Opinion ID: 2356414
Heading Depth: 2
Heading Rank: 3

Heading: The Berman Statutes, as the Majority Construes Them, Are Preempted by the FAA.

Text: As the high court has explained, the FAA not only declares a liberal federal policy favoring arbitration agreements, it creates a body of federal substantive law that requires courts to enforce privately negotiated arbitration agreements within the FAA's coverage according to their terms. ( Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478 [103 L.Ed.2d 488, 109 S.Ct. 1248]; Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24 [74 L.Ed.2d 765, 103 S.Ct. 927].) This federal policy and substantive law apply notwithstanding any state substantive or procedural policies to the contrary. ( Moses H. Cone Hospital, 460 U.S. at p. 24.) In other words, Congress, in enacting the FAA, intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements ( Southland Corp. v. Keating (1984) 465 U.S. 1, 16 [79 L.Ed.2d 1, 104 S.Ct. 852] ( Southland )), 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 ( id. at p. 10). In short, the FAA embodies a clear federal policy of requiring arbitration unless the agreement to arbitrate is not part of a contract evidencing interstate commerce or is revocable `upon such grounds as exist at law or in equity for the revocation of any contract.' [Citation.] `... [N]othing in the [FAA] indicat[es] that the broad principle of enforceability is subject to any additional limitations under state law.' [Citation.] ( Perry v. Thomas (1987) 482 U.S. 483, 489-490 [96 L.Ed.2d 426, 107 S.Ct. 2520].) In Preston, the high court recently made clear that the FAA preempts not only state laws that require a judicial forum for resolution of disputes the parties have agreed to arbitrate, but also state statutes that refer [such] disputes initially to an administrative agency. ( Preston, supra, 552 U.S. at p. 349.) At issue there was the constitutionality of a California statute very much like the Berman statutes in that it required the Labor Commissioner to hear and determine disputes arising under California's Talent Agencies Act (TAA) (§ 1700 et seq.), subject to an appeal within 10 days after determination, to the superior court where the same shall be heard de novo. (§ 1700.44, subd. (a).) In Preston, an attorney who performed services in the entertainment industry sought recovery of fees for services rendered to a former Florida judge who appeared on television. (552 U.S. at p. 350.) The attorney demanded arbitration based on the parties' agreement to arbitrate any dispute relating to their contract. The former judge responded by filing a petition with the Labor Commissioner charging that their contract was illegal because, in violation of the TAA, the attorney had acted as a talent agent without the required license. ( Preston, supra, at p. 350.) A California trial court denied the motion to compel arbitration, and the California Court of Appeal affirmed that decision, reasoning that section 1700.44, subdivision (a), vest[ed] `exclusive original jurisdiction' over the dispute in the Labor Commissioner. [Citation.] ( Preston, supra, at p. 351.) The high court reversed, holding that the statute conflict[ed] with the FAA's dispute resolution regime by grant[ing] the Labor Commissioner exclusive jurisdiction to decide an issue that the parties agreed to arbitrate [citation] .... ( Preston, supra, at p. 356.) In reaching its conclusion, the court rejected the claim that, because de novo review of the Labor Commissioner's decision could proceed as an arbitration, the TAA was nevertheless compatible with the FAA. ( Preston, supra, at p. 356.) This approach, the court explained, would frustrate a prime objective of an arbitration agreement: to achieve `streamlined proceedings and expeditious results.' [Citation.] ( Id. at pp. 357-358.) Requiring initial reference of the parties' dispute to the Labor Commissioner would, at the least, hinder speedy resolution of the controversy. ( Id. at p. 358.) Thus, the court held, [w]hen parties agree to arbitrate all questions arising under a contract, the FAA supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative. ( Id. at p. 359.) The majority holds that the Berman statutes do precisely what Preston says, under the FAA, a state statute may not do: lodge primary jurisdiction over a dispute in an administrative agency notwithstanding the parties' agreement to arbitrate that dispute. Under Preston, the Berman statutes, so construed, directly conflict with the FAA and violate the supremacy clause of the United States