Opinion ID: 1780860
Heading Depth: 3
Heading Rank: 1

Heading: Applicability of the FAA to Determinations of Waiver

Text: ¶ 92. A preliminary issue which must be addressed is the application of § 3 in state courts. Section 3 refers to any of the courts of the United States. Maryland's highest court has read this reference as limiting § 3 to the federal courts. Wells v. Chevy Chase Bank, F.S.B., 363 Md. 232, 768 A.2d 620, 625-26 (2001). ¶ 93. The U.S. Supreme Court has never reached the issue of whether § 3 (and § 4, which refers to any United States district court) are binding on the states. In Southland Corp. v. Keating , the Court noted in passing that we do not hold that §§ 3 and 4 of the [Federal] Arbitration Act apply to proceedings in state courts. Section 4, for example, provides that the Federal Rules of Civil Procedure apply in proceedings to compel arbitration. The Federal Rules do not apply in such state-court proceedings. Southland Corp., 465 U.S. at 16 n. 10, 104 S.Ct. 852. Five years later, the Court observed that Southland Corp. had expressly reserv[ed] the question whether those sections applied in state courts. Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 476 n. 6, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). The Volt Court did not reach the question either, observing that we need not resolve it to decide this case. Id. at 477, 109 S.Ct. 1248. ¶ 94. In neither Southland Corp. nor Volt did the Court mention its footnote in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), in which the Court stated: Although § 3 refers ambiguously to a suit in any of the courts of the United States, the state courts have almost unanimously recognized that the stay provision of § 3 applies to suits in state as well as federal courts, requiring them to issue the same speedy relief when a dispute is referable to arbitration. (The North Carolina Supreme Court has so held, although not until after the District Court ordered this stay. Burke County Public Schools Board of Education v. Shaver Partnership, 303 N.C. 408, 279 S.E.2d 816 (1981).) This is necessary to carry out Congress's intent to mandate enforcement of all covered arbitration agreements; Congress can hardly have meant that an agreement to arbitrate can be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues on the same dispute in state court. See also Prima Paint, 388 U.S., at 404, 87 S.Ct., at 1806. 460 U.S. at 27 n. 34, 103 S.Ct. 927 (emphasis added). I note especially the language that the application of § 3 to state courts is necessary to carry out Congress's intent. The citation to Prima Paint likewise points us to the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts. 388 U.S. at 404, 87 S.Ct. 1801. Insofar as § 3 fulfills that intent and that purpose, it must be binding on the states, since Southland Corp. held that Congress overrode state law insofar as necessary to implement its national policy favoring arbitration. Southland Corp., 465 U.S. at 10, 104 S.Ct. 852. ¶ 95. The Texas Supreme Court has interpreted note 34 to Moses H. Cone as applying § 3 to state courts. In re Bruce Terminix Co., 988 S.W.2d 702, 704 n. 2 (Tex.1998). The Florida Supreme Court has approved the decision of one of its intermediate courts that § 3 applies to state courts. See Merrill Lynch Pierce Fenner & Smith v. Melamed, 405 So.2d 790, 793 (Fla.Dist.Ct.App.1981), aff'd, 476 So.2d 140 (Fla.1985). See also Wolff v. Fid. Brokerage Servs., Inc., 2002 WL 31382606, at  (Mass.Super.Ct. Sept. 5, 2002); Stokes v. Metro. Life Ins. Co., 351 S.C. 606, 571 S.E.2d 711, 715 (2002). ¶ 96. Although this Court has never addressed the issue of § 3's applicability, we have repeatedly cited federal law with regard to waiver of arbitrability. In this Court's recent decision in Russell v. Performance Toyota, Inc ., we stated that a party waives arbitration if it substantially takes advantage of the judicial process and quoted the Fifth Circuit for the rule that to establish a waiver, the objector to arbitration must establish `that a party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.' Russell, 826 So.2d at 724 (quoting Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir.1999)) (emphasis added). See Cox v. Howard Weil, Labouisse, Friedrichs, Inc., 619 So.2d 908, 913-14 (Miss.1993) (applying FAA and federal case law for rule that a party defaults on or waives a demand for arbitration under the Federal Arbitration Act when that party `actively participates in a lawsuit or takes other action inconsistent with [the right to arbitration]' ); see also Univ. Nursing Assocs., PLLC v. Phillips, 842 So.2d 1270, 1276-77 (Miss.2003) (relying on cases interpreting FAA, even while skeptical of whether FAA applicable to instant facts). ¶ 97. The decisive consideration, however, is that the substantive provisions of the FAA (which are expressly binding on state courts) are frequently enforceable only in state courts. As the Fifth Circuit recently reiterated, there is no independent federal subject-matter jurisdiction under the FAA. Bank One, N.A. v. Shumake, 281 F.3d 507, 513 (5th Cir.2002). Hence, where no diversity or federal-question jurisdiction exists, parties seeking to enforce the FAA will have no choice but to turn to state courts for relief. As the Florida court in Melamed correctly stated: Fairness, logic, and constitutional constraints require us to enforce federal rights in state courts whenever