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Arbitrator, not Labor Commissioner, decides issues
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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Three new Supreme Court cases
February 19, 2008 by Ross Runkel at LawMemo
US Supreme Court will hear case on union's waiver of court forum for statutory claim.
14 Penn Plaza LLC v. Pyett (Certiorari granted February 19, 2008) [Details, briefs]
When employees sued claiming age discrimination, the employer filed a motion to compel them to take the case to arbitration. The employees were covered by a collective bargaining agreement which prohibited age discrimination and also said "All such claims shall be subject to the grievance and arbitration procedure [in the collective bargaining agreement] as the sole and exclusive remedy for violations." The trial court denied the motion to compel arbitration, and the 2nd Circuit affirmed. The 2nd Circuit held that "arbitration provisions contained in a [collective bargaining agreement], which purport to waive employees' rights to a federal forum with respect to statutory claims, are unenforceable."
See discussion of this case at Daily Developments in EEO Law and at ADR Prof Blog: Supreme Court hears third arbitration case this term: 14 Penn Plaza v. Pyett and at Workplace Prof Blog: Supreme Court Certs
US Supreme Court will hear case on union's use of agency fees for out-of-unit litigation.
Locke v. Karass (Certiorari granted February 19, 2008) [Details, briefs]
The Maine State Employees Association (MSEA) is the exclusive bargaining agent for certain state workers, and collects compulsory "agency fees" from non-members who are in the bargaining unit. Some of these fees are transferred to Service Employees International Union (SEIU), MSEA's national affiliate. MSEA included in its calculation of chargeable expenditures those costs of litigation (by both itself and SEIU) that was germane to collective bargaining. This meant that nonmembers contributed, through their service fees, to some litigation that was not undertaken specifically for their own bargaining unit, but rather was conducted by or on behalf of other units or the national affiliate, sometimes in other states. Included within this general category of expenditures were the salaries of SEIU's lawyers, and other costs of providing legal services to bargaining units throughout the country. Costs of litigation that was not related to collective bargaining, however, were not included in the service fees assessed to MSEA's nonmembers. The 1st Circuit held that MSEA may lawfully charge non-members for this "extra-unit litigation" so long as it is germane to the union's collective bargaining duties.
US Supreme Court will hear case on ERISA anti-alienation.
Kennedy v. Plan Administrator for Dupont Savings and Investment Plan (Certiorari granted February 19, 2008)
Decision below: 5th Cir 08/15/2007
William Kennedy's ERISA plan contained a no-alienation provision. William designated his wife Liv as the sole beneficiary. Upon their divorce, Liv agreed to be divested of all her rights. However, there was no Qualified Domestic Relations Order (QDRO). The 5th Circuit held that an ERISA Qualified Domestic Relations Order is the only valid way a divorcing spouse can waive her right to receive her ex-husband's pension benefits under ERISA.
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Gentry arbitration commentary
August 30, 2007 by Ross Runkel at LawMemo
Lots of commentary on Gentry v. Superior Court (Circuit City):
Gentry - New attack on class action waivers.
Gentry - Opt-out clause is not a safe harbor for unconscionability.
Gentry: Class Action Arbitration Bans Not Always Enforceable in Wage Cases.
Gentry Court: Mostly No class-action waivers in employment contracts.
Gentry v. Superior Court (Circuit City) Opinion.
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Cal Ag interest arbitration is constitutional
July 05, 2006 by Ross Runkel at LawMemo
When a California agricultural employer and a union fail to agree on a collective bargaining agreement, they are required to engage in interest arbitration to write a contract.
After an arbitrator [actually improperly called a mediator] wrote a contract for The Hess Collection Winery and United Food and Commercial Workers, the employer tried to get out of it. A petition to the California Agricultural Labor Relations Board (resulting in a decision in favor of the union) was followed by a court challenge.
The California Court of Appeal ruled for the union. It was 2-1. Hess Collection Winery v. California Agricultural Labor Relations Board (California Ct App 07/05/2006).
The court said:
"Hess [the employer] seeks an order setting aside the Board’s decision. Hess contends the statutory scheme (§ 1164 et seq.) violates principles of due process in that it unreasonably interferes with the right of contract, denies the right of judicial review, and is aimed at protectionism. Hess also contends that the scheme violates equal protection, invalidly delegates legislative authority, and is vague and overbroad."
"We shall conclude Hess’s contentions are without merit."
