On February 20, 2008, in an 8-1 decision, the United States Supreme Court decided the case of Preston v. Ferrer, holding that the Federal Arbitration Act (FAA) supersedes state laws that would make administrative agencies the first stop for determining issues arising under an FAA-governed contract. In other words, when parties agree to arbitrate disputes arising under an FAA-governed contract, no state can require them to submit their contract-based dispute to a government agency instead of arbitration.

The Preston case started as a dispute between Alex Ferrer (of Fox television’s "Judge Alex" fame) and Arnold Preston, an entertainment attorney who claimed that Ferrer owed him money for services performed under a contract. Because the agreement between Ferrer and Preston contained an arbitration provision, Preston brought a demand for arbitration to enforce his rights.

Ferrer resisted arbitrating the dispute. He claimed that the contract was invalid and unenforceable under the California Talent Agencies Act (TAA), because Preston had acted as a talent agent without the license required by the TAA. Since the TAA provides the California Labor Commissioner with exclusive jurisdiction to hear disputes arising under the TAA, Ferrer argued that the Labor Commissioner should be the one to decide whether the contract was valid, not an arbitrator. The Labor Commissioner and the California courts agreed. The arbitration was halted, and the Labor Commissioner was left to decide whether Preston violated the TAA, and therefore whether the contract was enforceable.

Preston appealed this result to the U.S. Supreme Court, which reversed the holding of the state court. The Court first noted that it was undisputed that Preston’s contract was governed by the FAA, which covers all arbitration agreements concerning a transaction involving interstate commerce. The Court went on to note that in prior decisions It held that attacks on the validity of an entire FAA-governed agreement must first be considered by an arbitrator, even if state law would normally require a court to decide the question. The Supreme Court applied this same reasoning in holding that the FAA required Ferrer’s attack on the valid of the contract under the TAA to be submitted first to an arbitrator, as provided by the contract itself. The Court invalidated the TAA to the extent that it gave the Labor Commissioner exclusive jurisdiction to decide that question

In effect, the Court stated the obvious: a contractual agreement to arbitrate all disputes under the contract requires just that, when the contract is governed by the FAA. The FAA supersedes state laws, such as TAA, which lodge primary jurisdiction in another forum, whether judicial or administrative, and mandates that the contract-based dispute be submitted to arbitration for resolution.

The Preston decision is an important affirmation of the federal preference for arbitrating disputes that arise under contracts containing arbitration agreements, notwithstanding some states’ preferences to the contrary when statutory claims are involved. Employers may want to consider again whether to place arbitration provisions into their employment agreements if they do not do so already, and to take a firmer position in opposing any attempts to allow contract-based disputed to be determined in other forums, whether before a court or an administrative agency.

Click here for full text of the Preston decision, along with the dissenting opinion from Justice Thomas, is available at: