Chapter 4 - § 4.3 • PREEMPTION OF STATE ARBITRATION LAW (CRUAA) BY FEDERAL ARBITRATION LAW (FAA)
| Jurisdiction | Colorado |
This section deals with the historical issue of what happens when state and federal law collide.12
§ 4.3.1—The Doctrine Of FAA Preemption Of State Arbitration Law
Article VI, Clause 2 of the U.S. Constitution, referred to as the "Supremacy Clause," states that the Constitution, laws of the United States, and treaties "shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any state to the contrary notwithstanding." Early in the history of the United States, the Supreme Court applied the Supremacy Clause to declare certain state laws void — preempted by the laws of the United States.13
Preemption may occur when, in federal legislation, Congress expressly states that federal law preempts state law.14 It may also occur by implication, in two ways. First, conflict preemption occurs under the Supremacy Clause when any state law that conflicts with federal law is preempted/voided.15 Second, implied preemption can occur when Congress by its legislation occupies the entire field.16
The U.S. Supreme Court stated in Southland Corp. v. Keating17 that the FAA created a body of substantive law applicable in both state and federal courts. State statutes that invalidate arbitration agreements covered by the FAA may violate the Supremacy Clause. The essence of the Supremacy Clause is to void state law contrary to or impeding implementation of federal law and policy. So, specifically as to arbitration law: when the FAA is applicable, contrary state law that restricts or limits the philosophy of the FAA is void (and perhaps more). In general, for purposes of determining whether there is preemption of state law, there are two points of possible conflict between state and federal law of arbitration:
1) The FAA promotes the resolution of claims by arbitration, whereas some state law does not, or is more restrictive; and
2) The FAA requires that arbitration agreements shall be treated the same as any other contracts. State law that singles out arbitration contracts for more restrictive treatment will be preempted.18
As discussed in § 4.2.2, the FAA applies, generally stated, when the dispute involves interstate commerce. Under the preemption doctrine, this means that while the case may be in state court, when the FAA applies, it preempts portions of otherwise applicable state law.
However, under the preemption doctrine generally (not just as to arbitration law), federal law preempts only state substantive law, and not state procedural law. When the FAA is applicable to a state-court arbitration case, traditionally only substantive law of the FAA is applied under the classic preemption doctrine. FAA substantive law displaces state substantive arbitration law. The issue becomes which arbitration laws are substantive, and which are procedural.
In the arbitration law context, the preemption doctrine generally is broader (although sometimes narrower). While a specific federal arbitration law might be "procedural," if its application is deemed necessary to promote the national policy (as evidenced by the FAA) in favor of arbitration, the procedural law might preempt a contrary state procedural law. Similarly, if the state law is not an obstacle, FAA substantive law might not preempt the state law.
Thus, the U.S. Supreme Court announced that:
Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any agreement within the coverage of the Act.19
Shortly after that Supreme Court decision, the Court declared that FAA substantive law applied and had to be enforced in state courts (when the FAA applied) as well as in federal courts.20
The Supreme Court has acknowledged that the FAA was not intended to be the sole arbitration law to the exclusion of all state law, and that states may use their own procedures to enforce the FAA dictates that arbitration agreements to which the FAA applies must be enforced unless revocable on grounds that would be applicable to any contract.21
Classic application of FAA preemption has occurred when (1) state law discriminated against arbitration agreements as compared to other contracts by requiring that in order for arbitration agreements to be valid, the agreements contain a statement about the arbitration requirement in large letters (discrimination against arbitration agreements);22 and (2) state laws prohibiting, for example, an award of punitive damages by an arbitrator were preempted by the FAA, which allows such award.23
§ 4.3.2—Expanding Scope Of FAA Preemption Of State Arbitration Law
As late as 2006, the U.S. Supreme Court noted that FAA § 2 is "the only [FAA] provision that we have applied in state court."24 This is not the case today, as additional sections of the FAA have been held to preempt state law.
