- Supreme Court Closes Off Another Avenue for Avoiding Arbitration Agreements
- March 13, 2008
- Law Firm: Winston & Strawn LLP - Chicago Office
The Supreme Court has made it easier to bring contractual disputes before an arbitrator, even when state law grants exclusive jurisdiction over the dispute to an administrative agency. The Federal Arbitration Act (FAA) generally requires enforcement of private agreements to arbitrate, and the Supreme Court has held that a party to such an agreement cannot avoid arbitration simply by challenging the validity of the contract in a state or federal court. In Preston v. Ferrer, No. 06-1463 (Feb. 20, 2008), the Court held that the FAA also preempts attempts to avoid arbitration by challenging the validity of a contract in a state administrative agency.
The case involved a contract between Alex Ferrer, a former Florida trial judge and the star of the television show Judge Alex, and Arnold Preston, a California attorney who provides services to entertainers. When Judge Alex refused to pay fees due under the contract, Preston initiated arbitration proceedings. Although the contract included an agreement to arbitrate “any dispute . . . relating to the terms of [the contract] or the breach, validity, or legality thereof,” Judge Alex resisted arbitration on the ground that the contract as a whole was invalid under California’s Talent Agencies Act (TAA). Because the TAA grants the California Labor Commissioner exclusive original jurisdiction over any dispute under the Act, Judge Alex argued that the Commissioner should decide the validity of the contract in the first instance. Preston countered that the arbitration agreement controlled, and that Judge Alex therefore should litigate his TAA defense before an arbitrator.
The Los Angeles Superior Court ruled in favor of Judge Alex and enjoined the arbitration proceedings. A divided panel of the California Court of Appeal affirmed.
In an 8-1 opinion written by Justice Ginsburg, the Supreme Court reversed. The Court explained that the FAA “establishes a national policy favoring arbitration,” preempting state laws that would undercut the enforceability of arbitration agreements. As the Court recently explained in Buckeye Check Cashing, Inc. v. Cardegna (2006), a party cannot avoid its agreement to arbitrate simply by challenging the validity of the contract containing the arbitration clause in a state court. The result is no different where, as here, a party challenges the validity of the contract before a state administrative agency. Any other conclusion would bog down the parties’ dispute in state administrative proceedings, frustrating “[a] prime objective of an agreement to arbitrate”—namely, “streamlined proceedings and expeditious results.”
The Court emphasized that enforcement of the arbitration agreement would not compromise any substantive rights provided by state law. For example, Judge Alex can still raise a defense under the TAA. The arbitration agreement simply ensures that an arbitrator—not a state agency—will decide the merits of that defense in the first instance.
After a string of recent California decisions reflecting hostility to arbitration agreements, Preston is a welcome reminder that state laws undermining the enforceability of arbitration agreements are preempted by the FAA. The decision also makes clear that states cannot circumvent the pro-arbitration policy of the FAA by lodging exclusive jurisdiction over certain types of disputes in an administrative agency. The decision thus makes the enforceability of arbitration agreements in the face of state-law challenges significantly more secure.