Like federal law, California state arbitration law generally recognizes the separability doctrine, whereby arbitration clauses are viewed as separate from the rest of a contract and not necessarily impacted by defects in the larger contract containing the arbitration clause. For example, general allegations of fraudulent inducement with respect to the larger contract do not invalidate the obligation to arbitrate and are decided by an arbitrator. It’s as if the arbitration clause has some immunity, or as some have described this arbitration doctrine (and to borrow a phrase from the Bee Gees), the arbitration clause is “stayin’ alive,” regardless of what is happening to the rest of the contract.
In a recent California Supreme Court decision, the court discussed an exception to the separability doctrine. In Sheppard, Mullin, Richter & Hampton LLP v. J-M Mfr. Co., No. S232946 (Cal. Aug. 30, 2018) (click here for a copy of the decision), the California Supreme Court recognized that under California law, a party may avoid arbitration if the entire contract containing the arbitration clause is illegal and against public policy. In this case, a law firm had failed to obtain a proper waiver of a conflict of interest involving its clients in violation of state legal ethics rules. This unethical conflict of interest rendered the law firm’s engagement agreement with a client (which contained an arbitration clause) unenforceable as against public policy. As a result, the court could invalidate an arbitrator’s award regarding attorneys’ fees.
This case reminds me of a broader theme of party autonomy in arbitration law. There is some tension between the California Supreme Court’s illegality exception recognized in this Sheppard Mullin case and the U. S. Supreme Court’s decision interpreting the FAA in Buckeye Check Cashing v. Cardegna. In Buckeye, the Supreme Court held that under the FAA, an arbitration clause is generally enforceable, even if the arbitration clause is contained in a contract violating Florida criminal laws prohibiting banks from charging usurious interest rates. There are ways to distinguish Buckeye from the Sheppard Mullin case, but the California Supreme Court avoided this tension with Buckeye by viewing federal law as inapplicable. The arbitration clause at issue provided for arbitration conducted in accordance with the California Arbitration Act, and thus the FAA did not control in this Sheppard Mullin case. U. S. Supreme Court cases like Volt and Mattel recognize room for state arbitration laws to exist and flourish alongside the FAA, even if application of the FAA could lead to a different result. Allowing parties to select application of state law, to the exclusion of federal law, helps respect party autonomy as the core value of arbitration law.