The recent decision of the California Court of Appeal, Second District in  Saheli v. White Memorial Medical Center (2018) 21 Cal.App.5th 308, proves again the point that what is stated in your contractual arbitration clause matters. While it may seem axiomatic that words matter, in reality business law scribes generally spend less time on crafting arbitration clauses than the business terms of an agreement.

In Saheli, the court proved this point by closely examining the language of an arbitration agreement to determine whether the parties intended to incorporate federal preemption principles in a choice of law clause—a cautionary tale for arbitration clause drafters everywhere.

In Saheli, a doctor sued the defendant hospital where she was a resident for multiple causes of action arising from what she alleged was a retaliatory and wrongful termination; included in her complaint were violations of two State civil rights laws, the Ralph Act (Civil Code section 51.7) and Bane Act (Civil Code section 52.1) based on her claim that she faced discrimination due to her gender and Iranian heritage.  The defendant hospital had an arbitration clause in its employee handbook and training agreement that had the standard broad language of “arising out of’ “or related to” and that any dispute would be resolved under applicable California law, but importantly carved out “any claim that is non-arbitrable under applicable state or federal law,” which the handbook provided “are not arbitrable under this [Arbitration Agreement].”  (Saheli, supra, 21 Cal.App.5th at p. 315.)

The Ralph Act and Bane Act were enacted to combat hate crimes; they contain provisions that were specifically intended by the Legislature to discourage arbitration of claims arising under these statutes.  (Id. at pp. 320-322.)  However, they are arbitrable under the Federal Arbitration Act (“FAA”), which preempts any state rule that “discriminates” against arbitration or which disfavors contracts to arbitrate.  (Id. at pp. 320-333.)  In Saheli, the parties disputed whether the carve-out clause (excluding “any claim that is non-arbitrable under applicable state . . . law”) means “applicable state law only to the extent it is not preempted by federal law”—as the defendant hospital argued—or means “applicable state law notwithstanding any preemptive effect of federal law”—as Saheli argued.

The trial court agreed with Saheli, and ordered Saheli to arbitrate all her claims except those under the Ralph Act and Bane Act.  The Court of Appeal reversed and held that all of the claims were arbitrable, and that the parties did not incorporate preempted state law into the arbitration agreement.  (Id. at pp. 315-316.)  The Court of Appeal followed the direction of federal cases that interpreted this carve-out in its ordinary meaning to encompass only California law that is not preempted by the FAA; as the Court explained, “the phrase ‘applicable state law’ is not ambiguous and its ordinary meaning refers only to valid state law.”  (Id. at p. 319, cleaned up.)  Thus, the parties should have been ordered to arbitrate all of their claims, including those arising under the Bane Act and Ralph Act.  (Id. at pp. 319, 333.)

Thus, although the arbitration clause that Saheli signed required the arbitration to be governed by California law, that did not include California laws that were inconsistent with the FAA.

Parties should remain aware of the potential complications presented by federal preemption issues when they are crafting arbitration agreements and any carve-outs based on state law.

(Josephine Mason also contributed to this post.)

As a litigator, Neil has been lead counsel in a substantial number of court and jury trials, appeals and arbitrations in state and federal courts in the areas of legal malpractice defense, technology, securities, fiduciary fraud, corporate and business disputes, real estate and natural resources involving environmental, water and oil and gas.