Petitioners Brief — Preston v. Ferrer

IN THE

Supreme Court of the United States

ARNOLD M. PRESTON,

Petitioner,

ALEX E. FERRER,

Respondent.

a |

+

ON WRIT OF CERTIORARI TO THE

SUPREME COURT OF CALIFORNIA

BRIEF FOR THE PETITIONER

Joseph D. Schleimer

Counsel of Record

Kenneth D. Freundlich

SCHLEIMER & FREUNDLICH, LLP

9100 Wilshire Boulevard

Suite 615 - East Tower

Beverly Hills, CA 90212

(310) 273-9807

Counsel for Petitioner

November 1, 2007

QUESTION PRESENTED

Whether the Federal Arbitration Act and Buckeye

Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)

preempt the holding in this case, voiding an interstate

arbitration agreement under the California Talent

Agencies Act?

TABLE OF CONTENTS

Page

QUESTION PRESENTED........................0000. i

TABLE OF CONTENTG.................ccccccccosseees iil

TABLE OF AUTHORITIEG.......................... iv

CREED BAY cvcccccccccoscccscocsccccnscsossecceee 1

ETE a ee 1

STATUTES INVOLVED....................cccccce00 2

STATEMENT OF THE CASE...................... 3

SUMMARY OF THE ARGUMENT............... 8

| ___EREEEEESE SS e ONO ne Men en aa 9

A. Under the FAA, the Arbitrator

Decides Issues of Legality

of the Entire Contract...................000000. 11

B. State Law Abrogation of the

Right to Arbitrate is

Subject to FAA Preemption................. 12

C. The Express Intent of the

Parties Was That the Arbitrator

Shall Decide the Validity Issue........... 17

RA TENE RS ee EB OrE 23

TABLE OF AUTHORITIES

CASES

Page(s)

Allied-Bruce Terminix Companies, Inc. v.

Dobson, 513 U.S. 265 (1995)............00.....ssesccseeees 10

AT & T Technologies, Inc. v. Communications

Workers of America, 475 U.S. 643 (1986)........... 21

Brandon, Jones, Sandall, Zeide, Kohn, Chalal

& Musso, P.A. v. MedPARTNERS, Inc.,

203 F.R.D. 677 (S.D.Fla.2001)..............cccssseseeees 20

Buckeye Check Cashing, Inc. v. Cardegna,

| RT ne i, 3, 6, 8, 11

Circuit City Stores, Inc. v. Adams,

a 9,16

Citizens Bank v. Alafabco, Inc.,

a 10

Contec Corporation v. Remote Solution Co.,

Ltd., 398 F.3d 205 (2d Cir. 2005)....................... 20

Dean Witter Reynolds, Inc. v. Byrd,

TS ee 9

Doctor’s Associates, Inc. v. Casarotto,

| ET aCe 10

Equal Employment Opportunity Commission v.

Waffle House, Inc., 534 U.S. 279 (2002)............. 14,15

Ferrer v. Preston,145 Cal.App.4th 440 (2006)....... 1

First Options of Chicago, Inc. v. Kaplan,

Ne ee 20

Gilmer v. Interstate/ Johnson Lane

Corporation, 500 U.S. 20 (1991)...............64. 9, 12-15

Green Tree Financial Corp.-Alabama v.

Randolph, 531 U.S. 79 (2000)..................00.ccceeeeee 10

-]V-

Green Tree Financial Corp. v. Bazzle,

Re ll

Mastrobuono v. Shearson Lehman Hutton,

pw a 0 eer 10, 17, 21

Mitsubishi Motors Corporation v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985).................. 9, 21

Moses H. Cone Memorial Hospital v. Mercury

Construction Corporation, 460 U.S. 1 (1988)....... 11

Pacificare Health Systems, Inc. v. Book,

Se ee lair cnitctiinceciniticnbitiiendaiivenainnn 11

Perry v. Thomas, 482 U.S. 483 (1987).................. 9,16

Prima Paint Corporation v. Flood & Conklin Mfg.

