Do the Federal Arbitration Act and the Supreme Court's holding in Buckeye Check Cashing v. Cardegna preempt a state statute requiring parties to exhaust administrative remedies before filing any action in court or with an arbitrator?
In 2002, Arnold Preston, a lawyer, and Judge Alex Ferrer entered into a contract where Preston agreed to act as Ferrer's personal manager in exchange for a portion of the earnings from a potential television deal. The contract contained a clause which required that any disputes over the validity of the contract be arbitrated. Several years later, Preston filed an action with the American Arbitration Association against Ferrer, seeking earnings which he claims are owed under that contract. Ferrer claims that the entire contract is invalid under the California Talent Agencies Act, and also contends that under that act, the parties must exhaust their administrative remedies by submitting the dispute to the California Labor Commissionerbefore an arbitrator or court can hear the case. The California Court of Appeals agreed with Ferrer. Preston challenges this holding, claiming that that the Federal Arbitration Act and the Supreme Court's decision in Buckeye Check Cashing v. Cardegna, 546 U.S. 440 (2006), which held that when there is an arbitration agreement disputes over the validity of a contract must first be submitted to an arbitrator, require this dispute to be first submitted to arbitration. Arbitration agreements are found in many contracts, and this decision could have a significant impact on the enforceability of such clauses and on the States' ability to regulate certain industries and agreements.
Questions as Framed for the Court by the Parties
Whether the Federal Arbitration Act and Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204 (2006) preempt the holding in this case, voiding an interstate arbitration agreement under the California Talent Agencies Act?
This case involves a contract dispute between Judge Alex Ferrer, currently arbitrating disputes on the Fox Channel television show, "Judge Alex," and a lawyer, Arnold Preston, who works as personal manager for entertainers. Ferrer v. Preston, 145 Cal. App. 4th 440, 443-42 (2006). In June 2005, Preston began arbitration proceedings with the American Arbitration Association, claiming that he is owed a portion of Ferrer's earnings from "Judge Alex" under a contract the parties signed in 2002. Id. at 443. The contract contained an arbitration agreement, which provided that disputes about the validity of the contract would be decided by arbitration. See id. at 448. Ferrer filed motion to stay the arbitration, alleging that under the California Talent Agencies Act ("TAA"), the dispute should first be heard by the California Labor Commissioner. Id. at 630-31. Ferrer claims that Preston was working as an unlicensed talent agent when their contract was signed, and that therefore the contract is invalid under the TAA, California Labor Code Section 1700.5, which requires that talent agents be licensed. Id. at 444.
Section 1700.44 of the TAA vests original jurisdiction for disputes under it in the Labor Commissioner. See Cal. Lab. Code ? 1700.44.?The California Court of Appeals held that this provision requires parties to first submit their dispute to Labor Commissioner before it can be heard by an arbitrator. Ferrer v. Preston, 145 Cal. App. 4th at 445. The court peremptorily dismissed the question of federal preemption by the Federal Arbitration Act ("FAA") when it found that the Supreme Court's recent decision in Buckeye Check Cashing v. Cardegna did not apply. Ferrer, 145 Cal. App. 4th at 447. Buckeye Check Cashing interpreted Section 2 of the FAA to require that any dispute involving the validity of all or part of a contract containing an arbitration clause, provided it is not over the arbitration clause itself, should be heard first by the arbitrator. See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 447 (2006). The court found that Buckeye Check Cashing only addressed the priority of an arbitrator over a court, but did not address or apply to situations, such as this one, where a statute vests an administrative agency with original jurisdiction over the specific dispute. See Ferrer, 145 Cal. App. 4th at 447. The California Supreme Court denied Preston's petitioner for review. See Ferrer v. Preston, 2007 Cal. LEXIS 1539(February 14, 2007). Preston appealed the United States Supreme Court which granted certiorari on September 25, 2007. Preston v. Ferrer, No. 06-1463 (U.S. 2007).
In Preston v. Ferrer, the Supreme Court will consider whether the Federal Arbitration Act ("FAA"), preempts a state statute which requires parties to exhaust administrative remedies before filing any action in court or with an arbitrator. See Preston v. Ferrer, No. 06-1463 (U.S. 2007). Preston argues that such a statute is preempted by the FAA, because an administrative action is equivalent to the civil suit, and under the Court's holding in Buckeye Check Cashing v. Cardegna, a dispute over the validity of a contract containing an arbitration agreement must first be heard by an arbitrator. Brief for Petitioner at 12-13.?Ferrer argues that the state statute does not abrogate the right to arbitrate; it merely postpones arbitration, and therefore is not preempted by the FAA. Brief for Respondent at 33.
In 1925, Congress passed the Federal Arbitration Act ("FAA"). 9 U.S.C. ?? 1, et seq. Section 2 of the FAA provides that an agreement to arbitrate disputes can only be revoked on the same grounds as any other contract. See 9 U.S.C. ? 2. This section embodies a "national policy favoring arbitration and places arbitration on equal footing with all other contracts." Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 443 (2006).?
