U.S. Supreme Court Holds That Contractual Arbitration Agreements Trump State Administrative Proceedings

The United States Supreme Court now holds that the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (FAA) supersedes state administrative enforcement remedies with regard to contractual rights and obligations when the contract provides for mandatory arbitration of contractual disputes. Preston v. Ferrer, 128 S.Ct. 978, 2008 WL 440670 (Feb. 20, 2008). The decision has important implications for employers that require arbitration agreements from their employees in states such as New York, New Jersey and Pennsylvania, which provide for administrative enforcement of their discrimination and compensation laws.

Background:
Arnold M. Preston, a California attorney who renders services to persons in the entertainment industry, commenced arbitration proceedings in California against Alex E. Ferrer, who appears as “Judge Alex” on a Fox television network program. Preston sought to recover fees allegedly due from Ferrer under a contract pursuant to which Preston provided services to Ferrer and which contained an arbitration clause. In response, Ferrer petitioned the California Labor Commissioner, charging that the contract was invalid and unenforceable in its entirety under the California Talent Agencies Act (TAA) because Preston had acted as a talent agent without the license required by the TAA. Ferrer also brought an action in the California Superior Court to enjoin Preston from proceeding with the arbitration. In that action, Preston moved to compel arbitration, claiming that he provided services under the contract as a personal manager, not as a talent agent. That court granted Ferrer’s application for an injunction and denied Preston’s motion. The California Court of Appeals affirmed, holding that the TAA vested exclusive jurisdiction over the dispute in the Labor Commissioner and that the arbitration clause was not enforceable with regard to disputes where original jurisdiction was vested with an administrative agency. After the California Supreme Court declined review, Preston petitioned the United States Supreme Court.

The Supreme Court’s Analysis:
The Supreme Court began its analysis by reaffirming its prior decisions holding that the FAA “establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution. The [FAA], which rests on Congress’ authority under the Commerce Clause, not only supplies a procedural framework applicable in federal courts; it also calls for the application, in state as well as federal courts, of federal substantive law regarding arbitration.” The Court further explained that when an attack is made on the validity of an entire contract, as distinct from an attack directed to an arbitration clause specifically, the issue of the contract’s validity is to be resolved by the arbitrator in the first instance rather than by a federal or state court.

With regard to the case before it, the Court noted that the TAA requires talent agents to procure a license from the Labor Commissioner and renders illegal and void an unlicensed person’s contract with an artist to provide the services of a talent agency. Contractual determinations by the Labor Commissioner become final and binding unless appealed within 10 days. Thus the Court framed the issue before it as to whether an arbitrator or the California Labor Commissioner should answer the question of whether Preston had acted as a personal manager, as he claimed to be, or as an unlicensed talent agent under state law.

The Court held that the TAA conflicted with the FAA’s dispute resolution regime in two respects: First, the TAA grants the Labor Commissioner exclusive jurisdiction to decide an issue that the parties have agreed to arbitrate. Second, the TAA imposes prerequisites to enforcement of an arbitration agreement that are not applicable to contracts generally. The Court resolved the conflict in favor of arbitration. In so ruling, it rejected Ferrer’s contention that the FAA should not take precedence over state administrative proceedings as opposed to state judicial proceedings. The Court found support in its prior rulings holding that the mere existence of a federal agency, the EEOC, intended to enforce the federal discrimination laws did not supersede the enforceability of an arbitration clause in an employee agreement. Although an arbitration clause could not prevent the EEOC from initiating proceedings as an advocate on behalf of an employee, the role of the California Labor Commissioner was not that of an advocate but that of a neutral dispute resolver. “That role is just what The FAA-governed agreement between Ferrer and Preston reserves for the arbitrator.” Thus the Court held that the FAA supersedes California’s administrative scheme: “We hold today that, when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA.”

In so holding, the Court distinguished prior cases which have held that in order to prevent inconsistent results arbitration proceedings can be stayed pending state court proceedings where not all parties to the dispute are parties to the arbitration agreement and therefore cannot be compelled to arbitrate. Finally, the Court rejected Ferrer’s argument that a choice of law provision in the contract calling for the application of California law negated the arbitration clause because California provided a specific administrative procedure via the TAA. The Court held that the choice of law provision required the application of California substantive law to the issue of whether Preston was a personal manager or a talent agent but that the arbitration clause required the issue to be resolved in the first instance by an arbitrator.

Conclusion:
Preston v. Ferrer is a significant opinion for employers who have adopted, or who are thinking about adopting, policies requiring their employees to arbitrate disputes concerning the employment relationship. Most states provide for administrative proceedings that employees are otherwise free to initiate for alleged violations of state anti-discrimination laws or compensation laws. The Court has now made clear that these types of proceedings must give way to valid arbitration agreements.