Alaska Employment Law

Our Hero Judge Alex Has a Bad Day in Court (Two New U.S. Supreme Court Opinions)

On February 20, 2008, the United States Supreme Court issued two opinions of interest to employers and businesses. This summary briefly reviews the opinions and their respective significance.

Judge Alex Gets Reversed: Effect of Arbitration Provisions on State Administrative Actions

In Preston v. Ferrer, the Court held that the Federal Arbitration Act displaced operation of a state statute vesting exclusive jurisdiction in a California Administrative Agency to resolve disputes concerning talent agency contracts. Arnold Preston represented Alex Ferrer (”Judge Alex” on an apparently popular Fox television network program concerning which many of us were previously oblivious) in network negotiations. Ferrer owed Preston money under the contract. Preston invoked the contract’s arbitration clause. Judge Alex sought relief from state court to enjoin arbitration, arguing that Preston was a talent agent and that California’s Talent Agencies Act vested exclusive jurisdiction for all disputes involving talent agents with the California Department of Labor. Preston argued that he was not a talent agent, but instead a manager. The Superior Court agreed with Judge Alex that the issue concerning Preston’s status should be decided by the Department of Labor because the Talent Agencies Act vested exclusive jurisdiction with that agency. California’s Court of Appeals affirmed.

Preston filed a petition for writ of certiorari with the United States Supreme Court. The Court accepted review and reversed in an 8-1 opinion authored by Justice Ginsburg. The Court noted that the question was not whether or not the FAA preempted state law, but instead what forum should decide the question concerning Preston’s status (was he a talent agent or a manager?). The Court emphasized that the FAA set a clear national policy in favor of arbitration and saw no principled basis for distinguishing this case from Buckeye Check Cashing decided in 2006, where the Court held that disputes involving contract validity should be referred to an arbitrator and not decided in state court when the contract contained a valid arbitration provision.

Significance:  The opinion completes a logical trilogy from Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967), to Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 446 (1996), to (now) Preston v. Ferrer. The governing principle is that disputes involving the validity of a contract with an arbitration clause should be decided in the first instance by the arbitrator and not federal or state courts or state administrative agencies. “When 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.”

Fiduciaries Will LaRue the Day: Reach of Potential ERISA Claims Against Fiduciaries Broadened

In LaRue v. DeWolff, Boberg & Associates, the Court attempted to clarify existing precedent and held that a plan administrator’s failure to follow investment instructions from a participant in a defined contribution pension plan could be sued for breach of fiduciary duty. The opinion departs from (or clarifies) prior precedent that arose in the context of a defined benefit plan, in which the Court had held that plan participants could not bring suit for individual claims. See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).

The case is of interest on numerous grounds, not the least of which is the procedural basis underlying the Court’s opinion. LaRue raised an untimely argument before the Court of Appeals that he was entitled to relief under one particular statutory provision that had not been argued before the district court. The Court of Appeals reached the merits of that argument along with the timely raised argument. The Court granted certiorari only on the timely raised argument, but then decided the case on the untimely (and presumably waived) argument.

On the substantive merits, all nine justices concurred in the result, but the majority only secured five votes. The majority placed significant reliance on the changing “landscape of employee benefit plans.” Russell was handed down in an era when defined benefit plans represented the norm. Today, in contrast, defined contribution plans predominate. Viewing this against ERISA’s statutory scheme persuaded the majority that cognizable individual claims existed.

What is the difference? A defined contribution plan returns the value of an individual retirement account which is contingent on the amounts invested by the individual and the return on those selected investments. A defined benefit plan usually promises a participant a fixed level of retirement income based on years of service and compensation.

Significance:  The opinion will likely be perceived as a broadening of potential fiduciary liability, and that may well be a correct reading. The United States Department of Labor has issued guidance concerning the extent to which Plans may seek to indemnify fiduciaries. See 29 CFR 2509.75-4. This might be a good time for employers and businesses to consider reviewing principles of fiduciary liability with their Plan Administrators and fiduciaries. The issue of fiduciary liability under ERISA is too complicated to cover within the scope of this brief summary.

Disclaimer

This legal summary is for informational purposes and is not intended as legal advice. Employers with questions or seeking additional information should confer with counsel.

Mr. Fisher practices law with Birch Horton Bittner & Cherot, 1127 West 7th Avenue, Anchorage, Alaska 99501; (907) 276-1550; gfisher@bhb.com. J.D., University of Washington School of Law (1991), Washington Law Review; B.A. with honors, Harpur College, S.U.N.Y. Binghamton (1988).