The dissent argued that the statute delegated legislative power unconstitutionally, and violated the equal protection guarantees of both the state and federal constitutions.
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NLRB takes aim at arbitration clause
June 19, 2006 by Ross Runkel at LawMemo
Did you think the NLRB would hold that a mandatory arbitration policy adopted by a non-union employer violated the National Labor Relations Act?
That's what they did in U-Haul Company of California (NLRB 06/08/2006) (2-1).
Primary reasoning: "because the employees would reasonably construe the broad language to prohibit the filing of unfair labor practice charges with the Board."
The case is important because the Board held the arbitration policy on its face was an unfair labor practice, even though there was no proof that anybody had ever been deterred from utilizing the NLRB's processes.
The employer made agreement to an arbitration policy a condition of employment or continued employment. The policy states that it:
. . . applies to all ... employees, regardless of length of service or status and covers all disputes relating to or arising out of an employee’s employment with [the employer] or the termination of that employment. Examples of the type of disputes or claims covered by the [Arbitration Policy] include, but are not limited to, claims for wrongful termination of employment, breach of contract, fraud, employment discrimination, harassment or retaliation under the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 and its amendment, the California Fair Employment and Housing Act or any other state or local anti-discrimination laws, tort claims, wage or overtime claims or other claims under the Labor Code, or any other legal or equitable claims and causes of action recognized by local, state or federal law or regulations. [Emphasis added.]
The NLRB put its focus on the bold language.
The majority said:
We recognize that the language in the arbitration policy does not explicitly restrict employees from resorting to the Board’s remedial procedures. However, the breadth of the policy language, referencing the policy’s applicability to causes of action recognized by “federal law or regulations,” would reasonably be read by employees to prohibit the filing of unfair labor practice charges with the Board. Plainly, the employees would reasonably construe the remedies for violations of the National Labor Relations Act as included among the legal claims recognized by Federal law that are covered by the policy. Thus, we find that the language of the policy is reasonably read to require employees to resort to the Respondent’s arbitration procedures instead of filing charges with the Board.
The decision was 2-1, with Member Wilma B. Liebman and Member Peter C. Schaumber in the majority, and Chairman Robert J. Battista dissenting.
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Argument audio: Who decides unconscionability?
September 29, 2005 by Ross Runkel at LawMemo
Listen to the oral argument of the 9th Circuit (en banc) in Nagrampa v. MailCoups, Inc.
The 9th Circuit reheard en banc (11 judges!) on 09/27/2005 the issue of whether it was for an arbitrator, rather than a court, to decide whether a contact is unconscionable. Nagrampa v. MailCoups, Inc (9th Cir 03/21/2005) was the original 3-judge panel decision holding that the arbitrator decides this question.
In Nagrampa there was a francise agreement which contained an arbitration agreement within it. Nagrampa claimed that both the arbitration agreement and the whole agreement were unconscionable. The 9th Circuit panel applied Prima Paint v. Flood & Conklin, 388 US 395 (1967), and made its own decision on the unconsionability of the arbitration agreement, but held that it was for the arbitrator to decide whether the contract as a whole was unconscionable.
That decision was withdrawn pending decision of the en banc court.
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Arbitration Blog? Try it.
August 18, 2005 by Ross Runkel at LawMemo
This is a shamelessly self-promoting post to entice you to take a look at Arbitration Blog, which discusses developments in employment arbitration and labor arbitration. Some recent entries:
- Motion to arbitrate delayed, denied
- Arbitration Law Memo
- Manifest disregard for the law
- NASD Discovery Arbitrator Pilot
- Armendariz doesn't apply to common-law claims
- "Reverse" discrimination violates public policy
- Forum clause controls which court can order arbitration
- Arbitration Law Memo
- Side agreement not arbitrable
- Court severs anti-punitive damages clause
- Interlocutory appeal will stop lower court litigation
- En banc hearing on who decides unconsionability
- Bill to exclude employment contracts from FAA
- Anti-class-action clause was unconscionable
- Ryan's certiorari petition
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EEOC-McDonald's mediation agreement
August 17, 2005 by Ross Runkel at LawMemo
EEOC and McDonald's USA, LLC today signed a "Regional Universal Agreement to Mediate" to informally resolve workplace disputes through Alternative Dispute Resolution (ADR) prior to an EEOC investigation or potential litigation when a charge of discrimination is filed with the federal agency in McDonald’s Atlanta Region. Illinois-based McDonald’s owns and operates a number of restaurants in Alabama, Georgia, and South Carolina, which will be covered by the agreement. [EEOC Press Release]
One of the advantages of this agreement appears to be that the EEOC web site now contains the following language:
McDonald's USA, LLC is the leading foodservice provider in the United States serving a variety of wholesome foods made from quality ingredients to millions of customers every day. More than 80 percent of McDonald's 13,700 U.S. restaurants are independently owned and operated by local franchisees. For more information about McDonald's visit www.mcdonalds.com.
