Opinion
NOT TO BE PUBLISHED
Super. Ct. No. 02AS04482
RAYE, J.After defendant E*Trade Securities, Inc. (E*Trade) fired employee plaintiff Ivan H. Dupree (Dupree), he filed suit alleging various torts. Both Dupree’s employment agreement and brokerage account agreement contained an arbitration clause requiring binding arbitration under the rules of the National Association of Securities Dealers, Inc., Code of Arbitration Procedure (NASD Code). E*Trade brought a petition to compel arbitration.
The trial court denied the petition, finding the arbitration agreement unconscionable because it required Dupree to arbitrate the matter outside the state, waive California laws regarding neutral arbitrators, and bear responsibility for the arbitrator’s fees. In essence, the trial court found the NASD Code differed from the new Ethics Standards for Neutral Arbitrators in Contractual Arbitration (Cal. Rules of Court, appen., div. VI; hereafter California Standards) promulgated by the California Judicial Council in July 2002. E*Trade appeals, arguing the California Standards are preempted by the NASD Code. Dupree failed to file a respondent’s brief.
In the interim, the California Supreme Court found the federal Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.; hereafter SEA) preempts the California Standards in arbitrations involving self-regulatory organizations (SROs). (Jevne v. Superior Court (2005) 35 Cal.4th 935 (Jevne).) Accordingly, we reverse the trial court’s order with directions for the court to enter a new order granting E*Trade’s petition to compel arbitration.
SROs are self-regulatory organizations registered with the United States Securities and Exchange Commission (SEC) pursuant to the SEA. As part of the comprehensive system of regulation of the securities industry, the SEA authorizes SROs within the securities industry to self-regulate their members subject to oversight by the SEC. SROs are subject to extensive oversight, supervision, and control by the SEC on an ongoing basis. (Mayo v. Reynolds (2003) 258 F.Supp.2d 1097, 1101 (Mayo).)
FACTUAL AND PROCEDURAL BACKGROUND
Dupree’s Employment Contract and Complaint
Dupree entered into a written employment contract with E*Trade in January 1997. E*Trade terminated Dupree’s employment in April 2001. Dupree filed suit, alleging breach of the covenant of good faith and fair dealing, slander, and libel in connection with his termination. The complaint also alleged E*Trade committed fraud in relation to Dupree’s E*Trade brokerage account. Dupree alleged E*Trade fraudulently induced Dupree to trade in an E*Trade account through marketing statements and commission rebates, causing him monetary loss because of a system defect.
As an employee of E*Trade licensed with the National Association of Securities Dealers, Inc. (NASD), Dupree signed a “Form U-4” application for securities industry registration (Form U-4). Form U-4 contains an arbitration agreement that states: “I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations indicated in Item 10 as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.”
Item 10 on the first page of Form U-4 lists “NASD” under the heading “To Be Registered With the Following” and “CA” as the jurisdiction. As E*Trade points out, under NASD Code, rule 10201(a), “a dispute, claim, or controversy eligible for submission under the Rule 10100 Series between or among members and/or associated persons . . . arising in connection with the business of such member(s) or in connection with the activities of such associated person(s), or arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of [¶] . . . [¶] (2) a member against a person associated with a member or a person associated with a member against a member . . . .” (Italics added.)
Under this NASD rule, by signing Form U-4, Dupree agreed to arbitrate any dispute in connection with his brokerage activities or arising out of his employment under the NASD rules.
Dupree also agreed to arbitrate all claims arising out of his E*Trade account. When Dupree opened his account, he signed an E*Trade account application form. In capital letters directly above his signature the application states: “I UNDERSTAND THAT THIS ACCOUNT IS GOVERNED BY A PRE-DISPUTE ARBITRATION CLAUSE WHICH IS CONTAINED IN PAGE 7, PARAGRAPH 31b of E*TRADE’S CUSTOMER AGREEMENT.”
By signing the account application form, Dupree agreed to E*Trade’s customer agreement. The customer agreement requires binding arbitration under the NASD Code of any controversy arising out of or in any way relating to Dupree’s E*Trade account.
The customer agreement states, in pertinent part: “Arbitration Agreement. You agree to arbitrate any controversy between you and E*TRADE . . . arising out of or relating in any way to your Account, including but not limited to: (i) transactions of any kind made on your behalf by, through or with E*TRADE . . . or (ii) the performance, construction or breach of this Agreement or any other written agreement between you and E*TRADE. Such arbitration shall be conducted in accordance with the rules then in effect of the [NASD].”
One of the functions of SROs such as the NASD is to provide arbitral fora for the resolution of securities industry disputes. Historically, arbitration has been a preferred remedy in the securities industry. Securities brokers routinely include arbitration clauses in their customer agreements. The SEC has expansive power to regulate the SRO arbitration programs. (Mayo, supra, 258 F.Supp.2d at p. 1102.)
