This week, the Ninth Circuit resolves whether parties can delegate issues of contract formation to an arbitrator, and explains the bounds of federal courts’ jurisdiction over ratemaking orders in a challenge to the procedure for capitalizing a California wildfire fund.
The Court held that when a party challenges the very existence of an agreement to arbitrate the court must decide the issue notwithstanding the existence of a delegation clause delegating issues of arbitrability to the arbitrator.
The panel: Judges Wardlaw, Berzon, and Pregerson (C.D. Cal.), with Judge Pregerson writing the opinion.
Key highlight: “Put simply, the [Mutual Arbitration Agreement], as drafted, describes and governs a relationship between Ahlstrom and D.R. Horton that does not exist, and thus does not constitute a properly formed agreement to arbitrate.”
Background: Plaintiff Ahlstrom previously worked as a loan officer for defendant DHI Mortgage Company, Ltd. (“DHIM”). Plaintiff brought a putative class action against DHIM asserting employment-related claims and DHIM moved to compel arbitration based on a Mutual Arbitration Agreement that Ahlstrom signed during his new-hire onboarding process. The agreement was between “the undersigned employee,” and “D.R. Horton, Inc.,” DHIM’s parent company. D.R. Horton never employed Ahlstrom. Ahlstrom argued that the Mutual Arbitration Agreement was never properly formed due to a failure to satisfy a condition precedent in the agreement. The district court granted the motion to compel, concluding that it could not address the condition precedent argument because the agreement’s delegation clause delegated formation issues to the arbitrator.
Result: The Ninth Circuit reversed. The Court disagreed with DHIM that parties may agree to delegate issues of formation to an arbitrator. To the contrary, the Supreme Court has recognized that a court should order arbitration only if it is convinced an agreement has been formed. And the Fifth and Tenth Circuits have specifically rejected the argument that a court lacks authority to decide whether an agreement to arbitrate exists where the parties have clearly and unmistakably delegated the arbitrability issues to the arbitrator. The Court agreed with its sister circuits that where, as here, a party challenges the very existence of an agreement to arbitrate, the district court must address it and determine whether an agreement exists. The Court next concluded that the Mutual Arbitration Agreement did not constitute a properly formed agreement between Ahlstrom and D.R. Horton because it was drafted to govern an employer-employee relationship between them that never existed. The parent-subsidiary relationship between D.R. Horton and DHIM is insufficient to establish that the Mutual Arbitration Agreement in any way identifies the latter was the employer because parents and subsidiaries are treated as distinct entities. Because the Mutual Arbitration Agreement describes and governs a relationship between Ahlstrom and D.R. Horton that did not exist, it did not constitute a properly formed agreement to arbitrate and Ahlstrom should not have been compelled to arbitrate its claims against DHIM based on it.
The Court held that the Johnson Act, which denies federal courts’ jurisdiction over public utility ratemaking disputes, barred plaintiff ratepayers’ constitutional challenge to California Assembly Bill 1054, which created a “Wildfire Fund” to cover utility liabilities resulting from wildfires and instructed the California Public Utilities Commission to consider imposing a surcharge on ratepayers to help capitalize the fund.
Panel: Chief Judge Murguia, and Judges Nelson and Forrest, with Judge Forrest writing the opinion.
Key Highlight: “If we allowed Plaintiffs to avoid the Johnson Act based on their characterization of their challenge, we would render the Act a nullity just as surely as if we allowed plaintiffs asserting non-rate-based claims to avoid the Johnson Act.”
Background: California enacted AB 1054 to address the “increased risk of catastrophic wildfires.” The statute identified various funding sources for a Wildfire Fund to cover utility liabilities, including directing the California Public Utilities Commission to immediately “initiate a rulemaking proceeding to consider” imposing a “nonbypassable charge from ratepayers.” Before the Commission began its proceeding, ratepayers filed suit in federal court, alleging that AB 1054 and the surcharge proceeding violated their right to procedural due process under the Fourteenth Amendment and qualified as an unlawful taking under the Fifth Amendment. After notice and comment, and oral argument before an administrative law judge, the Commission issued a final decision approving the ratepayer surcharge, and plaintiffs amended their complaint to include that decision. The district court dismissed for lack of subject matter jurisdiction under the Johnson Act.
Result: The Ninth Circuit affirmed. Under the Johnson Act, “district courts shall not enjoin, suspend or restrain the operation of, or compliance with, any order affecting rates chargeable by a public utility,” so long as: (1) jurisdiction is based on diversity or the federal constitution; (2) the order does not interfere with interstate commerce; (3) there was “reasonable notice and hearing;” and (4) “[a] plain, speedy and efficient remedy may be had in” state court. Plaintiffs here challenged only whether the surcharge order “affect[ed] rates,” and whether it was made after “reasonable notice and hearing.”
First, the Court held that the surcharge order “affect[ed] rates” within the meaning of the statute. The Ninth Circuit has interpreted the Johnson Act broadly, applying it to “all suits affecting state-approved utility rates,” whether direct or indirect. Because plaintiffs challenged the wildfire surcharge and sought to enjoin the portions of AB 1054 that create the Wildfire Fund and the process by which a utility company may seek assistance from the Fund, the suit would necessarily “affect state-approved utility rates.”
Second, the Court held that the Commission had provided adequate notice and hearing. The Commission had “allowed anyone interested to become party to the proceedings, circulated notice of the hearing in the CPUC’s widely disseminated monthly newsletter, assisted people unfamiliar with CPUC procedures, allowed all parties to present their opinions at multiple stages of the process, allowed oral argument, accepted comments on the Proposed Decision, and responded to those comments in the Final Decision.” That process “surpassed what [the Court has] accepted in prior case,” and an additional evidentiary hearing was not necessary. Based on this record, the Commission “satisfied the Johnson Act’s procedural requirements” and the courts lacked jurisdiction over plaintiffs’ suit.