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Preston v Ferrer: FAA preempts California statute
February 20, 2008 by Ross Runkel at LawMemo
Preston v Ferrer (US Supreme Court, February 20, 2008).
8 to 1, US Supreme Court today holds that issues are to be decided by an arbitrator, not by the California Labor Commissioner. No surprises here.
The official syllabus:
A contract between respondent Ferrer, who appears on television as “Judge Alex,” and petitioner Preston, an entertainment industry attorney, requires arbitration of “any dispute … relating to the [contract’s] terms … or the breach, validity, or legality thereof … in accordance with [American Arbitration Association (AAA)] rules.” Preston invoked this provision to gain fees allegedly due under the contract. Ferrer thereupon petitioned the California Labor Commissioner (Labor Commissioner) for a determination that the contract was invalid and unenforceable under California’s Talent Agencies Act (TAA) because Preston had acted as a talent agent without the required license. After the Labor Commissioner’s hearing officer denied Ferrer’s motion to stay the arbitration, Ferrer filed suit in state court seeking to enjoin arbitration, and Preston moved to compel arbitration. The court denied Preston’s motion and enjoined him from proceeding before the arbitrator unless and until the Labor Commissioner determined she lacked jurisdiction over the dispute. While Preston’s appeal was pending, this Court held, in Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440 , that challenges to the validity of a contract requiring arbitration of disputes ordinarily “should … be considered by an arbitrator, not a court.” Affirming the judgment below, the California Court of Appeal held that the TAA vested the Labor Commissioner with exclusive original jurisdiction over the dispute, and that Buckeye was inapposite because it did not involve an administrative agency with exclusive jurisdiction over a disputed issue.Held: When parties agree to arbitrate all questions arising under a contract, the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq., supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative. Pp. 4–16.
(a) The issue is not whether the FAA preempts the TAA wholesale. Instead, the question is simply who decides—the arbitrator or the Labor Commissioner—whether Preston acted as an unlicensed talent agent in violation of the TAA, as Ferrer claims, or as a personal manager not governed by the TAA, as Preston contends. P. 4.
(b) FAA §2 “declare[s] a national policy favoring arbitration” when the parties contract for that mode of dispute resolution. Southland Corp. v. Keating, 465 U. S. 1 , 10. That national policy “appli[es] in state as well as federal courts” and “foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements.” Id., at 16. The FAA’s displacement of conflicting state law has been repeatedly reaffirmed. See, e.g., Buckeye, 546 U. S., at 445–446; Allied-Bruce Terminix Cos. v. Dobson, 513 U. S. 265 . A recurring question under §2 is who should decide whether “grounds … exist at law or in equity” to invalidate an arbitration agreement. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395 , which originated in federal court, this Court held that attacks on an entire contract’s validity, as distinct from attacks on the arbitration clause alone, are within the arbitrator’s ken. Buckeye held that the same rule applies in state court. See 546 U. S., at 446.
Buckeye largely, if not entirely, resolves the present dispute. The contract at issue clearly “evidenc[ed] a transaction involving commerce” under §2, and Ferrer has never disputed that the contract’s written arbitration provision falls within §2’s purview. Ferrer sought invalidation of the contract as a whole. He made no discrete challenge to the validity of the arbitration clause, and thus sought to override that clause on a ground Buckeye requires the arbitrator to decide in the first instance. Pp. 5–6.
(c) Ferrer attempts to distinguish Buckeye, urging that the TAA merely requires exhaustion of administrative remedies before the parties proceed to arbitration. This argument is unconvincing. Pp. 6–12.
(1) Procedural prescriptions of the TAA conflict with the FAA’s dispute resolution regime in two basic respects: (1) One TAA provision grants the Labor Commissioner exclusive jurisdiction to decide an issue that the parties agreed to arbitrate, see Buckeye, 546 U. S., at 446; (2) another imposes prerequisites to enforcement of an arbitration agreement that are not applicable to contracts generally, see Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681 . Pp. 7–8.
(2) Ferrer contends that the TAA is compatible with the FAA because the TAA provision vesting exclusive jurisdiction in the Labor Commissioner merely postpones arbitration. That position is contrary to the one Ferrer took in the California courts and does not withstand examination. 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.” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1 . Pp. 8–10.
