Perry et al. v. Thomas
482 U.S. 483 (1987)
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Rule of Law:
Section 2 of the Federal Arbitration Act pre-empts state laws that require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration, even if the state law protects an important state interest such as wage collection.
Facts:
- Kenneth Morgan Thomas applied for a job with the securities company Kidder, Peabody & Co.
- As part of his application, Thomas signed a registration form containing a clause agreeing to arbitrate any disputes with his employer according to the rules of the organizations with which he registered.
- Thomas registered with the New York Stock Exchange (NYSE), whose Rule 347 mandates arbitration for all employment-related disputes.
- A dispute later arose between Thomas and Kidder, Peabody over unpaid sales commissions.
- Relying on a California law, Thomas sued his employer and two of its employees, Barclay Perry and James Johnston, in state court to recover the commissions, which are defined as 'wages' under state law.
- Thomas refused his employer's demand to submit the dispute to arbitration as required by the agreement he had signed.
Procedural Posture:
- Kenneth Morgan Thomas sued Kidder, Peabody & Co., Barclay Perry, and James Johnston in California Superior Court (a trial court) for wage collection.
- The defendants (appellants) filed petitions in state and federal court to compel arbitration based on the agreement Thomas had signed.
- The California Superior Court denied the petition to compel arbitration, finding that California Labor Code § 229 permitted the court action.
- The defendants appealed to the California Court of Appeal (an intermediate appellate court).
- The Court of Appeal affirmed the trial court's decision, holding that the state law was not pre-empted by federal law.
- The California Supreme Court (the state's highest court) denied the defendants' petition for review.
- The defendants (appellants) then appealed to the Supreme Court of the United States, which noted probable jurisdiction.
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Issue:
Does § 2 of the Federal Arbitration Act pre-empt § 229 of the California Labor Code, which allows an individual to bring a court action for wage collection despite the existence of a private agreement to arbitrate?
Opinions:
Majority - Justice Marshall
Yes, § 2 of the Federal Arbitration Act (FAA) pre-empts § 229 of the California Labor Code. The FAA establishes a national policy favoring arbitration that withdraws the power of states to require a judicial forum for claims that parties have contractually agreed to arbitrate. The court's reasoning is that the FAA, enacted under the Commerce Clause, creates a body of federal substantive law that is enforceable in both state and federal courts. This federal policy is in 'unmistakable conflict' with California’s § 229, which specifically allows litigants to bypass arbitration agreements for wage disputes. Under the Supremacy Clause, the state law must give way to the federal statute. The Court distinguished its prior holding in Merrill Lynch v. Ware, explaining that Ware concerned pre-emption under the Securities Exchange Act of 1934, not the FAA, and that the 1934 Act did not contain the same clear congressional mandate favoring arbitration as the FAA does.
Dissenting - Justice Stevens
No, the Federal Arbitration Act should not pre-empt the California Labor Code. The dissent argues that the Court has recently and improperly expanded the FAA's pre-emptive scope far beyond what Congress originally intended. Because prior holdings are not directly on point, the Court is not bound by stare decisis and should preserve the power of states to except certain important categories of disputes from arbitration.
Dissenting - Justice O'Connor
No, the Federal Arbitration Act should not pre-empt the California Labor Code. The dissent first reiterates the view that the FAA should not apply to state court proceedings at all. Even if it did, states, like Congress, should be able to preclude the waiver of a judicial forum for matters of important public policy. California has a clear and important policy to protect workers from being forced to arbitrate wage claims, and this legislative choice is entitled to respect.
Analysis:
This decision significantly reinforces the broad pre-emptive power of the Federal Arbitration Act over conflicting state laws. It clarifies that state legislatures cannot create carve-outs from arbitration for specific types of claims, even for areas of traditional state concern like employment law and wage protection. The ruling establishes that the only grounds for invalidating an arbitration agreement are generally applicable contract defenses (like fraud or duress), not state policies that are hostile to arbitration itself. This has led to the widespread enforcement of arbitration clauses in employment and consumer contracts, limiting access to courts for many types of disputes.
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