Happy 100th Birthday, FAA!

By Leslie King O’Neal

A bare-bones statute that doesn’t even include a definition of arbitration, the FAA has become a powerful tool in supporting arbitration agreements through court interpretations. This post provides an overview of how the FAA (and arbitration) have expanded over the last 100 years.

FAA’s Purpose: Simpler, Faster, Cheaper Solutions for Business

Before the FAA’s enactment, state and federal courts often refused to compel arbitration and allowed parties to revoke arbitration agreements.

Julius Cohen, a lawyer, and Charles Bernheimer, a cotton merchant, believed business needed arbitration for speedy, economical and practical dispute resolution.

Because litigation was slow and costly they said, “businessmen needed solutions that were simpler, faster and cheaper.”[ii] They drafted the FAA based on the NY arbitration statute, (which they also drafted) and lobbied the business community and Congress to pass it.  Cohen told Congress the FAA was merely a procedural statute for federal courts that would not affect state law.[iii]

100 Years Later—Things Have Changed

Since 1925, U.S. Supreme Court opinions have interpreted the FAA expansively. Some commentators assert the Supreme Court has “created an arbitration law Congress never enacted.”[iv]  Others decry the FAA’s preemption of contrary state arbitration laws as “federalization of state law.”[v]

Today the FAA applies in federal and state courts, covers consumer and employment contracts and applies to statutory civil rights, antitrust, and discrimination claims as well as contract disputes and even personal injury cases.

FAA Is Federal Substantive Law

Far from being a merely procedural statute in federal court, the FAA is now considered substantive law. In Moses H. Cone Memorial Hospital v. Mercury Construction Corp.,[vi] the Supreme Court held that the FAA created a body of federal substantive law of arbitrability and that the FAA governed in state and federal court.[vii]

Who Decides Validity of Underlying Contract?

If a party claims it was fraudulently induced to sign a contract with an arbitration clause, does the arbitrator or the court decide the contract validity issue? In Prima Paint Corp. v. Flood & Conklin Mfg. Co.,[viii] plaintiff claimed fraud in the inducement of the underlying contract, which included an arbitration clause. Holding that the FAA comes within Congress’s power to regulate interstate commerce and admiralty matters, SCOTUS held the arbitration agreement was severable from the underlying contract. Therefore, the arbitrator, not the court, decides issues of the underlying contract’s validity. The court decides only issues regarding the arbitration agreement’s validity. This is true even if the underlying contract is void or illegal under state law. The Supreme Court reiterated these rulings in Buckeye Check Cashing v. Cardegna[ix ]Justice Scalia, writing for the majority, stated that the severability doctrine applied even if the underlying contract was void under applicable state law.

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FAA Preempts Contrary State Law

Not only is the FAA substantive federal law, but it also preempts contrary state law regarding arbitration agreements. In Southland Corp. v. Keating[x] the Supreme Court held the FAA preempted the California Franchise Investment Law, which did not allow arbitration of claims arising under it. Writing for the majority, Chief Justice Burger stated that, by adopting the FAA Congress intended to foreclose all other state laws undercutting arbitration.

Although many commentators (and Justices) have criticized the Southland decision, the Supreme Court followed it in later cases. For example, in Doctor’s Associates, Inc. v. Casarotto,[xi] the court held the FAA preempted a Montana statute requiring contracts with arbitration clauses to have a “notice of arbitration” typed in capital letters on the first page of a contract. Finding the Montana statute conflicted with FAA §2, SCOTUS held the FAA “displaces the Montana statute with respect to arbitration agreements covered by the Act.”

Interstate Commerce Is Broadly Interpreted

SCOTUS has interpreted the language in FAA §2 (“a contract evidencing a transaction involving commerce”) to mean that the contract or transaction in fact involved interstate commerce—whether the parties contemplated or intended this is irrelevant. Under this definition nearly all transactions involve interstate commerce, making the FAA applicable in most cases.

