Applying California Arbitration Law over the FAA: Denying Arbitration in the Case of Third Parties

Rambus Inc. v. Hynix Semiconductor, Inc.
2007 WL 18829 (Cal. App. Jan. 3, 2007)

A California appellate court recently released an opinion regarding international arbitration. Rather than applying the FAA which would have required the court to compel arbitration, the court looked to California law and determined that arbitration was not required.

Rambus, Inc., filed suit against Hynix Semiconductor, Inc. and Hynix Semiconductor America, Inc. (collectively, "Hynix"); Samsung Electronics Co., Ltd. ("SEC"), Samsung Semiconductor, Inc., and Samsung Electronics America, Inc. (collectively, "Samsung") and other parties alleging a conspiracy to fix prices of dynamic random access memory ("DRAM") in violation of the Cartwright Act. Rambus had previously entered into licensing arrangements with Hynix and SEC. Both contracts had California choice of law and mandatory arbitration provisions. Accordingly, upon filing of the suit, Hynix and SEC moved to compel arbitration in accordance with the contracts. The trial court found that valid, enforceable arbitration provisions existed. Nonetheless, the court refused to apply the FAA and instead held that California law allowed trial courts discretion to refuse arbitration if certain conditions exist. Here, because not all defendants would be subject to arbitration, the court found that arbitration would create piecemeal adjudication of the dispute and would therefore be contrary to public policy. The California appellate court affirmed the refusal to compel arbitration.

California Arbitration Law v. the Federal Arbitration Act
The California arbitration law allows courts discretion in refusing to compel arbitration in certain cases. Section 1281.2 states:

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] ... [¶] (c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.... [¶] ... [¶]

If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c) herein, the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.

In contrast, the FAA requires arbitration when there exists a valid arbitration agreement, even if third parties would not be subject to the arbitration. As stated by the court:

Title 9 United States Code section 2 provides: "A written provision in any maritime transaction or 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, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Thus, the FAA requires an arbitration agreement to be enforced even if multiple parties are involved who are not bound to arbitrate. (See, e.g., Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 19-20, superseded by statue on other grounds.)

Here, the court found that because the FAA does not preempt California arbitration law, it need not apply the FAA. Because the parties expressed an intent to apply substantive California law, the court finds comfort in applying the California arbitration law. "[O]ur Supreme Court holds that when the parties choose California law to govern their agreement, the procedural sections of the FAA are not 'applicable.' (Cronus, supra, 35 Cal.4th at p. 380.)." Clearly, if this case were in a federal court, the FAA procedural rules would apply and arbitration would be required.

Given the strong congressional support of arbitration particularly in the context of interstate and international commerce, should the FAA procedural rules trump state arbitration law? To me, this case is a compelling study of why such preemption may be justified.