Arbitration Article No. 11

THE FEDERAL ARBITRATION ACT AND LOCAL ARBITRATIONS

The U.S. Supreme Court’s recent holding in Preston v. Ferrer (2008) 128 S.Ct. 978 that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (FAA) (fn. 1) supersedes state laws that lodge primary jurisdiction of contractual arbitration questions in judicial or administrative forums shall have a substantial impact on who decides arbitral issues in California. (The FAA rests on Congress’s authority under the Commerce Clause “for the application, in state as well as federal courts, of federal substantive law regarding
arbitration.” [Id. at p. 981].)

Ferrer, a former Florida trial court judge who currently appears as “Judge Alex” on a Fox television network program, signed a management contract with Preston, a California attorney who renders services to persons in the entertainment industry. The contract contained an American Arbitration Association (AAA) clause that provided arbitration for “any dispute … relating to the terms of [the contract] or the breach, validity, or legality thereof … in accordance with the rules [of the AAA].” Thereafter, Preston initiated an arbitration proceeding against Ferrer to recover fees allegedly due under the contract. Ferrer, arguing that Preston was a talent agent who was operating without a license in violation of the Talent Agencies Act (Cal. Lab. Code Ann. § 1700.44(a)) (TAA), filed a motion with the arbitrator to stay that proceeding and, at the same time, filed a petition with the Labor Commissioner to determine the controversy and to stay the arbitration.

After the arbitrator denied Ferrer’s motion to stay the arbitration, Ferrer sought injunctive relief in the Los Angeles Superior Court to restrain Preston from proceeding with the arbitration. Preston, who contended that the TAA did not apply to him because he was acting as a personal manager, filed a motion with the same court to compel arbitration. The court denied Preston’s motion, granted Ferrer’s and stayed the action pending final resolution by the Labor Commissioner of Ferrer’s petition.

In the appellate court, Preston relied on Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440 in arguing that the FAA preempts California law requiring the Commissioner to first adjudicate the legality of the contract. Buckeye holds 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.” (Preston v. Ferrer, supra, at p. 981.)

In a 2-to-1 decision (145 Cal.App.4th 447), the appellate court affirmed the trial court judgment, holding that the relevant provision of the TAA vests “exclusive original jurisdiction” over the dispute in the Labor Commissioner. In an exercise of chutzpah, the appellate court found Buckeye to be “inapposite” because it “did not involve an administrative agency with exclusive jurisdiction over a disputed issue … did not consider whether the FAA preempts application of the exhaustion doctrine … (and) did not discuss whether a challenge to a contract as a whole should first have been made to an administrative agency where there is a statute vesting the agency with exclusive original jurisdiction to decide a challenge based on specific grounds.” (Id. at p. 447.) In dissent, Miriam Vogel viewed Buckeye as controlling. Presciently, she stated that “Instead of the speedy, efficient, and relatively inexpensive procedure contemplated by the parties’ contract, my colleagues have permitted Ferrer to cause a delay of years and triple or quadruple the parties’ expenditures.” (Id. at p. 451.)

The California Supreme Court denied Preston’s petition for review. The U.S. Supreme Court, in an 8-1 decision (Thomas dissenting), reversed the court of appeal decision.

The U.S. Supreme Court held that the FAA “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.” (Id. at p. 981.) Thus, the issue is not whether the Act preempts the TAA. “Instead, the question is simply who decides whether Preston acted as personal manager or as talent agent.” (Id. at p. 983.) The Court further found that the “prime objective of an agreement to arbitrate … to achieve ‘streamlined proceedings and expeditious results.’ (Citations.) … would be frustrated … if Preston could compel arbitration in lieu of de novo Superior Court review. Requiring initial reference of the parties’ dispute to the Labor Commissioner would, at the least, hinder speedy resolution of the controversy.” (Id. at p. 986.)

Accordingly, Preston v. Ferrer “disapprove(d) the distinction between judicial and administrative proceedings … 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.” (Id. at p. 987.) (fn. 2.)

In summary, Preston v. Ferrer holds that the FAA applies to local arbitrations where the parties have agreed or contracted to settle the dispute, which involves commerce, by arbitration. Left unanswered are the following questions: Does the contract requirement include consumer arbitrations, which are contracts drafted by or on behalf of a non-consumer party, such as an employer, health care entity or insurance plan, with a consumer party who is required to accept the arbitration provision? What standard or case law does the arbitrator use to decide whether the transaction at issue involves commerce and, therefore, implicates the FAA? And, lastly, if the arbitrator decides that the Commerce Clause does not apply, does he or she then automatically lose jurisdiction of the matter? These issues, and more, are surely going to be litigated as lawyers, the courts and arbitrators attempt to apply Preston v. Ferrer.

n. 1 – Section 2 of the FAA states: “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 U.S.C. § 2.

n 2 – In a subsequent part of the decision, the Supreme Court reaffirmed Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468 which held that the FAA does not bar a stay of arbitration when a third party, who is not bound by the arbitration agreement at issue, is also involved in the litigation. (Id. at pp. 987-989.)

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
(310) 201-0010

Copyright Michael D. Marcus, March 2008

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