No Arbitrary Decisions

U.S. Supreme Court rules on arbitration cases

Earlier this year, this column noted that an increasing number of employers were attempting to cut their exposure to job-related lawsuits by forcing employees to channel their claims through arbitration ["No Day in Court," Waste Age, March 2008]. In its term that ended in June, the U.S. Supreme Court decided two arbitration cases that are likely to affect the waste industry and other segments of the business community.

In Preston v. Ferrer [128 S.Ct. 978], Alex E. Ferrer, a retired Florida judge who appears on television as "Judge Alex," signed a contract with Arnold M. Preston, a California entertainment lawyer. All disputes under the contract were subject to arbitration. After Ferrer refused to pay a management fee on the grounds that Preston was not a licensed talent agent, Preston initiated a proceeding with the American Arbitration Association. Ferrer promptly filed a complaint with the California labor commissioner alleging that the contract was invalid under state law because Preston was unlicensed and asking the commissioner to block the arbitration.

When the labor commissioner refused to do so, Ferrer filed suit to stay the proceeding, and Preston moved to compel arbitration. An intermediate state appeals court eventually ruled that the labor commissioner — and not an arbitrator — should decide whether Preston needed a license in order to recover his fees.

The U.S. Supreme Court reversed the decision, ruling that the Federal Arbitration Act (FAA) pre-empts state laws that require a first-look at the issue by a state agency. Writing for the 8-1 majority, Justice Ginsburg said that "when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA."

In Hall Street Associates, LLC v. Mattel, Inc. [128 S.Ct. 1396], the justices ruled by a 6-3 margin that judicial review of arbitration awards cannot be expanded by agreement of the parties. The background of the case is as follows: Hall Street leased a site to the toy manufacturer Mattel. After Hall Street incurred costs cleaning up contaminants from Mattel's operations, the parties signed an agreement to arbitrate Hall Street's claim against Mattel for indemnification. The agreement gave a judge the right to change or set aside an award if the judge determined that the arbitrator's legal conclusions were wrong.

The arbitrator ruled for Mattel. A federal district judge reversed, but a federal appeals court reinstated the arbitrator's award, ruling that the FAA prohibited judicial review of the kinds of claims involved in the dispute. Justice Souter wrote the majority opinion, which noted that the FAA severely restricts judicial review to specific statutory grounds such as fraud. Courts have "no business" enlarging the factors beyond what the law allows, he said.

The decisions come as more companies are seeking to limit and even eliminate their exposure to employment-related litigation by cutting off access to the courts. Employer handbooks, and other company policy statements now typically state that workers who have claims and grievances must pursue them through arbitration.

Barry Shanoff
Legal Editor
Rockville, Md.