Opinion ID: 2829241
Heading Depth: 2
Heading Rank: 1

Heading: The FAA and Choice of Law

Text: The TAA renders arbitration agreements unenforceable if the agreements containing the arbitration clauses are agreements for services “in which the total consideration to be furnished by the individual is not more than $50,000” and the agreements are not in writing, signed by each party, and each party’s attorney. Tex. Civ. Prac. & Rem. Code § 171.002(a )( 2). The homeowners contend that the arbitration agreements are governed by the TAA and are unenforceable for failure to meet the two identified TAA requirements. Olshan argues that the FAA applies to the agreements and preempts the TAA’s exemption from coverage under section 171.002(a )( 2), making the arbitration clauses enforceable. See In re Nexion Health at Humble, Inc. , 173 S.W.3d 67, 69 (Tex. 2005) (per curiam ) (addressing a similar exemption under the TAA for personal injury cases). Section 2 of the FAA preempts state law that would otherwise render arbitration agreements unenforceable in a contract involving interstate commerce. 9 U.S.C. § 2; Southland Corp. v. Keating , 465 U.S. 1, 10–11 (1984). “The Act was designed to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate, and place such agreements upon the same footing as other contracts.” Volt Info. Scis ., Inc. v. Bd. of Trs . of Leland Stanford Junior Univ. , 489 U.S. 468, 474 (1989) (internal quotations omitted). We have recognized that the FAA preempts parts of the TAA, including section 171.002(a )( 2) of the Civil Practice and Remedies Code. See Jack B. Anglin Co. , 842 S.W.2d at 271 (discussing FAA’s preemption of non-waiver provision of DTPA); Nexion , 173 S.W.3d at 69 (Tex. 2005) (discussing FAA’s preemption of TAA section 171.002(a )( 3)). But the FAA does not “confer a right to compel arbitration of any dispute at any time.” Volt , 489 U.S. at 474. The FAA policy is simply to “ ensur [e] that private agreements to arbitrate are enforced according to their terms.” Id . at 479. In Volt , the Court upheld the application of a California statute that allowed a stay of arbitration proceedings pending resolution of related litigation because the contract also contained a 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 reiterated that “the FAA pre-empts state laws which ‘require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.’” Id . at 478 (quoting Southland Corp. , 465 U.S. at 10). But the FAA does not prevent the enforcement of agreements to arbitrate under different rules than those set forth in the Act itself. . . . Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted. . . . By permitting the courts to “rigorously enforce” such agreements according to their terms, we give effect to the contractual rights and expectations of the parties, without doing violence to the policies behind by the FAA. Id . at 479 (citations omitted). Subsequently, in Mastrobuono v. Shearson Lehman Hutton, Inc. , the Court held that the FAA preempted New York’s prohibition against arbitral awards of punitive damages despite a choice of law provision in an arbitration agreement that stated the agreement “shall be governed by the laws of the State of New York.” 514 U.S. 52, 63–64 (1995). The Court first stressed that the agreement would be enforced as written, stating that “the case before us comes down to what the contract has to say about the arbitrability of petitioners’ claim for punitive damages.” Id . at 58. Where the Court in Volt read the choice-of-law provision as definitively choosing state law over federal law, the Court in Mastrobuono read the provision differently: The choice-of-law provision, when viewed in isolation, may reasonably be read as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship. . . . At most, [it] introduces an ambiguity into an arbitration agreement that would otherwise allow punitive damages awards. Id . at 59, 62. Then, using FAA mandated rules of contract construction, the Court concluded that the provision should be read “to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators.” Id . at 62–64. Thus, courts treat arbitration agreements as other contracts in applying the legal rules to interpret them. The goal is to discern the true intentions of the parties, as the FAA’s primary purpose is to ensure private agreements to arbitrate are enforced according to their terms, no more, no less. Volt , 489 U.S. at 479; see also Baravati v. Josephthal , Lyon & Ross, Inc. , 28 F.3d 704, 709 (7th Cir. 1994) (Posner, C.J.) (“[S] hort of authorizing trial by battle or ordeal or, more doubtfully, by a panel of three monkeys, . . . parties are as free to specify idiosyncratic terms of arbitration as they are to specify any other terms in their contract.”).