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The justices of the California Supreme Court took up the issue of arbitration enforceability Wednesday and ran in both directions. At issue in the potentially precedent-setting case is when federal arbitration law should pre-empt state law. The California statute in question allows trial court judges to refuse to enforce arbitration if a pending court case involves third-party litigants not bound by the agreement. The Los Angeles-based 2nd District Court of Appeal had ruled in 2003 that the Federal Arbitration Act doesn’t preclude the application of state Code of Civil Procedure �1281.2(c), because the statute isn’t hostile to the federal goals and policies of obtaining consistent rulings. Much of the lower court’s decision was based on its interpretation of Volt Info. Sciences v. Leland Stanford Jr. University, 489 U.S. 468, a 1989 U.S. Supreme Court ruling that generally held that there “is no federal policy favoring arbitration under a certain set of rules.” It also held that state laws can be pre-empted if they are “an obstacle” to federal law. The case before the state Supreme Court on Wednesday involved claims arising under six contracts between related parties where only four contracts contained agreements to arbitrate under federal rules. Los Angeles County Superior Court Judge Richard Wolfe used his discretion under state law to stay the arbitration and allow trial to proceed “in order to promote efficiency in the resolution of disputes among the parties, and to avoid the possibility of contradictory outcomes.” The appeal court upheld his decision, even though the opponents had argued that the agreements would affect interstate commerce and, therefore, were pre-empted by the FAA. On Wednesday, the high court’s justices seemed to have some differences of opinion about the value of Volt. Chief Justice Ronald George, without elaborating, asked lawyers for both sides whether the 15-year-old ruling remained valid in light of subsequent U.S. Supreme Court rulings that appear to say federal law pre-empts state statutes whenever there is a conflict between litigation and arbitration proceedings. Woodland Hills, Calif., attorney William Soroky, who represented the appellant, Cronus Investments Inc., had written in court papers that the general law had always been that the FAA pre-empted state law that “was invoked to defeat or delay arbitration.” The exception, he wrote, was when all parties had agreed to abide by California law. Justice Joyce Kennard seemed to think that Volt remained crucial to the pre-emption determination. “Don’t we have to look at the words of this contract to determine what it means?” she asked Soroky’s opponent, Encino, Calif., lawyer Thomas Ready. The U.S. Supreme Court and some lower California courts, she added, “have said we take a look at the language” to determine whether the parties were operating under federal or state law. Meanwhile, Justices Ming Chin and Carlos Moreno seemed concerned about the practical aspects of the trial court judges’ decisions. Chin asked Ready whether he planned “to try this massive civil case in court and then arbitrate,” while Moreno took the other side of the coin in questioning Robert Olson, a partner in Los Angeles’s Greines, Martin, Stein & Richland who represented Health Net of California as an amicus curiae. “What if there is only one party to the arbitration in the claim?” Moreno asked. “Are you saying all others have to wait while that party arbitrates? The trial court has to wait until the arbitration of one party is complete?” Olson said yes. “The arbitral issues come first,” he said, “and you litigate what’s left.” In court papers, Olson’s firm had argued that the appeal court’s holding could let litigants circumvent federal law by simply naming a third party not bound by an arbitration agreement. The firm also argued that state law must yield to federal law. “Any other result,” Greines associate Cynthia Tobisman wrote, “would gut the FAA’s central purpose of assuring that state laws do not disfavor enforcement of arbitration provisions, conferring on courts virtually unfettered discretion to negate parties’ contractual arbitration rights in many, if not most, cases.” A ruling in Cronus Investments Inc. v. Concierge Services LLC, S116288, is due within 90 days.

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