Despite the FAA, many courts, particularly state courts, have been reluctant enforce arbitration agreements. Brief of Chamber of Commerce of the United States as Amicus Curiae at 1. The Supreme Court last addressed a state court's resistance to enforcing an arbitration agreement in 2006, in Buckeye Check Cashing, Inc. v. Cardegna. See 546 U.S. 440 (2006). In Buckeye Check Cashing, Cardegna claimed his contract with Buckeye Check Cashing, Inc. was invalid under Florida law. Buckeye Check Cashing, 546 U.S. at 442. The Florida Supreme Court held that if the contract itself was allegedly unlawful under state law, the arbitration agreement in it could not be enforced, and the case should first be heard in court. Id. at 443. The Supreme Court reversed and held that arbitration provisions are severable from the remainder of the contract, and that unless a challenge is to validity of the arbitration clause itself, an arbitrator, not a court, will first hear any challenges to the contract's validity. Id. at 445-46.
Federal Preemption and Exhaustion of Administrative Remedies
In Ferrer v. Preston, the California Court of Appeals held that Buckeye Check Cashing did not require parties to first submit a dispute to arbitration when there is a state statute which requires them first to exhaust administrative remedies. Ferrer, 145 Cal. App. at 447. In differentiating Ferrer v. Preston from Buckeye Check Cashing, the court noted that Buckeye Check Cashing did not "involve an administrative agency with exclusive jurisdiction over a disputed issue," nor did it address whether the FAA "preempts application of the exhaustion doctrine." Id.
Preston contends that contrary to this holding, the FAA preempts any state law abrogation of the right to arbitration. Brief for Petitioner at 12-13. Relying on the Court's holding in Gilmer v. Interstate/Johnson Lane Corporation, he argues that a complaint filed with an administrative agency is equivalent to a private civil suit. Id. at 12-15, referencing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 50 (1991). ?Thus, since Ferrer is not challenging the validity of the arbitration agreement in the administrative action, but the validity of the entire contract, under Buckeye Check Cashing the case should first be heard by an arbitrator. Id. He distinguishes the instant case from Equal Opportunity Commission v. Waffle House, Inc., where the Court held that an arbitration agreement cannot be enforced against an agency bringing a third party suit. Id. at 14-15, referencing Equal Employment Opportunity Comm'n v. Waffle House, Inc., 534 U.S. 279 (2002). He points out that here, the suit was filed by Ferrer, a signatory to the agreement, rather than by a third party. Id.
Preston also contends that enforcing the arbitration agreement is consistent with the intent of the parties as expressed in the contract, and that the Court should defer to this intent. Brief for Petitioner at 17, 20. He points out that the contract expressly provides that disputes over the "validity and legality" of the contract are subject to arbitration. Id. at 17. Even absent this express language, he argues the parties' intent to submit such disputes to arbitration is clear because the contract incorporates the American Arbitration Association rules, which also provide that disputes over the validity of the contract should be submitted to arbitration. Id. at 17-18.
In response, Ferrer argues that the TAA is a procedural law which is not preempted by the FAA. Brief for Respondent at 33, 38-39. He argues that under the Court's holding in Volt Information Science, Inc. v. Board of Trustees, the FAA does not preempt state procedural laws which allow a contract to be enforced under the FAA. Id. at 27-28, citing Volt Info. Sci. v. Bd. of Trustees, 489 U.S. 468 (1989).?Ferrer contends that the requirement to exhaust administrative remedies under the TAA is procedural because it does not remove a case from arbitration, but only postpones the arbitration. Id. at 33, 38-39. The TAA provides that any decision by the Labor Commissioner is subject to de novo review by the California Superior Court, and Ferrer argues that in this review the court would enforce the arbitration agreement on motion by either party. Id. at 13, 40. He stresses that this distinguishes the instant case from Buckeye Check Cashing, which he argues addressed a state law which placed an entire category of disputes completely beyond the reach of the arbitrator. Id. at 31-32. Ferrer concludes that since the contract incorporates California law, it incorporates the TAA's procedural requirements, including the requirement to exhaust administrative remedies. Id. at 27-28. He also concludes that because the contract incorporates California law, it is also consistent with the intent of the parties to require them to exhaust administrative remedies. Id. at 27.
Preemption and State Police Powers
Ferrer contends that the TAA is an exercise of a State's traditional police powers to protect its residents. Brief for Respondent at 37. He argues that a State's exercise of its historic police power can only be preempted by a federal statute if there is clear Congressional intent for such preemption. Id. Here, the TAA is not preempted because there is no clear indication that Congress intended to preempt statutes which only postpone arbitration. Id. at 37-39. He argues that requiring parties to exhaust administrative remedies before arbitration allows the agency to fulfill its distinct investigatory and policing functions, without detracting from the adjudicatory role of the court or arbitrator. Id. at 40. He maintains that a finding for Preston would contravene the Court's holding in Waffle House, because it would allow parties to impact an agency's statutory function through use of arbitration agreements, severely undermining the Labor Commissioner's ability to police the entertainment industry Id. at 45-47.
