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Monday, January 14, 2008

Did Judge Alex Misstate the Law?

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.

Posted by Steve Vladeck on January 14, 2008 at 10:38 PM in Blogging, Current Affairs, Steve Vladeck | Permalink


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Steve -- I think that we're talking past each other. I agree that Section 1700.45 applies only to "talent agencies." If you're a "talent agency," then I agree with you that your arbitration provision must comply with Section 1700.45's notice and participation requirements to be valid. And if your provision does comply, then your arbitration provision is enforceable, and you have two choices. First, you can dispense with the Labor Commissioner entirely (so long as he gets notice of and the right to attend the hearing). Second, the provision can allow the parties to go to the Labor Commissioner first and then have the de novo appeal heard by the arbitrator. (I believe that the second possibility is implied by the sentence in Section 1700.45 that says that the parties "may" skip the step of going to the Labor Commissioner.)

OK, now what about if you're not a "talent agency"? Suppose, for example, you're a cable company or a wireless service provider -- these sorts of companies assuredly have contracts with the Britney Spearses of the world. Because these companies aren't "talent agencies," then Section 1700.45 doesn't apply at all. As I read your posts, you think that this means that the arbitration provision simply isn't enforceable, because one needs Section 1700.45 to make it "valid." I don't think that that is correct. I don't think that Section 1700.45 purports to govern every contract an artist can enter. I think that, instead, one looks to Section 1281 of the Code of Civil Procedure, which declares that, in general, arbitration provisions are enforceable. Indeed, Section 1700.45 has to declare that Section 1281 doesn't apply to arbitration agreements involving artists and "talent agencies" in order to make room for Section 1700.45's conditioning the enforcement of those provisions on compliance with Section 1700.45's notice and participation requirements.

I think that the point of the statutory scheme is that "managers" are supposed to be treated like cable companies and cell phone companies.

Posted by: K | Jan 16, 2008 3:10:03 PM

K -- I didn't understand my comment to be that whether Preston is a "talent agency" is irrelevant. Quite to the contrary, I realize that that's the central question here, especially because it goes squarely to the validity of the contract (which as I noted above is the real issue at the heart of the case). I guess I read 1700.45 differently from you.

Here's what the relevant portion of 1700.45 says:

"a provision in a contract providing for the decision by arbitration of any controversy under the contract or as to its existence, validity, construction, performance, nonperformance, breach, operation, continuance, or termination, shall be valid:

(a) If the provision is contained in a contract between a talent agency and a person for whom the talent agency under the contract undertakes to endeavor to secure employment."

So, my reading is that 1700.44 says "go to the labor commissioner, and then appeal to the Superior Court, which reviews de novo." And 1700.45 says "unless there is a valid agreement to arbitrate the issue," defining "valid" as meaning "between a talent agency and a [client]." Doesn't that imply that if the specified conditions _aren't_ met, then the agreement to arbitrate is invalid, and so there is no basis for granting a motion to compel? If not, what is the _purpose_ of 1700.45?

Posted by: Steve Vladeck | Jan 15, 2008 5:56:21 PM

Steve -- I think that you've got it backwards. The superior court would be required to grant a motion compelling arbitration only if the court concludes that Preston is *not* a "talent agency." If Preston is a "talent agency," then the arbitration clause in his contract is enforceable under Section 1700.45 only if it meets the various conditions set forth in that statute. The clause in fact doesn't, and so Section 1700.45 would bar an order compelling arbitration under either Section 1700.45 or (per the last sentence of the statute) under Section 1281 of the Code of Civil Procedure.

Moreover, whether Preston is a "talent agency" is not irrelevant. Rather, it's the heart of Judge Alex's defense to Preston's contract claim. As I understand it, if Preston is a "talent agency," then the contract between Preston and Judge Alex is illegal and Judge Alex doesn't have to pay Preston any commissions. Otherwise, the contract is legal and he does have to pay (barring some other unrelated defense).

The way I think it plays out, then, is that Preston gets to arbitrate his contract claim only if the Labor Commissioner AND the superior court both conclude that Preston is not a "talent agency." But by doing so, there's basically nothing left to arbitrate because that finding is tantamount to a finding that judgment should be entered in Preston's favor.

Posted by: K | Jan 15, 2008 2:44:00 PM

K -- I might be misunderstanding, but on my reading, 1700.45 says that you can only arbitrate the validity of the contract itself (which is the real issue here) if the arbitration provision is "contained in a contract between a talent agency and a person for whom the talent agency under the contract undertakes to endeavor to secure employment," or other possibilities not here relevant.

Thus, if the Labor Commissioner (or the Superior Court) concludes that Preston is not a "talent agency," then 1700.45 does _not_ allow for the arbitration of the contract's validity. So when the Respondent's brief says "the [Superior Court] is required to grant a motion compelling arbitration if the parties have executed a valid and applicable arbitration agreement," what it means is "the [Superior Court] is required to grant a motion compelling arbitration if the court concludes that Preston is in fact a 'talent agency.'" To me, at least, that's just not the same thing.

Posted by: Steve Vladeck | Jan 15, 2008 1:10:54 PM

Doesn't Section 1700.45 of the California Labor Code answer your question of whether Brunstad correctly stated the law? Brunstad's position is that, after the Labor Commissioner has reached a decision and there's an appeal to the superior court (as authorized by Section 1700.44), a party could successfully petition to compel arbitration of that de novo appeal under Section 1281 of the California Code of Civil Procedure (which is California's equivalent to the Federal Arbitration Act). As I read Section 1700.45 of the Labor Code, however, an arbitration provision in a contract between a talent agency and an artist is "valid" only if it expressly provides the Labor Commissioner with notice of and the right to attend any arbitration proceedings. Thus, an arbitration provision does not do so -- as the one in Judge Alex's and Preston's contract evidently did not -- is not valid. Indeed, the last sentence of Section 1700.45 says that an arbitration provision that fails to comply with its requirements is not made valid by Section 1281 of the California Code of Civil Procedure (which is the legal basis for Brunstad's claim that the appeal would be arbitrable). Accordingly, once either Judge Alex or Preston appeals from the Labor Commissioner's ruling to the superior court, the superior court would refuse to compel arbitration of the appeal: Section 1700.45 renders the arbitration provision not "valid" and precludes reliance on Section 1281 to make it so.

Posted by: K | Jan 15, 2008 11:33:44 AM

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