Legal Commentary

Over at BLT, Tony Mauro has a great report up on the argument in Preston v. Ferrer (the "Judge Alex" case), by far the less outwardly interesting of the two cases the Supreme Court heard today. As Tony recounts, there were serious fireworks during the argument of Judge Alex's lawyer, Eric Brunstad, including several suggestions by the Justices that Brunstad's merits brief affirmatively misstated the law.

Although Tony's focus is on the atmospherics inside the courtroom, I want to step back and try to explain what, from my perspective, the real problem is here (and why the Justices were so understandably peeved).

For more, see below the fold...

The case is basically about an arbitration provision in a contract between Ferrer ("Judge Alex") and Preston, who attempted to procure work in the entertainment industry for Ferrer. Under California law (specifically, the "Talent Agencies Act"), if Preston was acting as a talent agent, then he needed a license in order to act as Ferrer's agent, which he never obtained. Thus, the underlying substantive question is whether Preston was acting as a talent agent. If so, it appears that the contract the parties entered into for Preston's services is void... The contract itself includes an arbitration clause, which requires that all disputes over the contract be settled by an arbitrator.

California law, though, first requires that the question of whether Preston was acting as a "talent agency" (and therefore needed a license) be settled by the California Labor Commissioner, with de novo review in the Superior Court. So, California law, at least, suggests that the threshold (and potentially dispositive) question should be resolved by an administrative agency, and not by an arbitrator (and the contract includes a choice-of-law provision incorporating California law).

Enter the Federal Arbitration Act. The FAA, as interpreted in a series of Supreme Court cases dating back to the 1960s (Prima Paint) through as recently as two years ago (Buckeye Check Cashing) requires that, where contracts provide for arbitration, any challenge to the contract (except to the arbitration clause itself--to "arbitrability") must first be settled by the arbitrator. So, the question that always seemed to be at the heart of Preston is whether the FAA preempts California law, to the extent that California law requires that such disputes first go to the labor commissioner.

What this really boils down to is the impact the proceedings before the labor commissioner have on arbitration. If the labor commissioner's decision can actually preclude arbitration on some issues (including, perhaps, whether Preston was acting as a "talent agent"), then precedent seems to clearly suggest that the FAA preempts the labor commissioner's authority. If, on the other hand, the labor commissioner's decision merely delays arbitration, and does not affect the arbitrator's ability to resolve disputes de novo, there is a much weaker argument for FAA preemption (and a Supreme Court case from the 1980s that arguably supports the conclusion that the FAA does not preempt).

In the California courts, Ferrer's lawyers argued vehemently that, under California law, the labor commissioner gets to go first, and the parties do not get to go back to the arbitrator to re-litigate those issues that the commissioner has authority to settle. It was on this understanding that the Fourth District Court of Appeal relied in its decision (and which Judge Vogel focused on in her dissent, arguing for why FAA preemption was warranted).

But Ferrer's response brief on the merits before the Supreme Court makes a different argument (see page 13; emphasis added):

Once the matter vests in the Superior Court, either party may move to compel arbitration if the parties have agreed to arbitrate their dispute. CAL. CIV. PROC. CODE § 1281.2.4 Following an appeal of the Commissioner?s determination to the Superior Court, the court is required to grant a motion compelling arbitration if the parties have executed a valid and applicable arbitration agreement. Id.; see Rosenthal v. Great Western Fin. Secs. Corp., 14 Cal. 4th 394, 413 (1996).

If this is true, then it changes the entire complexion of the case, and makes what probably looked like an easy reversal to the Court into a much closer question. As Brunstad writes one page later,

It is evident that section 1700.44 of the TAA does not, in fact, invalidate an arbitration agreement or prevent arbitration of a controversy arising under its provisions. Rather, the TAA simply vests the Commissioner with initial administrative jurisdiction to determine if the TAA has been violated, subject to de novo resolution (i) in the Superior Court if the parties have not agreed to arbitrate, or (ii) by an arbitrator if they have. Thus, at most, the TAA may postpone arbitration in a particular case; it does not preclude or invalidate an otherwise enforceable arbitration agreement.

Whereas the FAA would clearly preempt a state law that precluded arbitration in favor of an administrative proceeding, it is a much closer call whether it would do so when the administrative proceeding was merely ancillary to (and in no way affected) the arbitration. So if either party had a statutory right to compel arbitration after the labor commissioner's decision, Ferrer probably wins.

The problem, as Justice Kennedy pointed out, is that it is dubious at best whether this is an accurate statement of California law. Certainly, neither citation invoked as support for the notion that California law would require the Superior Court to send the case to arbitration actually stands for that proposition, and the Court of Appeal concluded effectively to the contrary (even while ruling for Ferrer) in its decision below. So, on this one tiny sentence, buried on page 13 of the Respondent's Brief on the merits, the whole case turns--but only if the brief correctly states the law. If it doesn't, we're back where we started, i.e., a California Court of Appeal decision that seems obviously wrong, and an easy win for Preston.

That's why, I imagine, the Justices got so animated--and so frustrated--with Mr. Brunstad.