The Court rules that the FAA is applicable to wholly intrastate consumer claims.

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Allied-Bruce Terminix Cos., Inc. et al v. Dobson, 513 U.S. 265 (1995)
 

Relevant Facts: A homeowner contracted with an exterminator to inspect and protect his home from termites. The contract included both a lifetime guarantee and an arbitration clause. The homeowner decided to sell his house. The exterminator was called to the home to inspect and guarantee that the home was pest-free, which they did. The homeowner sold the house to a buyer. Shortly thereafter, the buyer discovered termites everywhere. The buyer sued the homeowner and extermination company. The company moved to compel the buyer’s suit into arbitration based on the forced arbitration clause in the contract with homeowner. The company’s motion to compel arbitration was denied at both the district court and appellate court levels.

 

Question Before The Court: Whether the Federal Arbitration Act (FAA) applies to wholly intrastate consumer contracts.

 

The Opinion: The petitioner directly called on the Court to overturn its 1984 opinion in Southland Corp. v. Keating, 465 U.S. 1 (1984), where the Court had ruled that the FAA preempts certain state laws and ruled that state courts must order arbitration under the FAA unless an exception applies. Instead, the Court here doubled down on, and went further, than the Southland Court in holding that states are not free to apply anti-arbitration law or policy.

 

The majority reasoned that Section 2 of the FAA is rooted in Congress’ Commerce Clause power, and should be applied using the modern understanding of the limits of the commerce clause, and not as the legislature understood the power to exist at the time the FAA was passed in 1925. The Court then expressly prohibited states from limiting the enforcement of arbitration clauses, declaring, “States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or inequity for the revocation of any contract.’ What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the Act’s language and Congress’ intent.”

 

With this case, the Court fully committed to enforcing forced arbitration clauses in adhesive consumer contracts. Relying on its modern commerce clause analysis, the Court held that if the transaction involved interstate commerce in fact, then the FAA will apply to the contract. Even though the contract here was for extermination services on a stationary home, as the company used materials obtained through interstate commerce to conduct those services, the tangential relationship to interstate commerce was enough in the Court’s view to render the contract subject to the FAA.

 

In his dissent Justice Clarence Thomas rebuked the majority’s opinion, arguing, among other things, that the FAA does not apply to states at all, that the FAA itself in no way supports this outcome, and that the Court was now just making up new FAA rules as they go along, independent of congressional intent or legislative text. These arguments clearly failed to persuade, as the Court relied on its majority opinion here to support its 2001 holding in Circuit City v. Adams, which vastly expanded the reach of the FAA to cover nearly all contracts of employment.

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