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Court's second '07-'08 ADR case challenges arbitrator supremacy.

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Kathleen A. Bryan
International Institute for
Conflict Prevention and Resolution
Susan E. Lewis
John Wiley & Sons, Inc.
VOL. 26 NO. 1 JANUARY 2008
Russ Bleemer
Jossey-Bass Editor:
David Famiano
Production Editor:
Ross Horowitz
Alternatives to the High Cost of Litigation (Print ISSN 1549-4373, Online ISSN 1549-4381) is a newsletter published 11 times a year by the International Institute for
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Can a California law requiring the state’s
labor commissioner to oversee contracts take
priority over the Federal Arbitration Act’s
enforcement requirements? This preemption
issue will be argued before the U.S. Supreme
Court this month. Michael E. Johnson and
Piret Loone, of New York, analyze the issues
before the Court, discuss the key precedent
likely to affect the outcome, and make a prediction. Also included is a sidebar summarizing the four amicus views ..................Page 1
A full listing of the offerings and archive for
CPR’s new International Dispute
Negotiation podcast series, available free on
the web; Part II of the highlights of CPR’s
2007 Fall Meeting, and a CPR senior vice
president departs after a decade ........Page 2
Inspired by a classical festival, Robert
Shafton, of Los Angeles, takes a lighter look
at conflict resolution techniques and practices, analogizing conductors and orchestra
members to neutrals and advocates ....Page 3
A Pittsburgh attorney who developed a
diversity fellowship now focuses on a report
that will help others expand the profession
through a mentor program. Also, the Italian
Legislature proposes permitting, for the first
time, class actions for money damages–but
sets up an ADR facility to administer the
payouts ............................................Page 9
CPR News ......................................Page 2
Subscription Info..............................Page 2
ADR Briefs ......................................Page 9
Cartoon by Cullum..........................Page 9
Index Info ......................................Page 16
VOL. 26 NO. 1 JANUARY 2008
Court’s Second ‘07-‘08 ADR Case
Challenges Arbitrator Supremacy
Code §1700.44, required that parties to
a management contract containing an arbitration clause submit their dispute concerning the contract’s validity to a state
Less than two years ago, the U.S.
Labor Commissioner.
Supreme Court in Buckeye Check Cashing
Preston v. Ferrer, 06-1463, will be arInc. v. Cardegna, 546 U.S. 440 (2006),
gued on Jan. 14.
clarified that arbitrators, not judges, have
The Ferrer court sought
primary responsibility for
to distinguish Buckeye, deciddetermining the validity of
ed earlier in the year, on the
contracts containing arbitraground that the Talent Agention clauses.
cies Act vested initial jurisThe Buckeye Court held
diction in an administrative
that, as a matter of substanagency, while Buckeye intive arbitration law under the
volved an attempt to avoid
Federal Arbitration Act, 9
arbitration by filing a suit in
U.S.C. §§1-16, any chala court.
lenge to the validity of the
Given the strongly pro-arbitration
contract as a whole must be determined
position taken by the Supreme Court in
by the arbitrator, even if the obligation to
2006, the Ferrer court’s superficial and
arbitrate is contained in the contract
technical distinction doesn’t appear likely
claimed to be unenforceable.
to withstand the Court’s scrutiny.
The Court made clear that this FAAArbitration and the FAA appear to be
based principle applies even to state lawhigh on the Supreme Court’s priority list
based challenges to contract validity
this term. Another important case on the
sought to be presented to a state court.
FAA’s reach, Hall Street Assocs. v. Mattel,
Buckeye has since been cited in more
No. 06-989, was argued before the Court
than 170 federal and state court decion Nov. 7. [The Court asked the Hall
sions, often as embodying the FAA’s proStreet Associates’ parties for additional
arbitration policy, and the nationwide
briefs on Nov. 16. See “The Amicus
trend toward enforcement of arbitration
View: What They’re Saying about Hall
Street Associates, and Why,” 25 AlternaAt the end of the 2006-2007 term,
tives 166 (November 2007).] The Hall
the Court agreed to hear an appeal from
Street Associates issue focuses on whether
the decision in Ferrer v. Preston, 145 Cal.
the FAA precludes the enforcement of an
App. 4th 440 (Nov. 30, 2006), where the
arbitration agreement providing for a
California Court of Appeal held that the
more expansive judicial review of an arbiCalifornia Talent Agencies Act, Labor
tration award than the FAA contemplates. Like Hall Street Associates, Ferrer
gives the Court the opportunity to clariJohnson is a partner and Loone is an associate in
the Litigation and Trial Practice Group of the
New York office of Alston & Bird LLP.
