Perry v. Thomas
96 L. Ed. 2d 426 · Supreme Court of the United States · 1987
Facts
Kenneth Morgan Thomas, a former employee, sued his former employer, Kidder, Peabody & Co., and two of its employees, Barclay Perry and James Johnston, in California Superior Court. The complaint arose from a dispute over commissions on the sale of securities, alleging breach of contract, conversion, civil conspiracy, and breach of fiduciary duty. Thomas had signed a Uniform Application for Securities Industry Registration form, agreeing to arbitrate disputes required by the rules of organizations with which he registered, including NYSE Rule 347, which mandates arbitration for employment-related controversies. After Thomas refused to submit to arbitration, the defendants sought to compel arbitration under the Federal Arbitration Act. Thomas opposed, arguing that California Labor Code § 229 allowed him to pursue wage actions in court despite an arbitration agreement.
Procedural history
Thomas brought an action in California Superior Court, where the defendants' petition to compel arbitration was denied, citing *Merrill Lynch v. Ware* as controlling authority. The California Court of Appeal affirmed this decision, interpreting *Ware* to mean that California Labor Code § 229 was not pre-empted by the FAA. The California Supreme Court denied the appellants' petition for review. The U.S. Supreme Court noted probable jurisdiction and subsequently reversed the California Court of Appeal's judgment.
Issue
Does Section 2 of the Federal Arbitration Act, which mandates enforcement of arbitration agreements, pre-empt Section 229 of the California Labor Code, which allows actions for the collection of wages to be maintained without regard to the existence of any private agreement to arbitrate?
Holding
Yes, Section 2 of the Federal Arbitration Act pre-empts Section 229 of the California Labor Code. The judgment of the California Court of Appeal is reversed, and the case is remanded for further proceedings.
Rule
Section 2 of the Federal Arbitration Act (FAA) establishes a liberal federal policy favoring arbitration agreements, creating a body of federal substantive law of arbitrability enforceable in both state and federal courts. This federal policy, enacted pursuant to the Commerce Clause, pre-empts state laws that require a judicial forum for claims that contracting parties agreed to resolve by arbitration. State laws that derive their meaning precisely from the fact that an arbitration contract is at issue do not comport with Section 2, and courts cannot construe arbitration agreements differently from other contracts under state law.
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