Perry v. Thomas, 86-566

• Decision Date: 15 June 1987
• Docket Number: No. 86-566,86-566
• Citation: 96 L.Ed.2d 426,107 S.Ct. 2520,482 U.S. 483
• Parties: Barclay PERRY and James Johnston, Appellants v. Kenneth Morgan THOMAS
• Court: U.S. Supreme Court

482 U.S. 483

107 S.Ct. 2520

96 L.Ed.2d 426

Barclay PERRY and James Johnston, Appellants

v Kenneth Morgan THOMAS.

No. 86-566.

Argued April 28, 1987.

Decided June 15, 1987.

Syllabus

Appellee brought suit in California Superior Court against his former employer and appellants, two of its employees, alleging breach of contract and related causes of action arising from a dispute over commissions on securities sales. After appellee refused to arbitrate, appellants filed a petition to compel arbitration under §§ 2 and 4 of the Federal Arbitration Act, which respectively provide that contractual arbitration provisions are valid and enforceable and mandate their judicial enforcement. The demand for arbitration was based on a provision in a form appellee executed in connection with his employment application, whereby he agreed to arbitrate any dispute with his employer. Appellee opposed arbitration on the ground that his suit was authorized by California Labor Code § 229, which provides that wage collection actions may be maintained without regard to the existence of any private agreement to arbitrate. The court refused to compel arbitration, characterizing as "controlling authority" Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348 which upheld § 229 in the face of a Supremacy Clause preemption challenge premised on an arbitration requirement in a New York Stock Exchange rule, which was promulgated pursuant to § 6 of the Securities & Exchange Act of 1934 (1934 Act). The State Court of Appeals affirmed. Both lower courts refused to consider appellee's argument that appellants lacked "standing" to enforce the arbitration agreement since they were not parties to it.

Held:

1. Under the Supremacy Clause, § 2 of the Federal Arbitration Act pre-empts § 229 of the California Labor Code. In enacting § 2, Congress declared a national policy favoring arbitration and withdrew the States' power to require a judicial forum for the resolution of claims that contracting parties agreed to resolve by arbitration. Ware is distinguishable on the ground that the language and policies of the 1934 Act and the regulations promulgated thereunder evidenced no clear federal intent to require arbitration. The oblique reference to the Federal Arbitration Act in footnote 15 of Ware cannot fairly be read as a definitive holding that that Act does not pre-empt § 229, since the footnote was concerned with federally created rights and did not address the issue of federal pre-emption of state-created rights. Pp. 489-491 2. Appellee's contention that resolving in appellants' favor the question of their "standing" to enforce the agreement to arbitrate is a prerequisite under Article III of the Constitution to their maintenance of this appeal is rejected. Appellee's "standing" argument—which this Court does not reach because the lower courts did not address it—simply presents the straightforward contract interpretation issue whether the arbitration provision inures to appellants' benefit and may be construed to cover the present dispute. That issue may be resolved on remand, and its status as an alternative ground for denying arbitration does not prevent this Court from reviewing the lower courts' holdings on the pre-emption question. P. 492.

Reversed and remanded.

MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, WHITE, BLACKMUN, POWELL, and SCALIA, JJ., joined. STEVENS, J., post, p. ----, and O'CONNOR, J., post, p. ----, filed dissenting opinions.

Peter Brown Dolan, Los Angeles, Cal., for appellants.

Bruce Gelber, Beverly Hills, Cal., for appellee.

Justice MARSHALL delivered the opinion of the Court.

In this appeal we decide whether § 2 of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., which mandates enforcement of arbitration agreements, pre-empts § 229 of the California Labor Code, which provides that actions for the collection of wages may be maintained "without regard to the existence of any private agreement to arbitrate." Cal.Lab.Code Ann. § 229 (West 1971).

