Supreme Court Upholds Arbitration as Proper Forum for Challenges to Validity of Agreements with Arbitration Clauses

Tuesday, April 1, 2008
The U.S. Supreme Court recently held that in cases arising under the Federal Arbitration Act, the arbitrator designated under the agreement must determine the validity of the agreement. State laws giving jurisdiction under to another forum are pre-empted by the FAA.
Preston v. Ferrer, decided February 20, 2008.

In Preston an entertainment attorney initiated an arbitration proceeding against a television performer to recover attorney fees. The attorney invoked the parties' agreement to arbitrate any dispute relating to the terms of the contract or the breach, validity, or legality thereof in accordance with the rules of the American Arbitration Association (AAA).

The performer sued in California state court seeking to stay the arbitration on the basis the contract was invalid and unenforceable under the California Talent Agencies Act. The California courts found state law controlling and refused to enforce the arbitration agreement because state law vested the Labor Commissioner with exclusive jurisdiction over the dispute.

The Supreme Court reversed, holding that when a contract contains an arbitration provision, any challenge to the validity of the contract as a whole must be considered by the arbitrator, not a court or an administrative agency. In contrast, state law governs where the challenge is only to the enforceability of the arbitration provisions.

This decision should prevent employees from asserting contract defenses in response to an employer's efforts to compel binding arbitration, as long as the agreement is compliant with state law.
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