(3) Ferrer contends that the conflict between the arbitration clause and the TAA should be overlooked because Labor Commissioner proceedings are administrative rather than judicial. The Court rejected a similar argument in Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20 . Pp. 10–12.
(d) Ferrer’s reliance on Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468 , is misplaced for two reasons. First, arbitration was stayed in Volt to accommodate litigation involving third parties who were strangers to the arbitration agreement. Because the contract at issue in Volt did not address the order of proceedings and included a choice-of-law clause adopting California law, the Volt Court recognized as the gap filler a California statute authorizing the state court to stay either third-party court proceedings or arbitration proceedings to avoid the possibility of conflicting rulings on a common issue. Here, in contrast, the arbitration clause speaks to the matter in controversy; both parties are bound by the arbitration agreement; the question of Preston’s status as a talent agent relates to the validity or legality of the contract; there is no risk that related litigation will yield conflicting rulings on common issues; and there is no other procedural void for the choice-of-law clause to fill. Second, the Court is guided by its decision in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U. S. 52 . Although the Volt contract provided for arbitration in accordance with AAA rules, 489 U. S., at 470, n. 1, Volt never argued that incorporation of those rules by reference trumped the contract’s choice-of-law clause, so this Court never addressed the import of such incorporation. In Mastrobuono, the Court reached that open question, declaring that the “best way to harmonize” a New York choice-of-law clause and a clause providing for arbitration in accordance with privately promulgated arbitration rules was to read the choice-of-law clause “to encompass substantive principles that New York courts would apply, but not to include [New York’s] special rules limiting [arbitrators’] authority.” 514 U. S., at 63–64. Similarly here, the “best way to harmonize” the Ferrer-Preston contract’s adoption of the AAA rules and its selection of California law is to read the latter to encompass prescriptions governing the parties’ substantive rights and obligations, but not the State’s “special rules limiting [arbitrators’] authority.” Ibid. Pp. 12–15.
145 Cal. App. 4th 440, 51 Cal. Rptr. 3d 628, reversed and remanded.
GINSBURG, J., delivered the opinion of the Court, in which ROBERTS, C. J., and STEVENS, SCALIA, KENNEDY, SOUTER, BREYER, and ALITO, JJ., joined. THOMAS, J., filed a dissenting opinion.
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Hawaii ignores Federal Arbitration Act
June 08, 2006 by Ross Runkel at LawMemo
The Hawaii Supreme Court ignored the Federal Arbitration Act in deciding that an employer's arbitration provision could not be enforced.
I thought Hawaii was a state of the United States, bound by the law of the land. Not so, it seems, based on the decision in Douglass v. Pflueger Hawaii, Inc (Hawaii 05/25/2006). Majority opinion | Concurring opinion
Two big errors, in my opinion.
Error No. 1: Ignoring Buckeye Check Cashing v. Cardegna (US Supreme Court 02/21/2006)
In Buckeye there was a lawsuit dealing with whether a high-interest loan agreement could be enforced. The loan agreement contained an arbitration provision.
For the Florida Supreme Court, it was easy. They said the whole contract was illegal and void under Florida law (because of the high interest rate), and therefore the arbitration provision could not be enforced.
The US Supreme Court said that was wrong. It's a two-step process. First look solely at the arbitration provision. If the parties agreed to arbitrate, then send the case to an arbitrator to decide whether the whole contract was illegal and void.
The Hawaii court got it backwards. They first looked to see whether the whole contract could be avoided on the ground that the plaintiff was under age.
Turns out this error did not affect the outcome, because the Hawaii arbitration provision was unenforceable for another reason.
Error No. 2: Treating arbitration provisions in a special way.
When the Hawaii court got to the issue of whether the plaintiff had assented to the arbitration provision, it became important to the court that this provision was contained in a long employee handbook and was not "boxed off" or otherwise set apart from the other provisions of the handbook. The error here is that the court was using a special rule that applies only to arbitration provisions. I can't imagine that every other provision had to be "boxed off." Thus, the court ignored the requirement that states can refuse to enforce arbitration agreements only on the very same grounds that they refuse to enforce other agreements. In other words, no special rules for arbitration are allowed.
But it didn't matter.
