In a case arising from a dispute between a TV judge and his alleged talent agent, the United States Supreme Court held that the Federal Arbitration Act (FAA) preempted the application of a California law that would have given the commissioner of an administrative agency original jurisdiction to decide the validity of the parties' contract.

In Preston v. Ferrer, No. 06-1463, 2008 WL 440670 (Feb. 20, 2008), Preston, an entertainment attorney, and Ferrer, known on TV as "Judge Alex," entered into a contract whereby Preston would render managerial services in aid of Ferrer's entertainment career.

The contract contained an arbitration agreement, so when Ferrer allegedly failed to make payments due under the contract, Preston filed an arbitration claim. In response, Ferrer filed a petition with the California Labor Commissioner (Commissioner), arguing that the contract was void under the California Talent Agencies Act (TAA) because Preston was not licensed as a talent agent.

Ferrer also filed lawsuit to enjoin the arbitration. The trial court granted the injunction, and in affirming that ruling, the California Court of Appeal rejected Preston's argument that the FAA preempted an application of California law that would give the Commissioner original jurisdiction to decide the validity of the parties' contract.

The United States Supreme Court granted certiorari "to determine whether the FAA overrides a state law vesting initial adjudicatory authority in an administrative agency."

As the Court indicated, the underlying dispute in this case was relatively straightforward. Ferrer claimed that Preston was an unlicensed talent agent, in which case the contract would be void under the TAA, while Preston claimed that he was a personal manager, not a talent agent, in which case the TAA would not be implicated. The question before the Court was whether the FAA would preempt a California law referring that dispute to the Commissioner in spite of the parties' agreement to arbitrate the dispute.

The Court recently addressed a similar question in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). Buckeye reaffirmed a rule that where a contract contains an arbitration agreement, the validity of the arbitration agreement is a question for the court, but the validity of the underlying contract is a question for the arbitrator. As the Court noted, Buckeye "largely, if not entirely, resolves" the question in this case because Ferrer's challenge was directed at the contract as a whole and not specifically at the arbitration agreement.

Nevertheless, Ferrer attempted to distinguish Buckeye on various grounds. First, he relied on a provision for de novo review of the Commissioner's ruling in arguing that the TAA "merely postpones arbitration until the [Commissioner] has exercised her primary jurisdiction." The Court rejected this argument because Ferrer took a different position in the lower courts. Moreover, as the Court explained, the postponement of arbitration would frustrate the parties' objective in agreeing to arbitrate because it would "hinder speedy resolution of the controversy."

Alternatively, Ferrer relied on EEOC v. Waffle House, Inc., 534 U.S. 29 (2002) in arguing that Buckeye was inapposite because the Commissioner is part of an administrative agency rather than the judiciary. In rejecting this argument, the Court explained that Waffle House addressed the role of an administrative agency "not as adjudicator but as prosecutor."

Lastly, Ferrer attempted to distinguish Buckeye by arguing that the contract's California choice-of-law provision brought the case within the auspices of Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 489 U.S. 468 (1989). The Court found that Ferrer's reliance on Volt was misplaced for two reasons. First, unlike this case, Volt involved third parties who were strangers to the arbitration agreement. Second, the parties' arbitration agreement invoked arbitration rules that authorize the arbitrator to decide the validity of the underlying contract, which trumped any contrary implication arising from the choice-of-law provision.

This case reinforces the strong federal policy favoring arbitration by foreclosing the application of state laws that would delay arbitration by requiring the exhaustion of administrative remedies or otherwise mandating some non-binding, extra-judicial proceeding. As such, arbitration will continue to remain a cost-effective and expeditious alternative to court.