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
(continued on page 5)
VOL. 26 NO. 1
Arbitrator Supremacy
(continued from front page)
fy the FAA’s preemptive reach.
In Buckeye, the Supreme Court held that
in disputes implicating the FAA, a challenge to the legality of a contract as a
whole must be decided by the arbitrator,
rather than a court.
The Buckeye plaintiffs brought a putative class action in a Florida state court
regarding their “payday” loan contracts
with Buckeye, which provided customers
a short-term loan for a fee. The plaintiffs
alleged that the contracts were illegal, because Buckeye charged usurious interest
rates that violated Florida’s lending and
consumer protection laws.
Buckeye moved to dismiss, and to
compel arbitration pursuant to the arbitration clause contained in its standard
loan agreement. The trial court denied
the motion, holding that only a court
could resolve the claim that the contract
was illegal under Florida law.
A Florida appellate court reversed,
holding that the trial court should have
dismissed the action in favor of arbitration. Foreshadowing the U.S. Supreme
Court’s eventual holding, the Florida appellate court reasoned that an arbitrator
should hear the parties’ dispute because
the plaintiff challenged the enforceability
of the entire contract, but did not specifically challenge its arbitration provision.
But the Florida Supreme Court reversed. It held that the FAA only applies
to contracts, and that state law determines what a contract is. It reasoned that
an illegal contract, or a contract void ab
initio, as here, would not be a contract at
all, leaving the state court with no arbitration clause to enforce.
The U.S. Supreme Court reversed
again. It drew a bright line between challenges to the validity of an arbitration
clause and to the validity of the agreement as a whole. This “severability” doctrine treats an arbitration clause as a separate agreement within the parties’ contract, and unless the arbitration clause
itself is challenged, the arbitrator retains
the power to determine the overall con-
tract’s validity.
The U.S. Supreme Court rejected the
Florida Supreme Court’s rationale that
the FAA cannot apply unless a “contract”
exists, which it held to be inconsistent
with the FAA’s well-settled severability
rule. Finally, the nation’s top court put to
rest any debate regarding the FAA’s application to state court proceedings by ex-
Another Supreme Test
The event: This month, for the
second time this term, the
Supreme Court will hear arguments in an arbitration case.
The significance: It’s not really a
new issue. Though accepted as
a pre-emption matter, the lastdecided Court opinion, 2006’s
Buckeye Check Cashing, on arbitrability, will figure in the
The prediction: The California
appeals court will be reversed,
and an arbitrator will get first
crack at the dispute, not the
state labor commissioner.
plicitly stating that in both state and federal forums, the arbitrator must decide
the validity of the contract as a whole.
Ferrer involves a 2002 “Personal Management Agreement” between Arnold M.
Preston, a Florida attorney who moved to
California to work for the William Morris Agency, and Alex E. Ferrer, a television
personality known as “Judge Alex.”
Under the agreement, Ferrer agreed to
pay Preston a percentage of his earnings
from his television show for Preston’s
managerial services. The agreement included an arbitration provision.
In 2005, Preston filed an arbitration
demand with the American Arbitration
Association seeking damages for breach
of contract based on Ferrer’s alleged failure to pay his fees. Shortly thereafter, Ferrer filed a petition with the California
State Labor Commissioner claiming that
the contract was void because Preston was
acting as an unlicensed talent agent in violation of the Talent Agencies Act. The
petition asked the commissioner to stay
Preston’s arbitration.
Under the Talent Agencies Act, controversies regarding talent agencies must
be referred to the Labor Commissioner
for determination. The commissioner’s
rulings are subject to de novo review by a
California state court.
When the commissioner denied Ferrer’s motion to stay arbitration, Ferrer
filed a complaint in the Los Angeles
County Superior Court. He sought a declaration that the dispute was not subject
to arbitration, and to restrain Preston
from proceeding with the arbitration.
Ferrer did not challenge the agreement’s arbitration clause. Preston moved
for an order compelling arbitration.
On Dec. 7, 2005, the court granted
Ferrer’s motion for a preliminary injunction, denied Preston’s motion to compel
arbitration, and stayed the action pending resolution of the petition by the Labor Commissioner.
The California Court of Appeal upheld the trial court’s order by a 2-1 vote.
The majority held that notwithstanding
the arbitration clause in the agreement,
the Talent Agencies Act vested exclusive
original jurisdiction in the Labor Commissioner to decide whether the contract
was valid, and whether it involved the
services of a talent agency.