ig a Se ciiciiccrieincecctatnincbatinidamnitinan 11

Qualcomm Incorporated v. Nokia Corporation,

466 F.3d 1366 (Fed.Cir. 2006)...................cccceeeeee 20

Rodriguez De Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989)...........cccccceseeee 9,13

Saturn Distribution Corporation v. Paramount

Saturn, Ltd., 326 F.3d 684 (5" Cir. 2008)........ 9, 15, 16

Shearson/ American Express, Inc. v

McMahon, 482 U.S. 220 (1987)............::cccceeeeeeee 13

Sinnamon v. McKay (1983) 142 Cal.App.3d 847... 8

Southland Corporation v. Keating,

a eb a tinideieniseniiticcsiicinn 1, 10, 16

Terminix International Company, LP v. Palmer

Ranch Limited Partnership,

432 F.3d 1327 (11™ Cir. 2008)..............sccscseceseees 19

United Steelworkers of America v. Warrior

and Gulf Navigation Company,

ae ee iccicescniesstssisisiteiiiasiiininintiaiiniia 21

Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior University,

GP as Ge Got cersintsterinesiiciaiiinliantantaaaiaae 10, 17

CONSTITUTION

U.S. Constitution, Article VI, clause 2................0000cceeeees 1, 16

STATUTES

Ee 1, 2,6, 16

en 21

TTT CD 1

California Labor Code §98.2...............ccccceceesseeseeeees 8

California Labor Code §229...................cccccecceseeeeees 16

California Labor Code §1700 et. seq................... 11

California Labor Code §1700.44(a)............... 2, 3, 5, 6

OTHER

Asa Commercial Rule R-7..................cccccceeeceeeeeeees 18

-Vi-

OPINIONS BELOW

The Order Denying Review by the California

Supreme Court was entered on February 14, 2007.

Petition for Writ of Certiorari Appendix (“Pet. App.”)

la.

The majority opinion of the California Court of

Appeal dated November 30, 2006, was published as

Ferrer v. Preston (2006) 145 Cal.App.4th 440 and is set

forth at Pet. App. 2a—12a.

The dissent by the Hon. Miriam A. Vogel,

Justice, California Court of Appeal, is set forth at Pet.

App. 12a~17a.

JURISDICTION

The decision of the California Courts was final

upon the denial of review by the California Supreme

Court, entered on February 14, 2007. Pet. App. la.

The Petition for a Writ of Certiorari was filed on May

4, 2007 and was granted on September 25, 2007.

The jurisdiction of this Court is invoked

pursuant to 28 U.S.C. §1257(a), as it involves an issue

of Federal preemption under the Supremacy Clause of

the U.S. Constitution (Article VI, clause 2) and the

Federal Arbitration Act, 9 U.S.C. §2. See Southland

Corporation v. Keating, 465 U.S. 1 (1984).

STATUTES INVOLVED

Federal Arbitration Act

9 U.S.C. §2, states, in pertinent part:

A written provision in any. . .contract

evidencing a transaction involving

commerce to settle by arbitration a

controversy thereafter arising out of such

contract. . .or the refusal to perform the

whole or any part thereof. . . .shall be

valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in

equity for the revocation of any contract.

California Labor Code

California Labor Code §1700.44(a), states, in

pertinent part:

In cases of controversy arising under this

chapter, the parties involved shall refer

the matters in dispute to the Labor

Commissioner, who shall hear and

determine the same, subject to an appeal

within 10 days after determination, to

the superior court where the same shall

be heard de novo.

STATEMENT OF THE CASE

This case concerns the issue whether the

Federal Arbitration Act preempts California Labor

Code §1700.44 (a), as construed by the California

Court of Appeal.

The Court of Appeal held that §1700.44(a)

abrogated Petitioner’s right to arbitrate by granting

exclusive jurisdiction to the California Labor

Commissioner to determine the validity of an artist's

personal management contract. Petitioner contends

that the Court of Appeal misinterpreted and failed to

adhere to Buckeye Check Cashing, Inc. v. Cardegna,

546 U.S. 440 (2006), because Respondent disputed the

validity of the entire contract, but made no challenge

to the arbitration clause itself.

