WASHINGTON -- In a case that raises important questions of federalism, the Supreme Court was asked to decide yesterday when the Federal Arbitration Act supersedes state law.
The federalism issue was raised as the justices heard oral argument in Allied-Bruce Terminix Companies Inc. and Terminix International Co. v. Dobson, in which numerous states and state authorities have intervened.
The central question is when the federal act, rather than state law, applies to consumer contracts that involve interstate commerce. The arbitration law, which Congress passed in 1925, covers contracts "evidencing a transaction involving commerce," and the congressional intent behind those words is a key issue.
While securities contracts between brokerage houses and Customers are deemed to be consumer contracts, the high court is not expected to separately address enforcement of securities arbitration agreements because there is little dispute that they fall under the federal law, attorneys say.
The high court, even with the addition of new justices Stephen Breyer and Ruth Bader Ginsburg, "is still very much a plain-meaning court," said an attorney at a recent news briefing. But the arbitration act "is not crystal clear," and "plain meaning will only take you so far," said the attorney, Maureen Mahoney of the firm Latham & Watkins.
The high court in a 1984 decision, Southland Corp. v. Keating, in which justices William Rehnquist and Sandra Day O'Connor dissented, held that the act applies in state as well as federal court.
In the Terminix case, states have intervened in favor of overturning the Southland decision. Attorneys general of 20 states said that the case "is ultimately more about federalism than about arbitration." Each state "is entitled to decide for itself how to govern proceedings in its own courts," they said.
Some state courts have broadly concluded that the standard for applying the federal act is when a contract "affects" interstate commerce. But other states, such as Alabama in the Terminix case, have determined that the act applies only when contractual parties "contemplated substantial interstate activity."
A coalition led by the Alabama Water and Wastewater Institute, which represents 13 public and municipal water boards in Alabama, also intervened, saying that contracts their members enter into for engineering and other professional services would be affected by the outcome of the case.
Alabama's standard of applying the federal law only when parties "contemplated" interstate commerce activity "represents a revival of the Alabama Supreme Court's long-standing hostility towards arbitration." the water and sewer institute said.
The purpose of arbitration agreements, which call for parties to submit to a private arbitrator rather than the courts to resolve disputes, is to provide certainty about remedies, lessen litigation costs and delays, and ultimately lower consumer costs, said attorney H. Bartow Farr 3d at yesterday's argument. Farr represents Terminix.
The facts of the case involve a contract entered into by an Alabama couple to purchase a termite protection plan from Allied-Bruce Terminix Companies, which does business in eight states. When the couple sold their home, they and Terminix certified that the home was free of termites, but the new owners shortly discovered termites.
The new owners, Michael and Wanda Dobson, sued the previous owners and Terminix on grounds they were liable for fraud. A trial court rejected a motion by Terminix to force the Dobsons to arbitrate the dispute under the termite protection contract.
The lower court was upheld by the Alabama Supreme Court, which held that the arbitration clause was not enforceable because interstate commerce was not involved.
At yesterday's oral argument, Farr said the Alabama ruling "embodies precisely the sort of hostility to arbitration" that led to passage of the Federal Arbitration Act in the first place. The act should be broadly construed to apply to any contract with an arbitration clause that affects interstate commerce, he said.
The Terminix contract clearly affects interstate commerce because Terminix is an interstate company and the spray used to eradicate the termites was made outside of Alabama, Farr said.
Attorney Allan R. Chason of Bay Minette, Ala., who represents the Dobsons, said Congress could not have meant to reach so far that it would regulate a termite protection contract in Alabama.
The commerce clause prohibits states from erecting barriers to interstate commerce unless expressly authorized to do so by Congress. In this case, under the Alabama standard, the Dobsons did not contemplate interstate commerce activity when they took over the termite contract from the previous owners, he said. They should therefore be free to sue in court, he said.
States that adopt narrow standards like Alabama's are seeking to protect consumers that often lack bargaining power in signing boilerplate contracts like the termite protection plan, Chason said.
The Terminix view that any contract affecting interstate commerce is enforceable under the federal act "would sweep all of that aside," Justice O'Connor said of the state protections. "We had a narrower view of commerce clause power in 1925" than the Terminix view, she said.