Originally from Dispute Resolution Journal

When Samuel Gompers, the first president of the American Federation of Labor, was asked what organized labor wanted, he simply said: “more.”1 This word can also be used to describe what has happened in the area of arbitration during the last decade. The following is a look at what we see as the top 10 developments in American arbitration law in the 1990s.

One- Uniform National Arbitration Law: FAA Preemption of State Law

The basis for federal arbitration law is the commerce clause of the U.S. Constitution, which allows federal control of foreign and interstate commerce, or activities “involving” such commerce. Virtually all activity that can be characterized as economic is subject to federal control under the commerce clause. The “separability doctrine” prohibits states from applying substantive law regarding voidable contracts to prevent enforcement of an arbitration agreement.2 The commerce clause provides the basis for federal preemption of state arbitration law.

Two important Supreme Court arbitration cases decided in the 1990s serve to illustrate the scope and importance of the preemption of state law. One is based on a consumer contract and the other is based on a business transaction.

Allied-Bruce Terminex Companies, Inc. v. Dobson arose out of a contract between a locally owned pest control company (but also a franchisee of a national firm) and a home owner, that provided for arbitration of disputes.3 Subsequently, termite infestation was discovered. The home owner brought suit, and the pest control company sought to have the state court enforce the arbitration provision. An Alabama statute prohibited the enforcement of pre-dispute arbitration agreements. While such broad anti-arbitration legislation is rare, many states have adopted statutes that seek to protect consumers, franchisees, and local firms by limiting the scope and application of arbitration and of forum selection clauses.

The Supreme Court held that the Alabama statute was preempted by the Federal Arbitration Act (FAA), and therefore the dispute was to be decided by arbitration rather than judicial trial. The Court reached this decision despite an extraordinary amicus brief filed by 20 state attorneys general, which argued that the Court should uphold the state statute. The Court also gave the broadest possible preemptive scope to the commerce power in the arbitration context. Few if any contracts have less connection with interstate commerce than a transaction between a small, locally owned business and an individual home owner.