The Court ruled that a state labor law guaranteeing workers access to a public judicial forum to adjudicate certain employment claims was preempted by the FAA.

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

Relevant Facts: An employee who had worked for a securities broker in California sued for unpaid commissions in violation of state law. Based on an arbitration provision found in a Uniform Application for Securities Industry Registration form that all broker-employees are required to complete, the employer moved to compel arbitration. The state court refused to grant the motion, citing Merrill Lynch, Pierce, Fenner & Smith v. Ware, which held wage violations under that statute were non-arbitrable.


Question Before The Court: Whether a state labor statute that expressly guarantees employees a private right of action is preempted by the FAA, thereby forcing claims brought under that statute into arbitration.


The Opinion: In light of its more recent pro-arbitration decisions, the U.S. Supreme Court declined to apply the reasoning of the Ware Court. Instead, the Court focused on whether the state labor code section guaranteeing employees a private right of action for the collection of wages “without regard to the existence of any private agreement to arbitrate,” was preempted by the Federal Arbitration Act. Citing our nation’s “federal policy favoring arbitration agreements” and a handful of its most recent arbitration cases, the Court held that the state labor protections were in “unmistakable conflict” with the FAA, and so, “under the Supremacy Clause, the state statute must give way.”


The Court, in a footnote, spoke to the root of the issue, providing “In instances such as these, the text of Section 2 provides the touchstone for choosing between state law principles and the principles of federal common law envisioned by the passage of that statute: an agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ Thus, state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of Section 2. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes non-arbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold the legislature today cannot.”


Justice Sandra Day O’Conner strongly disagreed with the majority in her dissent, providing, “Under the standards we most recently applied in Shearson/American Express Inc. v. McMahon, 482 U. S. 220 (1987), there can be little doubt that the California Legislature intended to preclude waiver of a judicial forum; it is clear, moreover, that this intent reflects an important state policy. . . to protect the worker from the exploitative employer who would demand that a prospective employee sign away in advance his right to resort to the judicial system for redress of an employment grievance. . . . In my view, therefore, even if the [FAA] applies to state court proceedings, California’s policy choice to preclude waivers of a judicial forum for wage claims is entitled to respect. Accordingly, I would affirm the judgment of the California Court of Appeal.”

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