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Wednesday, February 20, 2008

Supreme Court To Judge Alex: Arbitrate This

The Supreme Court has ruled 8-1 that the Federal Arbitration Act supersedes state law in cases in which parties argue to arbitrate disputes in a particular forum. The case involves tv's "Judge Alex" Ferrer and the attorney who represented him. Alex Ferrer later tried to prevent the attorney, Arnold Preston, from collecting a percentage, saying that Mr. Preston is not licensed as a talent agent as required under the California Talent Agencies Act. Judge Ruth Bader Ginsburg wrote the majority opinion. Justice Thomas dissented, saying that he did not believe that the FAA applies in state courts.

This case concerns a contract between respondent Alex E. Ferrer, a former Florida trial court judge who currently appears as "Judge Alex" on a Fox television network program, and petitioner Arnold M. Preston, a California attorney who renders services to persons in the entertainment industry. Seeking fees allegedly due under the contract, Preston invoked the parties' agreement to arbitrate "any dispute . . . relating to the terms of [the contract] or the breach, validity, or legality thereof . . . in accordance with the rules [of the American Arbitration Association]."...

Preston's demand for arbitration, made in June 2005, was countered a month later by Ferrer's petition to the California Labor Commissioner charging that the contract was invalid and unenforceable under the California Talent Agencies Act (TAA)... Ferrer asserted that Preston acted as a talent agent without the license required by the TAA, and that Preston's unlicensed status rendered the entire contract void. 

...

In December 2005, the Superior Court denied Preston's motion to compel arbitration and enjoined Preston from proceeding before the arbitrator "unless and until the Labor Commissioner determines that . . . she is without jurisdiction over the disputes between Preston and Ferrer."...During the pendency of Preston's appeal from the Superior Court's decision, this Court reaffirmed, in Buckeye, that challenges to the validity of a contract providing for arbitration ordinarily "should . . . be considered by an arbitrator, not a court." ...In a 2-to-1 decision issued in November 2006,  the California Court of Appeal affirmed the Superior Court's judgment. The appeals court held that the relevant provision of the TAA, vests "exclusive original jurisdiction" over the dispute in the Labor Commissioner....Buckeye is "inapposite," the court said, because that case "did not involve an administrative agency with exclusive jurisdiction over a disputed issue."... The dissenting judge, in contrast, viewed Buckeye as controlling; she reasoned that the FAA called for immediate recognition and enforcement of the parties' agreement to arbitrate and afforded no basis for distinguishing prior resort to a state administrative agency from prior resort to a state court....The California Supreme Court denied Preston's petition for review....We granted certiorari to determine whether the FAA overrides a state law vesting initial adjudicatory authority in an administrative agency.

...

An easily stated question underlies this controversy. Ferrer claims that Preston was a talent agent who operated without a license in violation of the TAA. Accordingly, he urges, the contract between the parties, purportedly for "personal management," is void and Preston is entitled to no compensation for any services he rendered. Preston, on the other hand, maintains that he acted as a personal manager, not as a talent agent, hence his contract with Ferrer is not governed by the TAA and is both lawful and fully binding on the parties.

Because the contract between Ferrer and Preston provides that "any dispute . . . relating to the . . . validity, or legality" of the agreement "shall be submitted to arbitration,"...Preston urges that Ferrer must litigate "his TAA defense in the arbitral forum,"....Ferrer insists, however, that the "personal manager" or "talent agent" inquiry falls, under California law, within the exclusive original jurisdiction of the Labor Commissioner, and that the FAA does not displace the Commissioner's primary jurisdiction....The dispositive issue, then, contrary to Ferrer's suggestion, is not whether the FAA preempts the TAA wholesale....The FAA plainly has no such destructive aim or effect. Instead, the question is simply who decides whether Preston acted as personal manager or as talent agent.

...

