California Supreme Court Addresses Public Policy/Illegality Defense to Arbitration
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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.
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