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Parties picked FAA over state law
February 21, 2006 by Ross Runkel at LawMemo

Parties to an arbitration agreement can select whether to use state law or federal law to govern the arbitration. And it can make a huge difference.

In Rodriguez v. American Technologies (California Ct App 02/16/2006) they expressly picked the Federal Arbitration Act (FAA).

American sought a court order compelling arbitration. Rodriguez pointed out that there was a third party involved who was not subject to arbitration, and that splitting the case between arbitration and litigation could result in conflicting rulings on common issues of law and fact.

• A California statute says that a court has several options. It may refuse to compel arbitration, or it may stay either the arbitration or the court proceeding pending completion of the arbitration proceedings. (California Code of Civil Procedure § 1281.2(c).
• The Federal Arbitration Act requires that a federal court must stay the court proceeding and compel the arbitration.

So when the California trial court applied California law and denied the motion to compel arbitration, that was wrong. So says the California Court of Appeal.

My view:

• Yes, parties can - by agreement - select either federal law or California law to govern the arbitration proceedings.
• I'm troubled by the fact that the relevant part of the FAA (Section 3) specifically refers to federal courts when it says a court must issue a stay of court proceedings.
• There is a missing link in the logic.
• Incorporating the FAA into an agreement is not the same thing as agreeing that the express words of the FAA (that is, the reference to federal courts) will have a new meaning (that is, a reference to state courts).

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