Respondent Alex E. Ferrer is a former Florida

Circuit Court Judge who now makes his living as the

star of Judge Alex, a television program syndicated

nationwide by Twentieth Century Fox, in which

Respondent arbitrates petty civil disputes as a form of

entertainment. Pet. App 3a.

Petitioner Arnold M. Preston (“Preston”) is an

attorney, who renders services as a personal manager,

advising and counseling artistic personnel in the

motion picture-television industry. Pet. App. 3a, 12a;

J.A. 9.

In March, 2002, Mr. Preston and Judge Ferrer

entered into a written contract (“Management

Agreement”) which provides for payment of a fee on

Judge Ferrer’s earnings from Judge Alex. J.A. 8-19.

The Management Agreement included a

standard American Arbitration Association provision

calling for arbitration of disputes. J.A. 17, 413. The

arbitration clause specifically provided that disputes

about the “validity” and “legality” of the contract

would be decided by arbitration.

Judge Ferrer resides in Florida and tapes the

Judge Alex television program in Texas. Pet. App. lla.

Mr. Preston had his office in California. Jd. As it

happened, Judge Ferrer was in Nevada when he

signed the Management Agreement. Jd. As such, the

interstate nature of the contract has never been in

dispute.

When Judge Alex went on the air, Judge Ferrer

refused to pay the management fee, so on June 4,

2005, Mr. Preston commenced a proceeding with the

American Arbitration Association in Los Angeles,

California. J.A. 5-19.

Judge Ferrer responded on July 5, 2005, by

filing an action with the California Labor

Commissioner, challenging the legality of the entire

management contract under the California Talent

Agencies Act. J.A. 20-23. Among other things, his

Petition asked for a declaration the Management

Agreement is void, and based thereon, for an order

staying the arbitration. J.A. 23.

The Labor Commissioner's hearing officer

determined the Ferrer petition asserted a “colorable

i,

basis for exercise of the Labor Commissioner's

jurisdiction....” J.A. 33. However, she also determined

that she lacked the authority to stay the arbitration.

J.A. 32.

The arbitrator set a hearing on the merits for

January 26, 2006. J.A. 30. To head the merits hearing

off, on November 2, 2005, Judge Ferrer filed suit in the

Los Angeles Superior Court, seeking an injunction

against the arbitration. J.A. 26-29. On November 8,

2005, Mr. Preston responded by filing a Motion to

Compel Arbitration in the Superior Court. Pet. App.

4a.

On December 7, 2005, the Superior Court

denied Mr. Preston’s Motion to Compel Arbitration,

issued the injunction against the arbitration, and

ordered that the legality of the entire contract under

the Talent Agencies Act would be decided by the Labor

Commissioner, not the Arbitrator. Pet. App. 18a—27a.

During all of these proceedings, Judge Ferrer’s

challenge to arbitration was based on his claim the

entire Management Agreement was invalid, and at no

time did he make any challenge to the validity of the

arbitration clause. Pet. App. 14a. Indeed, the

undisputed evidence was that Judge Ferrer initialed

every page of the Management Agreement, including

the page bearing the arbitration clause. Pet. App. 13a;

J.A. 8-19.

The California Court of Appeal affirmed in a 2-1

decision, based on California Labor Code §1700.44(a),

which the Court held gives the Labor Commissioner

exclusive jurisdiction to hear disputes under the

Talent Agencies Act. The Court of Appeal stated:

The question before us is who has

original jurisdiction to make the

determination as to the validity of the

parties’ contract. Defendant contends

that the question of the contract's

validity should be determined by the

arbitrator. . . .We disagree.

The parties’ contract included a standard

AAA arbitration clause, including a

stipulation that the parties are to

arbitrate any attack on the “validity or

legality” of the contract. However, as

interpreted by the courts, [Labor Code]

section 1700.44, subdivision (a), vests

exclusive original jurisdiction in the

Commissioner to resolve issues arising

under the Act... .

Pet. App. 6a.

The dissenting opinion by Justice Miriam A.

Vogel argued that the Federal Arbitration Act (9

U.S.C. §2) and Buckeye Check Cashing, Inc. v.

