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Date: 12-03-2017

Case Style: State Farm General Insurance Company v. Watts Regulator Co.

Case Number: B271236

Judge: Grimes

Court: California Court of Appeals Second Appellate District Division Eight on appeal from the Superior Court, Los Angeles County

Plaintiff's Attorney: Karl R. Loureiro and William E. Pallares

Defendant's Attorney: Todd C. Harshman, Grotefeld Hoffman and Daniel Berglund

Description: A nonprofit organization (Arbitration Forums, Inc. or AF)
provides arbitration services for insurers and self-insured
companies who become members of AF by signing its “Property
Subrogation Arbitration Agreement” (the AF arbitration
agreement). Plaintiff State Farm General Insurance Company
and defendant Watts Regulator Company are members of AF
that signed the AF arbitration agreement many years ago. After
notice to its members in November 2014, AF changed the AF
arbitration agreement, effective January 1, 2015, to exclude
product liability claims from the kinds of claims subject to
compulsory arbitration under the agreement.
A few months later, plaintiff filed this lawsuit, alleging
subrogated product liability claims against defendant arising
from a loss that occurred in November 2012. Defendant filed a
motion to compel arbitration, contending it had a vested right,
under the AF arbitration agreement in effect before January 1,
2015, to compulsory arbitration of the claim.
We find no basis for any vested right to arbitration under
the circumstances of this case, where the parties have agreed to
be bound by contractual terms and rules determined by a third
party. We therefore affirm the trial court’s denial of defendant’s
motion to compel arbitration.
Plaintiff and defendant became signatories to the AF
arbitration agreement, independently of each other, some years
before November 28, 2012, when a water loss damaged the home
of one of plaintiff’s insureds. The damage is alleged to have been
caused by a defect in a supply line manufactured by defendant.
The original AF arbitration agreement
At the time of the November 2012 water damage, the
relevant provisions of the AF arbitration agreement were these:
Article First (headed “Compulsory Provisions”) stated:
“Signatory companies must forego litigation and submit any
personal, commercial, or self-insured property subrogation claims
to Arbitration Forums, Inc.”
Article Second contained eight exclusions from the
compulsory arbitration requirement. When plaintiff and
defendant became signatories, and at the time of the loss in
November 2012, none of the eight listed exclusions applied to the
claim at issue in this case.
Article Fifth described “AF’s Function and Authority.”
Among other matters, it stated that: “AF, representing the
signatory companies, is authorized to: [¶] (a) make appropriate
Rules and Regulations for the presentation and determination of
controversies under this Agreement . . . .” AF was also
authorized to “(e) invite other insurance carriers, noninsurers, or
self-insureds to participate in this arbitration program, and
compel the withdrawal of any signatory for failure to conform to
the Agreement or the Rules issued thereunder.”
Article Sixth governed withdrawals from the agreement. It
provided: “Any signatory company may withdraw from this
Agreement by notice in writing to AF. Such withdrawal will
become effective sixty (60) days after receipt of such notice except
as to cases then pending before arbitration panels. The effective
date of withdrawal as to such pending cases shall be upon final
compliance with the finding of the arbitration panel on those
The revised AF arbitration agreement
In November 2014, AF issued an e-bulletin, advising its
members that, effective January 1, 2015, AF would change its
Property Subrogation Arbitration Agreement to exclude product
liability claims from compulsory arbitration. Effective January 1,
2015, the change was: “No company shall be required, without
its written consent, to arbitrate any claim or suit if: (i) it is a
product liability claim arising from an alleged defective product.”
The November 2014 e-bulletin further advised members
that, while arbitration of product liability claims would no longer
be compulsory as of January 1, 2015, “cases filed prior to
January 1, 2015, will remain in arbitration’s jurisdiction and will
be processed to hearing. [¶] Parties may still consent to use the
Property Program to resolve product liability claims on a per-case
basis on and after January 1, 2015.”
Neither plaintiff nor defendant withdrew from the AF
arbitration agreement.
On March 26, 2015, plaintiff filed a complaint in the
superior court against defendant seeking subrogation for
plaintiff’s payments to its insured in connection with the
November 28, 2012, water damage to his home. The complaint
alleged causes of action for negligence, strict products liability
and breach of implied warranties. Plaintiff did not submit these
