Facts
- A Birmingham homeowner bought a lifetime termite protection plan from an in-state Terminix franchise; the out-of-state franchisor guaranteed performance.
- The plan promised inspections, treatment, and repairs (up to $100,000) for new termite damage.
- The contract contained a broad clause requiring arbitration of any controversy or claim arising out of or relating to the agreement.
- Before the home was sold to new buyers, the company reinspected and reported no termite problems.
- After the sale, the buyers found severe termite infestation and claimed the company’s treatment and repairs were inadequate.
- The buyers sued the prior owners, the franchise, and the franchisor in Alabama state court.
- The franchise and franchisor moved to stay litigation and compel arbitration under § 2 of the Federal Arbitration Act (FAA).
Issues
- Whether FAA § 2’s phrase “a transaction involving commerce” extends to the full scope of Congress’s Commerce Clause power.
- Whether FAA coverage turns on whether the parties contemplated substantial interstate activity when they agreed to arbitrate.
- Whether the FAA preempts an Alabama statute making predispute arbitration clauses invalid and unenforceable.
Decision
- The Supreme Court reversed and remanded.
- The Court held that “involving commerce” in FAA § 2 is the functional equivalent of “affecting commerce,” indicating Congress intended to reach the full extent of its Commerce Clause power.
- The Court rejected Alabama’s “contemplation of the parties” test; the FAA applies when the transaction in fact involves interstate commerce, regardless of the parties’ subjective expectations.
- Because the termite protection arrangement had interstate commerce connections (including an interstate franchising relationship and out-of-state involvement), the FAA applied.
- The FAA preempted Alabama’s anti-arbitration statute, making the arbitration clause enforceable.
Legal Principles
- FAA § 2 covers contracts evidencing transactions that “involve” interstate commerce, interpreted broadly to the limits of Congress’s commerce power.
- FAA applicability depends on objective, factual interstate commerce involvement, not on whether the parties contemplated interstate activity at contracting.
- In state-court proceedings, the FAA preempts state laws that invalidate or refuse to enforce predispute arbitration agreements within § 2’s scope.
- A state rule that conditions enforcement of arbitration on a special, arbitration-specific showing (such as subjective contemplation of interstate commerce) is inconsistent with the FAA.
Conclusion
The Court held that the FAA broadly applies to arbitration clauses in contracts that in fact involve interstate commerce and that the FAA preempts state statutes refusing to enforce such arbitration agreements, requiring Alabama courts to honor the arbitration clause in the termite protection contract.