Argument preview: Preston v. Ferrer

Argument Preview

The Federal Arbitration Act (FAA) provides for the enforcement of arbitration clauses in commercial contracts. California’s Talent Agencies Act (TAA), on the other hand, requires parties to a contract first bring their disputes before the California Labor Commission before bringing the case in court, or to an arbitrator. On Monday, January 14, in Preston v. Ferrer, the Court will hear oral arguments regarding whether the FAA preempts the TAA’s dispute resolution provisions.

Joseph D. Schleimer, of Schleimer & Freundlich in Beverly Hills, CA, will argue on behalf of petitioner Arnold Preston, an attorney with clients in the motion picture and television industries. G. Eric Brunstad, Jr., from the Hartford office of Bingham McCutchen, will argue on behalf of respondent Alex Ferrer, who is a retired Florida state judge and currently the host of the syndicated courtroom show “Judge Alex.” The petitioner’s brief is available here and the respondent’s brief is available here.

In March 2002, Ferrer and Preston entered into a management agreement that provided for payment of a fee from petitioner’s earnings and included a standard American Arbitration Association clause for the resolution of disputes arising under the contract. On June 10, 2005, Preston began arbitration proceedings against Ferrer, seeking to collect fees that he claimed he was owed under the agreement. In July 2005, Ferrer filed both a motion with the arbitrator to stay the arbitration proceedings and a petition with the California Labor Commission asking the commissioner to stay the arbitration. He argued that because Preston had acted as an unlicensed talent agent, the entire agreement was invalid under the TAA.

In November 2005, Ferrer filed a complaint in a California court, seeking a declaration that the contractual dispute was not subject to arbitration and injunctive relief halting the arbitration proceedings pending the commissioner’s decision on the validity of the agreement under the TAA. Preston then filed a motion with the California court asking it to compel arbitration. In December 2005, the trial court granted Ferrer’s motion for a preliminary injunction against arbitration proceedings, pending the Labor Commission’s review of the contract, and denied Preston’s motion to compel arbitration.

The California Court of Appeals affirmed the trial court’s ruling, holding that the Labor Commission would have to rule on the legality of the agreement under the TAA before Preston would have a right to recover in arbitration. The appeals court thus rejected Preston’s argument that (1) the FAA preempted the TAA’s procedural requirements; and (2) the Supreme Court’s holding in Buckeye Check Cashing, Inc. v. Cardegna required an arbitrator, rather than the Labor Commission, to first resolve a challenge to the validity of the entire contractual agreement (as opposed to a challenge to the validity of the arbitration clause specifically). The appeals court distinguished Buckeye Check Cashing on the ground that the Court had not considered in that case whether parties must exhaust their administrative remedies before taking a case to arbitration. The California Supreme Court declined to review the case in February 2007, and the Supreme Court granted certiorari in September 2007.

At the Supreme Court, petitioner Preston argues that Ferrer’s challenge is to the validity of the entire agreement rather than the arbitration clause itself, which – pursuant to Buckeye Check Cashing – must be considered by the arbitrator in the first instance. Moreover, petitioner argues, the appeals court’s conclusion that Buckeye Check Cashing does not apply to proceedings before administrative agencies conflicts with the Court’s decision in Gilmer v. Interstate/Johnson Lane Corporation, which held that disputes between parties with an arbitration agreement should go to arbitration in the first instance, even when the applicable federal law vests initial jurisdiction with an administrative agency.

With respect to state laws that preclude arbitration of a contractual dispute pending review by an administrative agency, Preston argues that the FAA, and decisions interpreting the act, such as Southland Corporation v. Keating, preclude the states from requiring judicial review of claims that parties had agreed to settle through arbitration. Petitioner urges the Court to adopt the approach of the Fifth Circuit in Saturn Distribution Corp. v. Paramount Saturn, Ltd., and hold that the strong federal policy favoring arbitration preempts state laws designed to limit arbitration (including those requiring review by an administrative agency).

Finally, petitioner argues that the express intent of the parties was to settle disputes through arbitration. Petitioner cites the arbitration clause of the agreement, which provides that disputes concerning the “validity[] or legality” of the contract should be settled by an arbitrator; petitioner also claims that the clause incorporates the American Arbitration Association’s Commercial Rules, which allow the arbitrator “to determine the existence or validity of a contract.”

Respondent counters that, in the management agreement, the parties agreed to be bound by California law, and that any conflict between the contract and California law would be settled in favor of California law. California law, however, includes the TAA, “which does not preclude arbitration where there is a valid and applicable arbitration clause, but merely postpones it pending the Commissioner’s review.” Respondent thus argues that the Court’s decision in Volt Information Sciences, Inc. v. Leland Stanford Junior University, which held that the Federal Arbitration Act does not preempt a state law that foreclosed arbitration between two parties until a third party’s litigation with a one of the arbitrating parties was resolved.

This provision of the contract notwithstanding, respondent also argues that the TAA is an exercise of California’s police power over the operations of the entertainment industry. Accordingly, Medtronic v. Lohr establishes a presumption against preemption of the TAA by federal law, unless Preston can produce evidence that preempting such a law was the clear and manifest purpose of Congress. There is no evidence, respondent asserts, that Congress explicitly sought to preempt the TAA. Moreover, the TAA is not preempted because it is consistent with the broad purposes of the Federal Arbitration Act: “[T]he TAA promotes expeditious, expert resolution of controversies arising under the TAA, while at the same time providing for ultimate de novo resolution of the controversy by a court or arbitrator.” Thus, Preston cannot demonstrate a conflict between the FAA and the TAA that would warrant preemption.

Ferrer also argues that the Court’s decision in EEOC v. Waffle House prohibits private parties from stripping governmental agencies of claims entrusted to those agencies for review, such as the Labor Commissioner’s oversight of claims under the TAA. Finally, the appeals court’s decision is consistent with decisions such as Southland that prevent states from limiting access to arbitration, as Southland only prohibits the states from categorically removing access to arbitration for certain kinds of disputes, while the TAA only requires an administrative agency to review the issue before it is submitted to arbitration. Alternatively, respondent argues, the Court should either limit Southland by concluding that the FAA does not apply to state administrative procedures or overrule the case by holding that Congress “never intended” the FAA “to apply to state court proceedings over state law issues.”

In his reply brief, petitioner counters that proceedings before the Labor Commissioner are not expeditious, but instead are routinely followed by de novo review in the California Superior Court and appellate review of that decision, all before a case reaches arbitration; the TAA thus conflicts with the FAA’s purpose of encouraging courts to enforce arbitration clauses. Petitioner also argues that respondent’s reliance on Volt is misplaced, as that decision only applies to arbitration proceedings delayed by third-party litigation. The relevant precedent, petitioner argues, is Mastrobuono v. Shearson Lehman Hutton, Inc., a decision holding that choice of law provisions refer to the substantive principles to be used in arbitration proceedings, rather than to procedural rules delaying arbitration.