Constitution (U.S. Const., art. VI, cl. 2). Preston also establishes that the availability of arbitration after a Berman hearing, as part of the statutory de novo review process, does not permit a different conclusion. What the high court said about the TAA in Preston fully applies to the Berman statutes, as the majority construes them: Requiring initial reference of the parties' dispute to the Labor Commissioner would, at the least, hinder speedy resolution of the controversy. ( Preston, supra, 552 U.S. at p. 358.) In this regard, the majority acknowledges that we noted in 1998 that the time between filing a complaint with the Labor Commissioner and a Berman hearing date was usually four to six months, and that Sonic has documented cases in which the commencement of a Berman hearing took a year or more. (Maj. opn., ante, at p. 681, fn. 5.) Moreover, as we have previously observed, because either party to a Berman hearing has a right to a trial de novo in superior court, where the ruling of the Labor Commissioner's hearing officer is entitled to no deference, Berman hearings may result in no cost savings to the parties. ( Gentry, supra, 42 Cal.4th at p. 464.) Thus, the prospect of arbitration after a Berman hearing does not alter the conclusion that the Berman statutes, as the majority construes them, are incompatible with the FAA. In short, as an Illinois appellate court held just last year,  Preston makes it clear that the [FAA] preempts the Berman statutes insofar as they vest[] [primary] jurisdiction in the [Labor] Commissioner rather than an arbitration proceeding ... as provided in [a] contract. ( Ruff v. Splice (2010) 398 Ill.App.3d 431 [338 Ill.Dec. 101, 923 N.E.2d 1250, 1253].) The majority's grounds for distinguishing Preston are unpersuasive. The majority first observes that unlike Preston, which involved a challenge to the parties' contract as a whole, this case involves a challenge only to a portion of the arbitration agreement. (Maj. opn., ante, at p. 692.) This observation, although accurate, is irrelevant. In Preston, the circumstance that the challenge was to the contract as a whole, rather than only to its arbitration clause, was material only to the court's threshold determination that the dispute between the parties presented an issue that, but for the TAA, would be for the arbitrator to decide in the first instance. ( Preston, supra, 552 U.S. at p. 353.) It played no part in the court's subsequent holdingwhich is the part of Preston that governs herethat the FAA preempts the TAA insofar as the TAA confers on the Labor Commissioner primary jurisdiction to decide an issue the parties have agreed to arbitrate. Here, it is undisputed that Moreno's claim for vacation pay presents issues that, but for the majority's construction of the Berman statutes, would be for the arbitrator to decide in the first instance. Thus, that Preston involved a challenge to the contract as a whole does not diminish the controlling force of its unqualified and unequivocal holding that the FAA preempts state laws that lodge in an administrative agency primary jurisdiction over an issue the parties have agreed to arbitrate. ( Preston, supra, at pp. 349-350.) The majority next asserts that Preston is distinguishable because of the fundamental differences between the TAA and the statutory regime[] now before us. (Maj. opn., ante, at p. 692.) According to the majority, because the TAA does not come with the same type of statutory protections as are found in the Berman hearing and posthearing procedures, Preston does not govern. (Maj. opn., ante, at p. 692.) The potential procedural advantages the Legislature has attached to a Berman hearing do not render Preston inapplicable. Under Preston, were our Legislature, based on its view of public policy, to enact a statute requiring administrative determination of a claim before resort to any other forum, the FAA would preempt that statute's enforcement where the parties have agreed, in a predispute agreement evidencing interstate commerce, to arbitrate that claim. Indeed, this conclusion follows not just from Preston, but from other decisions in which the high court has expressly rejected the proposition that the enforceability of [an] arbitration agreement turn[s] on [a] state legislature's judgment concerning the forum for enforcement of [a] state-law cause of action. [Citation.] ( Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440, 446 [163 L.Ed.2d 1038, 126 S.Ct. 1204] ( Buckeye ).) The Legislature may not circumvent this proscription simply by attaching advantageous procedures