When Alabama homeowners sued on a “termite protection plan” that included an arbitration clause, the Alabama Supreme Court denied the termite company’s request for a stay because Alabama had a statute making pre-dispute arbitration clauses unenforceable.  The Alabama Supreme Court held the FAA applied only if the parties “contemplated substantial interstate activity” at the time of contract.

Reversing the state court, the U.S. Supreme Court held that, because the transaction between the homeowners and the termite company involved interstate commerce, the FAA applied.[xii]

FAA’s Scope Expands Further

Beginning in the 1980’s the U.S. Supreme Court issued several decisions expanding the FAA’s scope to include antitrust, civil rights, age discrimination, employment and consumer claims.[xiii] Although SCOTUS has not ruled on this, some recent cases have upheld arbitration clauses including personal injury and wrongful death claims.[xiv] (For further discussion on expansive arbitration clauses, see post No Limits on Arbitration?https://theconstructionadrtoolbox.com/2024/12/broad-arbitration-clauses-are-becoming-more-common/).

FAA Amended for Sexual Harassment & Sexual Assault Claims

In 2021 Congress passed the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021”[xv] amending the FAA to invalidate pre-dispute arbitration agreements under federal, tribal or state law related to sexual assault or sexual harassment disputes. Also, a court (not an arbitrator) shall determine the validity and enforceability of agreements related to such claims and the law’s application, regardless of delegation clauses. The Prima Paint severability doctrine does not apply in these cases.

Takeaways:

• Because of the broad definition of “interstate commerce,” the FAA applies to almost all transactions.
• The FAA preempts contrary state laws regarding arbitration.
• The FAA applies to securities claims, RICO claims, age discrimination claims, consumer claims, employment contracts, and personal injury claims.
• Sexual harassment and sexual assault claims are now exempt from the FAA.

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[i] 9 U.S.C. §§1-16

[ii] Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St. U. L. Rev. (2006) (hereafter “Moses”). This article has an in-depth discussion of the FAA’s history. https://ir.law.fsu.edu/lr/vol34/iss1/3

[iii] “Cohen made clear in his brief [to Congress] that what was being proposed to accomplish these goals was simple and limited—a statute that would apply only to procedure in the federal courts and would not affect state law . . .” Id. at 103.

[iv]  Moses, supra, note ii.

[v]  Note, State Courts and the Federalization of Arbitration Law, 134 Harv. L. Rev. 1184 (Jan. 2021).http://chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://harvardlawreview.org/wp-content/uploads/2021/01/134-Harv.-L.-Rev.-1184.pdf

[vi] 460 U.S. 1 (1983).

[vii] “Moreover, the Court also emphasized, without citing any authority, that there is a strong federal policy favoring arbitration.” Moses, supra note ii at 123.

[viii] 388 U.S. 395, 418 (1967).

[ix]546 U.S. 440 (2006). Buckeye involved usurious loan transactions which were void under Florida law.

[x] 465 U.S. 1 (1984).

[xi] 517 U.S. 681 (1996). Justice Ginsburg wrote the majority opinion.

[xii] Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995).

[xiii] See e.g.Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (Sherman and Clayton Act antitrust claims); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (age discrimination claims); Shearson/American Express v. McMahon, 482 U.S. 220 (1987) (Racketeer Influenced and Corrupt Organizations Act (RICO) and Securities Exchange Act 1934 claims).

[xiv] McGinty v. Uber Technologies, Inc., (Sup. Ct. N.J. Appellate Division, Docket no: A-1368-23) (unpublished opinion)(Uber passenger’s personal injury claims subject to arbitration); Piccolo v. Great Irish Pubs Florida, Inc. (Case No:2024-CA00616-O, Circuit Court, 9^th Judicial Circuit in and for Orange County, Florida) (asserting wrongful death claims subject to arbitration).

[xv]Public Law 117-90 (2021).