Commercial Litigation and Arbitration

Contractual Designation of State’s Law as Governing Does Not Evidence Parties’ Intent to Preclude Application of Federal Arbitration Act

From Precision Press, Inc. v. MLP USA, Inc., 2009 U.S. Dist. LEXIS 46107 (N.D. Iowa June 1, 2009):

MLP argues that the Sales Agreement's arbitration clause is governed by federal law, the FAA. Anderson Brothers contends that state law should govern because of the parties' incorporation of a choice of law clause in paragraph 13(g) of the Sales Agreement. Eighth Circuit precedent, however, does not support that proposition. In UHC Management Co. v. Computer Sciences, Corp., 148 F.3d 992, 996-97 (8th Cir. 1998), discussing Supreme Court precedent, including the decision in Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995), relied upon by Anderson Brothers, the Eighth Circuit concluded it "will not interpret an arbitration agreement as precluding the application of the FAA unless the parties' intent that the agreement be so construed is abundantly clear." UHC Mgmt., 148 F.3d at 996-97; see Dominium Austin Partners, LLC v. Emerson, 248 F.3d 720, 729 n. 9 (8th Cir. 2001) ("The construction of an agreement to arbitrate is governed by the FAA unless the agreement expressly provides that state law should govern.").

Like the Sales Agreement here, the contract at issue in UHC Management contained an arbitration clause that was silent as to whether state or federal arbitration law applied.... The contract in UHC Management did contain a choice-of-law clause, which stated, "[t]o the extent not preempted by ERISA or other federal law, this Agreement shall [be] governed by and construed under the laws of the State of Minnesota." ... The Eighth Circuit Court of Appeals held that, from the language in the agreement, it could not divine an intent on the parties to preclude application of the FAA, noting:

The agreement makes no reference to the Minnesota Uniform Arbitration Act or to Minnesota case law interpreting the allocation of powers between arbitrators and courts. Moreover, the choice-of-law clause itself specifically provides that Minnesota law must yield whenever preempted by federal law, which cuts against the argument that the parties intended that the FAA not apply.


The choice of law clause in the Sales Agreement here is even more generic than the choice of law clause addressed in UHC Management, providing only that: "This Contract Shall be construed in accordance with the laws of the state of Illinois." ... The choice of law clause here does not even state that it is governed by Illinois law, only that it is to "construed in accordance" with Illinois law. Moreover, the Sales Agreement makes absolutely no reference to the Illinois Uniform Arbitration Act. Indeed, the opposite is true. Instead of referring to state law or state rules, the Sale Agreement's arbitration clause states that arbitration will be conducted "pursuant to the American Arbitration Association's Model Commercial Arbitration Rules." Such a generic choice-of-law clause, that is utterly silent regarding state arbitration rules governing the agreement, as a matter of law, does not make the parties' intent to have federal courts apply state arbitration law "abundantly clear." UHC Management, 148 F.3d at 997; see P.R. Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 29 (1st Cir. 2005) (holding that "every circuit that has considered the question . . . [has] held that the mere inclusion of a choice-of-law clause within the arbitration agreement is insufficient to indicate the parties' intent to contract for the application of state law concerning judicial review of awards"), cert. denied, 126 S. Ct. 1785 (2006), rev'd on other grounds by Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008); Jacada, Ltd. v. Int'l Mktg. Strategies, Inc., 401 F.3d 701, 711-12 (6th Cir. 2005) (holding that generic choice-of-law provision did "not unequivocally suggest an intent to displace the default federal standard"), rev'd on other grounds by Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008); Sovak v. Chugai Pharm. Co., 280 F.3d 1266, 1270 (9th Cir.) ("[A] general choice-of-law clause within an arbitration provision does not trump the presumption that the FAA supplies the rules for arbitration."), cert. denied, 123 S. Ct. 114 (2002); Roadway Package Sys. v. Kayser, 257 F.3d 287, 288-89 (3d Cir. 2001) ("We hold that a generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA's default regime."), rev'd on other grounds by Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008); Porter Hayden Co. v. Century Indemn. Co., 136 F.3d 380, 382 (4th Cir. 1998) ("[A]bsent a clearer expression of the parties' intent to invoke state arbitration law, we will presume that the parties intended federal arbitration law to govern the construction of the Agreement's arbitration clause."). As the Sixth Circuit Court of Appeals has noted:

Most contracts include a choice-of-law clause, and, thus, if each of these clauses were read to foreclose the application of the substantive law enacted by Congress in the FAA, the FAA would be applicable in very few cases. Such an interpretation of the FAA is simply not viable, as it would effectively emaciate the Act itself.

Ferro Corp. v. Garrison Indus., Inc., 142 F.3d 926, 938 (6th Cir. 1998). Accordingly, because it is not "abundantly clear"that the parties intended to invoke state arbitration law over federal law, the court will not read the Sales Agreement as precluding the application of the FAA.

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