FAA Has No Say

L.A. Unified Sch. Dist. v. Safety Nat’l. Cas. Corp., No. B275597 D2d8 (July 12, 2017)

The LAUSD brought a mega litigation against 27 different insurers over coverage issues stemming from the sex abuse scandal at Miramonte Elementary that broke about five years ago. One of the carriers had an arb clause in their policy. But others didn’t. The trial court denied a motion to compel under Code of Civil Procedure § 1281.2(c), which permits denial of arbitration under circumstances where there a risk of conflicting rulings in pending litigation with third parties.

The key issue is choice of law. The procedural parts of the FAA don’t have an exception like § 1281.2(c). So if the FAA governs the procedure, the trial court erred. 

There’s no doubt that the case is within the purview of the FAA because an insurance policy is a contract in interstate commerce. But the clause did not say that the FAA governed the procedure for compelling arbitration. So the question is, when the contract is silent about choice of procedural law but within the scope of the FAA, and the motion to compel is litigated in state court, does California or FAA procedure apply?

The substantive federal law of arbitrability governs a contract that touches on interstate commerce, regardless of whether it elects the application of federal law. FAA §§ 1 and 2 effectively preempt contrary state law on arbitrability questions. 

But the provisions of the FAA that deal with procedures for compelling arbitration, FAA §§ 3 and 4, are stated in terms of how those issues get resolved in federal courts. And, as the California Supreme Court held in Cronus Investments, Inc. v. Concierge Services, 35 Cal. 4th 376, 384 (2005), §§ 3 and 4 do not preempt state procedural law for how courts should go about compelling cases to arbitration, inducing the exception in § 1281.2(c). So unless the parties expressly agree that the FAA’s procedures for compelling arbitration should apply, the trial court was free to employ § 1281.2(c).

On the merits of that decision, the trial court also didn’t abuse its discretion. The case was highly complex and all arose out of the same underlying facts. Indeed, the LAUSD’s principal contention is that the whole litigation over the Miramonte incidents counts as a single “occurrence” under all of the different policies. Given that there was substantial evidence of a potential for conflicting rulings on the key issues if only part of the case were sent to an arbitration, it was appropriate for the trial court to invoke § 1281.2(c) to deny the motion to compel.

Affirmed.