Preston counters by arguing that arbitration will adequately protect vulnerable individuals because, though enforcing the arbitration agreement requires them to arbitrate civil claims, they retain the right to file complaints with administrative agencies which can then perform their policing function. Reply Brief of Petitioner at 12. Preston also argues that personal managers themselves act to protect their clients. Id. at 15. He draws a sharp distinction between the functions performed by personal mangers and by talent agents. See Id. at 13, 15-16. He notes that personal managers have only one or few clients and often manage many aspects of their lives and careers, whereas talent agents have large client lists, little personal contact, and mainly attempt to procure employment for and collect money from their clients. Id. As he asserts that he is a personal manager, a position that California has recognized as exempt from the TAA, the police power Ferrer argues is undermined is only tangentially implicated by their dispute. See Id. at 13-14, 20.
In Preston v. Ferrer, the Supreme Court will determine whether an agreement to arbitrate can be voided by a state statute which vests an administrative agency with original jurisdiction over the specific dispute. See Preston v. Ferrer, No. 06-1463 (U.S. 2007). In 2007, Preston and Ferrer entered into a contract which contains an arbitration agreement and provides that California law will govern all disputes over the validity of the contract. Ferrer v. Preston, 145 Cal. App. 4th 440, 443, 448 (Cal. App. 2d Dist. 2006). Many modern contracts, such as cell phone and some employment contracts, contain clauses similar to the one at issue in this case. ?See Brief of CTIA - the Wireless Association as Amicus Curiae at 1; Brief of Macy's Group Inc. as Amicus Curiae at 1.
Businesses often prefer to resolve disputes with consumers and other contracting parties through arbitration because they believe it is a "relatively fast, fair, and inexpensive method" of resolving such disputes. Brief of the Chamber of Commerce of the United States of American as as Amicus Curiaeat 2-3. Arbitrations are conducted by neutral decision makers selected by the parties, are less formal and generally faster than litigation, but still result in binding, legally enforceable, decisions that are only subject to limited review by the courts. American Arbitration Association, Introductory Guide to AAA Arbitration and Mediation at 5. Since arbitration is a private proceeding, the parties can agree to keep it, and its results, confidential. Id. However, groups such as unions and consumer advocates often dislike arbitration agreements because they believe the agreements weaken the ability of the government and other organizations to protect vulnerable parties. See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 442-43 (2006); Brief of Screen Actors Guild, Inc., et al. as Amici Curiae at 3.
If the Court finds for Ferrer, it could diminish the efficacy and enforceability of arbitration clauses in contracts; a prospect which alarms the many commercial interests that have filed amicus briefs. As the United States Chamber of Commerce points out, California's economy is the largest in the United States and the eighth largest in the world. Brief of the Chamber of Commerce of the United States of America as Amicus Curiae at 18. Thus, if the Court validates California's "continuing hostility" to arbitration, it will create significant problems for nationwide businesses which use such agreements and rely upon their consistent enforcement. Id. In fact, the Chamber of Commerce believes that if the Supreme Court finds for Ferrer, the California Court of Appeals decision would become a blueprint that states could follow to create laws which would allow contracting parties to avoid their contractual obligations. Id. at 24.
Conversely, a decision for Preston could severely undermine the power of the California Labor Commissioner to enforce the Talent Agencies Act ("TAA"), because it would limit the Commissioner's power to police entertainment contracts and hence to protect artists. Brief of Screen Actors Guild, Inc., et al. as Amici Curiae at 6. California is the center of the American entertainment industry, and as such, has a special interest in regulating and policing the industry. See Brief for Respondent at 8. As described by the Screen Actors Guild and the American Federation of Television and Radio Artists, the purpose of the TAA is to protect vulnerable artists who are unable to effectively negotiate contracts from being taken advantage of by their representatives. Brief of Screen Actors Guild, Inc., et al. as Amici Curiae at 7-8. The TAA requires a person acting as "talent agent," someone who procures employment for an entertainer, be licensed. Cal. Lab. Code ? 1700.4(a). If someone procures employment for an entertainer without being a licensed talent agent, then they are not entitled to any portion of the entertainer's earnings. See Brief for Respondent at 1-2. One of the main strengths of this regulatory scheme is the Labor Commissioner's ability invalidate contracts which violate the TAA. Id. at 8. If parties can escape otherwise mandatory administrative review through arbitration agreements, the Commissioner will be unable to effectively police the agreements and fulfill her protective function. Id. at 6.
The Supreme Court's decision in Preston v. Ferrer could have a large impact on the enforceability of arbitration agreements and on the States' ability to investigate contractual arrangement. Should the Court find for Ferrer, it will undermine its holding in Buckeye Check Cashing v. Cardegna, because it will allow states to police arbitration agreements by requiring parties to exhaust administrative remedies before arbitration. However, should the Court find for Preston, it may give contracting parties the ability to avoid administrative scrutiny through arbitration agreements and perpetuate arrangements that are contrary to the public policy represented in a state's statutory schemes.
Written by: Lauren Buechner
Edited by: Cecelia Sander Cannon