Federal Court in California Rules That the Federal Arbitration Act Preempts California Statute That Requires Arbitrations Relating to California Construction Projects Take Place in California

Bell Prods. v. Hosp. Bldg. & Equip. Co., 2017 U.S. Dist. LEXIS 9183 (ND of Cal. Jan. 23, 2017)

A Contractor, Hospital Building and Equipment Company (“HBE”) entered into a subcontract with a mechanical subcontractor, Bell Products, Inc. (“Bell”), on a design-build project for a California hospital.  Bell sued HBE, asserting that HBE’s plans and specifications were deficient and failed to meet requirements of the applicable regulatory agencies, resulting in 15 months of delay to the project.  Bell initially sued HBE in State Court.  However, the case was removed to federal court, and the federal court stayed the proceedings pending conclusion of arbitration.

The subcontract provided that:  all claims between HBE and Bell shall be decided by arbitration; the arbitration shall be per the Construction Industry Rules of the American Arbitration Association; the arbitration provisions shall be governed by the Federal Arbitration Act (“FAA”) and “unless [HBE] requests the locale to be the place of the Project, the arbitration locale shall be St. Louis, Missouri.  Bell sought relief from the venue provision, based upon a California Statute, C.C.P. § 410.42(a)(1), which provides:

(a) The following provisions of a contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state, shall be void and unenforceable:
(1) A provision which purports to require any dispute between the parties to be litigated, arbitrated, or otherwise determined outside this state.

The major issue before the court was whether California, and not St. Louis, Missouri, was the proper venue for arbitration.  This involved a review of the FAA, particularly section 2, which permits an arbitration provision to be declared unenforceable only “upon such grounds as exist in law or equity for the revocation of any contract.”  

The court looked to two Ninth Circuit cases to determine if C.C.P. 410.42(a)(1) met the “any contract” standard.  In Bradley v. Harris Research, Inc., 275 F.3d 884 (9th Cir. 2001), the franchise agreement arbitration provision provided that the venue was to be in Utah.  This provision violated a California Statute, which requires arbitration of California franchise agreements to be held within California.  The court in Bradley held that the FAA preempted the statute because the California Statute applied only to forum selection and only to franchise agreements.  Thus, it did not apply to “any contract.” 

Later, in Sakkab v. Luxottica Retail N. Am., Inc., 863 F.3d 425 (9th Cir. 2015) the Ninth Circuit held that the FAA did not preempt the rule which bars contractual provisions that waive labor claims under California Labor Code § 2698.  The court in Sakkab held that the proper test to avoid preemption was that the California Statute must be “generally applicable” to both arbitration and litigation applications and not conflict with the purpose of the FAA, and not whether the statute was applicable to “all contracts.” Thus, the FAA did not preempt the California Statute in Sakkab. 

The court here examined whether the holding in Bradley or Sakkab controlled in this matter.  The court concluded that because the earlier decision in Bradley had not been overruled, that decision remained the controlling law.  The court also concluded that because C.C.P. § 410.42(a)(1) only applies to forum selection clauses and only to contracts between a contractor and subcontractor, it does not apply to “any contract” and therefore the FAA preempts it.  As a result, the court ruled that arbitration was to be held pursuant to the terms of the subcontract, in St. Louis, Missouri.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

John H. Conrad

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