Preston v. Ferrer and the Validity of Arbitration Agreements...and Who Decides?

My summary of the case is here. I will begin by citing the syllabus of the case (official summary) as it described the relevant facts; then I will quote from Justice Ginsburg's majority opinion (8-1; Thomas dissenting), in which the Court held that under the Federal Arbitration Act ("FAA"), the Arbitrator rather than a state official or state court, would decide the meaning of the contract. Thus, as predicted, Judge Alex lost his case at the US Supreme Court.

The Court's Summary of the Facts

Here they are, taken from the syllabus of the case:

"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, 446, 126 S.Ct. 1204, 163 L.Ed.2d 1038, 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."

The Court's Dealing with the Case

Rather than getting bogged down by all the complexities of the case, the Court cut through it all and defined the issue as one of favoring, or disfavoring, the honoring of arbitration agreements in contracts. If these agreements were to be honored by courts, then they "pre-empted" any state laws that refer state-law controversies to a judicial forum but also state statutes that refer certain disputes to administrative agencies. Here is how Justice Ginsburg defined the issue:

"As this Court recognized in Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), the Federal Arbitration Act (FAA or Act), 9 U.S.C. § 1 et seq. (2000 ed. and Supp. V), establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution. The Act, which rests on Congress' authority under the Commerce Clause, supplies not simply 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. 465 U.S., at 16, 104 S.Ct. 852. More recently, in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), the Court clarified that, when parties agree to arbitrate all disputes arising under their contract, questions concerning the validity of the entire contract are to be resolved by the arbitrator in the first instance, not by a federal or state court.

The instant petition presents the following question: Does the FAA override not only state statutes that refer certain state-law controversies initially to a judicial forum, but also state statutes that refer certain disputes initially to an administrative agency? 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."

At the heart of her analysis, Justice Ginsburg relied on Section 2 of the FAA of 1925. That section provides:

"A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," 9 USC sec. 2.

It is this strong policy favoring arbitration of disputes, when such an arbitration clause appears in a contract, that lay behind the rest of her analysis. Though she spends considerable time applying cases to the facts at hand, she considers the Buckeye case, (546 US 440 (2006)) dispositive. In Buckeye the Court concluded that challenges to the validity of a contract requiring arbitration of disputes ordinarily "should..be considered by an arbitrator, not a court."

Returning, then, to the central question of this case, it was who decides whether Preston acted as a personal manager or as a talent agent for Mr. Ferrer. The Court decided that the arbitrator, rather than a state court or administrative agency, makes this call. A big win for those favoring the validity of arbitration clauses...

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