court, supra, 122 Cal.App.3d 147, 154, 175 Cal.Rptr. 851, we held that arbitration conducted by NYSE was presumptively biased in favor of a member firm and against a non-member employee. In a later decision, Parr v. Superior Court (1983) 139 Cal.App.3d 440, 188 Cal.Rptr. 801, we distinguished Hope and enforced an agreement calling for arbitration conducted by NYSE. In Parr an investor sued the brokerage firm Merrill Lynch, a NYSE member. The court held that Merrill Lynch had rebutted any presumption of bias by showing that the arbitration rules were new, and had been approved by the Securities and Exchange Commission (hereafter, SEC).

The records in Parr and in this case reveal that the NYSE arbitration procedure was formulated at the instance of the SEC, and reviewed and approved by the SEC. (Securities Industry Conference on Arbitration Third Report to the Securities Exchange Commission (Jan. 31, 1980); SR-NYSE-79-23, SEC Rel. No. 34-16390 (Nov. 30, 1979.)

“The SEC is an agency of the federal government which bears as one of its most important duties the protection and enforcement of the public's interest in the area of securities. (See, e.g., 15 U.S.C. §§78j; 78k-l, 78o(c); Merrill Lynch, Pierce Fenner & Smith, Inc. v. Ware (1973) 414 U.S. 117, 128-130 [94 S.Ct. 383, 390-391, 38 L.Ed.2d 348, 359-360]; 17 C.F.R. § 200.1().) Without some basis for doing so, we are reluctant to find unconscionable procedures which have been approved by the SEC. We find that the procedures outlined in the NYSE rules display beyond any doubt much more than the requisite minimal integrity.” Parr v. Superior Court, supra, 139 Cal.App.3d 440, 447, 188 Cal.Rptr. 801.)

Plaintiffs argue that Hope governs disputes between securities firms and their employees, attempting to distinguish Parr as a dispute between a securities firm and an investor. Although the rules for arbitration are the same for either type of dispute, plaintiffs claim that the distinction between Hope and Parr is significant, because the SEC is concerned only with protecting investors. Thus, according to plaintiffs, the SEC's approval of the arbitration procedures has no bearing on employees' claims against a member of the exchange.

The SEC, however, has broader authority and responsibility than plaintiffs assert. In the Securities amendments of 1975, Congress amended the Securities Exchange Act (hereafter, SEA), extending the SEC's role overseeing stock exchange rule-making. (Drayer v. Krasner, supra, 572 F.2d 348, 357, cert. den., 436 U.S. 948, 98 S.Ct. 2855, 56 L.Ed.2d 791.) The 1975 amendments expanded SEA's goals to include not only investor protection, but market efficiency and fair administration of stock exchanges. (Id., at p. 358.) Pursuant to those goals, SEC will not register a stock exchange unless it determines that:

“(5) The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange.


“(8) The rules of the exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.” (15 U.S.C. § 78f, subds. (b)(5) and (b)(8).)

We conclude that the authority of SEC does extend to reviewing the rule requiring arbitration of employees' claim against members of the exchange. (Drayer v. Krasner, supra, 572 F.2d 348, 358.) The Constitution of the NYSE requires arbitration of a dispute between a member and a non-member, according to the NYSE rules for arbitration, if either party so requests. (NYSE Const., art. VIII, § 1.). The SEC has approved the Constitution. The SEC has not exercised its powers to amend the NYSE arbitration procedures. (See 15 U.S.C. § 78s, subd. (c).) In fact, the SEC has “shown its familiarity with NYSE's arbitration procedures for disputes between members and nonmembers (including registered representatives9 ) and indicated general approval of them, 2 Report of Special Study of Securities Markets 559-61 (1963).” (Drayer v. Krasner, supra, 572 F.2d 348, 358, emphasis added.)

From the SEC's approval, tacit or otherwise, of the NYSE's Constitution and rules, we can infer that these provisions are related to the goal of market efficiency embodied in the 1975 amendments to the SEA. (See Drayer v. Krasner, supra, 572 F.2d 348, 358.) “Registered representatives play an important role in the flow of business on securities exchanges. The arbitration provision enables member firms to rid themselves of registered representatives who, as they believe, are dishonest or ineffective ․ without subjecting themselves to lengthy and costly litigation--including, as here; a request for punitive damages.” (Ibid.)

We may properly consider the SEC's approval of the NYSE arbitration provisions as evidence rebutting any presumption of unfairness. Furthermore, as in Parr, “[e]ven without the SEC's imprimatur, we believe these rules measure up to the 'minimum levels of integrity' described in Scissor-Tail.” (Parr v. Superior Court, supra, 139 Cal.App.3d 440, 447, 188 Cal.Rptr. 801.)10

B. Waiver of Right to Compel Arbitration

Plaintiffs contend that defendant waived its right to arbitrate by litigating the controversy, citing McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1980) 105 Cal.App.3d 946, 950-952, 164 Cal.Rptr. 751. In particular, plaintiffs note that defendant answered the complaint and engaged in discovery. Defendant insists that in light of the pro-arbitration policy, waiver claims must be closely scrutinized, citing both federal and state decisions. (E.g. ATSA of California, Inc. v. Continental Ins. Co. (9th Cir.1983) 702 F.2d 172, 175; Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 588 P.2d 1261.)

“The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” (Moses H. Cone Hospital v. Mercury Constr. Corp., supra, 460 U.S. at pp. 24-25, 103 S.Ct. at pp. 941-942.) The party claiming waiver has a “heavy” burden of proving intentional relinquishment of the right to arbitrate (see Martin Marietta Aluminum, Inc. v. General Elec. Co. (9th Cir.1978) 586 F.2d 143, 146; Keating v. Superior Court, supra, 31 Cal.3d 584, 604-608, 183 Cal.Rptr. 360, 645 P.2d 1192, revd. on other grounds sub. nom. Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852), not just participation in litigation not reaching the merits. (Keating v. Superior Court, supra, 31 Cal.3d at p. 605, 183 Cal.Rptr. 360, 645 P.2d 1192.)

The waiver claim is wholly without merit. Defendant was entitled to answer the complaint and begin preparing a defense. (Pacific Inv. Co. v. Townsend (1976) 58 Cal.App.3d 1, 12 Cal.Rptr. 489; ATSA of California, Inc. v. Continental Ins. Co., supra, 702 F.2d 172, 175.) Moreover, plaintiff has not' shown prejudice from defendant's actions, a requirement for waiver under ATSA of California, (Ibid.) The case relied on by plaintiffs. McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 105 Cal.App.3d 946, 164 Cal.Rptr. 751, does not support their waiver argument. McConnell prevents parties from “testing the water” in court before deciding to seek arbitration. (Id., at p. 951, 164 Cal.Rptr. 751.) Here, defendant never tried to test the water. Defendant immediately and consistently pursued arbitration; there has been no adjudication on the merits.

* * *

The provisions requiring arbitration are enforceable according to their terms. The order appealed from is reversed and the cause remanded,with instruction that the superior court grant the petition to compel arbitration.

HOLMDAHL, Justice.

ELKINGTON, Acting P.J., and NEWSOM, J., concur.

Copied to clipboard