FAA or State Arbitration Law?

Which Applies & When?

By Leslie King O’Neal

        

Where’s My Yacht?

        

Does Choice of Law Provision Displace FAA?

         Both parties asserted the Massachusetts Arbitration Act governed based on the contract’s choice of law provision which stated: “This Agreement shall be governed by and interpreted in accordance with the [l]aws of the Commonwealth of Massachusetts.”

First Circuit Requires Explicit Language to Displace FAA

         However, the district court held this generic choice of law provision wasn’t sufficient to displace the FAA as governing law.[vi] “The FAA applies when there is federal subject matter jurisdiction, i.e., diversity jurisdiction . . . and when the contract calling for arbitration evidences a transaction involving interstate commerce.” First Circuit precedent requires explicit contractual language to displace the FAA with a state arbitration statute.[vii] However, the federal circuits are split on this issue, as discussed below.

Interest Award Challenge Doesn’t Meet FAA Standard to Vacate

Noting that “when determining whether to uphold, vacate, or modify an arbitration award, federal courts apply ‘one of the narrowest standards of judicial review in all of American jurisprudence,’” the district court confirmed the award and entered final judgment for Durant. The arbitrator’s alleged error in the interest award did not outweigh the deference arbitration awards enjoy under the FAA.

SCOTUS Decisions Create Conflict

         Two SCOTUS decisions create uncertainty about whether the FAA, the law described in the choice of law clause or the law of the state where the arbitration is held should apply.

         In Volt Information Sciences v. Bd. Of Trustees of Leland Stanford Junior University[viii] the parties’ construction contract had an arbitration clause and a choice of law clause. The trial court held the choice of law included the California Arbitration Act, which, unlike the FAA, provided for staying the arbitration pending Stanford’s indemnity litigation with third parties. The trial court and the 9^th Circuit held California’s arbitration rules applied. SCOTUS affirmed, holding parties could “choose the terms under which they will arbitrate” e.g. California’s arbitration rules.

         Several years later, SCOTUS decided the Mastrobuono v. Shearson Lehman Hutton[ix] case, holding that a New York choice of law clause ecompassed substantive principles of New York law, but not the New York rules limiting arbitrators’ authority to award punitive damages.

 Trying to harmonize these cases has been challenging. The federal circuits have reached different conclusions on the interplay between choice- of-law clauses and the FAA.[x] As one court said, this “presents a recurring and troubling theme in many commercial contracts: to what extent must a court—confronted with a choice-of-law provision in a contract—incorporate the designated state’s statutory and common law governing arbitration even when doing so seems contrary to the Federal Arbitration Act (“FAA”)?”[xi]

Circuits Split on Whether “Choice of Law” Clause Ousts FAA

         A majority of federal circuits (1^st, 3d, 4^th, 5^th, 6^th, 7^th, 8^th, 9^th) hold that a generic choice of law clause does not incorporate a state’s arbitration rules into a contract and doesn’t displace the FAA.[xii] Some commentators criticize this approach as frustrating the FAA”s goals by, among other things, reducing a state’s ability to experiment with new and more efficient arbitration procedures.[xiii]

         The Second Circuit and the D.C. Circuit hold broad choice of law provisions are sufficient to invoke state arbitration laws and opt out of the FAA’s default rules.[xiv] These decisions have been criticized as undermining the arbitrator’s authority and responsibility for resolving contract and procedural questions.[xv]

State Courts Struggle with FAA Preemption

         Similarly, state courts struggle to apply the U.S. Supreme Court’s FAA preemption doctrines, especially in ruling on motions to compel arbitration and motions to vacate arbitration awards.[xvi] All fifty states have arbitration statutes, some of which duplicate the FAA. However, many states’ arbitration rules differ from the FAA, particularly regarding grounds for vacatur.

Florida Example

         For example, Chapter 682, Florida’ arbitration statute, is based on the Revised Uniform Arbitration Act (“RUAA”).[xvii] However, §682.13, setting forth grounds for vacatur, differs significantly from FAA §10. First, it states that the court “shall vacate” an arbitration award if the specified grounds are proved. The FAA states the court “may” vacate the award. Second, there are only four grounds for vacatur listed in FAA §10, but §682.10 lists seven grounds.

