THE McCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART II

THE McCARRAN-FERGUSON ACT AND REVERSE PREEMPTION PART II

Part I | Part III | Part IV | Part V

By: Alex Martin

The Federal Arbitration Act

Arbitration in the United States, in some shape or form, has been around since the early 20th century.[1] Incorporating both statutory law and common law, arbitration in the early 1900s was described by one individual as “robust and active,” with most states having adopted arbitration statutes by this period.[2]

Before 1914, arbitration laws varied dramatically from state to state.[3]  During this period, the federal courts generally applied federal arbitration law, rather than state arbitration law, even though “no distinctive body of federal arbitration law existed [during this period].”[4]  Moreover, at this time, courts generally expressed hostility toward arbitration agreements and refused to enforce them for a variety of reasons.[5]

By the 1920s, advocates for expanding and strengthening arbitration laws had made significant strides in compelling the acceptance of state and federal arbitration statutes.[6]  As a result of these advocates’ efforts, the United States Arbitration Act (“USAA”) was passed in 1925 to place arbitration agreements upon the same footing as other contractual agreements, thereby ensuring the enforcement of agreements to arbitrate.[7]

Nonetheless, the USAA had its share of critics.  These critics voiced general concern “about the adhesive aspects of arbitration contracts.”[8]  One such critic, remarked, “We all know from a practical experience that the fine type of contracts whilst entirely binding, is seldom read, and we do feel that it is a giving up [of] rights” that belong to American citizens.[9]  Still other critics were concerned about the potential “long-arm” effect of arbitration statutes, which would require parties to arbitration agreements to travel “from coast to coast to participate involuntarily in arbitrations.”[10]

The modern arbitration act, the FAA,[11] includes three key, statutory provisions.[12]  Section 2 of the FAA provides that a written arbitration agreement “in any maritime transaction or a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”[13]  Section 3 provides that a federal court, in which suit has been brought, “upon any issue referable to arbitration under an agreement in writing for such arbitration[,]” stay the court action pending arbitration once it has concluded that the issue before it is arbitrable under the parties’ arbitration agreement.[14]  Finally, Section 4 furnishes a remedy for a party “aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration” by mandating the federal court order arbitration once it has concluded that a valid arbitration agreement exists and that the agreement was not adhered to.[15]