FAA Pre-emption:Texas Supreme Court Clarifies FAA Pre-emption of Texas Arbitration Act (Web)

In In re D. Wilson Const. Co., 2006 WL 1792021 (Tex. June 30, 2006) (available at http://www.supreme.courts.state.tx.us/historical/2006/jun/050326.htm), the Texas Supreme Court clarified precisely when the Federal Arbitration Act (FAA) preempts the Texas Arbitration Act (TAA), noting that many Texas appeals courts wrongly view the FAA and the TAA as mutually exclusive.

The underlying contracts involved a school district and two general contractors. Their contract expressly incorporated AIA Document A201, a standard construction industry contract containing a broad arbitration agreement incorporating any controversy or claim arising out of or related to the contract or its breach, such claims to be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association.

A subcontractor involved in a personal injury action sought injunctive relief to preserve evidence against the school district, after which the school district filed third-party actions against several parties, including the general contractors as well as other subcontractors.

The subcontractor and third party defendants moved to compel arbitration.  After the trial court had denied the movants’ motion to compel arbitration, they filed both a petition for writ of mandamus under the FAA and an interlocutory appeal under the TAA.

The Texas Appeals Court for the Thirteenth District consolidated the two proceedings and dismissed the interlocutory appeal on the ground that it lacked jurisdiction over it, the TAA being inapplicable since the construction contracts involved interstate commerce and denied the writ after agreeing with the trial court that the contract was ambiguous.

In the appeal to the Texas Supreme Court, the movants complained that:

-the Appeals Court erred in dismissing their interlocutory appeal for want of jurisdiction under the TAA, and

-the trial court erred in deeming the arbitration agreements ambiguous and abused its discretion in denying their motions to compel arbitration.

The opinion of the Texas Supreme Court noted that many appeals courts wrongly view the FAA and TAA as mutually exclusive, while the US Supreme Court and the Texas Supreme Court held the FAA only preempts state law when it actually conflicts with federal law.

There is no tension between the federal and state procedures if state courts review by mandamus an order that the federal courts would review by interlocutory appeal. Nevertheless, it is quite different when state courts review an order by mandamus that the federal courts could not review at all, because it would contravene the legislative intent behind the FAA. (In re Olga Palacios, 2006 WL 1791683 (Tex. June 30, 2006)), available at http://www.supreme.courts.state.tx.us/historical/2006/jun/050038.pdf

The FAA generally permits immediate appeal of orders not favoring arbitration, while it prevents appeal of interlocutory orders favorable to arbitration.

The opinion also states that “for the FAA to preempt  the TAA, state law must refuse to enforce an arbitration agreement that the FAA would enforce, either because (1) the TAA has expressly exempted the agreement from coverage, or (2) the TAA has imposed an enforceability requirement not found in the FAA”.

The FAA does not preempt the TAA in this case, because the parties did not assert anything in the TAA or other state law that would thwart the enforcement of the agreements at issue. Therefore, the Appeals Court had jurisdiction under both laws.
 
The Texas Supreme Court decided the merits of the case under the mandamus jurisdiction. The writ of mandamus was granted and the trial court was directed to vacate its order denying arbitration. 
 

-- Zoltan Elek, CPR Intern
 

Keywords: Arbitration