The California Arbitration Standards
Effective July 1, 2002, the California Judicial Council adopted the California Standards under the authority of Code of Civil Procedure section 1281.85.
The California Standards are published in an appendix to the California Rules of Court.
The California Standards include a procedure for arbitrator disclosures of potential conflicts of interest. (Cal. Rules of Court, appen., div. VI, std. 7.) The differences between the California Standards and the NASD Code form the crux of this appeal.
The California Standards impose different, more detailed information disclosure requirements for arbitrators, different timing requirements for disclosure, and different rules for disqualification of arbitrators. For example, the California Standards require disclosure of certain types of past contacts even when such matters do not create any appearance of bias or impropriety. (Cal. Rules of Court, appen., div. VI, std. 7(d).) In contrast, the NASD Code does not require disclosure of such contacts unless it is “likely to affect impartiality or might reasonably create an appearance of partiality or bias.” (NASD Code, rule 10312(a)(2).) The California Standards require automatic disqualification of an arbitrator who fails to disclose such information; the NASD Code does not permit automatic disqualification. Instead, the NASD Code allows motions to disqualify to the director of arbitration under certain circumstances. (§ 1281.91, subd. (a); NASD Code, rule 10308(d).)
NASD Reaction to California Standards
The NASD reacted to these differences between its arbitration rules and the California Standards by temporarily suspending the appointment of arbitrators in California in July 2002. The NASD continued to appoint arbitrators and designate hearing locations in neighboring states, such as Nevada. The NASD also allowed parties to choose California arbitrators to hear disputes out of state at no additional cost.
The NASD resumed allowing parties to proceed with arbitrations in California in September 2002. However, the NASD required parties to sign a waiver agreement stating the California Standards were not applicable to their arbitrations. It is this mandatory waiver that Dupree challenged in the trial court.
According to E*Trade, the NASD instituted the new waiver procedure to ensure that parties could move forward with their cases in California under the NASD Code. The NASD implemented a new rule requiring any industry member, such as E*Trade, to waive the California Standards when a customer waives them.
The waiver procedure became part of the NASD Code following SEC approval in September 2002. (67 Fed. Reg. 62085 (Oct. 3, 2002).)
In instituting the waiver, the NASD provided the SEC with the following explanation: “On July 1, California introduced new rules governing the arbitration process in that state. The rules were designed to address conflicts of interest in private arbitration forums that are not part of a federal regulatory system overseen on a uniform, national basis by the SEC. The NASD and NYSE not-for-profit, highly regulated dispute resolution programs have in place appropriate conflict of interest rules.” (67 Fed. Reg. 62086 (Oct. 3, 2002).) The NASD opined the California Standards placed extreme and unnecessary disclosure burdens on NASD arbitrators, individuals who already met stringent NASD disclosure rules. The potential liability for inadvertent violations of the California Standards led the NASD to conclude that if it implemented the California Standards, investors would be saddled with higher costs, a less efficient process, and a smaller pool of potential arbitrators. (67 Fed. Reg. 62086-62087 (Oct. 3, 2002).)
The NASD also noted: “Under the California Standards, even inadvertent nondisclosure of immaterial relationships is a basis for removal of an arbitrator and vacatur of an award. The California Standards remove from the alternative dispute resolution administrator the power to decide contested challenges to arbitrators, instead vesting this authority unilaterally in any party to the arbitration. As currently drafted, the California Standards would allow a party unilaterally to challenge and remove one arbitrator after another, thus destroying any notion of arbitral finality and closure.” (67 Fed. Reg. 62087 (Oct. 3, 2002).)
Finally, the NASD explained the new waiver as requiring “industry parties to waive the California Standards in all cases in which all the parties in the case who are customers . . . agree to waive application of the Standards. Under such a waiver, the case would proceed in California under the existing NASD Code, which already contains extensive disclosure requirements and provisions for challenging arbitrators with potential conflicts of interest.” (67 Fed. Reg. 62087, supra.)
E*Trade’s Motion to Compel Arbitration
E*Trade filed a motion to compel arbitration, arguing Dupree’s execution of Form U-4 obligated him to arbitrate his claims under the NASD Code. Dupree opposed the petition. He acknowledged signing Form U-4, requiring mandatory arbitration of employment and account disputes, but argued the trial court should not enforce the NASD’s Form U-4 because it is procedurally and substantively unconscionable. Dupree asserted the NASD procedure required plaintiffs to pay exorbitant filing fees and failed to meet minimum levels of integrity for arbitration conducted in California.
