State Laws Aimed At Arbitration Contracts Preempted

State Laws Aimed At Arbitration Contracts Preempted

BRADLEY v.HARRIS RESEARCH, INC., No. 00-16021 (9th Cir., 12/28/01):

Chem-Dry is a well-known provider of carpet cleaning services and HRI is a Utah corporation that franchises these outlets. HRI granted a Chem-Dry franchise to the Bradleys in 1983 and, in the Franchise Agreement, provided for five-year renewal anniversaries that, while “automatic,” required the Bradleys to update to a “then current Franchise Agreement.”

By 1998, the standard Agreement contained an arbitration clause requiring disputes to be arbitrated in Utah, but the Bradleys objected, when a dispute arose. They sought a declaratory judgment that California Business & Professions Code, §20040.5, which requires a California situs for franchisees, was violated by the 1998 Agreement, rendering it unenforceable.

HRI countered by asserting the FAA and arguing that it preempted the local statute. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996) is instructive on the issue of preemption in a franchise context, the Court observes, although the conflict between the FAA and the Montana statute at issue was somewhat more clear. The Montana statute was aimed at franchise arbitration clauses specifically; §20040.5, part of the California Franchise Relations Act, was aimed at franchise forum selection clauses, without specific reference to arbitration. “It is possible,” the Ninth Circuit reasons, “to construe the Supreme Court’s holding in Doctor’s Assocs., as being limited to state statutes that ‘single out’ arbitration provisions, as opposed to statutes that affect both arbitration and litigation; however, the Court’s reasoning is based on the principle that only state law that addresses the enforcement of ‘contracts generally’ is not preempted by the FAA.”

Accordingly, the Court holds that “a state law that invalidates arbitration agreements is not preempted by the FAA only if the law is generally applicable” …or applies to ‘any contract’” and, on this basis, enforces the Utah situs and the requirement to arbitrate.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.