to the administrative process and declaringeither expressly or, as the majority finds here, impliedlythose procedures to be unwaivable as a matter of public policy. As the high court has made clear, the FAA's preemptive policy requiring enforcement of arbitration agreements according to their terms applies notwithstanding any state substantive or procedural policies to the contrary. ( Moses H. Cone Hospital v. Mercury Constr. Corp., supra, 460 U.S. at p. 24, italics added.) Nor, contrary to the majority's analysis, may a state legislatureor in this case, a state courtavoid this FAA proscription by invoking the rule that the FAA permits revocation of arbitration agreements upon such grounds as exist at law or in equity for the revocation of any contract. (9 U.S.C. § 2.) The high court has twice expressly rejected this very approach. In Southland, the court held that the FAA preempted California's Franchise Investment Law (Corp. Code, § 31000 et seq.) insofar as we had construed it to prohibit enforcement of agreements to arbitrate claims under that law. ( Southland, supra, 465 U.S. at p. 10.) Justice Stevens dissented from this holding, relying on the same FAA enforceability exception the majority now invokes: revocation based on `such grounds as exist at law or in equity for the revocation of any contract.' (465 U.S. at p. 18 (conc. & dis. opn. of Stevens, J.).) He reasoned that, because a contract void as contrary to public policy is revocable at law or in equity, the FAA does not preempt a state law that provid[es] special protection to franchisees by declaring agreements to arbitrate claims under the Franchise Investment Law void as a matter of public policy. (465 U.S. at p. 21.) The Southland majority rejected this view, explaining: We agree, of course, that a party may assert general contract defenses such as fraud to avoid enforcement of an arbitration agreement. We conclude, however, that the defense to arbitration found in the California Franchise Investment Law is not a ground that exists at law or in equity `for the revocation of any contract' but merely a ground that exists for the revocation of arbitration provisions in contracts subject to the California Franchise Investment Law. Moreover, under [Justice Stevens's] view, `a state policy of providing special protection for franchisees ... can be recognized without impairing the basic purposes of the federal statute.' [Citation.] If we accepted this analysis, states could wholly eviscerate congressional intent to place arbitration agreements `upon the same footing as other contracts,' [citation] simply by passing statutes such as the Franchise Investment Law. We have rejected this analysis because it is in conflict with the [FAA] and would permit states to override the declared policy requiring enforcement of arbitration agreements. ( Id. at pp. 16-17, fn. 11.) The majority's analysis is inconsistent with Southland. Contrary to the majority's conclusion, under Southland, the defense to arbitration the majority has read into the Berman statutesbased on a state public policy that precludes waiver of a Berman hearing's potential procedural advantagesis not a ground that exists at law or in equity `for the revocation of any contract' but merely a ground that exists for the revocation of arbitration provisions in contracts subject to the Berman statutes. ( Southland, supra, 465 U.S. at p. 16, fn. 11; see Carter v. SSC Odin Operating Co., LLC (2010) 237 Ill.2d 30 [340 Ill.Dec. 196, 927 N.E.2d 1207, 1218-1219] ( Carter ) (anti-waiver provisions of state Nursing Home Care Act, although based on public policy, are not a defense generally applicable to `any contract' because they invalidate arbitration agreements [only] in a specific type of contractthose involving nursing care].) Also contrary to Southland, the majority's view that California may implement a `a state policy of providing special protection for' a class of individualsin this case, employeeswill permit California wholly [to] eviscerate congressional intent to place arbitration agreements `upon the same footing as other contracts,' [citation] simply by passing statutes such as the Berman statutes. ( Southland, at p. 16, fn. 11.) In this regard, the majority's approach, Southland declares, conflict[s] with the FAA and, therefore, is impermissible. ( Southland, at p. 16, fn. 11.) The majority's analysis is also inconsistent with the high court's more recent decision in Buckeye, supra, 546 U.S. 440. In Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 402-404 [18 L.Ed.2d 1270, 87 S.Ct. 1801], the