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Basics of Arbitrator Disqualification in California Part 2

This is the second in a series of posts regarding basic issues of arbitrator disqualification for domestic arbitrations seated in California. This post concerns the interaction between the California Arbitration Act and the Federal Arbitration Act. As noted in the first post, if an arbitrator makes a disclosure that falls within one of the required categories set forth in Section 1281.9 of the California Arbitration Act, either party has the unfettered right to disqualify the arbitrator pursuant to Section 1281.91(b) regardless of whether the disclosure reflects actual bias so long as the disqualification is done within the prescribed time limits. Unlike the detailed disclosure rules under California State law, the Federal Arbitration Act provides no automatic mechanism for disqualification, nor does the FAA set out categories of mandatory disclosures like CAA Section 1281.9. Instead, the Federal Arbitration Act generally requires an arbitrator to disclose to the “parties any dealings that might create an impression of possible bias." Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 149, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968). Disqualification is determined on a case-by-case basis depending on the nature of the disclosure. It is, therefore, important to determine whether the Federal Arbitration Act’s case-by-case analysis or the California Arbitration Act’s automatic disqualification provision applies to a particular case.

The Federal Arbitration Act applies to “a contract evidencing a transaction involving commerce to settle by arbitration a controversy.” 9 U.S.C. §1. Unless an arbitration agreement fails to meet the very low “involving commerce” threshold, it will be subject to the provisions of the Federal Arbitration Act. Although the Federal Arbitration Act generally preempts state laws that stand as an obstacle to arbitration agreements (AT&T v. Concepcion, 131 S. Ct. 1740 (2011)), the FAA’s preemptive power does not extend to California’s procedural rules governing the conduct of an arbitration “where the parties have agreed that their arbitration agreement will be governed by the laws of California.” Volt Inf. Sciences v. Stanford Univ., 489 U.S. 468, 470 (1989).

The question then is whether the parties have agreed in their arbitration agreement that the procedural laws in the California Arbitration Act or the FAA apply to issues of arbitrator disqualification. This is where things get interesting. In federal court, “[t]here is a strong default presumption that the Federal Arbitration Act, not state law, supplies the rules for arbitration.” Fidelity Federal Bank v. Durga Ma Corp., 386 F.3d 1306, 1311 (9th Cir. 2004). Unless the parties expressly designate state procedural law, the rules of procedure under the Federal Arbitration Act will apply. For example, if a contract states that it will be governed by California law and the arbitration conducted under the AAA Rules, the court will interpret that agreement to apply substantive California law to the parties’ dispute and apply federal procedural law to the arbitration. Id. at 1312.

In contrast, in Cronus Investments v. Concierge Services, 25 Cal.Rptr.3d 540, 35 Cal.4th 376, 107 P.3d 217 (2005), the California Supreme Court held that FAA rules of procedure do not apply to California state court proceedings unless the parties to the arbitration agreement “expressly designate that any arbitration proceeding should move forward under the FAA's procedural provisions rather than under state procedural law.“ Id. at 554. Accordingly, when interpreting the parties’ intent in an arbitration agreement it matters whether the disqualification action is taking place in federal or state court because each court relies on a default presumption that its own rules of procedure applies.

This is not simply a matter of removing a state case to federal court under the Federal Arbitration Act. For domestic arbitrations, there is no federal question jurisdiction under the FAA. There must be an independent basis for jurisdiction to get into federal court, e.g., diversity jurisdiction. The FAA is "something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties' dispute." Vaden v. Discover Bank, 556 U.S. 49, 59, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009). Because of the differing presumptions in state and federal court, whether there happens to be an independent basis for jurisdiction can be outcome determinative.[1]

[1] The independent basis requirement under the Federal Arbitration Act applies only to domestic arbitrations. Chapter 2 of the Federal Arbitration Act concerning certain international arbitrations expressly provides for jurisdiction in federal court. See 9 U.S.C. §§203. Indeed, Section 205 of the FAA provides for removal of any state action to federal court if the matter relates to an international arbitration covered under FAA Chapter 2.

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