The TAA permits arbitration in lieu of proceeding before the Labor Commissioner if an arbitration provision "in a contract between a talent agency and [an artist]" both "provides for reasonable notice to the Labor Commissioner of the time and place of all arbitration hearings" and gives the Commissioner "the right to attend all arbitration hearings." § 1700.45. This prescription demonstrates that there is no inherent conflict between the TAA and arbitration as a dispute resolution mechanism. But § 1700.45 was of no utility to Preston. He has consistently maintained that he is not a talent agent as that term is defined in § 1700.4(a), but is, instead, a personal manager not subject to the TAA's regulatory regime. 145 Cal. App. 4th, at 444, 51 Cal.Rptr. 3d, at 631. To invoke § 1700.45, Preston would have been required to concede a point fatal to his claim for compensation -- i.e., that he is a talent agent, albeit an unlicensed one -- and to have drafted his contract in compliance with a statute that he maintains is inapplicable.

Procedural prescriptions of the TAA thus conflict with the FAA's dispute resolution regime in two basic respects: First, the TAA, in § 1700.44(a), grants the Labor Commissioner exclusive jurisdiction to decide an issue that the parties agreed to arbitrate, see Buckeye, 546 U.S., at 446; second, the TAA, in § 1700.45, imposes prerequisites to enforcement of an arbitration agreement that are not applicable to contracts generally....

...

Ferrer contends that the TAA is nevertheless compatible with the FAA because § 1700.44(a) merely postpones arbitration until after the Labor Commissioner has exercised her primary jurisdiction....The party that loses before the Labor Commissioner may file for de novo review in Superior Court. See § 1700.44(a). At that point, Ferrer asserts, either party could move to compel arbitration under Cal. Civ. Proc. Code Ann. § 1281.2(West 2007), and thereby obtain an arbitrator's determination prior to judicial review. ...

That is not the position Ferrer took in the California courts. In his complaint, he urged the Superior Court to declare that "the [c]ontract, including in particular the issue of the validity of the [c]ontract, is not subject to arbitration," and he sought an injunction stopping arbitration "unless and until, if ever, the Labor Commissioner determines that he/she has no jurisdiction over the parties' dispute." ...Ferrer also told the Superior Court: "[I]f . . . the Commissioner rules that the [c]ontract is void, Preston may appeal that ruling and have a hearing de novo before this Court."...
Nor does Ferrer's current argument -- that § 1700.44(a) merely postpones arbitration -- withstand examination. Section 1700.44(a) provides for de novo review in Superior Court, not elsewhere. Arbitration, if it ever occurred following the Labor Commissioner's decision, would likely be long delayed, in contravention of Congress' intent "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible."... If Ferrer prevailed in the California courts, moreover, he would no doubt argue that judicial  findings of fact and conclusions of law, made after a full and fair de novo hearing in court, are binding on the parties and preclude the arbitrator from making any contrary rulings.

...

Ferrer asks us to overlook the apparent conflict between the arbitration clause and § 1700.44(a) because proceedings before the Labor Commissioner are administrative rather than judicial.... Allowing parties to proceed directly to arbitration, Ferrer contends, would undermine the Labor Commissioner's ability to stay informed of potentially illegal activity... and would deprive artists protected by the TAA of the Labor Commissioner's expertise....
In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), we considered and rejected a similar argument, namely, that arbitration of age discrimination claims would undermine the role of the Equal Employment Opportunity Commission (EEOC) in enforcing federal law. The "mere involvement of an administrative agency in the enforcement of a statute," we held, does not limit private parties' obligation to comply with their arbitration agreements.

...

Finally, it bears repeating that Preston's petition presents precisely and only a question concerning the forum in which the parties' dispute will be heard...."By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral . . . forum." ...So here, Ferrer relinquishes no substantive rights the TAA or other California law may accord him. But under the contract he signed, he cannot escape resolution of those rights in an arbitral forum.

In sum, we disapprove the distinction between judicial and administrative proceedings drawn by Ferrer and adopted by the appeals court. When parties agree to arbitrate all questions arising under a contract, the FAA supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.

Read more here. Read the opinion here. The case is Preston v. Ferrer, 2008 U.S. LEXIS 201; 2008 WL 440670 (U.S.)

Note that in January of this year, the California Supreme Court ruled that the Talent Agencies Act applies to personal managers as well as to talent agents. See Marathon Entertainment v. Blasi.

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