The appellate court rejected Preston’s
argument that the FAA preempted the
Talent Agencies Act under the Supreme
Court’s Buckeye decision. In a cursory
analysis, the appeals court deemed Buckeye inapposite because “it did not involve
an administrative agency with exclusive
jurisdiction over a disputed case.” Ferrer,
145 Cal. App. 4th at 447.
The appeals court’s Ferrer decision
didn’t address Buckeye’s forceful rejection
of “the proposition that the enforceabili-
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
(continued on page 8)
VOL. 26 NO. 1
The Amicus Are Unanimous: Reverse the Lower Court, and Arbitrate
Four friend-of-the-court briefs have
been filed in Preston v. Ferrer, as of Alternatives’ press time, in preparation for
the Jan. 14 argument at the U.S.
Supreme Court.
All of the briefs support petitioner
Arnold M. Preston in his bid to have his
California appellate case reversed, and
the matter against his former client sent
to arbitration.
It’s a return to the amicus filing
room for two of the parties here.
CTIA—The Wireless Association, and
the Pacific Legal Foundation, both filed
briefs earlier this term in the hot arbitration case of Hall Street Associates v. Mattel, No. 06-989, which was argued in
November. Both amicus supported petitioner Hall Street Associates’ request to
enforce a contractual provision allowing
heightened judicial review for an arbitration award.
The Court asked the Hall Street Associates’ parties for new briefs on Nov.
16, nine days after the argument. No
decision had been issued at press time.
Here are background and excerpts
from the Preston amicus briefs:
v. Thomas, 482 U.S. 483, 491 (1987)) or
condition the enforceability of arbitration
agreements on compliance with special
requirements that are not applicable to
contracts generally (Doctor’s Assocs. Inc. v.
Casarotto, 517 U.S. 681, 687 (1996)).”
The brief also asks the Court to
draw a line that halts what the group
views as a long-term problem:
The decision below is part of a
much broader pattern of attacks on
“The California
Legislature and
courts . . . have
distrust of
arbitration by
CTIA—The Wireless Association, a
Washington, D.C., nonprofit industry
lobbying group that represents service
providers, manufacturers, and Web companies, among others, declares that the
California Talent Agencies Act conflicts
with the FAA. It notes in its summary
that the act specifies that cases “must first
be submitted to the California Labor
Commissioner, whose decision will then
be reviewed de novo by the Superior
Court. The statute allows disputes to be
arbitrated, but only if the parties’ arbitration agreement (i) requires the parties to
notify the Labor Commissioner of the
time and place of all arbitration hearings
and (ii) authorizes the Commissioner to
attend all hearings. These limitations on
the right to arbitrate cannot be reconciled
with this Court’s clear holdings that
States may not declare disputes or claims
off limits to arbitration (Southland Corp.
v. Keating, 465 U.S. 1, 10 91984); Perry
seeking to declare
various disputes or
This Court held that effort preempted by the FAA [in Southland].
Next, the Legislature tried to place
certain wage-collection claims under
the California Labor Code off limits
to arbitration. This court struck
down that effort too [in Perry].
Undeterred, the California Supreme
Court held that claims for so-called
“public” injunctive relief under the
Consumer Legal Remedies Act . . .
and Unfair Competition Law . . . are
non-arbitrable. [Citations omitted.]
And during the same time frame, it
held that discrimination claims
brought under the Fair Employment
and Housing Act are arbitrable only
if the arbitration agreement in question provides for, inter alia, ‘more
than minimal’ discovery and a written ruling. [Citation omitted.] . . .
The same mistaken premise underlies [these examples] and the decision below: that the State is free to
declare certain disputes or claims to
be non-arbitrable as a matter of
public policy or to impose conditions on the enforcement of arbitration provisions whenever it believes
that such conditions are necessary to
advance “unwaivable statutory
rights.” [Citation omitted.]
claims to be nonarbitrable. . . .”
arbitration in California. The California Legislature and courts have
for decades demonstrated distrust of
arbitration by seeking to declare various disputes or claims to be non-arbitrable or, as in this case, arbitrable
only if certain onerous conditions
are satisfied.
First, the California Legislature tried
to make claims under the Franchise
Investment Law non-arbitrable.
