Caseflicks

Supreme Court of the United States • 1989

Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. U.

489 U.S. 468 | 109 S. Ct. 1248 | 103 L. Ed. 2d 488 | 1989 U.S. LEXIS 1273 | 57 U.S.L.W. 4295

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Takeaway

In short, this case holds that the FAA enforces the arbitration agreement the parties actually made, including their contractual choice to use state arbitration procedures that may permit a stay of arbitration.

Background

Volt contracted to install electrical conduits at Stanford. Their construction contract required arbitration of disputes arising from the contract and stated that the contract would be governed by the law of the place where the project was located—California.

After a dispute over payment for extra work, Volt demanded arbitration. Stanford instead sued Volt in California court for fraud and breach of contract and also sued two other construction companies that had no arbitration agreements with Stanford. Volt sought to compel arbitration. Stanford invoked California Code of Civil Procedure § 1281.2(c), which permits a court to stay arbitration when related litigation involving third parties could produce conflicting rulings on common factual or legal issues.

The California Superior Court stayed arbitration, and the California Court of Appeal affirmed. The Court of Appeal held that the contract's choice-of-law clause incorporated California arbitration law, including the stay provision. It further held that the Federal Arbitration Act did not preempt applying that state rule when the parties had selected California law. The California Supreme Court denied review.

Issues

Issue #1

Whether the Supreme Court had appellate jurisdiction to review the California court's application of California's arbitration-stay statute against a federal preemption challenge.

Holding

Yes. The Court had jurisdiction because Volt challenged the state statute as preempted by the FAA, and the California Court of Appeal upheld the statute's application.

Reasoning

Under the then-applicable jurisdictional statute, the Court could review a final state-court judgment that sustained a state statute against a claim that it conflicted with federal law. Volt expressly argued that § 1281.2(c), as applied to its interstate-commerce contract, violated the Supremacy Clause because it conflicted with the FAA.

It did not matter that the California court reached its result through its interpretation of the parties' contract. The state court nonetheless upheld application of the California statute against Volt's federal preemption objection, which was enough to establish appellate jurisdiction.

Issue #2

Whether the FAA gave Volt a federal right to compel immediate arbitration despite the California court's conclusion that the parties chose California arbitration rules.

Holding

No. The FAA enforces arbitration in the manner the parties agreed upon; it does not guarantee arbitration under federal procedural rules regardless of the contract's terms.

Reasoning

The Court treated the California Court of Appeal's reading of the choice-of-law clause as a state-law contract interpretation that ordinarily was not subject to Supreme Court review. That court had found that the parties incorporated California arbitration law, including § 1281.2(c), into their agreement.

This was not a finding that Volt waived a federal right. Section 4 of the FAA authorizes an order requiring arbitration to proceed only "in the manner provided for" in the parties' agreement. If the agreement incorporated a rule allowing arbitration to be stayed in this setting, Volt never possessed a contractual right to immediate arbitration under the FAA.

The federal policy favoring arbitration did not require a different construction. That policy favors enforcing private arbitration agreements according to their terms; it does not require arbitration under one particular set of procedures. Applying state procedural rules that the parties selected therefore did not offend the FAA's pro-arbitration policy.

Issue #3

Whether the FAA preempted California Code of Civil Procedure § 1281.2(c) when it was used to stay arbitration under this interstate-commerce contract.

Holding

No. The FAA did not preempt the California stay provision because the parties had agreed to arbitrate under California law.

Reasoning

The FAA contains no express preemption clause and does not occupy the entire field of arbitration. State law is still preempted when it actually conflicts with federal law by frustrating Congress's purposes, so the relevant question was whether enforcing the California stay rule under this contract undermined the FAA's objectives.

The FAA's central purpose is not to force arbitration in every circumstance or to maximize procedural speed. Its principal purpose is to overcome judicial hostility to arbitration and to make arbitration agreements enforceable on the same footing as other contracts.

The FAA preempts state laws that invalidate agreements to arbitrate claims that the parties agreed to submit to arbitration. But it does not prohibit parties from defining the scope of arbitration or selecting the rules under which arbitration will proceed. Parties may limit the claims they arbitrate and may choose state arbitration procedures.

Enforcing the California rule honored the parties' contractual expectations. Although § 1281.2(c) allowed a stay that the FAA itself would not expressly provide, enforcing the chosen rule ensured that arbitration proceeded according to the parties' agreement rather than imposing federal procedures they had not selected.

Dissents

Justice Brennan

Reasoning

Justice Brennan, joined by Justice Marshall, agreed that parties may choose state arbitration rules in place of otherwise applicable federal rules. But he concluded that these parties had not made that choice. In his view, the ordinary contract clause selecting "the law of the place where the Project is located" chose California law rather than another state's law; it did not exclude governing federal law.

He argued that the Court should independently review the California court's construction because that construction defeated an asserted federal statutory right under the FAA. State-law determinations are not insulated from review when they are logically antecedent to, and effectively nullify, a federal right. The FAA also supplies federal substantive law requiring ambiguities about arbitrability to be resolved in favor of arbitration.

The dissent regarded the California court's reading as implausible. A standard choice-of-law clause ordinarily says nothing about the relationship between federal and state law, and federal law is part of the law applicable in every state. The clause's reference to the law of the project's location thus naturally included federal law as well as California law.

Because the FAA required enforcement of the parties' specifically enforceable agreement to arbitrate, and because the choice-of-law clause did not displace the FAA, Justice Brennan believed California's stay rule could not block arbitration. He warned that treating ordinary state choice-of-law clauses as exclusions of federal law could largely nullify the FAA for existing commercial contracts.