E*Trade argued the California Standards were preempted by federal securities law and the Federal Arbitration Act. (9 U.S.C. § 1 et seq.; hereafter FAA.)
E*Trade stated the purpose of the waiver was to insulate arbitrators from liability until preemption issues were resolved. According to E*Trade, the resolution of a pending federal case, Mayo, supra, 258 F.Supp.2d 1097,would render the waiver issue moot.
The trial court denied E*Trade’s motion to compel arbitration, finding the arbitration provision unconscionable “because it requires plaintiff to arbitrate this matter outside the State of California, waive California laws regarding neutral arbitrators, and bear responsibility for the arbitrator’s fees.” Following entry of judgment, E*Trade filed a timely notice of appeal.
DISCUSSION
I
As E*Trade notes, there are no disputed facts before us on appeal. We review questions of law de novo. (Mount Diablo Medical Center v. Health Net of California, Inc. (2002) 101 Cal.App.4th 711, 717.) Where the evidence is undisputed, we review an arbitration contract de novo to determine whether it is enforceable. (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174.)
II
To resolve the conflict between the parties, we must determine whether the NASD Code preempts the California Standards. The trial court found no preemption; E*Trade argues in favor of preemption.
The supremacy clause of article VI of the United States Constitution grants Congress the power to preempt state law. State law that conflicts with a federal statute is “without effect.” It is well established that consideration of issues arising under the supremacy clause starts with the assumption that the historic police powers of the states are not to be superseded by federal act unless that is the clear and manifest purpose of the Congress. (Cipollone v. Liggett Group, Inc. (1992) 505 U.S. 504, 516 [120 L.Ed.2d 407].)
The United States Supreme Court has explained that federal preemption arises in three circumstances. First, Congress can define explicitly the extent to which its enactment preempts state law. Second, in the absence of explicit statutory language, state law is preempted when it regulates conduct in a field that Congress intended the federal government to occupy exclusively. Such an intent may be inferred from a scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room for the states to supplement it. Finally, state law is preempted to the extent it actually conflicts with federal law. The Supreme Court has found preemption where it is impossible for a private party to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. (English v. General Electric Co. (1990) 496 U.S. 72, 78-79 [110 L.Ed.2d 65].)
III
The Supreme Court in Jevne, supra, 35 Cal.4th 935 considered the interplay between the California Standards and the NASD Code. Plaintiff Jevne filed an action against a brokerage and financial services firm and a member of the NASD, asserting causes of action for negligence and breach of fiduciary duty. The firm moved to compel arbitration, based on the arbitration provisions in an agreement relating to Jevne’s account. The provision required all disputes to be settled through binding arbitration in accordance with the rules and procedures of the NASD. The trial court granted the firm’s motion to compel. (Id. at pp. 941-942.)
In September 2002, during arbitration proceedings, one of the arbitrators recused himself. In July 2002 the NASD had ceased appointing arbitrators in NASD arbitrations in California in light of the California Standards imposing new ethical obligations on arbitrators. The NASD informed Jevne it would not appoint a replacement arbitrator and would not proceed with the arbitration unless Jevne agreed to waive the California Standards or agreed to have the arbitration conducted in another state. (Jevne, supra, 35 Cal.4th at p. 943.) Jevne refused and filed a motion to set aside the court’s prior order compelling arbitration. The trial court denied the motion. (Ibid.) The appellate court denied Jevne’s petition for a writ of mandate. Although the court concluded that the Judicial Council had acted within its authority in drafting the California Standards, and that they are not preempted by the FAA, the court also concluded the California Standards conflicted with, and are preempted by, the SEA. The Supreme Court granted review. (Id. at p. 944.)
The Supreme Court began by noting that the SEA contains no express preemption provisions. Accordingly, the court found neither express preemption nor field preemption at issue. (Jevne, supra, 35 Cal.4th at p. 950.) Instead, the court considered only conflict preemption: when it is impossible to comply with both federal and state law, and when the state law could prevent or impair accomplishment of the purposes and objectives of the federal law. (Ibid.)
In Jevne, the plaintiff argued the NASD Code did not have the preemptive force of federal law, and as a consequence, the California Standards could conflict with the NASD Code without necessarily being preempted by the SEA. After reviewing the preemptive force of the NASD Code, the Court concluded: “[B]ecause the SEC now reviews all SRO rules, any of those rules may be germane to the SEA’s goals of fair dealing and investor protection. Whether a particular rule is germane to the congressional purposes is a matter to be determined by careful examination of the rule’s contents and consideration of any public pronouncements by the SEC concerning the rule’s purpose and effect. As the federal agency entrusted with enforcement of the SEA, the SEC’s approval of an NASD rule is an expression of federal policy that may have preemptive effect. [Citation.] SEC approval will have preemptive effect if the SEC intended that the rule prevail over conflicting state law and if the SEC’s decision was not arbitrary or in excess of its statutory authority.” (Jevne, supra, 35 Cal.4th at p. 953.)