claims to AF for arbitration at any time before suit was filed.
On July 22, 2015, defendant filed a motion to compel
arbitration, asserting that plaintiff’s claims were, at the time the
claims arose, subject to the AF arbitration agreement that each of
them had signed.
In its opposition to the motion, plaintiff, citing AF’s
changes to the AF arbitration agreement effective January 1,
2015, contended that arbitration was no longer compulsory.
Defendant’s reply to plaintiff’s opposition argued that,
when the claim at issue arose in November 2012, plaintiff and
defendant were parties to a binding contract mandating that the
claim be arbitrated, so defendant had a “previously-vested right
[to arbitration] unless the parties specifically intended to
retroactively terminate their rights.” Thus, defendant contended,
“the present arbitration agreement, as of January 1, 2015, has no
bearing on whether this claim is arbitrable,” and instead “the
terms of the arbitration agreement applicable at the time the
claim arose govern as to whether this matter is subject to
arbitration.” Further, defendant argued, AF is not a party to the
AF arbitration agreement, “and its ‘interpretation’ of the
agreement between [defendant] and Plaintiff carries no legal
The trial court denied defendant’s motion to compel
arbitration. Defendant filed a timely notice of appeal.
Defendant contends, in substance, that once plaintiff and
defendant had signed on to the AF arbitration agreement, AF
could not “unilaterally” amend the terms of that agreement to
exclude product liability claims that accrued before the effective
date of the amendment. As will appear, we find no merit in this
1. Legal Principles
The governing legal principles are well established. The
policy underlying both the California Arbitration Act (Code Civ.
Proc., § 1280 et seq.) and the Federal Arbitration Act (9 U.S.C.
§ 1 et seq.) “ ‘is to ensure that arbitration agreements will be
enforced in accordance with their terms.’ ” (Avery v. Integrated
Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 59 (Avery).)
Arbitration is “a matter of contract” and the policy favoring
arbitration does not displace the need for a voluntary agreement
to arbitrate. (Ibid.) “Although the FAA preempts any state law
that stands as an obstacle to its objective of enforcing arbitration
agreements according to their terms, . . . we apply general
California contract law to determine whether the parties formed
a valid agreement to arbitrate their dispute[.]” (Id. at pp. 59-60,
citation omitted.)
“Interpreting a written document to determine whether it
is an enforceable arbitration agreement is a question of law
subject to de novo review when the parties do not offer conflicting
extrinsic evidence regarding the document’s meaning.” (Avery,
supra, 218 Cal.App.4th at p. 60.)
2. This Case
We begin with several pertinent points.
First, this is not an ordinary arbitration agreement, where
one party has contracted with another party to resolve disputes
arising under their agreement in an arbitral forum rather than in
court. In this case, plaintiff and defendant have not contracted
with each other directly. Both of them, acting independently and
along with many other insurers and self-insured companies, have
signed an agreement prepared and promoted by the organization
providing the arbitration services that are described in the
Second, AF places limits on the property subrogation
disputes that are subject to compulsory arbitration. These limits
appear in Arbitration Forums, Inc. Rules (the AF rules).1 Thus,
for example, the AF rules provide that compulsory arbitration is
applicable to a maximum claim amount of $100,000, and the AF
rules limit jurisdiction to accidents or losses occurring in the
United States, Puerto Rico and the U.S. Virgin Islands. None of
these limitations appears in the AF arbitration agreement – only
in the AF rules.
Third, as already described, signatories to the AF
arbitration agreement authorize AF to make those rules. In
Article Fifth, signatories agree that “AF, representing the
signatory companies, is authorized to: [¶] (a) make appropriate
Rules and Regulations for the presentation and determination of
controversies under this Agreement[.]” Defendant says this
provision merely “allow[s] AF to make appropriate procedural
rules” (italics added) and does not “allow[] AF to make rules
regarding the provisions of the Arbitration Agreement itself[.]”
That is not the case, as demonstrated by the jurisdictional,
monetary and geographical limitations that do not appear in the
agreement, but do appear in the AF rules. Those rules clearly
operate to limit the scope of a signatory’s agreement in Article
First to submit “any” property subrogation claims to AF. Thus it
is plain that signatories are bound by both the AF arbitration
agreement and the AF rules, neither of which contain any
restriction on AF’s authority to make changes.

