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June 25, 2010
Was Illinois Court Bound By California Ruling?
A CEO resigned from his employment and subsequently filed a claim for unpaid wages and other compensation with the California labor commissioner. The commissioner awarded the CEO over $185,000, and a default judgment on the award was entered in a California court. The CEO then registered the court’s judgment in an Illinois circuit court to enforce it against his employer (presumably headquartered in Illinois). But the Illinois court set the judgment aside, citing an arbitration clause in the CEO’s employment contract. The Illinois Court of Appeals ultimately had to resolve the matter.

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What happened. A provision in the employment contract between “Rix” and Splice, Inc., established that any disputes would be handled by arbitration. It also explained that the contract would be “governed and construed in accordance with the laws of the State of Illinois.” The Cook County circuit court granted Splice’s motion to have the judgment set aside, concluding that the arbitration clause removed any subject matter jurisdiction from the California commissioner. Rix appealed.

What the court said. The appeals court explained that the Federal Arbitration Act (FAA) provides that a written arbitration agreement contained within a commercial contract “shall be valid, irrevocable, and enforceable.” Meanwhile, the court noted that the U.S. Constitution provides that the judgments of one state’s court are entitled to “full faith and credit in every other state.” Under Illinois law, courts must “treat the foreign judgment in the same manner as a judgment of the circuit court for any county of this State.” But an Illinois court can set aside such a foreign judgment, the appeals court explained, “in limited situations, including where the rendering court lacked subject matter jurisdiction of the case …”

The court looked to a 2008 U.S. Supreme Court case (Preston v. Ferrer) that found that the FAA preempted California state law vesting jurisdiction in the labor commissioner rather than an arbitration proceeding conducted under the rules of the American Arbitration Association, as was provided in Rix’s contract.

Rix argued that Splice had waived whatever rights it had under the arbitration clause when it failed to appear in the labor commissioner’s hearing on the CEO’s claim. But the court found “no reason why Splice should have been required to engage in litigation in a forum that lacked jurisdiction.” Ruff v. Splice, Inc., Appellate Court of Illinois, No. 1-09-2093 (2010).

Point to remember: In the Preston case, the Supreme Court held that when parties agree to arbitrate any dispute arising under a contract, the FAA “supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.”

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