Clarifying Arbitration Jurisprudence: Preston v. Ferrer

Preston v. Ferrer, 2008 WL 440670 (U.S.) aroused little interest among arbitrators, presumably on the ground the case only confirmed Supreme Court jurisprudence invalidating attempts by state courts to subvert the FAA administratively rather than legislatively or by judicial decision. According to the Court, the issue in Preston “is not whether the FAA preempts [a state statute] wholesale, the question is simply who decides whether [defendant] petitioner . . . violated the contract].”

The Court disposed of this question summarily, repeating the familiar rule that only a challenge to the arbitration clause per se is subject to judicial scrutiny, i.e. whether the “making of the agreement” is enforceable or revocable “on grounds as exist at law or in equity for the revocation of any contract;" 9 U.S.C. 2. The arbitration clause is “seperable” from contractual terms, and the merits of the dispute are subject to arbitration. The question becomes: why did the Court take this case?

The possible answer: dicta to clarify earlier Supreme Court arbitration jurisprudence.
The Court discusses Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ. 489 U.S. 468 (1989), a case unrelated to the issue of whether the court or arbitrator decides resolution of a contractual dispute in arbitration or litigation. Volt allowed the trial court to stay arbitration and permit litigation under a forum selection and state choice of law clause in the contract designating California as the venue and applicability of its state procedural law. When resolution of arbitration and litigation would potentially produce different results, CCP 1282.2 (c) permits the court to stay arbitration. Unlike the two parties in Preston, the Court noted that when Volt demanded arbitration, Stanford sued Volt and two non signatory third parties. Volt is a procedural law case, not a determination of an arbitral forum selection clause of arbitrator or judge as in Preston.

The Court then discusses its rule in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). In Mastrobuono, a case unrelated to arbitral forum selection in Preston or civil procedure in Volt, the Court confronted a state choice of law clause law prohibiting an arbitrator from awarding punitive damages conflicting with NASD rules permitting an arbitrator to award punitive damages. The Court “harmonized” the two clauses by applying New York state substantive principles to the arbitration but prohibiting limitations on the authority of arbitrators. The contract in Preston contained a boilerplate arbitration clause stating AAA Rules applied to any dispute relating to the terms of the contract or the “breach, validity or legality thereof.” This provision overrides the choice of California law diverting arbitration administratively.