Facts
- Arnold Preston, a California attorney, contracted to act as Alex Ferrer’s personal manager in connection with a prospective television program, for a percentage of Ferrer’s earnings.
- The contract required arbitration under American Arbitration Association rules for any dispute relating to the contract’s terms or its “breach, validity, or legality.”
- Preston demanded arbitration seeking fees allegedly owed under the contract.
- Ferrer petitioned the California Labor Commissioner, asserting the contract was invalid under the California Talent Agencies Act (TAA) because Preston allegedly acted as an unlicensed talent agent.
- Ferrer sought to halt arbitration in state court; the trial court enjoined arbitration unless and until the Labor Commissioner determined she lacked jurisdiction.
- The California Court of Appeal affirmed, reasoning the TAA gave the Labor Commissioner “exclusive original jurisdiction” over the dispute.
- The U.S. Supreme Court granted certiorari.
Issues
- Whether the Federal Arbitration Act (FAA) preempts a state rule assigning primary (or “exclusive original”) jurisdiction to an administrative agency to decide a dispute the parties agreed to arbitrate.
- Whether an arbitrator, rather than a state agency, must decide a statutory illegality defense (here, alleged TAA violations) when the arbitration clause covers the contract’s “validity” and “legality.”
Decision
- Reversed (8–1, Ginsburg, J.).
- When parties agree to arbitrate all questions arising under a contract, the FAA supersedes state laws that lodge primary jurisdiction in another forum, including an administrative agency.
- The arbitration agreement had to be enforced; the arbitrator, not the Labor Commissioner, must decide whether Preston’s conduct fell within the TAA and rendered the contract invalid.
Legal Principles
- FAA § 2 establishes federal substantive law favoring enforcement of arbitration agreements in state and federal courts, displacing conflicting state rules.
- Where an arbitration clause covers disputes concerning a contract’s “validity” or “legality,” challenges to the contract as a whole are for the arbitrator in the first instance.
- A state cannot condition, delay, or reroute arbitrable disputes to a court or agency by assigning that tribunal “exclusive” or “primary” jurisdiction.
- Arbitration of statutory claims changes only the forum; parties retain substantive statutory protections, which the arbitrator must apply.
Conclusion
The Court held that the FAA preempts California’s requirement that TAA-based challenges be heard first by the Labor Commissioner when the parties’ contract commits disputes over the contract’s validity and legality to arbitration, so the arbitrator must decide the TAA issue.