In Chase v. Kia Motors Am., Inc., No. 22-cv-09082-JCS, 2023 U.S. Dist. LEXIS 31208, at *1-2 (N.D. Cal. Feb. 24, 2023), Judge Spero concluded that he did not have jurisdiction to hear a federal claim raised for the first time in an arbitration referred by a state court. Judge Spero summarized the case as follows:
Defendant Hyundai Capital America d/b/a Kia Finance (“Kia Finance”) removed this case from the California Superior Court for the County of Alameda,1 asserting that a federal claim that Plaintiffs added in arbitration while state court proceedings were stayed rendered the case removable once the stay was vacated. Plaintiffs John Chase and Hillary Chase move to remand on the basis that Kia Finance’s removal was untimely, arguing that Kia Finance should have removed when Plaintiffs first raised their federal claim in arbitration. Defendants Kia Motors America, Inc. (“Kia Motors”) and Michael C. Stead, Inc. d/b/a Michael Stead’s Hilltop Ford Kia (“Hilltop”) join Kia Finance in opposing remand. The Court held a hearing on February 24, 2023. Contrary to all parties’ positions, the federal claim never became part of the case before the Superior Court, and thus is not part of the case before this Court. This Court therefore lacks subject matter jurisdiction and REMANDS the case sua sponte on that basis. Lacking jurisdiction, the Court does not reach the procedural arguments asserted by the parties.
The Court found that since arbitration is “outside the court system”, the federal claim raised in arbitration for the first time never became part of the referring state court case. Accordingly, there was no federal claim to remove to federal court.
Plaintiffs argue that the FCRA claim gave rise to federal question jurisdiction supporting removal of the state court action when Plaintiffs first added that claim in arbitration. The Court disagrees. As a matter of California law, “[a]n arbitration has a life of its own outside the judicial system.” Titan/Value Equities Grp., Inc. v. Superior Court, 29 Cal. App. 4th 482, 489 (1994) (citation and internal quotation marks omitted). Code of Civil Procedure section 1281.4 requires a court to stay an action submitted to arbitration pursuant to an agreement of the parties. Beyond that, the court’s role is fairly limited. Once a petition is granted and the lawsuit is stayed, the action at law sits in the twilight zone of abatement with the trial court retaining merely vestigial jurisdiction over matters submitted to arbitration. During that time, under its “vestigial” jurisdiction, a court may; appoint arbitrators if the method selected by the parties fails (§ 1281.6); grant a provisional remedy “but only upon the ground that the award to which an applicant may be entitled may be rendered ineffectual without provisional relief” (§ 1281.8, subd. (b)); and confirm, correct or vacate the arbitration award (§ 1285). Absent an agreement to withdraw the controversy from arbitration, however, no other judicial act is authorized. Id. at 487 (cleaned up). The state court also retains jurisdiction over subsequent petitions filed in court regarding the same arbitration agreement, Cal. Civ. Proc. Code § 1292.6, and to consider motions to lift a stay under section 1281.98 and proceed in court instead of through arbitration, Williams v. W. Coast Hosps., Inc., 86 Cal. App. 5th 1054, 1068 (2022), petition for review filed, No. S278484 (Cal. Feb. 7, 2023). Although a state court may in some circumstances be called upon to provide relief affecting arbitration, the arbitration is a separate proceeding from the case filed (and stayed) before the court. The recent appellate decision in Williams makes clear that even when a state court grants a motion to vacate a stay under section 1281.98, it is not actually dismissing the arbitration, but instead recognizing the plaintiff’s withdrawal from arbitration and resuming its own judicial proceedings on that basis: “The trial court’s limited jurisdiction over the contractual arbitration, to be sure, does not extend to the power to dismiss the arbitration proceedings, once commenced. But the trial court neither dismissed the arbitration proceedings nor relied on its limited jurisdiction over the arbitration itself. Having announced their election to withdraw from the arbitration, plaintiffs by their motion to vacate the stay of the litigation properly invoked the court’s vestigial jurisdiction over the action at law. This “vestigial jurisdiction” extends to determining whether the arbitration proceedings resulted in an award on the merits, in which case the action at law should be dismissed because of the res judicata effects of the arbitration award; if it did not, then the action at law may resume to determine the rights of the parties. The trial court merely confirmed that arbitration had concluded without an award on the merits—as a result of plaintiffs’ unilateral exercise of their statutory rights—then acted within its jurisdiction to vacate its own prior order and allow the action at law to emerge from the twilight zone of abatement.” Williams, 86 Cal. App. 5th at 1069. The Court is aware of no case in California or in this circuit allowing removal based on the premise that new claims raised in arbitration are effectively part of the case pending before a state court where those claims were never presented by a complaint, either at the time those claims are raised in arbitration or when the state court lifts the stay on the claims actually presented to it. Plaintiffs cite no case allowing immediate removal when a federal claim is added during arbitration. Defendants cite no authority indicating that claims added in arbitration automatically “transfer” to a court case that had been stayed upon the stay being lifted.
