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S8 | MONDAY, MARCH 31, 2014 | Alternative Dispute Resolution
| NYLJ.COM

Boundaries of the FAA

And Reverse Preemption

Under the McCarran-Ferguson Act

OCK
GST
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See Scherk v. Alberto-Culver, 417 U.S. 506, islatures and consumer groups against the arbitration clauses on these grounds. Recog-
BY ALEXANDER D. HARDIMAN 511 (1974).
inability of state legislatures to restrict the nizing the fact that parties may not have equal
AND PETER A. HALPRIN
The excerpt outlines two crucial concepts use or terms of arbitration agreements under bargaining power, courts that have refused to
that have underpinned judicial interpretations state law because of the FAA. One area in enforce arbitration agreements have primarily
T he Federal Arbitration Act ensures that of the FAA. First, the FAA is a declaration of particular—insurance and the McCarran-Fer- permitted the relatively weaker party to an

arbitration agreements are enforceable. the “national policy favoring arbitration,” and guson Act—may offer a blueprint for those arbitration agreement to avoid arbitration on
Except when they’re not.
the FAA generally will preempt state laws groups to advocate for reform in other areas.
the grounds of fairness and unconscionability.
Writing in 1974, Supreme Court Justice Pot- that restrict arbitration or mandate terms Fairness and Unconscionability. Courts
ter Stewart described the intent and purpose in arbitration agreements that conflict with Challenging Arbitration Agreements
have refused to compel arbitration where the
of the Federal Arbitration Act (the FAA) as the FAA. See Southland v. Keating, 465 U.S. stronger party sets up a dispute resolution
follows:
1, 10 (1984); (“liberal federal policy favoring There are a number of contractual and process “utterly lacking in the rudiments of
Reversing centuries of judicial hostility arbitration agreements”); Moses H. Cone equitable defenses that parties have used even-handedness.” Hooters of Am. v. Phillips,
Mem’l Hosp. v. Mercury Constr., 460 U.S. 1, to successfully avoid arbitration.
173 F.3d 933, 935 (4th Cir. 1999).
to arbitration agreements, [the Act] was 24 (1983). Second, despite this strong policy, The advantages of arbitration are well In Hooters, a former Hooters bartender
designed to allow parties to avoid “the
costliness and delays of litigation,” and a party seeking to avoid arbitration is entitled known. One of the foremost advantages— threatened to sue Hooters for alleged sexual
to place arbitration agreements “upon to assert the full gamut of contractual and party autonomy—demonstrates the con- harassment suffered during her tenure as an
the same footing as other contracts... .” equitable defenses. See 9 U.S.C. §2; Walker v. tractual nature of arbitration. Arbitration employee. Hooters responded that the for-
Accordingly, the Act provides that an Ryan’s Family Steak Houses, 400 F.3d 370, 377 facilitates party autonomy in that it allows mer employee was required to submit her
arbitration agreement ... . “shall be valid, (6th Cir. 2005) (“Thus, generally applicable parties broad freedom to agree upon the claims to arbitration. Hooters then filed suit
irrevocable, and enforceable, save upon state-law contract defenses like fraud, forg- rules and procedures applicable to their to compel arbitration.
such grounds as exist at law or in equity ery, duress, mistake, lack of consideration or arbitration. See Gary B. Born, “International The Hooters arbitration program condi-
mutual obligation, or unconscionability, may Arbitration: Law and Practice” 12-13 (2012). tioned employee eligibility for raises, trans-
for the revocation of any contract.”
invalidate arbitration agreements.”).
However, this advantage can only truly be fers, and promotions on employees signing
Although the trend in dispute resolution enjoyed where the parties to an arbitration an agreement to arbitrate employment-
is the proliferation of arbitration clauses into agreement enjoy equal bargaining power and related disputes. The agreement provided
ALEXANDER D. HARDIMAN is a shareholder and PETER all aspects of agreements in the consumer the ability to freely negotiate its terms. As the that the resolution of claims would be in
A. HALPRIN is an attorney in Anderson Kill’s insurance goods, products and service industries, there use of arbitration clauses has proliferated in conjunction with rules promulgated by the
recovery group.
has been growing resistance from some leg-
recent years, so too have the challenges to
company. When the agreement was provided