The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., does not contain an express preemption provision, nor was it intended to be the exclusive codified arbitration law in all circumstances. However, the United States Supreme Court has repeatedly taught that where the FAA applies, it is deemed to supersede state laws that are inconsistent with its provisions and purposes. Yet recent decisions by the highest courts of North Carolina and New Hampshire provide examples of continued efforts by state courts to chip away at the preemptive effect of the FAA concerning the interpretation and enforcement of arbitration agreements and the confirmation or vacatur of arbitral awards.
The United States Supreme Court is not amused. Only last week, it in effect took the Kentucky Supreme Court to task for failing to give an arbitration agreement the same legal respect that would be given to other contracts, and indeed for doing so based on the essential nature of an arbitration agreement. See Kindred Nursing Centers L.P. v. Clark, 2017 U.S. LEXIS 2948 (May 15, 2017). In Kindred, the U.S. Supreme Court condemned a Kentucky Supreme Court decision that disfavored an arbitration agreement because of its defining feature – i.e., in choosing arbitration, the parties exclude a jury trial as a means of dispute resolution. The state court had held that an arbitration agreement was invalid because a power of attorney that authorized one of the parties to sign did not specifically grant the signatory the “right” to enter into an arbitration agreement, and that that was critical because such an agreement would in effect waive the “sacred” state constitutional right to a jury trial. The United State Supreme Court, in a 7-1 decision, had little difficulty in disposing of that reasoning. Justice Kagan, writing for the majority, reiterated that the FAA preempts any state law that discriminates against arbitration on its face, and also held that the FAA preempts “any [state] rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”
When Congress enacted the FAA in 1925, courts generally interpreted it as a procedural law applicable only in the federal courts, while states largely regulated arbitration by means of contract law. However, nearly six decades after enactment of the FAA, the Supreme Court indicated that it was actually substantive law, see Southland Corp. v. Keating, 465 U.S. 1 (1984), and thus changed the arbitration landscape. Consequently, for example, when the FAA applies, state contract laws generally govern the validity and interpretation of arbitration agreements, but only insofar as such state law does not treat such agreements differently from any other agreement.
State courts have nevertheless sought from time to time to chip away at this preemption principle. Here are a couple of recent examples.
The North Carolina Decision
In King v. Bryant, 795 S.E.2d 340 (N.C. 2017), the Supreme Court of North Carolina declined to enforce an arbitration agreement between a surgeon and patient, finding that the physician had obtained the agreement by breaching his fiduciary duty to the patient. The patient had brought a medical malpractice suit against the surgeon, and the surgeon sought to compel arbitration by enforcing an arbitration agreement that provided that the FAA would govern and that the health care dispute procedures of the American Arbitration Association (“AAA”) would apply.
The North Carolina trial court (the Superior Court) refused to compel...