And now you can read about wholesome foods at Ross' Employment Law Blog.
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Arbitration Law Memo
August 14, 2005 by Ross Runkel at LawMemo
Arbitration Law Memo is a free monthly service summarizing employment arbitration and labor arbitration court cases that appeared earlier in Employment Law Memo. Not really a blog, although we use blog software.
- On the web: http://www.lawmemo.com/arb/memo/
- email subscription: http://www.lawmemo.com/signup/
- RSS feed: http://www.lawmemo.com/rss.htm
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Anti-class-action clause was unconscionable
June 27, 2005 by Ross Runkel at LawMemo
It's not clear what effect Discover Bank v. Superior Court (California 06/27/2005) will have on anti-class-action clauses in employment arbitration agreements.
For consumer-cardholders suing banks for $29 each, such clauses are unconscionable under California law.
But the decision was quite limited:
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.
For more details, see Arbitration Blog.
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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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An arbitration system goes down in flames
March 13, 2005 by Ross Runkel at LawMemo
The 6th Circuit used some interesting logic in refusing to enforce an arbitration agreement under which Employment Dispute Services, Inc. (EDSI) would be the sole source of arbitrators. Ryan's Family Steak House required job applicants to agree that their employment claims would be arbitrated by EDSI. Employees wanted to go to court instead, arguing that the arbitration system was fatally flawed.
Most of the flaws found by the court are discussed in the Arbitration Blog.
The court ruled that the plaintiffs' agreements were unenforceable under the Federal Arbitration Act (FAA) "because they do not allow for effective vindication" of their federal statutory (FLSA) claims. Walker v. Ryan's (6th Cir 03/09/2005)
This finding was based on the conclusion that EDSI's arbitral forum is not neutral. Why? Here's the interesting logic: EDSI is a for-profit company. Ryan's provided 42 percent of EDSI's gross income in 2002. This resulted in a "symbiotic relationship." "Ryan's effectively determines the ... pools of arbitrators."
There was no evidence cited by the court that indicated that Ryan's had every exerted any actual influence in the selection of arbitrators, or that any of the individual arbitrators in EDSI's pool was actually biased, or that any arbitration conducted under the EDSI system had ever been overturned on the ground of arbitrator bias.
In short, the court didn't like the system, and didn't want to wait and see whether a neutral panel of arbitrators would be selected.
My view: I would expect to see conclusions like these supported by some evidence of actual bias rather than the fear of it.
Oh, well. The court also found the agreements unenforceable as a matter of Tennesee contract law.
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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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Federal question in underlying dispute supports jurisdiction to hear petition to compel arbitration
February 08, 2005 by Ross Runkel at LawMemo
I am grateful to David Nagle, chair of LeClair Ryan's Labor & Employment practice group, for pointing out a 4th Circuit decision dealing with the enforcement of arbitration agreements.
Discover Bank v. Vaden [full text pdf] (4th Cir 01/24/2005) is a banking case that should have an impact on employment cases. This is another reminder that the law dealing with enforcement of individual employer-employee arbitration agreements (not involving collective bargaining agreements) is often shaped by cases that have nothing at all to do with employment law.
The bank sued its customer in federal court under Federal Arbitration Act Section 4 to compel arbitration of state law claims that the customer had filed in state court.
The issue was whether the presence of a federal question in the underlying dispute is enough to support subject matter jurisdiction. The 4th Circuit held that it was.
Courts of Appeals are split on the question of whether, in a Section 4 suit, a federal district court has subject matter jurisdiction when the underlying dispute between the parties raises a federal question. One line of authority is that the basis for federal jurisdiction must appear on the face of the arbitration petition itself. That would require that there be some basis for jurisdiction other than the underlying dispute - such as diversity of citizenship or admiralty. The other line of authority (adopted by the 4th Circuit) allows the district court to look through the arbitration petition and "assess whether the overall controversy between the parties 'raises a federal question.'"
This case was included in today's monthly Arbitration Law Memo, an email service provided by LawMemo.Com. [Subscribe]
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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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