The United States Supreme Court has long maintained that the Federal Arbitration Act (FAA) establishes a national policy favoring arbitration whenever parties have contracted for arbitration as their exclusive mode of dispute resolution. On February 20, the Court issued an important decision reinforcing that policy. In Ferrer v. Preston, the Court ruled 8-1 that the FAA requires arbitration when the parties have so contracted, even if a state law would otherwise relegate their dispute to an administrative forum.
The case involved a dispute between Alex E. Ferrer—the "Judge Alex" of Fox television fame—and Arnold M. Preston, an entertainment industry lawyer in California. Ferrer had entered into a written contract with Preston, and Preston had provided services for Ferrer. The contract contained a broad arbitration clause, requiring arbitration of "any dispute . . . relating to the terms of [the contract] or the breach, validity or legality thereof in accordance with the rules [of the American Arbitration Association (AAA)]." Seeking fees allegedly due from Ferrer under the contract, Preston initiated an arbitration proceeding before the AAA.
Ferrer responded by filing a petition with the California Labor Commission, asserting that his contract with Preston was void and unenforceable under a California law, the California Talent Agencies Act (CTAA). Ferrer asserted in this state administrative forum that Preston had been acting as a "talent agent" without the license required by the CTAA, and that Preston's unlicensed status rendered the entire contract void. Preston, for his part, countered that he was not a "talent agent," but instead was a "personal manager," and that the licensure provision of the CTAA did not apply.
Ferrer also filed a civil suit and obtained an injunction in Los Angeles Superior Court barring Preston from proceeding with arbitration. In a 2-1 decision, the California state appellate court affirmed the injunction against arbitration. The state appellate court held that the CTAA vested exclusive original jurisdiction of disputes involving the CTAA before the California Commissioner of Labor. The state appellate court rejected Preston's argument that, in light of the contract's arbitration clause, the FAA preempted the CTAA provision. The California Supreme Court declined to hear the case.
Preston sought and obtained U.S. Supreme Court review. The Supreme Court reversed the California decision, paving the way for Preston to resume his pursuit of arbitration.
The Supreme Court's decision centers on Section 2 of the FAA, which generally provides for enforcement of written agreements for arbitration "save upon such grounds as exist at law or in equity for the revocation of any contract." Writing for herself and seven other Justices, Justice Ginsburg posited the issue under Section 2 as "who decides"—arbitrator or judge—whether "grounds . . . exist at law or in equity" to invalidate an arbitration agreement.
Justice Ginsburg drew upon the fundamental distinction developed in the Court's earlier decisions for resolution of this "recurring question" under Section 2 of the FAA. As she explained the distinction, "Attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause, are within the arbitrator's ken." Recently, as she noted, the Court in its 2006 decision in Buckeye Check Cashing, Inc. v. Cardegna, had reaffirmed this rule that, when a contract contains an arbitration clause, the validity of the underlying contract as a whole is ordinarily a matter for the arbitrator to resolve, while questions concerning the validity of the arbitration clause itself are for the court.
In his California state proceedings, Ferrer had sought invalidation of the entire contract with Preston. Rather than mounting a discrete challenge to the validity of the arbitration clause, Ferrer argued simply that the contract was void for non-compliance with the CTAA. Ferrer had not contended, for example, that the arbitration clause had been procured by fraud, or that the arbitration clause itself was procedurally or substantively unconscionable. Following Buckeye Check Cashing, Justice Ginsburg readily concluded that Ferrer's challenge to the validity of the contract as a whole should be resolved in arbitration.
Ferrer sought to distinguish Buckeye Check Cashing, relying, for example, on the Supreme Court's 2002 decision in EEOC v. Waffle House. There the Court held that an arbitration agreement signed by an employee who became a discrimination complainant did not bar the EEOC from filing an enforcement suit in its own name. But Justice Ginsburg explained that Waffle House addressed the role of an agency—not as a neutral adjudicator, as the California Labor Commissioner would function under the CTAA—but as a prosecutor pursuing an enforcement action in its own name. Here, the California Labor Commissioner would be free to act as an advocate to enforce the CTAA, just as the EEOC would act in instituting a law suit alleging employment discrimination. However, the Labor Commissioner's role as adjudicator was foreclosed, in light of the overriding policy of the FAA favoring arbitration, by Ferrer's agreement with Preston to submit any disputes concerning the breach or validity of their contract to arbitration.
Justice Ginsburg rejected Ferrer's argument that the CTAA "merely postpones" arbitration pending the Labor Commissioner's decision, without wholly preventing it. Requiring initial reference of the dispute to the Labor Commissioner, she reasoned, would frustrate the objective of arbitration "to achieve ‘streamlined proceedings and expeditious results.'"
Finally, Justice Ginsburg was unpersuaded by Ferrer's contentions premised on the contract's choice-of-law clause, which provided that the contract would be governed by California law. Ferrer argued that adherence to the parties' choice of California law to govern their contract would require submission to the exclusive jurisdiction of the Labor Commissioner. Significantly, Justice Ginsburg noted that the parties' contract provided for arbitration "in accordance with [AAA] rules" and that one of those rules, AAA Commercial Rule 7(b), states that "[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part." Justice Ginsburg concluded: "The incorporation of the AAA rules, and in particular Rule 7(b), weighs against inferring from the choice-of-law clause an understanding shared by Ferrer and Preston that their disputes would be heard, in the first instance, by the [California] labor commissioner."
The Supreme Court's decision in Ferrer— with unusual near-unanimity for the Court as now comprised—underscores the continuing vitality, at the highest level of the federal judiciary, of the strong federal policy favoring arbitration when the parties have so contracted. Contracting parties who wish to enhance the prospect that an arbitrator will determine the validity of their contract should ensure that their arbitration clause is a broad clause, referring all disputes to arbitration. And, as a matter of skillful contract draftsmanship, as the Court's decision also makes clear, those who wish to ensure an arbitral forum should consider expressly stating in their arbitration clause, or incorporating into it the applicable rule of the AAA or other alternative dispute resolution provider, that the arbitrator is granted the authority to determine the existence or validity of the contract of which the arbitration clause is a part.
It remains to be determined whether the continuing trend of Supreme Court decisions favoring arbitration will be tempered by congressional action. Significant legislation is pending in both Houses of Congress to amend the FAA and pare back dramatically the arbitrability of consumer disputes or employment disputes.