Several times over the past few months, I’ve discussed in this blog court decisions underscoring my belief that more and more state courts now “get it” on Federal Arbitration Act preemption of state laws impinging on arbitration. Two recent decisions by state supreme courts underscore this now undeniable trend.
Washington and Crop Insurance
The first case is Weidert v. Hanson, issued September 12. This case involved a predispute arbitration agreement (“PDAA”) contained in a crop insurance contract. Weider, a farmer, suffered a crop loss as a result of a drought, and brought a law suit in court against the agent who sold him the policy, and eventually the insurance company. The dispute centered on Weidert’s allegation that he was not provided adequate coverage, and that he overplanted based on the insurer’s analysis on his projected crop yields. The insurer moved in court to stay the lawsuit and compel arbitration. Both the trial court, sitting as a court of equity, and the Court of Appeals declined to order arbitration, as a matter of general equity and “in the interest of judicial efficiency.”On appeal the Washington Supreme Court, sitting en banc, reversed, based on FAA preemption. The court examined section 2 of the FAA, which states:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The court found that the phrase “at law or in equity for the revocation of any contract” means that a PDAA can be challenged based on “general contract defenses such as fraud, duress, or unconscionability.” However, the court held there is nothing in the FAA that permits a court to “ignore an otherwise valid arbitration agreement on equitable grounds.” In other words, defeating a PDAA on the general ground of equity will not work; a challenging party must assert a specific equitable ground such fraud, duress, or unconscionability to sustain its argument that the PDAA should not be enforced.
So, where is the FAA preemption issue? The court found particularly important the fact that arbitration of crop insurance disputes is required by regulations promulgated under federal law (the Federal Crop Insurance Act, 7 U.S.C. sec. 1501).” We agree with [the insurer] that the Federal Arbitration Act prohibits a state court from ignoring a valid federally mandated arbitration clause on equitable grounds.”
Arkansas and LegalZoom.com
In LegalZoom.com, Inc. v. McIllwain, issued on October 3, a divided Arkansas Supreme Court held that the PDAA in LegalZoom’s contract with its customers was valid and enforceable, even though the underlying case involved an allegation of the unauthorized practice of law (“UPL”). As in Weidert, the court below declined to order arbitration and was later reversed.
LegalZoom’s terms of service contained a PDAA. The customer went online and ordered a Will from LegalZoom. For reasons not clear to me from reading the opinion, the customer was evidently unhappy with the product he got from LegalZoom and eventually brought a class action lawsuit (I imagine he was very unhappy), alleging that LegalZoom was engaged in the unauthorized practice of law.
LegalZoom of course then moved to compel arbitration, arguing that the FAA required the court to enforce the PDAA. The customer argued that ULP issues are traditionally matters of state law and that the LegalZoom contact, which limited its liability, was unconscionable. He further asserted that the PDAA — which was otherwise admittedly very fair – was unconscionable because it essentially ousted the state from deciding ULP issues.
The customer prevailed at the trial court level, but lost at the state Supreme Court level. The court held that the trial court had “looked to the overall allegation concerning the unauthorized practice of law and not to any specific aspect of how it affected the arbitration clause” which is clearly contra to recent U.S. Supreme Court rulings on who decides whether a claim is arbitrable.
Further, said the court, “… to the extent that the circuit court based its decision on its conclusion that determining whether LegalZoom.com engaged in the unauthorized practice of law was a unique type of claim that was not susceptible to arbitration, that rationale was also rejected by the Supreme Court.” Finally, the court observed that nothing in the PDAA usurped the state from pursuing the ULP allegation. To underscore that point, the court directed the clerk to send a copy of its opinion to the state committee on ULP. The dissent would have upheld the trial court, based on the state’s inherent authority to deal with ULP issues.
“We Get It”
What is particularly noteworthy here is that the Washington Supreme Court, which previously had been somewhat hostile to arbitration, now seems to have gotten the message from the U.S. Supreme Court on FAA preemption. I expect other state courts to do the same thing when the opportunity arises.
 Interestingly, the PDAA requires that the customer print out and mail the claim form to LegalZoom, which I find kind of strange given that LegalZoom is on online company. Just sayin’….