Court Finds Home Inspection Agreement Involves Interstate Commerce, Thus Triggering FAA Instead Of State Arbitration Statute

Those confronting issues that would be decided differently under the Federal Arbitration Act than their state arbitration law may be interested in the Vermont Supreme Court’s decision in Masseau v. Luck.

The question of federal or state law was outcome determinative in that Vermont law provides that an arbitration agreement, to be enforceable, must contain a “written acknowledgement that provides ‘substantially’ as follows:

I understand that (this agreement/my agreement with _ of _) contains an agreement to arbitrate. After signing (this/that) document, I understand that I will not be able to bring a lawsuit concerning any dispute that may arise which is covered by the arbitration agreement, unless it involves a question of constitutional or civil rights. Instead, I agree to submit any such dispute to an impartial arbitrator.

The court held that the FAA–which does not require such an acknowledgment–controlled because, “although this is a close case,” “the home-inspection contract between the parties does substantially affect interstate commerce for two reasons. First, the home inspectors “operated their business pursuant to a franchise agreement with a company located outside of Vermont.” Second, “[h]ome inspections are frequently preconditions to securing financing to buy a house, and are accordingly integral to the real estate market.”

Thus, according to the court, even though “there is no dispute that the parties’ contract took place in intrastate commerce,” the operative question was “whether the transaction affects interstate commerce.” Because according to the court it did, the Vermont requirement that a party acknowledge its awareness of an arbitration provision was pre-empted by the FAA.

The court’s opinion engendered a concurrence, acknowledging the correctness of the pre-emption holding based on United States Supreme Court precedent, but questioning whether this result, in a normative sense, was appropriate:

“[I]n this case, there is scant evidence to suggest that the parties’ contract implicates interstate commerce. The record reflects that the contract’s only connection to interstate commerce is that defendant inspector operates its business under a franchise agreement with a company located outside of Vermont. But the parties to the contract—the homeowner and the individual hired to perform the inspection—are Vermont residents. The contract was signed in Vermont and the work was to take place within Vermont’s borders. Yet we cannot conclude that home inspections, in the aggregate, do not substantially affect interstate commerce. So, the FAA applies and preempts Vermont law. While the majority outcome is consistent with the United States Supreme Court’s FAA jurisprudence, I write to make the point that the FAA when passed by Congress was not originally intended to preempt state law in such situations.”

Inviting further jurisprudence–or perhaps Congressional action–the concurrence also noted:

“The result is inconsistent with principles of federalism and harmful to consumers. Under these decisions, ‘federal courts have increasingly policed, and struck down . . . safeguards on arbitration passed by state legislatures’” … State notice requirements, which have been adopted by ‘a mix of traditionally conservative and liberal’ states, are intended to protect consumers and parties with unequal bargaining power by ensuring that they knowingly agree to arbitrate any disputes and forego rights they would have in court. … As the Montana Supreme Court explained, these requirements do not prevent parties from entering into arbitration agreements or otherwise undermine arbitration agreements. Such protections simply do not conflict with the FAA.”

With arbitration coming increasingly under the legislative microscope, opinions such as Masseau may serve to encourage those seeking to amend the FAA.

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