Macy’s Group Inc., the department
store holding company that owns Macy’s and Bloomingdale’s, agrees with
CTIA. Its amicus brief says that “basic”
Federal Arbitration Act Section 2 rules
“are under siege in the courts of California, the decision below being just one in
a long line of cases revealing hostility to
arbitration involving individuals. “
Macy’s argues that the FAA “establishes a strong federal policy in favor of
enforcing arbitration agreements on an
equal footing with other contracts, and
thus requires enforcing them according
to their terms. Equally well established
is that that policy applies to arbitration
of statutory rights and that, pursuant to
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
VOL. 26 NO. 1
the Supremacy Clause, it pre-empts any
contrary state policy. Furthermore, the
pre-emptive mandate of Section 2 not
only bars state courts from directly
voiding arbitration agreements out of
hostility for arbitration but also prohibits them from piecemeal or de facto
voiding of such agreements.”
Macy’s asks the Court to “broadly . . .
reiterate the FAA’s preemptive equalfooting mandate for the benefit of California courts and those who depend on
the lawful enforcement of arbitration
agreements in that State.”
Macy’s also notes that its four-yearold, company-wide workplace dispute
resolution program, in use in all of its
divisions, deploys binding arbitration as
its final step, “although employees are
given the opportunity to opt out of that
final step without any negative impact
on their employment.”
tems in disputes where the parties
have agreed to arbitration, and the
same policy applies to state administrative proceedings.
This is particularly compelling in
this case, where review by the Labor
Commissioner is not an alternative
to, but is an integral part of state judicial proceedings in California.
Under state law, the Labor Commissioner’s determination is subject to
de novo review in state court. Sinna-
The decision below
exacerbates the
The Pacific Legal Foundation, a 30year-old Sacramento, Calif., nonprofit
advocacy group whose work includes a
“Free Enterprise Project,” backs its preemption reading of the FAA under freedom-of-contracting principles. The view
echoes the foundation’s amicus brief in
Hall Street Associates. See “The Amicus
View: What They’re Saying About Hall
Street Associates, and Why,” 25 Alternatives 166 (November 2007).
The foundation believes Buckeye
Check Cashing Inc. v. Cardegna, 546
U.S. 440 (2006), should control the
Preston outcome:
Given that the FAA precludes initial
review by a federal administrative
agency, a straightforward application
of the rationale of Buckeye Check
Cashing and [Prima Paint Corp. v.
Flood & Conklin Mfg. Co., 388 U.S.
395 (1967)], foreclose state attempts
to interfere with arbitration by setting up administrative review procedures. In this case, review by the Labor Commissioner normally is required to determine the validity of a
talent-representative contract. States
may not interject their judiciary sys-
harm caused by
the refusal to
mon v. McKay, 191 Cal.Rptr. 295;
142 Cal. App. 3d 847, 850 (Cal. Ct.
App. 1983). The administrative determination, therefore, is in all essentials a state judicial proceeding.
Buckeye Check Cashing should therefore control the result. [Emphasis is
in the brief.]
The U.S. Chamber of Commerce
traditionally has strongly backed business’s use of arbitration, and opposing a
decision in which state law and processes preempt FAA arbitration is a natural
move. Among other amicus points, the
Washington, D.C.-based National
Chamber Litigation Center Inc. argues
that the decision is rooted in hostility
toward arbitration:
The financial and other risks created
by the decision below to other California litigants are well illustrated by
the facts of this case. Under California law, Ferrer’s administrative proceeding is apparently only a prelude
to further litigation. Section
1700.44(a) provides that ‘(i)n cases
of controversy arising under (the
Talent Agencies Act), the parties involved shall refer the matters in dispute to the Labor Commissioner,
who shall hear and determine the
same, subject to an appeal within 10
days after determination, to the superior court where the same shall be
heard de novo.’ And to take the case
to the superior court for this trial de
novo, the aggrieved party must post
a bond of at least $1,000 and up to
twice the amount of any judgment
approved by the Commissioner. See
Cal. Lab. Code § 1700.44(a).
Thus, by allowing Ferrer to litigate
the validity of the management contract before the Labor Commissioner
rather than the arbitrator, the decision below actually exacerbates the
harm caused by Ferrer’s refusal to arbitrate. In the typical case, a party
seeking to compel arbitration might
be forced into state-court litigation,
costly and time-consuming as that
may be. But the result in this case is
even worse, because the decision below forces petitioner to spend additional time and money merely to satisfy a condition precedent to statecourt litigation, perhaps including
another appeal. [Emphasis is in the
This case thus calls to mind this
Court’s admonition that allowing a
litigant to evade his agreement to arbitrate ‘could lead to prolonged litigation, one of the very risks the parties, by contracting for arbitration,
sought to eliminate. [Citing Southland.] Reversal will spare petitioner—and other California litigants—
from that perverse fate.