1 The AF rules “are made and administered by [AF] under
the authority of Article Fifth (a) of the various Arbitration
Agreements.” The rules cover jurisdiction, procedure, hearings,
decisions, awards, and administration.
All this leads us to conclude that neither of the parties had
any power to determine the terms of the AF arbitration
agreement; they could only decide, as they did, whether to assent
to terms set by AF, and if they did not, they were free to
withdraw. Nothing in the AF arbitration agreement or rules
suggested that AF could not change those terms. And nothing in
the AF arbitration agreement or rules suggested that AF could
not specify the date on which and circumstances under which
changes to the AF arbitration agreement would become effective.
Indeed, all indications are to the contrary. In addition to
Article Fifth just discussed, Article Sixth, the withdrawal
provision, plainly indicates that any signatory company could
withdraw from the agreement “by notice in writing to AF” (not by
notice to other members), effective 60 days after receipt of the
notice. Moreover, the only exception to the 60-day withdrawal
rule is for “cases then pending before arbitration panels,” as to
which withdrawal is not effective until final compliance with the
finding of the arbitration panel. There is no exception for claims
that have accrued but have not yet been filed with AF.
With these points in mind, we turn to defendant’s
contention that the law requires a different conclusion.
Defendant’s principal argument is that it “never consented
or agreed” to the “retroactive” application of the January 1, 2015
amendment to previously accrued claims. We reject the claim
that retroactivity principles apply here. The notion of
retroactivity presupposes that, before January 1, 2015, the date
of accrual determined whether a product liability claim was
subject to compulsory arbitration. Nothing in the AF arbitration
agreement or AF rules so states, and the withdrawal provision is
inconsistent with an interpretation that the accrual date of a
claim determines which arbitration agreement applies.
Defendant’s retroactivity claim relies on legal authorities to
the effect that the “critical point in time,” in determining whether
an employer’s modifications to an arbitration agreement apply to
an employee’s claims, “is when the claims accrued, not when the
employee filed his or her judicial complaint.” (Avery, supra, 218
Cal.App.4th at p. 62.) Avery explained that “[t]he implied
covenant [of good faith and fair dealing] prevents [the employer]
from applying [a new alternative dispute resolution process] to all
claims that accrued before [the employer] issued the new
handbook [containing the new process].” (Ibid.) That is, the
implied covenant of good faith and fair dealing prevents one
party to an arbitration agreement from unilaterally changing the
arbitration process with respect to claims that had already
We agree with the Avery principle, but it has no application
here. This is not a case where one party unilaterally changed its
agreement with another party. It is a case where a third party,
AF, set the terms of the agreement, and made a “unilateral”
change, effective on a future date and with advance notice to the
parties, both of whom were free to withdraw from the agreement