I

Appellee, Kenneth Morgan Thomas, brought this action in California Superior Court against his former employer, Kidder, Peabody & Co. (Kidder, Peabody), and two of its employees, appellants Barclay Perry and James Johnston. His complaint arose from a dispute over commissions on the sale of securities. Thomas alleged breach of contract, conversion, civil conspiracy to commit conversion, and breach of fiduciary duty, for which he sought compensatory and punitive damages. After Thomas refused to submit the dispute to arbitration, the defendants sought to stay further proceedings in the Superior Court. Perry and Johnston filed a petition in the Superior Court to compel arbitration; Kidder, Peabody invoked diversity jurisdiction and filed a similar petition in Federal District Court. Both petitions sought arbitration under the authority of §§ 2 and 4 of the Federal Arbitration Act.¹

The demands for arbitration were based on a provision found in a Uniform Application for Securities Industry Registration form, which Thomas completed and executed in connection with his application for employment with Kidder, Peabody. That provision states:

"I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions or by-laws of the organizations with which I register. . . ." App. 33a.

Rule 347 of the New York Stock Exchange, Inc. (1975), with which Thomas registered, provides that

"[a]ny controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party. . . ." App. 34a.

Kidder, Peabody sought arbitration as a member organization of the New York Stock Exchange (NYSE). Perry and Johnston relied on Thomas' allegation that they had acted in the course and scope of their employment and argued that, as agents and employees of Kidder, Peabody, they were beneficiaries of the arbitration agreement.

Thomas opposed both petitions on the ground that § 229 of the California Labor Code authorized him to maintain an action for wages, defined to include commissions,² despite the existence of an agreement to arbitrate. He relied principally on this Court's decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348 (1973), which had also considered the validity of § 229 in the face of a pre-emption challenge under the Supremacy Clause, U.S. Const., Art. VI, cl. 2. Thomas maintained that the decision in Ware stood for the proposition that the State's interest in protecting wage earners outweighs the federal interest in uniform dispute resolution.

The Superior Court denied appellants' petition to compel arbitration.³ Thomas v. Kidder Peabody & Co., Civ.Action No. C529105 (Los Angeles County, Apr. 23, 1985) (reprinted at App. 128a-129a). The court characterized Ware as "controlling authority" which held that, "in accordance with California Labor Code Section 229, actions to collect wages may be pursued without regard to private arbitration agreements." Id., at 129a. It further concluded that since Thomas' claims for conversion, civil conspiracy, and breach of fiduciary duty were ancillary to his claim for breach of contract and differed only in terms of the remedies sought, they should also be tried and not severed for arbitration. Id., at 128a-129a. The Superior Court did not address Thomas' contention that Perry and Johnston were "not parties" to the arbitration agreement, id., at 78a, and therefore lacked a contractual basis for asserting the right to arbitrate, an argument Thomas characterizes as one of "standing." ⁴

Before the California Court of Appeal, appellants argued that Ware resolved only the narrow issue whether § 229 was pre-empted by Rule 347's provision for arbitration, given the promulgation of that Rule by the NYSE pursuant to § 6 of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 885, as amended, 15 U.S.C. § 78f, and the authority of the Securities and Exchange Commission (SEC) to review and modify the NYSE Rules pursuant to § 19 of the 1934 Act, 15 U.S.C. § 78s.⁵ See 414 U.S., at 135. It was appellants' contention that, despite an indirect reference to the Federal Arbitration Act in footnote 15 of the Ware opinion, the pre-emptive effect of § 2 of the Act was not at issue in that case.

In an unpublished opinion, the Court of Appeal affirmed. Thomas v. Perry, 2d Civ. No. B014485 (2d Dist., Div. 5, Apr. 10, 1986) (reprinted at App. 139a-142a). It read Ware § single reference to the Federal Arbitration Act to imply that the Court had refused to hold § 229 pre-empted by that Act and the litigants' agreement to arbitrate disputes pursuant to Rule 347. Thus, the Court of Appeal held that a claim for unpaid wages brought under § 229 was not subject to compulsory arbitration, notwithstanding the existence of an arbitration agreement. App. 140a-141a. Like the Superior Court, the Court of Appeal also rejected appellants' argument, based on this Court's decision in Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), that the ancillary claims for conversion, civil conspiracy, and breach of fiduciary duty were severable from the breach-of-contract claim and should be arbitrated. App. 142a. Finally, the Court of Appeal refused to consider Thomas' argument that Perry and Johnston lacked "standing" to enforce the arbitration agreement. The court concluded that Thomas had raised this argument for the first time on appeal.⁶ Id., at 140a, n. 1.

The California Supreme Court denied appellants' petition for review. Id., at 144a. We noted probable jurisdiction,⁷ 479 U.S. 982,...