Wolsey, Ltd. v. Foodmaker, Inc.
144 F.3d 1205, 98 Daily Journal DAR 5235, 98 Cal. Daily Op. Serv. 3793 (1998)
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Rule of Law:
The Federal Arbitration Act (FAA) applies to agreements for non-binding arbitration. A general choice-of-law clause in a contract governed by the FAA incorporates a state's substantive laws but not special state procedural rules that allocate power between courts and arbitrators.
Facts:
- In February 1991, Foodmaker International (franchiser of Jack in the Box) entered into a Development Agreement with Wolsey, Ltd., giving Wolsey the right to develop restaurants in Hong Kong and Macau.
- The agreement stipulated a three-step dispute resolution process: a senior executive meeting, non-binding arbitration, and then litigation in federal court.
- In March 1994, Wolsey initiated this process, alleging Foodmaker fraudulently induced it to enter the agreement with false promises of future expansion rights into China.
- Wolsey claimed Foodmaker's president conspired with a third party, QSR Management, to prevent Wolsey's development so QSR could develop the area instead.
- After the first two steps failed to resolve the dispute, the parties proceeded to non-binding arbitration.
- In December 1995, the arbitration panel issued a non-binding award in favor of Wolsey, extending its development term and granting attorney's fees.
- Foodmaker refused to comply with the arbitration award.
Procedural Posture:
- After Foodmaker refused to comply with a non-binding arbitration award, Wolsey filed a complaint in federal district court, asserting new statutory claims.
- Foodmaker filed a motion in the district court to compel arbitration of these new claims under the terms of the parties' Development Agreement.
- The district court denied Foodmaker's motion to compel arbitration.
- Foodmaker, as appellant, appealed the district court's denial to the U.S. Court of Appeals for the Ninth Circuit, with Wolsey as the appellee.
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Issue:
Does a general choice-of-law clause selecting California law in a contract governed by the Federal Arbitration Act (FAA) incorporate California's procedural rule that allows a court to stay non-binding arbitration pending the outcome of related litigation involving third parties?
Opinions:
Majority - O’Scannlain, Circuit Judge
No. A general choice-of-law clause does not incorporate state procedural rules that govern the allocation of power between courts and arbitrators; it only incorporates the state's substantive law. First, the court determined that non-binding arbitration falls within the scope of the Federal Arbitration Act (FAA). The court reasoned that the essence of arbitration under the FAA is the agreement to submit a dispute for a decision by a third party and to complete that process before seeking recourse in the courts, which the agreement here required. Second, guided by the Supreme Court's decision in Mastrobuono v. Shearson Lehman Hutton, Inc., the court held that a generic choice-of-law clause, such as the one selecting California law in this agreement, should be read to encompass substantive principles but not special state rules that limit the authority of arbitrators. California's rule allowing a court to stay arbitration (Cal. Civ. Proc. Code § 1281.2(c)) is a rule allocating power between tribunals, not a substantive right of the parties. Therefore, the FAA's strong federal policy favoring arbitration preempts the state rule, and the arbitration must be compelled.
Analysis:
This decision reinforces the primacy of the Federal Arbitration Act over conflicting state procedural laws. It clarifies that the FAA's reach is broad, extending even to non-binding arbitration agreements. More importantly, it solidifies the rule from Mastrobuono that parties wishing to incorporate state procedural rules that limit arbitration must do so with specific, unambiguous language; a generic choice-of-law clause is insufficient. This holding promotes uniformity in the enforcement of arbitration agreements and makes it more difficult for parties to use state procedural tactics to avoid or delay their contractual obligation to arbitrate.
