The United States Supreme Court has now held that when parties agree to arbitrate all questions arising under a contract, the Federal Arbitration Act (“FAA”) will supersede state laws vesting jurisdiction over a dispute in an administrative forum. Preston v. Ferrer, No. 06–1463, slip op. at 2; 552 U.S. ___ (February 20, 2008). This ruling expands to administrative bodies the principle that arbitrators, not courts, should determine the validity of contracts containing comprehensive arbitration clauses.

Background Facts

Preston involved a dispute between a network television personality and his attorney for fees allegedly due under a talent management contract. The attorney originally filed a demand for arbitration based upon the contractual agreement to arbitrate “any dispute…relating to the terms of [the contract] of the breach, validity, or legality thereof…in accordance with the rules [of the American Arbitration Association]”. In response, the client attempted to stay the arbitration proceedings and petitioned the California Labor Commissioner for a determination that the attorney was an unlicensed agent under the California Talent Agencies Act (“TAA”), thereby rendering any contract, including its arbitration clause, unenforceable.

The Labor Commissioner’s hearing officer determined that it had “colorable basis” for jurisdiction over the matter pursuant to the TAA’s mandate that disputes arising under the statute be referred to the Labor Commissioner for adjudication, but nonetheless declined to stay the arbitration on the grounds that the Commissioner lacked the authority to order such relief. The client subsequently filed suit in Los Angeles Superior Court, seeking an order enjoining the arbitration and a declaration that the controversy between the parties was not subject to arbitration. The Superior Court agreed to enjoin the arbitration until the Labor Commissioner made the jurisdictional determination as to whether the attorney was an “agent” subject to the TAA. On appeal, the California Court of Appeals affirmed the Superior Court’s judgment that the TAA vests “exclusive original jurisdiction” over the dispute in the Labor Commissioner. After the California Supreme Court denied a petition for review, the United States Supreme Court granted certiorari, reversed the judgment of the California Court of Appeal, and HELD that the FAA overrides a state law vesting initial adjudicatory authority in an administrative agency.

Opinion of the Court

The sole question before the Court in Preston was who decides – the Commissioner of Labor or the arbitrator – whether the attorney acted as an unlicensed talent agent. The Court stated that the answer to this question was “largely, if not entirely” resolved by its recent opinion in Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), which held that “when parties agree to arbitrate all disputes arising under a 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.” Id. at 1. The Court reasoned that because the contract clearly evidenced a transaction involving commerce, and the client’s challenge went to the validity of the management contract as a whole, the FAA required that an arbitrator decide the issue of whether the attorney was an agent (and by extension the contract unenforceable) in the first instance. The FAA supersedes the TAA provision granting the Commissioner of Labor exclusive jurisdiction to decide an issue that the parties had agreed to arbitrate.

The Court considered the client’s argument that the TAA did not conflict with the FAA, but imposed only an exhaustion of remedies requirement precedent to arbitration. The Court found such a requirement to be contrary to the prime objective of arbitration, which is to achieve “streamlined proceedings and expedited results.” Id. at 10 (citing Mitsubishi Motors Corp. v. Soler Chrylser-Plymouth, Inc., 473 U.S. 614, 633 (1985). The Court also rejected the argument that because proceedings before the Labor Commissioner were administrative rather that judicial, allowing parties to proceed to arbitration would undermine the Labor Commissioner’s ability to perform its public service functions. The Court reasoned that the Labor Commissioner would not be pursuing an enforcement action in its own name, but would be serving as an adjudicator in a private dispute – a role the FAA reserved for the arbitrator. Id. at 11. Finally, the Court rejected the client’s contention that the contract’s California choice-of-law provision granted the Labor Commissioner jurisdiction over the dispute. Relying on its prior opinion in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995), the Court held that the best way to “harmonize” choice-of-law provisions with agreements to arbitrate was to read the choice-of-law clause as encompassing substantive principles of state law, but not special rules limiting an arbitrator’s authority.

Conclusion

The Supreme Court has now issued two recent opinions (Buckeye being the other) holding that it is the province of the arbitrator, not the courts or other tribunals, to decide whether grounds exist to invalidate a contract containing an arbitration agreement, except where the challenge is precisely limited to the agreement to arbitrate, itself. Preston expands upon this principle by holding that where parties agree to arbitrate all claims arising under a contract, the FAA will supersede any state laws vesting initial jurisdiction over a dispute in an administrative as well as judicial forum.