2 A portion of AF’s “Reference Guide,” dated 2009, explains
the withdrawal provision and “how simple it is to withdraw from
an arbitration program.” The reference guide states that:
“A withdrawing company should not file for arbitration during
this 60-day waiting period unless it is willing to have the panel
hear the case. All cases filed by or against the withdrawing
member during the 60-day waiting period are still subject to the
provisions of the program and the member must honor all
yet neither of whom withdrew. The implied covenant of good
faith and fair dealing is not implicated in this case. Defendant’s
repeated assertion of a “vested right” to arbitration of product
liability claims that accrued before January 1, 2015, fails for the
same reasons.
Taking a slightly different tack, defendant asserts that,
“[a]t most,” AF’s decision not to offer compulsory arbitration of
product liability claims after January 1, 2015, “meant that the
original Arbitration Agreement would expire or be terminated as
of that date.” From this premise, defendant concludes plaintiff
“would still be required to arbitrate claims that arose and
accrued” while the original agreement was in effect. For this
(erroneous) conclusion, defendant relies, for example, on Nolde
Brothers, Inc. v. Local No. 358, Bakery & Confectionery Workers
Union, AFL-CIO (1977) 430 U.S. 243 (Nolde Brothers), where the
court held that a union’s claim for severance pay under an
expired collective-bargaining agreement was “subject to
resolution under the arbitration provisions of that contract.” (Id.
at p. 255; see also John Wiley & Sons, Inc. v. Livingston (1964)
376 U.S. 543, 555 (John Wiley) [obligations of the parties under
the arbitration clause of their collective bargaining agreement
survived contract termination when the dispute was over an
obligation arguably created by the expired agreement].)
Again, the cases defendant cites are utterly inapt, factually
and legally. As the John Wiley court stated, “We see no reason
why parties could not if they so chose agree to the accrual of
rights during the term of an agreement and their realization
after the agreement had expired.” (John Wiley, supra, 376 U.S.
at p. 555.) That is not what happened here. And, as the high
court later explained, the Nolde Brothers principle applies “only
where a dispute has its real source in the contract.” (Litton
Financial Printing Division v. NLRB (1991) 501 U.S. 190, 205.)
This case does not have its source in a contract between the
parties. It does not involve a collective bargaining agreement, or
any other kind of agreement that has been negotiated between
the parties to it and that provides for arbitration of disputes over
obligations created by the expired contract. This is a subrogation
claim arising from a loss suffered by plaintiff’s insured – not a
dispute arising out of a contractual relationship between plaintiff
and defendant. At the risk of repetition, the AF arbitration
agreement is an industry program offered by a third party that
has determined the terms under which it will provide arbitration
services to companies who agree to bind themselves to the terms
set by the third party. There is no legal basis for applying rules
governing retroactivity, vested rights, or accrual of claims under
these circumstances.
Defendant next argues that plaintiff is “judicially estopped”
from taking the position that the AF arbitration agreement in
effect as of January 1, 2015, governs this case. Defendant relies
on a one-page order compelling arbitration in a Tennessee case
between plaintiff and defendant. In that case, both parties
“consent[ed]” to a holding by the Tennessee court that the
arbitration agreement in effect at the time the claim arose
(January 20, 2013) “governs this claim.”
Defendant does not enumerate the elements of judicial
estoppel in its opening brief, and for good reason; the doctrine has
no application here. “ ‘ “Judicial estoppel precludes a party from
gaining an advantage by taking one position, and then seeking a
second advantage by taking an incompatible position.” ’ ”
(Aguilar v. Lerner (2004) 32 Cal.4th 974, 986 (Aguilar).) The
goals of the doctrine “ ‘ “are to maintain the integrity of the
judicial system and to protect parties from opponents’ unfair
strategies.” ’ ” (Ibid.) Judicial estoppel “is an equitable doctrine,
and its application, even where all necessary elements are
present, is discretionary.” (MW Erectors, Inc. v. Niederhauser
Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 422,
italics omitted.)
There is no “unfair strategy” in consenting to arbitration in
one case and not in another. Nor did plaintiff “gain[] an
advantage” by consenting to arbitration in one case and then
“seek[] a second advantage” by not doing so in another. (Aguilar,
supra, 32 Cal.4th at p. 986.) Moreover, there is no showing
plaintiff has taken incompatible positions. The one-page order
defendant cites does not show the facts in the Tennessee matter,
and plaintiff tells us that this was a claim it had previously filed
with AF, before January 1, 2015, and then withdrew from
arbitration after AF announced the forthcoming change in its
rules. (This also happened in a California case where plaintiff
stipulated to arbitration with defendant; the stipulation in that
case shows the facts to be as plaintiff states.) In short, those
cases involved different circumstances – where plaintiff initially
submitted the claim to AF before January 1, 2015 – so defendant
has not shown any inconsistency in plaintiff’s position. In any
event, we cannot see why a party’s consent or stipulation to
arbitration in one case should estop it from taking a different
position in a different matter. The gravamen of judicial estoppel
“ ‘is the intentional assertion of an inconsistent position that
perverts the judicial machinery.’ ” (Jackson v. County of Los
Angeles (1997) 60 Cal.App.4th 171, 183.) Nothing of the sort
happened here.
Defendant also contends that an interpretation of the AF
arbitration agreement allowing AF “to change unilaterally the
arbitration agreement” renders the agreement “illusory.” This is
so, defendant tells us, because only the insurer (plaintiff) can
submit claims for arbitration (and, if we understand defendant’s
point correctly, plaintiff could choose not to submit accrued
product liability claims after AF announced the exclusion of those
claims in November 2014). That is so, but we fail to see how this
means “there was never any mutual obligation to perform.”
Defendant’s argument again presupposes there is merit to
its repeated assertion that the accrual date of a claim is
pertinent, an assertion we have rejected. Moreover, neither party
has withdrawn from the AF arbitration agreement as amended.
There was, and still is, until either party withdraws, an
obligation to arbitrate property subrogation claims not involving
products liability, in accordance with the rules and other
exclusions set by AF. The fact that product liability claims are no
longer subject to compulsory arbitration does not make the
agreement illusory. And perhaps even more to the point, “[a]
contract is unenforceable as illusory when one of the parties has
the unfettered or arbitrary right to modify or terminate the
agreement or assumes no obligations thereunder.” (Harris v.
TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 385, italics
added.) This is not such as case.
Next, in its reply brief defendant tells us we cannot rely on
the November 2014 e-bulletin (announcing the new product
liability exclusion) to construe the amended AF arbitration
agreement, because the e-bulletin is “extrinsic evidence.” (As
mentioned earlier, the e-bulletin tells members that, while “use of
the Property Program to resolve disputes involving product
liability claims . . . will no longer be compulsory as of January 1,
2015, cases filed prior to January 1, 2015, will remain in
arbitration’s jurisdiction and will be processed to hearing.”)
We are aware of no principle preventing the consideration
of extrinsic evidence to determine the meaning of an agreement.
Indeed, the case defendant relies on refers to a different point.
(See Fremont Indemnity Co. v. Fremont General Corp. (2007) 148
Cal.App.4th 97, 114 [observing that a court “cannot determine
based on only the four corners of a document, without
provisionally considering any extrinsic evidence offered by the
parties, that the meaning of the document is clear and
Finally, defendant asserts that if an agreement is capable
of two different reasonable interpretations, it is ambiguous, and
the ambiguity is to be resolved in favor of arbitration. That is so,
but again, this is not such a case. Here, the parties agreed to
arbitration under terms and rules set by a third party, AF, whose
intent to cease requiring and providing compulsory arbitration of
product liability claims as of January 1, 2015, is clear. There was
no error in the trial court’s denial of defendant’s motion to compel

Outcome: The order denying defendant’s motion to compel arbitration is affirmed. Plaintiff shall recover its costs on appeal.

Plaintiff's Experts:

Defendant's Experts:


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