Boundaries of the FAA And Reverse Preemption Under the McCarran-Ferguson Act

New York Law Journal

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PUBLISHED ON: April 9, 2014

The Federal Arbitration Act ensures that arbitration agreements are enforceable. Except when they’re not. Writing in 1974, Supreme Court Justice Potter Stewart described the intent and purpose of the Federal Arbitration Act (the FAA) as follows:

Reversing centuries of judicial hostility to arbitration agreements, [the Act] was designed to allow parties to avoid “the costliness and delays of litigation,” and to place arbitration agreements “upon the same footing as other contracts… .” Accordingly, the Act provides that an arbitration agreement … . “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

See Scherk v. Alberto-Culver, 417 U.S. 506, 511 (1974).

The excerpt outlines two crucial concepts that have underpinned judicial interpretations of the FAA. First, the FAA is a declaration of the “national policy favoring arbitration,” and the FAA generally will preempt state laws that restrict arbitration or mandate terms in arbitration agreements that conflict with the FAA. See Southland v. Keating, 465 U.S. 1, 10 (1984); (“liberal federal policy favoring arbitration agreements”); Moses H. Cone Mem’l Hosp. v. Mercury Constr., 460 U.S. 1, 24 (1983). Second, despite this strong policy, a party seeking to avoid arbitration is entitled to assert the full gamut of contractual and equitable defenses. See 9 U.S.C. §2; Walker v. Ryan’s Family Steak Houses, 400 F.3d 370, 377 (6th Cir. 2005) (“Thus, generally applicable state-law contract defenses like fraud, forgery, duress, mistake, lack of consideration or mutual obligation, or unconscionability, may invalidate arbitration agreements.”).

Although the trend in dispute resolution is the proliferation of arbitration clauses into all aspects of agreements in the consumer goods, products and service industries, there has been growing resistance from some legislatures and consumer groups against the inability of state legislatures to restrict the use or terms of arbitration agreements under state law because of the FAA. One area in particular—insurance and the McCarran-Ferguson Act—may offer a blueprint for those groups to advocate for reform in other areas.