court held that, as a matter of substantive federal arbitration law, a contract's arbitration provision is severable from the rest of the contract, and challenges to the validity of the contract as a whole, as opposed to the arbitration provision itself, must be arbitrated in the first instance. Notwithstanding this decision, in Cardegna v. Buckeye Check Cashing, Inc. (Fla. 2005) 894 So.2d 860, 864-865, the Florida Supreme Court held that, where the party resisting arbitration alleges that the entire contract is illegal and thus unenforceable as a matter of state public policy, a Florida court, and not an arbitrator, must first determine the contract's legality. In Buckeye, supra, 546 U.S. at page 446, the high court reversed the Florida court's decision, explaining that, under the FAA, Florida's public policy of refusing to enforce an arbitration provision in an illegal contract is irrelevant. The court explained: [I]n Southland, . . . [w]e . . . rejected the proposition that the enforceability of [an] arbitration agreement turned on the state legislature's judgment concerning the forum for enforcement of the state-law cause of action. [Citation.] So also here, we cannot accept the Florida Supreme Court's conclusion that enforceability of the arbitration agreement should turn on `Florida public policy and contract law' [citation]. ( Buckeye, supra, 546 U.S. at p. 446.) Under Buckeye, the majority's conclusion that Moreno's predispute waiver of his right to request a Berman hearing violates state public policy is simply irrelevant, and its view that the arbitration provision's enforceability should turn on `[California] public policy and contract law' is erroneous as a matter of federal law. ( Buckeye, supra, 546 U.S. at p. 446.) As Buckeye firmly establishes, contrary to the majority's view, the FAA does not permit either the Legislature or a majority of this court to refuse to enforce an arbitration agreement based on its judgment concerning the forum for enforcement of the state-law cause of action for vacation pay. [6] ( Buckeye, supra, at p. 446.) Despite these decisions, the majority declares that it does not understand the FAA to preempt a state's authority to impose various preliminary proceedings that delay both the adjudication and the arbitration of a cause of action in order to pursue important state interests. (Maj. opn., ante, at p. 693.) According to the majority, the high court has never suggested that the FAA preempts state laws requiring that preliminary administrative steps like the filing of an administrative complaint be pursued before the filing of a civil action. (Maj. opn., ante, at p. 693.) So, too, the majority continues, consistent with the FAA, a state Legislature may, as it has done with the Berman hearings, advance a certain public policy by offering certain classes of litigants the [unwaivable] option of an informal, nonbinding administrative hearing serving as a gateway to obtaining special protections that enable the vindication of their claims. (Maj. opn., ante, at p. 694.) Again, Preston conclusively refutes the majority's understanding of the FAA. There, in holding that the FAA preempts the TAA, the high court distinguished between an agency acting in the role of adjudicator and an agency acting in the role of prosecutor, pursuing an enforcement action in its own name or reviewing a . . . charge to determine whether to initiate judicial proceedings. ( Preston, supra, 552 U.S. at p. 359.) In proceedings under the TAA, the court explained, the Labor Commissioner functions not as an advocate advancing a cause before a tribunal authorized to find the facts and apply the law; instead, the Commissioner serves as impartial arbiter. Because [t]hat role is just what the FAA-governed agreement between [the parties] reserves for the arbitrator, the court explained, the TAA is incompatible with the FAA. ( Preston, at p. 359.) Similarly, in a Berman hearing, the Labor Commissioner functions not as an advocate advancing a cause before a tribunal authorized to find the facts and apply the law; instead, the Commissioner serves as impartial arbiter. And because that role is just what the FAA-governed agreement between Moreno and Sonic reserves for the arbitrator, the Berman statutes, as interpreted by the majority, are incompatible with the FAA. Thus, the FAA preempts the Berman statutes insofar as the majority construes them, as a matter of public policy, to allow Moreno to pursue a Berman hearing notwithstanding his agreement to forego that option and arbitrate his claim for vacation pay. [7]