Cardegna, 546 U.S. 440 (2006) (“Buckeye”) preempted

the majority decision, stating:

Because it is undisputed (correctly) that

the contract before us is governed by the

FAA ... it follows necessarily that the

arbitrator and not the court must

6-

determine the gateway issues. My

colleagues’ contrary conclusion — based

on the fact that the Buckeye court did not

consider whether the issue should go first

to a state administrative agency -—

ignores Buckeye’s holding that its rules

trump conflicting state procedures.

Pet. App. 16a.

The majority of the Court of Appeal did not

dispute the applicability of the Federal Arbitration

Act, but distinguished Buckeye on the grounds that the

Talent Agencies Act vests initial jurisdiction in an

administrative agency, whereas Buckeye involved an

attempt to avoid arbitration by filing a lawsuit in a

court:

[Preston] also argues that the Federal

Arbitration Act. . . preempts California

law requiring the Commissioner to first

adjudicate the legality of the contract...

Buckeye is inapposite . . . [because it] did

not involve an administrative agency

with exclusive jurisdiction over a

disputed issue. Buckeye did not consider

whether the FAA preempts application of

the exhaustion doctrine. ...

Pet. App. 10a.

Decisions of the California Labor Commissioner

are subject to a trial de novo in the Superior Court

-7-

pursuant to California Labor Code §§ 98.2 and

1700.44(a). See Sinnamon v. McKay (1983) 142

Cal.App.3d 847. As such, the Labor Commissioner

hearing is just an initial step in a protracted

adjudication process which usually winds up, like this

case did, in the California court system.

Thus, absent a reversal by this Court, pursuant

to the California Court of Appeal decision this case

would be remanded to the Labor Commissioner, where

an administrative hearing would be conducted on the

legality of the entire contract, possibly tollowed by a

trial de novo in the Superior Court on the same issue,

possibly followed by yet another appeal.

In other words, Mr. Preston’s arbitration could

ultimately be delayed until four to five years after the

filing of his original arbitration demand, and only take

place after he has incurred oppressive legal fees

litigating before the Labor Commissioner, de novo in

the Superior Court, and a second time before the

California appellate courts.

SUMMARY OF THE ARGUMENT

Since this case involves a challenge to the

legality of the entire contract, with no challenge to the

arbitration clause itself, state law is preempted and

the arbitrator decides the issue of legality. Buckeye

Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

Another provision of the California Labor Code,

which purported to abrogate the right to arbitrate

wage claims and channel them to a judicial tribunal,

-8-

was held preempted by the Federal Arbitration Act

(“FAA”). Perry v. Thomas, 482 U.S. 483 (1987).

The Court of Appeal’s distinction, that the

California Labor Code grants initial jurisdiction to an

administrative tribunal instead of a court, does not

avoid preemption under the FAA. Gilmer v. Interstate/

Johnson Lane Corporation, 500 U.S. 20, 28-29 (1991)

(“[T]he mere involvement of an administrative agency

in the enforcement of a statute is not sufficient to

preclude arbitration.”); Saturn Distribution Corp. v.

Paramount Saturn, Ltd., 326 F.3d 684, 687 (5" Cir.

2003)(State law which abrogates the right to

arbitration in favor of administrative tribunal is

preempted by the FAA).

ARGUMENT

Congress enacted the FAA to counter judicial

hostility toward arbitration agreements, a bias

inherited from the English courts, which were jealous

of any usurpation of their jurisdiction. Circuit City

Stores, Inc. v. Adams, 532 U.S. 105, 111 (2001).

Although some early decisions of this Court

demonstrated a reluctance to abandon the traditional

judicial hostility toward arbitration, that attitude was

subject to steady erosion, and the “outmoded

presumption of disfavoring arbitration proceedings”

was completely cast aside by the 1980s. Rodriguez De

Quijas v. Shearson/American Express, Inc., 490 U.S.

477, 480-481 (1989); Mitsubishi Motors Corporation v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985);

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

-9.

(1985).