Congress allows. Congress has allowed state courts to enforce federal arbitration rights, and has made state courts the exclusive forum for vindication of those rights except in those instances when the litigant can invoke federal jurisdiction on some independent ground. We should not and cannot make the substance of a federal right depend on the fortuity of the existence of an independent ground of federal jurisdiction. Melamed, 405 So.2d at 793 (emphasis added). The FAA creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate. Moses H. Cone, 460 U.S. at 25 n. 32, 103 S.Ct. 927. As the Tennessee Supreme Court has observed, in holding that this body of federal substantive law is binding on the states: To rule otherwise would permit and even encourage forum shopping, prevent and undermine the need for nationwide uniformity in the interpretation and application of arbitration clauses in foreign and interstate transactions, and permit individuals to circumvent the national law relating to arbitration agreements called for by the Federal Arbitration Act. Tenn. R. Pulp & Paper Co. v. Eichleay Corp., 637 S.W.2d 853, 857 (Tenn.1982). ¶ 98. These considerations would, I think, strongly influence the U.S. Supreme Court if and when it is squarely confronted with the applicability of § 3 to the states. The Court's statement in Moses H. Cone that Congress can hardly have meant that an agreement to arbitrate can be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues on the same dispute in state court suggests that it would not allow the determination of whether or not a suit can be arbitrated to hang upon which court a party petitions for a stay. And as the Court remarked in Southland Corp., since the overwhelming proportion of all civil litigation in this country is in the state courts, it would encourage and reward forum shopping to allow the choice of forum to be effectively determinative of whether arbitration can be enforced. 465 U.S. at 15, 104 S.Ct. 852. We are unwilling to attribute to Congress the intent, in drawing on the comprehensive powers of the Commerce Clause, to create a right to enforce an arbitration contract and yet make the right dependent for its enforcement on the particular forum in which it is asserted. Id. ¶ 99. In its arbitration decisions after Southland Corp. and Volt, the U.S. Supreme Court has repeatedly reiterated its broad support for arbitration, with an overall tendency of expanding, not curtailing, the reach of the FAA. In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991), the Court held that statutory claims are arbitrable, rejecting any arguments that arbitration was in any way defective in protecting the civil rights of claimants. In Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995), the Court put the broadest possible construction on the FAA's application to transaction[s] involving commerce, confirming that the FAA reaches to the farthest extent of Congressional power under the Commerce Clause. In Casarotto, as we have seen, the Court affirmed the states' limited power to invalidate arbitration clauses under § 2 while declaring invalid any state laws that would undermine the goals and policies of the FAA. Casarotto, 517 U.S. at 688, 116 S.Ct. 1652 (quoting Volt, 489 U.S. at 478, 109 S.Ct. 1248). And in Circuit City Stores, Inc. v. Adams, as I have noted above, this Court held that the FAA applies to nearly all employment contracts. Given the Court's much broader application of the FAA in the almost 20 years since Southland Corp., I find it highly implausible that the Court would take a giant leap backwards by holding that states need not consider themselves bound to follow § 3. ¶ 100. This point is missed by the Fifth Circuit when it conclude[s] from the Supreme Court's opinions that state courts do not necessarily have to grant stays of conflicting litigation or compel arbitration in compliance with the FAA's sections 3 and 4. McDermott Int'l, Inc. v. Lloyds Underwriters of London, 944 F.2d 1199, 1210-11 (5th Cir.1991). Consider parties whose dispute does not provide an independent basis for federal jurisdiction. They have agreed to arbitrate, but one party refuses. The other party cannot seek a stay in federal court, under Shumake. If the state courts can choose not to compel arbitration, then how can the FAA be said to apply to the states in any meaningful fashion? Against the Fifth Circuit's not necessarily, this Court cites the [t]his is necessary to carry out Congress' intent language of the U.S. Supreme Court in Moses H. Cone. ¶ 101. If state courts were free to create expansive definitions of waiver or default, thus defeating stay applications that would have met the federal standard, the substantive guarantees of the FAA would be denied to that great majority of aggrieved parties whose disputes do not qualify for federal jurisdiction. I cannot imagine that, upon due consideration (going beyond mere footnotes), the U.S. Supreme Court would approve such a two-tiered regime of arbitration law. To do so would eviscerate Southland Corp. ¶ 102. Therefore, and also because our Mississippi jurisprudence has long relied on the federal case law arising out of § 3, I would hold that § 3 governs applications for stays of arbitration under the FAA in our state courts. What suffices to show waiver or default under § 3, by the same token, must be neither more nor less than what suffices under federal law.