The court went on to consider whether California Standards, standard 7, which sets forth the matters that must be disclosed by a person nominated or appointed as an arbitrator, and standard 10, governing disqualification, conflicted with the NASD Code sections on disclosure and disqualification. (Jevne, supra, 35 Cal.4th at pp. 954-956.)
The court found it was not impossible to comply with the disclosure requirements of both the California Standards and the NASD Code. According to the court, for matters required to be disclosed by the California Standards, the arbitrator would make disclosure directly to the parties, as required by the California Standards. For matters required to be disclosed by the NASD Code, the arbitrator would make the disclosure to the director of arbitration, as required by the NASD Code. (Jevne, supra, 35 Cal.4th at p. 956.)
However, the court also found, after considering numerous SEC documents and briefs, that the California Standards disclosure requirements would impede or impair accomplishment of the goals of the NASD Code. The SEC argued the California Standards adversely affected NASD arbitrators in three ways: by increasing administrative costs associated with the more detailed disclosure requirements, by reducing the number of available arbitrators, and by reducing the uniformity and consistency of NASD arbitrators by imposing special requirements applicable in only one state. (Jevne, supra, 35 Cal.4th at p. 956.) The court noted that in deciding whether a state law conflicts with a federal law by hindering the complete accomplishment of the federal law’s objective, considerable weight is given to the views of the federal agency charged with administrating the federal law. (Id. at p. 958.)
The Court found the case for preemption even more compelling as to the California Standards’s disqualification provision. (Jevne, supra, 35 Cal.4th at pp. 958-959.) The Court found the disqualification provision of the California Standards conflicts with the disqualification rules under the NASD “insofar as it deprives the Director of Arbitration of authority to determine whether, after an arbitrator has been appointed, that arbitrator should be disqualified on the ground of bias or interest. Under standard 10 [of the California Standards], disqualification is automatic if a party timely serves a notice of disqualification in any of the circumstances described in the standard, some of which may occur after an arbitrator has been selected and appointed. Under the NASD Code, after an arbitrator is appointed, a party may seek disqualification of the arbitrator by making an objection, but it is the Director of Arbitration who makes the disqualification determination. This may often require the exercise of judgment to determine whether information that the arbitrator disclosed after appointment, or failed to disclose before appointment, sufficiently demonstrates a disqualifying bias or interest. These different systems of arbitrator disqualification are fundamentally irreconcilable because application of standard 10 could require disqualification of an arbitrator who could not be disqualified under the NASD rules because the Director of Arbitration had determined that the arbitrator did not have a disqualifying bias or interest.” (Jevne, at p. 958.)
The Court also noted the SEC had expressed the view that the California Standard’s disqualification provision conflicts with the NASD Code in a way that “threatens to frustrate the congressional goals and objectives underlying the SEA.” (Jevne, supra, 35 Cal.4th at p. 959.) The SEC staff concluded the added opportunities under the California system for disqualification of arbitrators may increase the complexity, cost, and uncertainty of the arbitration process. (Id. at pp. 959-960.) Such a result would “serve the interests of well-financed brokerage firms, while the average investor would suffer from protracted and costly proceedings.” (Id. at p. 960.) The Court concluded the SEC’s approval of the NASD disqualification code and its related pronouncements “reflect its determination that the NASD Code’s provisions governing arbitrator selection should prevail over conflicting state law, and this determination is neither arbitrary nor in excess of its statutory authority.” (Ibid.) Therefore, the Court found the SEA, through the SEC’s approval of the NASD Code, preempts the California Standards dealing with disclosure and disqualification.
Since the California Standards conflict with the SEC-adopted SRO arbitration rules, we conclude the SRO arbitration rules preempt application of the California Standards to the NASD Code. Therefore, we reverse the trial court’s order denying E*Trade’s petition to compel arbitration.
We note Jevne considered only claims brought pursuant to a brokerage account; here the court considered claims brought pursuant to a brokerage account and an employment agreement. However, as Dupree concedes, both the employment agreement and the brokerage agreement contained an arbitration clause requiring binding arbitration under the NASD Code. Since Dupree agreed to binding arbitration under the NASD Code for all his claims, the Supreme Court’s finding that the SRO arbitration rules preempt application of the California Standards to the NASD Code applies equally to Dupree’s employment and brokerage claims.
DISPOSITION
The judgment is reversed. The trial court is directed to enter an order granting E*Trade’s petition to compel arbitration. E*Trade shall recover costs on appeal.
We concur: SCOTLAND, P.J., BLEASE , J.