The Court found no support in federal jurisprudence either.
One out-of-circuit district court decision cited for the first time in a footnote of Plaintiffs’ reply held that discovery papers in arbitration gave rise to federal question jurisdiction because they made clear that the plaintiff was pursuing an ERISA claim, but held that although the defendants removed while arbitration was still pending, they waited too long to do so. See generally Moran v. Stevens Transp., Inc., No. 3:10-CV-0153-K, 2010 WL 1488034 (N.D. Tex. Apr. 12, 2010). It is not clear whether that court treated the discovery papers as indicating an intent to add a new claim, or as demonstrating that the negligence claim that the plaintiff asserted in both state court and arbitration actually arose under ERISA. If the latter, the case is of no use to Plaintiffs here, whose FCRA claim is distinct from anything they asserted in their original complaint. If the former, this Court finds it inconsistent with the majority view—discussed in more detail below in the context of Defendants’ arguments—that merely foreshadowing a new claim is not sufficient to establish removal jurisdiction, and thus not persuasive. The Moran court does not appear to have considered the question of whether the mislabeled or nascent ERISA claim ever became part of the case before the state court, which is what the defendants removed. Plaintiffs also cite the Eastern District of California’s decision in Lion Raisins, Inc. v. Fanucchi, 788 F. Supp. 2d 1167 (E.D. Cal. 2011), which held removal based on a proposed amended arbitration demand improper. Plaintiffs quote a section of that case where the court held that even assuming for the sake of argument that a mere proposal to amend the demand and add a purported federal claim were sufficient to establish removability—the court separately held that it was not—the defendants’ removal more than thirty days after that proposal was untimely. Mot. at 6 (quoting Lion Raisins, 788 F. Supp. 2d at 1172). The court went on to explain that the proposed amended arbitration demand, like a motion to amend a complaint in court, was not sufficient to support removal before it was allowed by the arbitrator, because the applicable arbitration rules required the arbitrator’s consent to add new claims. Lion Raisins, 788 F. Supp. 2d at 1172-74. The court appears to have assumed without discussion that a federal claim first raised in arbitration, if allowed by the arbitrator, is sufficient to support immediate removal of a state court action related to that arbitration. This Court does not find Lion Raisins persuasive as to that underlying issue that it did not specifically address. Otherwise, the closest case the parties have cited to the facts at issue is Blaker v. Credit One Bank, N.A., No. 18-cv-2108-CAB-JMA, 2018 WL 5307470 (S.D. Cal. Oct. 26, 2018). The plaintiffs in that case brought state law claims in state court, and although the parties were citizens of different states, the amount in controversy on the original claims did not meet the threshold for diversity jurisdiction. Id. at *1, *3. The state court granted a motion by the defendant to compel arbitration and stayed the case pending arbitration. Id. at *1. The plaintiffs filed an arbitration demand “that was virtually identical to the state court complaint,” but later filed an amended demand that added a federal claim under the Telephone Consumer Protection Act (“TCPA”). Id. Still later, they filed a brief indicating that based on their new TCPA claim, they were pursuing damages well over the $75,000 threshold for diversity jurisdiction. Id. The arbitrator entered a substantial award in favor of the plaintiffs. Id. When the plaintiffs filed a petition in state court to confirm the award, the defendant removed to federal court, and the plaintiffs moved to remand on the basis that removal was untimely. Id. Much like in this case, “both parties appear[ed] to agree that there [was] federal question jurisdiction . . ., [but] the Court [was] unconvinced.” Id. at *2. The court reasoned that “[t]he operative complaint in this lawsuit plainly does not assert a claim under the TCPA or any other federal statute” and did not require resolution of any substantial federal