In enacting the Federal Arbitration Act,

Congress declared a national policy favoring

arbitration “and withdrew the power of the states to

require a judicial forum for the resolution of claims

which the contracting parties agreed to resolve by

arbitration.” Southland Corporation v. Keating, 465

U.S. 1, 10 (1984); Doctor’s Associates, Inc. v. Casarotto,

517 U.S. 681, 687 (1996).

Preemption of anti-arbitration state laws

extends to any transaction “involving commerce,” since

Congress intended the Act’s reach to be coextensive

with that of the Commerce Clause. Allied-Bruce

Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 274

(1995). Because the FAA provides for the enforcement

of arbitration agreements within the full reach of the

Commerce Clause, it governs every transaction “within

the flow of interstate commerce.” Citizens Bank v.

Alafabco, Inc., 539 U.S. 52, 56 (2003).

Likewise, because of the strong Federal policy

favoring arbitration, statutory claims, even those

involving “important social policies,” are subject to

arbitration. Green Tree Finanical Corp.-Alabama uv.

Randolph, 531 U.S. 79, 89-90 (2000).

The ultimate goal of the Federal Arbitration Act

is to ensure “that private agreements to arbitrate are

enforced according to their terms.” Mastrobuono v.

Shearson Lehman Hutton, Inc., 514 U.S. 52, 54 (1995),

quoting Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior University, 489

-10-

U.S. 468, 478 (1989). In furtherance of that goal, all

doubt as to the scope of arbitrable issues is to be

resolved in favor of arbitration. Moses H. Cone

Memorial Hospital v. Mercury Construction

Corporation, 460 U.S. 1, 24-25 (1983); PacifiCare

Health Systems, Inc. v. Book, 538 U.S. 401, 407 n.2

(2003); Green Tree Financial Corp. v. Bazzle. 539 U.S.

444, 452 (2003).

A. Under the FAA, the Arbitrator

Decides Issues of Legality of the

Entire Contract

The sole legal basis for Judge Ferrer’s

resistance to arbitration is his claim that the entire

contract is void under California Labor Code §1700 et.

seq., also known as the Talent Agencies Act. Pet. App.

3a—10a; J.A. 23, 26-29.

This argument was adopted and articulated as

the basis for decision by the Los Angeles Superior

Court ( Pet. App. 18a—27a ) and it formed an essential

link in the chain of reasoning of the California Court of

Appeal. Pet. App. 6a—10a.

Petitioner respectfully submits that the Court of

Appeal erred, because only attacks on the arbitration

agreement itself are decided by the judiciary, whereas

allegations that the entire contract is void or illegal are

decided by the arbitrator. Prima Paint Corporation v.

Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404

(1967).

As stated in Buckeye, supra, 546 U.S. at

a,

445-446:

[A]s a matter of substantive federal

arbitration law, an arbitration provision

is severable from the remainder of the

contract. .. .[UJnless the challenge is to

the arbitration clause itself, the issue of

the contract's validity is considered by

the arbitrator in the first instance....

[T]his arbitration law applies in state as

well as federal courts. . . .[Bjecause

respondents challenge the Agreement,

but not specifically its arbitration

provisions, those provisions are

enforceable apart from the remainder of

the contract. The challenge should

therefore be considered by an arbitrator,

not a court.

B. State Law Abrogation of the

Right to Arbitrate is Subject

to FAA Preemption

The California Court of Appeal distinguished

Buckeye on the grounds that Buckeye involved

abrogation of the right to arbitrate in favor of a

judicial forum, whereas Judge Ferrer sought to require

adjudication of his attack on the entire contract before

an administrative tribunal. Pet. App. 10a—11a.

However, the reasoning of the Court of Appeal

clashes with Gilmer v. Interstate/Johnson Lane

Corporation, 500 U.S. 20 (1991) (“Gilmer”), wherein

-12-

this Court ordered arbitration of a claim based on the

Age Discrimination in Employment Act (“ADEA”).

In Gilmer, like this case, an adm inistrative

agency (the EEOC) had initial jurisdiction and private

claimants had an obligation to exhaust administrative

remedies before proceeding to court. Gilmer, supra, 500

U.S. at 27. Despite the exclusive administrative

jurisdiction of the EEOC, this Court held that the

employee would be required to arbitrate his ADEA

claim:

We. . .are unpersuaded by the argument

that arbitration will undermine the role

of the EEOC in enforcing the ADEA... .

