Morris Manning & Martin, LLP

HASSETT’S OBJECTIONS Arbitration and the Choice of Law Clause

09.04.2015

The Federal Arbitration Act generally governs the enforcement of arbitration clauses in contracts involving interstate commerce. 9 U.S.C. § 2. A state arbitration code generally governs arbitrations of contracts not involving interstate commerce. In Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., the U.S. Supreme Court held that the parties may choose to proceed under state arbitration law, interstate commerce notwithstanding. 489 U.S. 468, 479 (1989).  The agreement in Volt, contained a broad arbitration clause and a separate choice-of-law clause providing that “[t]he Contract shall be governed by the law of the place where the Project is located.” Id. at 470. The Court held that “the parties . . . agreed to abide by state rules of arbitration, [and] enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA . . .” Id. at 479.

Since Volt, courts have addressed whether particular choice of law clauses invoke a state arbitration code. The question is easy when the clause expressly incorporates the Federal Arbitration Act or a state’s arbitration code. See Aviation Data, Inc. v. American Express Travel Related Services Co., Inc., 62 Cal. Rptr. 3d 396 (Cal. App. 1st Dist. 2007) (holding that a contract that included a choice-of-law provision as well as a provision stating that arbitration “shall be governed by the Federal Arbitration Act” should be governed by the FAA); Autonation Fin. Servs. Corp. v. Arain, 592 S.E.2d 96 (Ga. Ct. App. 2003) (holding that a contract that contained a Georgia choice-of-law provision and a clause providing “all parties to this contract specifically acknowledge and agree that this contract evidences a ‘transaction involving interstate commerce’ under the Federal Arbitration Act” made clear the parties’ intent that the contract be governed under the FAA); Ford v. Nylcare Health Plans, 141 F.3d 243 (5th Cir. Tex. 1998) (holding that Texas law and the Texas General Arbitration Agreement govern the scope of an arbitration clause that stated, “Any controversy . . . shall be settled by arbitration in accordance with the Texas General Arbitration Act . . .”).

The question is more difficult when the contract simply states that it should be construed under the law of a particular state. At least eleven cases have addressed this question during 2015, and they are difficult to reconcile. For example, in White v. Turnberry Homes, LLC, the court considered a contract that included an arbitration clause and a separate Tennessee choice-of-law provision, and ultimately held that Tennessee law applied. White v. Turnberry Homes, LLC, No. M2014-01858-COA-R3-CV (Tenn. Ct. App. May 28, 2015). Likewise, in Maxim Marketing Corp. v. Trader Joe’s Co., the parties had signed a contract that included an arbitration provision and a choice-of-law provision stating, “[t]his Agreement . . . shall be governed by and construed in accordance with the laws of the State of California.” Maxim Mktg. Corp. v. Trader Joe’s Co., No. B258308 (Cal. App. 2d Dist. June 12, 2015). The court held that while the FAA typically governs arbitration provisions in contracts involving interstate commerce, because the contract provided that disputes would be “governed by” California law, they would apply the California Arbitration Act. Id. at *10-11.

Other recent cases were decided in the other direction. In Infinity Fulfillment Group v. Cenveo Corp., No. 14CV966 SNLJ (E.D. Mo. June 19, 2015), the court was faced with a contract that included an arbitration clause and a separate Missouri choice-of-law clause. In deciding whether the Federal Arbitration Act or the Missouri Uniform Arbitration Act should apply, the court reasoned, “[m]ost contracts include a choice-of-law clause, and, thus if each of these clauses were read to foreclose the application of the substantive law enacted by Congress in the FAA, the FAA would be applicable in very few cases.” Id. at *11. (quoting Decker v. Bookstaver, 2010 U.S. Dist. LEXIS 52428, at *7-8 (E.D. Mo. May 26, 2010)). The court also noted that the “choice-of-law clause . . . is separate from the arbitration clause . . .” Id. But see Trader Joe’s, supra, at *2, 11 (the contract contained a choice-of-law clause within the arbitration clause. The court held that the choice-of-law clause required state arbitration law to govern.). The court in Infinity held that it was not “abundantly clear” that the parties intended to proceed under Missouri’s arbitration law and, therefore, the FAA governed. Id. at *12-13. Similarly, in Riniker v. UnitedHealth Group, Inc., the court considered a contract that included an arbitration agreement and a separate choice-of-law provision. Riniker v. UnitedHealth Group, Inc., No. 12-cv-2875 (D. Minn. Apr. 20, 2015). The court held that a “generic choice-of-law clause is not sufficient to support an inference that parties intended for a state arbitration statute to apply[,]” and therefore the FAA applied. Id. at *8.

The question is not merely theoretical, but carries practical consequences. For example, some states bar the enforcement of an arbitration clause under circumstances where the FAA would enforce the clause. See White v. Turnberry, supra (Tennessee does not permit arbitration of contract formation issues); Pate v. Melvin Williams Manufactured Homes (In re Pate), 198 B.R. 841 (Bankr. S.D. Ga. 1996) (“Agreements to arbitrate disputes arising out of consumer transactions are not enforceable under the Georgia Arbitration Act.”); Phillippy v. ANB Fin. Servs., LLC, 386 S.W.3d 553 (Ark. Ct. App. 2011) (“. . . the Arkansas  Uniform Arbitration Act expressly excludes employer-employee disputes.”); Ex parte Messer, 509 S.E.2d 486 (S.C. Ct. App. 1998) (The controlling South Carolina arbitration statute, S.C. Code Ann. § 15-48-10 “exclude[s] certain types of claims from the Uniform Arbitration Act, including workers’ compensation claims, unemployment compensation claims, and collective bargaining disputes between employers and employees. Also excluded are lawyer-client and doctor-patient agreements, personal injury claims, and claims based on insurance or annuity contracts.”) citing S.C. Code Ann. § 15-48-10; Optimer Int’l, Inc. v. RP Bellevue, LLC, 214 P.3d 954 (Wash. Ct. App. 2009) (The legislature provided that the Arbitration Act “does not apply to any arbitration agreement between employers and employees or between employers and associations of employees.”) quoting Wash. Rev. Code Ann. § 7.04A.030; Ga. Code Ann. § 9-9-13 (Georgia expressly allows an award to be vacated for manifest disregard of law); Ga. Code Ann. § 9-9-13 (Georgia permits a stay of the arbitration or a vacation of the award “[i]f a claim sought to be arbitrated would be barred by limitation of time had the claim sought to be arbitrated been asserted in court . . .”).  

In many circumstances, the choice of arbitration law makes a difference.  The courts will continue to address the issue on an ad hoc basis.

1 Lew acknowledges and appreciates the valuable assistance of summer associate Lauren Dugas in preparing this article.