Reverse Pre-Emption of the FAA!

This morning, the Texas Supreme Court made vague reference to the possibility that the Federal Arbitration Act can be reverse pre-empted by the McCarran-Ferguson Act. Since this is the sort of thing we find fascinating, I poked around a bit.

As readers of this blog know, certain language (in 10-point boldface type no less) must be present in any arbitration agreement that would require a patient or prospective patient to arbitrate a medical liability claim. See Tex. Civ. Prac. & Rem. Code Section 74.451. This requirement emphasizes the Texas General Arbitration Act’s requirement that a personal injury claim may only be subject to arbitration if each party and each party’s attorney signs the arbitration agreement. See Tex. Civ. Prac. & Rem. Code Section 171.002(a)(3) and (c).

However, the Federal Arbitration Act has been held to preempt the Section 171.002(c) of the Texas Arbitration Act, so if the FAA governs, both parties’ attorneys do not need to sign an arbitration agreement for it to be valid in a personal injury claim. Given the breadth with which courts have found the FAA to apply, this preemption has served to markedly limit the protection the Texas Legislature tried to give Texans in both statutes referenced above.

On July 28, 2005, however, the First Court of Appeals in Houston issued a fascinating opinion in a case involving a nursing home’s attempt to enforce an arbitration clause which did not contain the language required by the former Article 4590i (which is the same language currently required by Section 74.451 of the CPRC). Since the arbitration agreement in question specified that the FAA, and not the TAA, governed its application, the nursing home argued that the FAA preempted article 4590i and that the arbitration clause was valid and enforceable.

Wait just a minute, said the plaintiff in that case. Another federal statute, the McCarran-Ferguson Act, provides that Federal statutes cannot preempt state laws enacted for the purpose of regulating the business of insurance, unless the federal statute in question specifically relates to the business of insurance. Since the FAA does not specifically relate to the business of insurance, and since 4590i states that it was passed in response to a “medical malpractice insurance crisis in the State of Texas,” the First Court of Appeals held that the McCarran-Ferguson Act reverse-preempts the Federal Arbitration Act. Put another way, it prevents the FAA from preempting the requirements Article 4590i places on arbitration clauses.

What does all this mean? I do not know. The problem, of course, is that the recent re-codification of Texas medical liability law eliminated the language about the statute’s being enacted in response to a liability insurance crisis. While the Legislature certainly made reference to an insurance crisis when it passed the 2003 tort reform legislation, it did not keep the statutory language on which the Kepka court relies. It will be interesting to see if McCarran-Ferguson reverse preemption continues as a valid doctrine in Texas in a “new-law” medical malpractice case.

Back on May 27, by the way, the Texas Supreme Court issued a mandamus opinion (in the same case linked-to above which started all this) requiring arbitration in a case where it held the FAA preempted the TAA’s attorney-signature requirement. It was a medical case in which the Supreme Court found that since the medical provider in question received federal funds, the FAA applied to a medical negligence case filed in Texas by Texans against Texans alleging Texas negligence. That mandamus opinion no longer seems available on the Court’s website or I’d link to it; its Westlaw citation is 2005 WL 1252271 for those so inclined.

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arbitration, ADR, Texas Supreme Court, law