In the end, all of this did not change the outcome. It turns out that the court found that there was no "consideration" for the agreement to arbitrate because the provision allowed the employer to make any changes at any time without any advance notice.
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Reverse preemption of the FAA
January 14, 2006 by Ross Runkel at LawMemo
The 5th Circuit says that a Mississippi statute "reverse preempts" the Federal Arbitration Act (FAA).
The state statute prohibits required arbitration of disputes arising from uninsured motorist provisions in personal automobile insurance policies.
The FAA normally preempts any state statute that purports to invalidate an arbitration agreement. However, this case involved an insurance policy, and the federal McCarran-Ferguson Act has a narrow exception for state laws governing the insurance industry.
The 5th Circuit decided that the state statute took priority over the FAA, so the policy-holder was not obligated to arbitrate his claim against the insurance company.
American Bankers Insurance v. Inman (5th Cir 01/11/2006).
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Anti-class-action clause was unconscionable
June 27, 2005 by Ross Runkel at LawMemo
A bank-customer agreement's arbitration provision had a clause forbidding classwide arbitrations. The California Supreme Court (4-3) says that was unconscionable and unenforceable. Discover Bank v. Superior Court (California 06/27/2005).
Basic facts: Discover Bank amended its agreement with credit cardholders by sending them a notice that added a requirement that disputes be resolved through arbitration, and that prohibited class action arbitrations. Cardholders accepted the new arbitration provision by continuing to use their cards. The contract provided that it was "governed by federal law and the law of Delaware."
Cardholders' suit claimed that the bank charged late fees (about $29) when payment was received after 1:00 p.m. on the due date, resulting in damages that were small as to individuals but large in the aggregate.
The bank sought an order compelling arbitration on an individual basis.
Basic holding of the California Supreme Court:
- The anti-class-action clause was unconscionable under California law.
- The Federal Arbitration Act (FAA) does not preempt California law on the unconsionability of class-action waivers.
- The whole case might be governed by Delaware law, so the court remanded for a lower court decision on that aspect.
The dissent (by three of the seven judges) agreed that the FAA did not preempt, but argued that the case should be decided under Delaware law which allows class action waivers. They saw no need to decide anything about unconsionability under California law.
My view:
- The unconsionability reasoning was quite narrow. The court said:
We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party “from responsibility for [its] own fraud, or willful injury to the person or property of another.” (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
Questions:- What is a "consumer contract"?
- What are "small amounts of damages"?
- What is "a scheme to deliberately cheat large numbers of consumers"?
- Will a choice of law clause (e.g., providing that Delaware law applies) result in enforcement of a clause that is lawful in the other state but unconscionable in California?
- Pre-dispute arbitration clauses in employment agreements are left up in the air by this case.
- Most such cases will involve much more than $29 in damages.
- How many employment disputes can be characterized as "a scheme to deliberately cheat large numbers of consumers" or employees?
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NASD rules preempt state ethics rules for arbitrators
May 23, 2005 by Ross Runkel at LawMemo
The California Supreme Court says the National Association of Securities Dealers (NASD) rules preempt California's "Ethics Standards For Neutral Arbitrators in Contractual Arbitration," and all of the California ethics rules are preempted. Jevne v. Superior Court (California 05/23/2005).
This case was between a brokerage and a customer, and will have an impact on employee-employer arbitrations conducted by the NASD.
California and the NASD both have rules requiring disclosures by neutral arbitrators, and California's are more extensive and complex. Both California and the NASD have rules under which arbitrators can be disqualified.
The NASD rules were specifically approved by the Securities Exchange Commission, which gave them the force of federal law and ultimately the power of the federal government to preempt state law.
The court identified four types of possible preemption: (1) where the federal statute expressly preempts (not here), (2) where the federal statute occupies a whole field of law (not here), (3) where it is actually impossible to comply with both federal and state law requirements (not here), and (4) where the state law could prevent or impair accomplishment of the purposes and objectives of the federal law (Bingo, that's it).
The logic: NASD is regulated by the Securities Exchange Commission (SEC), which is created by the Securities Exchange Act (SEA). SEA's objectives: fair dealing and investor protection. All NASD rules are reviewed and approved by the SEC, so they have the force of law. SEC's opinion is that California's rules have three negative effects on NASD arbitrations: (1) increased administrative costs, (2) reduction of the number of available arbitrators (because many are unwilling to comply), and (3) reduction of nationwide uniformity of NASD arbitrations.