issue. Id. The court also noted that petitions to confirm arbitration awards do not fall within federal question jurisdiction merely because an arbitration award resolved federal claims. Id. at *2-3 (citing Carter, 374 F.3d at 836). In a footnote, the court made clear that its reasoning applied not only to the particular posture of the case at the time arbitration concluded and the plaintiffs sought to confirm the award, but also to the question of whether the case was removable at the time the plaintiffs first raised their TCPA claim in arbitration. Id. at *3 n.4 (“Plaintiffs also contend that the case became removable when they included a TCPA claim in their amended claim in the arbitration. As discussed above, the inclusion of the TCPA claim in the arbitration did not create federal question subject matter jurisdiction, so it could not have made the case removable.”). This Court finds Blaker persuasive as to the issue of federal question jurisdiction, which is the portion of that decision most applicable to the case at hand. . . .Plaintiffs argue that because “Blaker clearly finds that when a party discovers the basis for federal jurisdiction during the course of arbitration, it is required to immediately remove the stayed state court proceedings to federal court or forfeit the right to remove,” the court could not have meant what it said in its footnote indicating that the case did not become removable when the plaintiffs added their TCPA claim in arbitration. Reply at 5-6. That argument ignores Blaker’s distinction in its treatment of grounds for federal question jurisdiction as compared to clues regarding the amount in controversy for diversity jurisdiction. Even if there were any inherent contradiction between the two portions of that decision, which is far from clear, this Court finds Blaker’s analysis of federal question jurisdiction persuasive. Plaintiffs’ other authority is inapposite. They argue that the case was removable when they added their FCRA claim in arbitration, because a lawsuit was pending at that time and the removal deadline ” ‘commences to run from the date of the first court action relating to the arbitration.’ ” Mot. at 7 (quoting Old Dutch Farms, Inc. v. Milk Drivers & Dairy Emp. Union Loc. 584, 222 F. Supp. 125, 130 (E.D.N.Y. 1963)). The sixty-year-old out-of-circuit district court decision on which they rely concerned prompt removal of a state court petition to compel arbitration, filed as a case-initiating document in court, and seeking to compel participation in arbitration proceedings that had been active for at least several months. Old Dutch Farms, 222 F. Supp. at 127, 130. It says nothing about removal of a stayed state court case based on claims asserted in arbitration running parallel to that case.
Ultimately, the Court concluded that there was no federal claim in the state court proceedings to remove.
The Court is satisfied that a claim first asserted in arbitration while a state court case is stayed does not automatically become part of the controversy before the state court. This holding is consistent with Ninth Circuit and Supreme Court authority holding that federal claims raised in arbitration proceedings that are instituted without a court order do not necessarily give rise to federal question jurisdiction on a subsequent petition to confirm or vacate the award. Badgerow v. Walters, 142 S. Ct. 1310 (2022); Carter v. Health Net of Cal., Inc., 374 F.3d 830, 836 (9th Cir. 2004). Reinforcing that conclusion, Plaintiffs themselves made clear in their motion to vacate the stay that they did not believe the FCRA claim had automatically become part of the case before the Superior Court, because they anticipated filing a motion to amend their complaint to assert that claim. Notice of Removal Ex. A at 321 & n.1. Because the arbitration was a separate proceeding from the state court action, and it was not clear merely from Plaintiffs asserting a federal claim in that proceeding that the state court would ever be faced with resolving such a claim (or any other substantial federal issue), the addition of the FCRA claim in arbitration did not establish federal question jurisdiction sufficient to remove the state court action at the time that claim was added.