Last month, a nearly-unanimous (8-1) United States Supreme Court fired the latest salvo in its continuing battle with the states over the Federal Arbitration Act (FAA). Preston v. Ferrer, No. 06-1463 (U.S. Feb. 20, 2008). In a case in which one of the litigants was FOX television's "Judge Alex," the Court held that, where the parties have agreed to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in any other forum, whether judicial or administrative, are superseded by the FAA. The decision could significantly affect franchisors and franchisees directly in connection with specific types of claims governed by state statutes. Its greater significance, however, lies in the emphatic nature of the opinion and the near unanimity of the Court, both of which suggest that the Supreme Court will continue to enforce the FAA against state attempts to limit its reach.
In order to appreciate the significance of Preston v. Ferrer, some background concerning the major Supreme Court decisions in the area may be useful. First, in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983), the Supreme Court noted that Section 2 of the FAA created a "liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary" and that "[t]he effect of the section is to create a body of federal substantive law of arbitrability." Subsequently applying these principles in the franchise context, the Supreme Court invalidated a provision of the California Franchise Investment Law that purported to render certain statutory claims by franchisees nonarbitrable. Southland Corp. v. Keating, 465 U.S. 1 (1984). The Court held that, in enacting the FAA, "Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements" and that the relevant provisions of the California Franchise Investment Law therefore violated the Supremacy Clause of the U.S. Constitution. 465 U.S. at 16 (footnote omitted).
In another franchise-related case, decided in 1996, the Supreme Court rejected a Montana statute that required a separate notice on the first page of any contract that included an arbitration provision, because the statute placed arbitration agreements on an "unequal 'footing'" from contracts generally. Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 686 (1996). In so holding, the Court noted that "[c]ourts may not ... invalidate arbitration agreements under state laws applicable only to arbitration provisions." 517 U.S. at 687 (emphasis in original). Most recently, the Supreme Court confirmed that state courts, as well as federal courts, must apply the federal standard of arbitrability set out in the FAA and the Court's decisions. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).
The decision in Preston v. Ferrer continues this trend of reversing lower court decisions that have refused to enforce arbitration agreements. Preston involved a contract between "Judge Alex" and a California attorney who provided services to persons in the entertainment industry. The contract unquestionably included an arbitration provision that, by its terms, pertained to the dispute. However, a California statute provided that contracts between "talent agents" and entertainers would be invalid and unenforceable if the agent lacked the requisite state license; the statute also vested the California Labor Commission with primary jurisdiction to determine the applicability of the statute. In the California courts, Judge Alex successfully invoked this procedure to avoid arbitration.
Consistent with its prior precedent, the Supreme Court reversed. Citing Southland, the Court noted that the FAA "'declare[s] a national policy favoring arbitration'" and that "[t]he FAA's displacement of conflicting state law is 'now well-established,' and has been repeatedly reaffirmed." Slip op. at 5 (additional citations omitted). The Court held further that, to the extent the California statute purported to vest jurisdiction over the controversy in a forum other than arbitration, it was preempted by the FAA. Finally, and perhaps most significantly, the Court held that, even if the reference to the Labor Commissioner were considered as merely an intervening step prior to an eventual arbitration, the statute still was preempted because it would delay the arbitration and thereby "at the least, hinder speedy resolution of the controversy." Slip op. at 10. Only Justice Thomas dissented.
The decision in Preston bodes well for franchisors who choose to include arbitration provisions in their agreements. Once again, a strong majority of the Supreme Court upheld the broad applicability of the FAA. However, history suggests that enforcement of arbitration provisions will continue to be a source of controversy and more Supreme Court decisions are likely as the state vs. federal battle over arbitration continues to evolve.