C.A. Rules New Standards for Arbitrators Partially Preempted
Div. Seven Justices Side With SEC and Exchange on One Issue, but Reject Broader Challenge to New ADR Rules
By KENNETH OFGANG, Staff Writer/Appellate Courts
Some features of California’s new standards for neutral arbitrators cannot be applied to securities industry arbitrations, which must follow rules established by the National Association of Securities Dealers and the Securities and Exchange Commission, the Court of Appeal for this district ruled yesterday.
Div. Seven agreed with a securities brokerage—backed by the SEC, the NASD, and the New York Stock Exchange as amici—that said it could not be forced to apply the state’s new rules to a dispute with a disgruntled investor.
The panel, however, in the first published opinion regarding the new standards, rejected broader attacks on the rules. The justices held that the Federal Arbitration Act does not generally prevent California from applying its own rules and they rejected a contention that the Judicial Council exceeded the scope of its legislative mandate by including dispute resolution provider organizations within the rules’ coverage.
The Ethics Standards for Neutral Arbitrators in Contractual Arbitration, as they are officially known, took effect July 1 of last year. They were adopted by the Judicial Council in compliance with SB 475, a 2001 bill authored by Sen. Martha Escutia, D-Los Angeles, Assemblywoman Hannah-Beth Jackson, D-Santa Barbara, and Assemblyman Darrell Steinberg, D-Sacramento.
The standards, set forth as an appendix to the California Rules of Court, include new requirements that potential arbitrators disclose facts that might tend to indicate a conflict of interest, such as whether the person has arbitrated another matter involving a party or attorney involved in the new proceeding in the previous five. The new rules also broaden the previous grounds for disqualification of an arbitrator.
The case ruled on yesterday involved a former customer of JB Oxford & Company who claimed the firm allowed funds to be improperly withdrawn from his account.
Jack Jevne sued the firm in Los Angeles Superior Court, but the firm moved to compel NASD arbitration pursuant to a standard industry agreement the investor had signed. The motion was granted in February 2001, and an arbitration panel was appointed in the summer of that year.
The firm demurred to Jevne’s claims, and a hearing was eventually scheduled for October of last year. Just prior to the hearing date, however, the NASD stopped appointing arbitrators in California as a result of the adoption of the ethics standards.
The NASD told Jevne it would not proceed with his arbitration unless he waived the ethics standards or agreed to have the arbitration conducted in another state. Jevne’s attorneys responded with a motion in the Superior Court case to vacate arbitration and set the matter for trial.
Los Angeles Superior Court Judge Jacqueline Conner agreed with the brokerage that Jevne was bound by the NASD rules and that the California standards were preempted.
Div. Seven yesterday denied Jevne’s petition for a writ of mandate that would have allowed the case to proceed in Superior Court.
Justice Fred Woods, writing for the court, said the rules on disclosure and disqualification conflict with the NASD rules and are thus preempted by federal securities laws to the extent that the industry rules have been approved by the SEC.
While the Legislature’s efforts to protect consumers are “laudable,” Woods wrote, the disqualification rules “present a clear physical conflict with the NASD rules.”
Under the NASD’s rules, the justice explained, only an official of the organization can disqualify an arbitrator. The new California standards, in contrast, allow disqualification by the Superior Court in certain circumstances.
The Judicial Council’s disclosure rules, Woods went on to say, “also appear to stand as an obstacle to the NASD rules” by requiring more extensive disclosures—with attendant increases in “costs, complexity and uncertainty of the arbitration process”—than the NASD requires.
But Woods agreed with the Judicial Council, whose amicus brief limited itself to the single issue, that the council had the authority to include ADR organizations within the definition of “neutral arbitrator.”
“Nothing in the recent legislative history indicates the Legislature intended to exclude certain classes of ‘neutral arbitrators’ or manifests an intent the California Standards should have a narrow or limited application, “ the justice wrote. “On the contrary, the California Standards were intended to have a broad application to all persons who serve as private judges.”
David S. Ettinger of Encino’s Horvitz & Levy, one of the authors of the council’s brief, said the council was “quite pleased” with the ruling on that issue. He noted that the Ninth Circuit has scheduled argument for next month in a case where the district judge held otherwise.
The case is Jevne v. Superior Court (JB Oxford Holdings, Inc.), 03 S.O.S. 5848.
Copyright 2003, Metropolitan News Company