[T]he mere involvement of an

administrative agency in the enforcement

of a statute is not sufficient to preclude

arbitration. For example, the Securities

Exchange Commission is heavily involved

in the enforcement of the Securities

Exchange Act of 1934 and the Securities

Act of 1933, but we have held that claims

under both of those statutes may be

subject to compulsory arbitration. See

Shearson/American Express Inc. uv.

McMahon, 482 U.S. 220, 107 S.Ct. 2332,

96 L.Ed.2d 185 (1987); Rodriguez de

Quijas v. Shearson/American Express,

Inc., 490 U.S. 477, 109 S.Ct. 1917, 104

L.Ed.2d 526 (1989).

Gilmer, supra, 500 U.S. at 28—29.

-13-

The present matter is analogous to Gilmer. On

its face, Judge Ferrer’s Petition to the Labor

Commissioner is nothing more than a private, civil

pleading, seeking an adjudication that the entire

contract is invalid and, based thereon, a ruling that

Respondent does not have to honor his promise to

arbitrate. J.A. 20-23.

The fact that Judge Ferrer was the Petitioner in

the Labor Commissioner proceeding (Jd.) and he was

Plaintiff in the Superior Court action (J.A. 26)

distinguishes this case from Equal Employment

Opportunity Commission v. Waffle House, Inc., 534

U.S. 279 (2002)(“ Waffle House”), where the EEOC filed

an enforcement action in its own name. The decision

in Waffle House clearly turned on the identity of the

EEOC as the named Plaintiff, and its status as non-

signatory to the arbitration agreement. Waffle House,

supra, 534 U.S. at 294. By contrast, in this matter the

Labor Commissioner is not a party; Judge Ferrer filed

the administrative and the judicial actions in his own

name. J.A. 26.

Petitioner submits that Waffle House ultimately

hinges on the exercise of discretion by the

administrative enforcement agency. As noted in the

Waffle House opinion, the EEOC received 79,896

charges of employment discrimination in 2000, but

filed only 291 lawsuits. Waffle House, supra, 534 U.S.

at 290 n.7. As such, the EEOC exercised considerable

discretion in deciding which cases to pursue, and

allocated its resources to prosecute cases in its own

name only when those cases were likely to benefit the

public in general. Once that decision was made, the

-14-

EEOC could proceed to court and it was not bound by

any private arbitration agreements.

Here, by contrast, the Labor Commissioner did

not file an action in her own name. Based on Judge

Ferrer’s pleading, the hearing officer merely found

there was a “colorable” case based on Judge Ferrer’s

pleadings (J.A. 32-33), but there was never any

evaluation of evidence, much less any decision by the

Labor Commissioner to file a lawsuit in her own

name.

As such, this case is analogous to Gilmer, and

not Waffle House.

The specific question of whether the existence of

an administrative tribunal negates the right to

arbitrate was heard and decided in Saturn Distribution

Corporation v. Paramount Saturn, Ltd., 326 F.3d 684

(5" Cir. 2003), a case wherein the party resisting

arbitration asserted that the Texas Motor Vehicles

Board (“TMVB’) had exclusive jurisdiction to hear the

case. The United States Court of Appeals for the Fifth

Circuit rejected that theory, holding:

There are no legal restraints external to

the parties’ arbitration agreement that

foreclose the arbitration of their dispute

because the TMVB does not have

exclusive jurisdiction of contractual

disputes between franchisors and

franchisees in the motor vehicle industry.

[citations] Even if it did, the strong

federal policy favoring arbitration

-15-

preempts state laws that act to limit the

availability of arbitration. Southland

Corp. v. Keating, 465 U.S. 1, 16, 104S.Ct.

852, 79 L.Ed.2d 1 (1984) (holding that

through the FAA, “Congress intended to

foreclose state legislative attempts to

undercut the enforceability of arbitration

agreements’); Circuit City Stores, Inc. v.

Adams, 532 U.S. 105, 122, 121 S.Ct.

1302, 149 L.Ed.2d 234 (2001) (discussing

the holding and continued vitality of

Southland ).