         Complicating the situation further is the Florida Supreme Court’s statement in Shotts v. OP Winter Haven, Inc.[xviii] that, “In Florida, an arbitration clause in a contract involving interstate commerce is subject to the Florida Arbitration Code (FAC), to the extent the FAC is not in conflict with the FAA.” So, Florida’s arbitration rules are incorporated into every arbitration clause (in contracts involving interstate commerce) as a matter of law. Florida courts have not discussed the interplay between applying the FAC and choice-of-law clauses.

Takeaways

• Remember that the FAA preempts contrary state laws and rules in cases involving interstate commerce. “Interstate commerce” is construed very broadly. The FAA governs if one of the parties has some economic activity with a nexus to interstate commerce (not necessarily the parties’ transactions or the contract itself).
• If including a choice-of-law clause in a contract, consider whether including the specified state’s arbitration rules is beneficial or not. Remember that in many jurisdictions, generic choice-of-law provisions don’t include arbitration rules

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[i] 9 U.S.C. §§1 – 402.

[ii] See post– Happy 100^th birthday, FAA! https://theconstructionadrtoolbox.com/2025/02/faa-is-100-years-old/

[iii] See Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265 (1995) (FAA governs any arbitration agreement where a party’s economic activity involves interstate commerce regardless of parties’ knowledge or intent) and Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003) (FAA doesn’t require specific contract to have substantial effect on interstate commerce if the economic activity in question represents a general practice subject to federal control).

[iv] Durant was from Washington, Alerion was a Massachusetts-based company, and the vessel was built in North Carolina, so the transaction involved interstate commerce.

[v] Durant v. Alerion Yachts, LLC (Civil Action No: 24-12569-FDS)

https://scholar.google.com/scholar_case?case=5958267040333945814&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt&html=&pos=5&folt=kw

[vi] Citing  Ribadeneira v. New Balance Athletics, Inc., 65 F.4th 1, 13 (1st Cir. 2023)https://scholar.google.com/scholar_case?case=1841151997186632951&hl=en&lr=lang_en&as_sdt=20003&as_vis=1

[vii]Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 932 F.3d 1 (1st Cir. 2019)  https://scholar.google.com/scholar_case?case=18222084325380003534&hl=en&lr=lang_en&as_sdt=20003&as_vis=1

[viii] 489 U.S. 468 (1989).

[ix] 514 U.S. 52 (1995).

[x] Jennifer Trieshmann, Horizontal Uniformity and Vertical Chaos: State Choice of Law Clauses and Preemption under the Federal Arbitration Act, 2005 J. Dispute Resolution (2005). https://scholarship.law.missouri.edu/jdr/vol2005/iss1/11

[xi] Sec. Ins. Co. of Hartford v. TIG Ins. Co. 360 F.3d 322 (2d Cir. 2004)

[xii]Dialysis Access Center v. RMS Lifeline, 683 F.3d 367 (1^st Cir. 2011); Roadway Pkg. Sys. v. Kayser, 257 F3d 287 (3d Cir. 2001); Porter Hayden v. Century Indemnity Co., 136 F3d 380 (4^th Cir. 1998); Atlantic Aviation v. EBM Group, 11 F.3d 1276 (5^th Cir. 1994); Ferro Corp. v. Garrison Ind., 142 F.3d 926 (6^th Cir. 1998); Northern Ill. Gas. Co. v. Airco Indus. Gases, 676 F.3d 270 (7^th Cir. 1982); UHC Mgmt Co v. Computer Sci., 148 F.3d 992 (8^th Cir. 1998); Wolsey Ltd. v. Foodmaker, 144 F.3d 1205 (9^th Cir. 1998).

[xiii] Note, An Unnecessary Choice of Law: “Volt, Mastrobuono and Federal Arbitration Act Preemption,” 115 Harv. L. Rev. 8 (June 2002)

[xiv] Security Ins. Co. of Hartford v. TIG Ins. Co., 360 F.3d 322 (2d Cir. 2004); Ekstrom v. Value Health, Inc., 68 F.3d 1391 (D.C. Cir. 1995).

[xv] Jennifer Treishmann, supra, note x.

[xvi] Jill Gross, Over-preemption of State Vacatur Law: State Courts and the FAA, 3J. Am. Arb. 1 (2004).

[xvii] Craig Lewis and Juan Ramirez, Jr., The Revised Florida Arbitration Code, 89 Fla. B. J. 8 (May 2015). Florida adopted the RUAA in July 2013. Twenty-three states and the District of Columbia have adopted the RUAA.

[xviii] 86 So.3d 456 (Fla. 2011).

[xix] Jill Gross, supra, note xv.