Today, as to preemption of state arbitration law, and state law applied to issues of formation of contracts and defenses thereto, the U.S. Supreme Court looks to whether the state law "'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,'" a liberal federal policy favoring arbitration.25
§ 4.3.3—When Federal Arbitration Law (FAA) Preempts State Arbitration Law (CRUAA)
As discussed above at § 4.2.2, the FAA governs arbitration when the dispute involves a transaction in interstate commerce.26 However, the Act does not contain any specific preemptive provision, and, when applicable, does not occupy the entire field of arbitration law,27 at least in state courts.
Generally, if the FAA does not apply, a state arbitration act such as the CUAA or the CRUAA does. For example, when two parties enter into a consumer contract containing an arbitration clause and the transaction involves interstate commerce, the FAA applies and overrules any and all contrary anti-arbitration state laws inconsistent with federal statute and policy.28
The U.S. Supreme Court, in Volt Information Sciences, Inc. v. Board of Trustees,29 defined the scope of preemption:
The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. But even when Congress has not completely displaced state regulation in an area, state law may nonetheless be pre-empted to the extent that it actually conflicts with federal law — that is, to the extent that it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." The question before us, therefore, is whether application of [state law] to stay arbitration under this contract in interstate commerce . . . would undermine the goals and policies of the FAA.30
Preemption of state arbitration law by federal arbitration law occurs when the FAA applies. Section 2 of the FAA preempts state arbitration statutes to the extent inconsistent with the FAA.31 While the FAA applies to all arbitration agreements involving interstate commerce (unless the parties otherwise agree), it contains no specific preemptive provision as to state law and does not occupy the entire field of arbitration law.32 Thus, even when the FAA applies to the arbitration, state arbitration law, in part, may also apply.
Chilcott Entertainment L.L.C. v. John G. Kinnard Co.,33 a Colorado Court of Appeals decision, illustrates a dilemma that the scope of federal preemption may create. An arbitration award was entered in favor of Kinnard and against Chilcott on July 2, 1997. Apparently, it was undisputed that the FAA was applicable. On September 19, 1997, two months and 17 days after entry of the award, Chilcott commenced a federal court action to vacate the arbitration award. On December 24, 1997, the federal court dismissed the civil action for lack of jurisdiction in that there was no diversity of citizenship between the parties and no federal question. Reconsideration was denied on January 22, 1999.
On March 9, 1999, more than six months after the arbitration award was entered, Chilcott filed a motion to vacate the award in Denver District Court. Kinnard moved to dismiss the motion to vacate on the ground that Chilcott did not file the motion to vacate within the three-month limitation prescribed by 9 U.S.C. § 12. The court applied the federal statutory time period, not the 30-day period of the CUAA, C.R.S. § 13-22-214(2), without discussion. The Colorado Court of Appeals held that the time period under the FAA was not tolled during the period in which the suit was pending in federal court. The court further held that the Colorado savings statute, C.R.S. § 13-80-111, was preempted by § 12 of the FAA. Thus, at least according to the Colorado Court of Appeals, apparently the time periods of the FAA, when the FAA applies, preempt any shorter time periods of the CUAA or CRUAA. Perhaps there would be no preemption if the state time limits were longer. The safer practice is to comply with the shorter time period.
In 1995 and 1996, the Colorado Court of Appeals and Colorado Supreme Court considered a similar issue.34 The court of appeals held that the arbitration agreement was invalid for failure to comply with requirements of the Colorado Health Care Coverage Act (HCCA). The supreme court affirmed, holding that to be valid, the arbitration agreement had to comply with both the HCCA and the FAA. The Supreme Court refused to consider the contention that the health-care statutes were preempted by the FAA because the issue had not been raised in the trial court or in the court of appeals. Thus, according to the Colorado Supreme Court, federal preemption of state laws can be waived.
In 1997, the U.S. District Court for the District of Colorado ruled that the FAA preempts the...
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