Other California ethics rules could not be severed, said the court, so the whole works was preempted.
My view: We got the same result from the 9th Circuit in Credit Suisse v. Grunwald (9th Cir 03/01/2005), although the reasoning was a little different. [See blog]
Now the question is whether there is any possibility that the outcome will be different for employment arbitrations conducted by NASD. It seems the outcome would be the same.
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Volt revisited, with a twist
March 20, 2005 by Ross Runkel at LawMemo
The Federal Arbitration Act (FAA) preempts state law that is contrary or frustrates the FAA's purposes. But parties can agree to state law arbitration rules and avoid FAA preemption. A simple matter of allowing folks to voluntarily opt out of the FAA. Volt Information Services v. Stanford University 489 US 468 (1989).
Cronus Investments v. Concierge Services (California 03/10/2005) put a twist on Volt.
The parties agreed to follow California law, and that the designation of California law "shall not be deemed an election to preclude application of the [FAA], if it would be applicable." A multi-party set of disputes arose, involving six agreements, some with and some without arbitration clauses. All this went to court, and the trial judge stayed the arbitrations pending resolution of the court litigation - as allowed by California Code of Civil Procedure 121.2 subdivision (c).
State law question - choice of laws
The California Supreme Court held that agreeing to use California law meant agreeing to use California's arbitration statutes.
Federal law question - preemption
(1) The court saw no actual conflict between the FAA and the California statute. This was based in large part on a finding that FAA Sections 3 and 4 (directing "courts of the United States" to stay court trials until arbitration has taken place, and directing "United States district court[s]" to order parties to proceed to arbitration) do not apply in state courts, and thus have no preemptive effect.
(2) The court saw no conflict with the spirit of the FAA, and said that the state law actually fosters the federal policy favoring arbitration. "It is an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties."
Significance of the case
I would not read much "law" into this case. It really means only that the parties are allowed to decide for themselves whether they want the procedural rules of the FAA or the procedural rules of the state statute to control.
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NASD rules preempt state ethics rules for arbitrators?
March 03, 2005 by Ross Runkel at LawMemo
The 9th Circuit says NASD rules preempt state ethics rules for arbitrators in employment disputes. The California Supreme Court hears arguments on a similar preemption issue on March 8, 2005.
The 9th Circuit case: Credit Suisse v. Grunwald (9th Cir 03/01/2005) [pdf]. Under Credit Suisse's Employment Dispute Resolution Program, Grunwald was obligated to use arbitration to resolve his employment dispute. He wanted arbitration conducted by the American Arbitration Association (AAA), but Credit Suisse preferred arbitration conducted by the National Association of Securities Dealers (NASD).
Why would it matter? California has a statute requiring neutral arbitrators to make extensive disclosures relating to potential conflicts of interest, and these would apply in an AAA arbitration. NASD rules also require disclosures but they are partly in conflict with the California rules.
The 9th Circuit held that the California rules are preempted and do not apply to NASD arbitrations.
The theory in brief: NASD is a private organization regulated by the Securities Exchange Commission (SEC). Acts of Congress can preempt state law and so can regulations of agencies such as the SEC. The arbitration rules adopted by the NASD were approved by the SEC, and therefore have preemptive force. Some California rules are preempted because they directly conflict with NASD rules; some are preempted because they would be an obstacle to executing Congress' purposes.
The California case: Jevne v. Superior Court, to be argued in the California Supreme Court March 8. Court of Appeal decision is Jevne v. Superior Court (California Court of Appeal 11/09/2003) [pdf]. This is not an employment case, but the court similarly held that the NASD arbitration rules preempted California's rules.
Interesting that the 9th Circuit decision is not binding on California courts. Although California is geographically within the 9th Circuit, it is a separate court system. So let's wait and see whether the cases come out the same. It could be that California doesn't think that the rules of a private organization (NASD) can preempt state law.
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Editor: Ross Runkel, Professor of Law Emeritus. email Ross@LawMemo.Com, Phone 503-399-8028. Copyright LawMemo, Inc.
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