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
–Russ Bleemer
VOL. 26 NO. 1
Arbitrator Supremacy
(continued from page 5)
ty of the arbitration agreement turn[s] on
the state legislature’s judgment concerning the forum for enforcement of the
state-law cause of action.” Buckeye, 546
U.S. at 446.
The Court of Appeal did not explain
how the California Legislature’s creation
of an administrative forum for disputes
involving talent agencies changed the
Buckeye Court’s analysis or holding.
The Ferrer dissenting judge concluded
that under Buckeye, the issue of whether
Preston was an unlicensed talent agent—
and the validity and legality of the contract—had to be determined by an arbitrator, not the Labor Commissioner or a state
court. Second District, Division One Acting Presiding Justice Miriam Vogel criticized the majority decision as ignoring
“Buckeye’s holding that [the FAA’s] rules
trump conflicting state procedures.” Ferrer,
145 Cal. App. 4th at 451 n.3.
Justice Vogel pointed out that the
Ferrer proceedings already had frustrated
the FAA’s pro-arbitration policies. Instead
of the speedy and inexpensive arbitration
procedure contemplated in the contract,
Ferrer had succeeded in imposing years of
delay and unnecessary legal expenditures,
none of which stood to advance the dispute’s ultimate resolution, since the Labor Commissioner’s findings would not
be binding.
At press time, four friend-of-thecourt briefs had been filed, all in support
of petitioner Preston. [See the accompanying box beginning on page 6.] Two filings were made by CTIA—the Wireless
Association, and the Pacific Legal Foundation, both of which also participated as
Hall Street Associates amicus. Also filing
briefs backing the request to enforce arbitration, and reverse the California court
decisions, was the U.S. Chamber of
Commerce, and retailer Macy’s.
Given the current Supreme Court’s
Excluding some
contracts from
the Federal
Arbitration Act’s
operations opens
the door to
After the California Supreme Court denied review, Preston petitioned for a writ
of certiorari from the U.S. Supreme
Court on the question of whether the
FAA and Buckeye preempt the Court of
Appeal’s holding.
The Supreme Court granted certiorari
on Sept. 25. As Preston has argued in papers filed with the Supreme Court, the
California Court of Appeal’s decision appears to invite states to avoid the application of Buckeye, and preemption under
the FAA, by setting up an alternative administrative agency to adjudicate certain
disputes that otherwise would be subject
to arbitration.
statute cannot be easily reconciled with
More broadly, the Supreme Court
would have a hard time fashioning a rule
that would allow administrative agencies
in some cases to have exclusive original
jurisdiction to consider a contract’s validity on an advisory basis, while leaving the
ultimate determination to the arbitral tribunal. Nor does there seem much reason
to craft such a rule, particularly given the
Supreme Court’s emphasis on arbitration’s efficient means of dispute resolution.
Upholding the Court of Appeal’s decision also would undermine the principle of severability. It would imply that
severability did not apply to arbitration
clauses where the state law vested primary
jurisdiction in an administrative agency.
Moreover, by excluding some types of
contracts from the FAA’s purview—such
as those governing talent agencies—in
states that have created administrative
dispute resolution mechanisms, the
Court would be opening the door to an
inconsistent and patchwork FAA application across different states and different
types of contracts.
Given Buckeye’s focus on promoting
arbitration and the uniform enforcement
of agreements across state lines, it appears
likely that the Supreme Court will reverse
the California Court of Appeal’s holding.
pro-arbitration stance, as Buckeye demonstrates, it probably will not let this potential loophole stand. It seems unlikely that
the Court will accept an argument that
because the Labor Commissioner’s ruling
is nonbinding and leaves the parties free
to submit their dispute to arbitration, the
Court of Appeal’s holding does not substantially run afoul of Buckeye.
As an initial matter, California’s Talent Agencies Act contemplates that the
Labor Commissioner’s ruling can be appealed to a state court, not to an arbitral
tribunal. By failing to account for the
possibility of an arbitral tribunal deciding
the merits of the parties’ dispute, the
In recent years, the U.S. Supreme Court
has shown significant interest in clarifying the FAA’s scope and preemptive power. In Buckeye, only a single dissenting
justice accepted the argument that the
FAA does not apply to state court proceedings. This states’ rights perspective
has gained little traction in the FAA context among the majority of current
Supreme Court justices, who have been
much more concerned with promoting
arbitration and the FAA’s uniform application of the FAA in state and federal
Ferrer likely will give the Court another opportunity to ensure that those interests are protected.
Published online in Wiley InterScience (
Alternatives DOI: 10.1002/alt
DOI 10.1002/alt.20210
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