Saturn Distribution Corporation, supra, 326 F.3d at

687.

In Perry v. Thomas, supra, 482 U.S. at 490-491,

this Court invalidated another provision of the

California Labor Code which purported to abrogate

private arbitration agreements:

[T]he present appeal addresses the pre-

emptive effect of the Federal Arbitration

Act, a statute that embodies Congress’

intent to provide for the enforcement of

arbitration agreements within the full

reach of the Commerce Clause. . . .This

clear federal policy places § 2 of the Act in

unmistakable conflict with California's

[Labor Code] § 229 requirement that

litigants be provided a judicial forum for

resolving wage disputes. Therefore, under

the Supremacy Clause, the state statute

must give way.

-16-

C. The Express Intent of the

Parties Was That the Arbitrator

Shall Decide the Validity Issue

It is now well settled that the primary purpose

of the Federal Arbitration Act is to ensure that private

agreements to arbitrate “are enforced according to

their terms.” Mastrobuono v. Shearson Lehman

Hutton, Inc., 514 U.S. 52, 54 (1995), quoting Volt

Information Sciences, Inc. v. Board of Trustees of

Leland Stanford Junior University, 489 U.S. 468, 478

(1989).

Applying that doctrine to Messrs. Preston and

Ferrer is simple, because the Management Agreement

expressly states that the “validity or legality” of the

contract is subject to arbitration:

...In the event of any dispute under or

relating to the terms of this agreement,

or the breach, validity, or legality thereof,

it is agreed that the same shall be

submitted to arbitration to the American

Arbitration Association in the city of Los

Angeles, California, and in accordance

with the rules promulgated by the said

association. .. .

J.A. 17, 913 (Emphasis added).

Even if the “validity or legality” language was

not present, the Preston/Ferrer agreement incorporates

the AAA Rules, and those Rules contain an express

agreement to arbitrate issues of the “validity” of the

-17-

contract. The relevant provisions in the AAA

Commercial Rules state:

R-7. Jurisdicti

(a) The arbitrator shall have the

power to rule on his or her own

jurisdiction, including any objections with

respect to the existence, scope or validity

of the arbitration agreement.

(b) The arbitrator shall have the

power to determine the existence or

validity of a contract of which an

arbitration clause forms a part. Such an

arbitration clause shall be treated as an

agreement independent of the other

terms of the contract. A decision by the

arbitrator that the contract is null and

void shall not for that reason alone

render invalid the arbitration clause.

(c) A party must object to the

jurisdiction of the arbitrator or to the

arbitrability of a claim or counterclaim no

later than the filing of the answering

statement to the claim or counterclaim

that gives rise to the objection. The

arbitrator may rule on such objections as

a preliminary matter or as part of the

final award.

See http://www.adr.org/sp.asp.

-18-

The incorporation of the AAA Rules has been

discussed in several recent cases, and a body of case

law has emerged that such “incorporation” of the Rules

vests the arbitrator with the power to decide issues of

arbitrability. As stated in Terminix International

Company, LP v. Palmer Ranch Limited Partnership,

432 F.3d 1327, 1329, 1332 (11™ Cir. 2005):

This is another arbitration dispute in

which the parties are litigating whether

or not they should be litigating. The

familiar scenario is that the parties agree

in writing to arbitrate any disputes

between them, but then one party files a

lawsuit taking the position that the

agreement to arbitrate is inapplicable,

invalid, or unenforceable for one reason

or another... .

Here, we are able to avoid the usual

process. . .[because] the parties have

agreed that the arbitrator will answer

this question, by providing (in all three of

the arbitration clauses at issue) that

“arbitration shall be conducted in

accordance with the Commercial

Arbitration Rules. . .of the American

Arbitration Association”. . .[and the AAA

Rules provide that] “(t]he arbitrator shall

have the power to rule on his or her own

jurisdiction, including any objections with

respect to the. . .validity of the

arbitration agreement.”. . . .By

incorporating the AAA Rules. . .the

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parties clearly and unmistakably agreed

that the arbitrator should decide whether

the arbitration clause is valid.

See also, Qualcomm Incorporated v. Nokia Corporation,

466 F.3d 1366, 1373 (Fed.Cir. 2006)(“[T]he 2001

Agreement, which incorporates the AAA Rules...clearly

and unmistakably shows the parties' intent to delegate

the issue of determining arbitrability to an

arbitrator.”); Contec Corporation v. Remote Solution

Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005)

(incorporation of Rule 7 of the AAA Commercial

Arbitration Rules serves as “clear and unmistakable

evidence of the parties’ intent” to arbitrate validity of

the contract and arbitrability of issues); Brandon,

Jones, Sandall, Zeide, Kohn, Chalal & Musso, P.A. v.

MedPARTNERS, Inc., 203 F.R.D. 677, 685

(S.D.Fla.,2001)(“[T]he parties contracted via. . .

incorporation. . .the Rules of the AAA. . . .Under

[former AAA] Rules 1 and 8, the Arbitrators have the

authority over arbitrability determinations and other

jurisdictional questions.”).

The requirement of judicial deference to the

intent of parties who have agreed to “arbitrate

arbitrability” was articulated by a unanimous Court in

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,

943 (1995):

We believe the answer to the “who”

question. . . is fairly simple. Just as the

arbitrability of the merits of a dispute

depends upon whether the parties agreed

to arbitrate that dispute, see, e.g.,

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Mastrobueno v. Shearson Lehman

Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct.

1212, 1216, 131 L.Ed.2d 76 (1995);

Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614,

626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444

(1985), so the question “who has the

primary power to decide arbitrability”

turns upon what the parties agreed about

that matter. Did the parties agree to

submit the arbitrability question itself to

arbitration? If so, then the court's

standard for reviewing the arbitrator's

decision about that matter should not

differ from the standard courts apply

when they review any other matter that

parties have agreed to arbitrate. See AT’

& T Technologies, Inc. v. Communications

Workers, 475 U.S. 643, 649, 106 S.Ct.

1415, 1418, 89 L.Ed.2d 648 (1986)

(parties may agree to arbitrate

arbitrability); Steelworkers v. Warrior &

Gulf Nav. Co., 363 U.S. 574, 583, n. 7, 80

S.Ct. 1347, 1353, n. 7, 4 L.Ed.2d 1409

(1960) (same). That is to say, the court

should give considerable leeway to the

arbitrator, setting aside his or her

decision only in certain narrow

circumstances. See, e.g., 9 U.S.C. § 10.

If Judge Ferrer had honored his promise to

arbitrate, including the specific promise to arbitrate

the “validity or legality” of the contract, this case

would have been expeditiously and economically

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resolved at a two-day hearing on January 26 and 27,

2006. J.A. 30. Instead, the matter has been contested

before the Arbitrator, the Labor Commissioner, the Los

Angeles Superior Court, the California Court of

Appeal, the California Supreme Court, and now before

the highest Court in the land.

Congress’ goal in enacting the Federal

Arbitration Act was to enforce private arbitration

agreements according to their terms, on a uniform,

nationwide basis, and thereby provide for the efficient,

expeditious, and economical resolution of disputes. As

illustrated by this case, that goal is utterly defeated by

denying the arbitral forum based on state law.

As stated by California Court of Appeal Justice

Miriam Vogel, in her dissent:

When a former judge and a lawyer enter

a contract in which they agree that anv

dispute about that contract will be

resolved by arbitration, I think they

ought to be bound by that agreement. . .

Instead of the speedy, efficient, and

relatively inexpensive procedure

contemplated by the parties’ contract, my

colleagues have permitted Ferrer to cause

a delay of years and triple or quadruple

the parties’ expenditures. . . .That is not

how it is supposed to work.

Pet. App. 12a, 17a.

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CONCLUSION

The judgment of the California Court of Appeal

should be reversed.

Respectfully submitted,

JOSEPH D. SCHLEIMER

Counsel of Record

KENNETH D. FREUNDLICH

SCHLEIMER & FREUNDLICH LLP

9100 Wilshire Boulevard

Suite 615 - East Tower

Beverly Hills, California 90212

(310) 273-9807

Counsel for Petitioner

November 1, 2007

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