Allied-Bruce Terminix Cos. v. Dobson

• Citation: 115 S. Ct. 834,130 L. Ed. 2d 753,513 U.S. 265
• Decision Date: 04 October 1994
• Docket Number: No. 93-1001,93-1001
• Parties: ALLIED-BRUCE TERMINIX COMPANIES, INC., AND TERMINIX INTERNATIONAL COMPANY, PETITIONERS v. G. MICHAEL DOBSON ET AL
• Court: United States Supreme Court

513 U.S. 265, 115 S. Ct. 834, 130 L. Ed. 2d 753, ALLIED-BRUCE TERMINIXCOMPANIES, INC., AND TERMINIX INTERNATIONAL COMPANY, PETITIONERS v. G. MICHAEL DOBSON ET AL.

No. 93-1001

SUPREME COURT OF

THE UNITED STATES

October 4, 1994, Argued

January 18, 1995, Decided

JUDGES: BREYER, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and STEVENS, O'CONNOR, KENNEDY, SOUTER, and GINSBURG, JJ., joined. O'CONNOR, J., filed a concurring opinion, post, p. 282. SCALIA, J., filed a dissenting opinion, post, p. 284. THOMAS, J., filed a dissenting opinion, in which SCALIA, J., joined, post, p. 285.

OPINION

JUSTICE BREYER delivered the opinion of the Court.

This case concerns the reach of § 2 of the Federal Arbitration Act. That section makes enforceable a written arbitration provision in "a contract evidencing a transaction involving commerce." 9 U.S.C. § 2 (emphasis added). Should we read this phrase broadly, extending the Act's reach to the limits of Congress' Commerce Clause power? Or, do the two italicized words -- "involving" and "evidencing" -- significantly restrict the Act's application? We conclude that the broader reading of the Act is the correct one, and we reverse a State Supreme Court judgment to the contrary.

I

In August 1987, Steven Gwin, a respondent who owned a house in Birmingham, Alabama, bought a lifetime "Termite Protection Plan" (Plan) from the local office of Allied-Bruce Terminix Companies, a franchise of Terminix International Company. In the Plan, Allied-Bruce promised "to protect" Gwin's house "against the attack of subterranean termites," to reinspect periodically, to provide any "further treatment found necessary," and to repair, up to $ 100,000, damage caused by new termite infestations. App. 69. Terminix International "guaranteed the fulfillment of the terms" of the Plan. Ibid. The Plan's contract document provided in writing that "any controversy or claim . . . arising out of or relating to the interpretation, performance or breach of any provision of this agreement shall be settled exclusively by arbitration." Id., at 70 (emphasis added).

In the spring of 1991, Mr. and Mrs. Gwin, wishing to sell their house to Mr. and Mrs. Dobson, had Allied-Bruce reinspect the house. They obtained a clean bill of health. But no sooner had they sold the house and transferred the Plan to Mr. and Mrs. Dobson than the Dobsons found the house swarming with termites. Allied-Bruce attempted to treat and repair the house, but the Dobsons found Allied-Bruce's efforts inadequate. They therefore sued the Gwins, and (along with the Gwins, who cross-claimed) also sued Allied-Bruce and Terminix in Alabama state court. Allied-Bruce and Terminix, pointing to the Plan's arbitration clause and § 2 of the Federal Arbitration Act, immediately asked the court for a stay, to allow arbitration to proceed. The court denied the stay. Allied-Bruce and Terminix appealed.

The Supreme Court of Alabama upheld the denial of the stay on the basis of a state statute, Ala. Code § 8-1-41(3) (1993), making written, predispute arbitration agreements invalid and "unenforceable." 628 So. 2d 354, 355 (1993). To reach this conclusion, the court had to find that the Federal Arbitration Act, which pre-empts conflicting state law, did not apply to the termite contract. It made just that finding. The court considered the federal Act inapplicable because the connection between the termite contract and interstate commerce was too slight. In the court's view, the Act applies to a contract only if "'at the time [the parties entered into the contract] and accepted the arbitration clause, they contemplated substantial interstate activity.'" Ibid. (emphasis in original) (quoting Metro Industrial Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 387 (CA2) (Lumbard, C. J., concurring), cert. denied, 368 U.S. 817, 7 L. Ed. 2d 24, 82 S. Ct. 31 (1961)). Despite some interstate activities (e. g., Allied-Bruce, like Terminix, is a multistate firm and shipped treatment and repair material from out of state), the court found that the parties "contemplated" a transaction that was primarily local and not "substantially" interstate.

Several state courts and Federal District Courts, like the Supreme Court of Alabama, have interpreted the Act's language as requiring the parties to a contract to have "contemplated" an interstate commerce connection. See, e. g., Burke County Public Schools Bd. of Ed. v. Shaver Partnership, 303 N.C. 408, 417-420, 279 S.E.2d 816, 822-823 (1981); R. J. Palmer Constr. Co. v. Wichita Band Instrument Co., 7 Kan. App. 2d 363, 367, 642 P.2d 127, 130 (1982); Lacheney v. Profitkey Int'l, Inc., 818 F. Supp. 922, 924 (ED Va. 1993). Several federal appellate courts, however, have interpreted the same language differently, as reaching to the limits of Congress' Commerce Clause power. See, e. g., Foster v. Turley, 808 F.2d 38, 40 (CA10 1986); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 406-407 (CA2 1959), cert. dism'd, 364 U.S. 801 (1960); cf. Snyder v. Smith, 736 F.2d 409, 417-418 (CA7), cert. denied, 469 U.S. 1037, 83 L. Ed. 2d 403, 105 S. Ct. 513 (1984). We granted certiorari to resolve this conflict, 510 U.S. 1190 (1994); and, as we said, we conclude that the broader reading of the statute is the right one.

II

Before we can reach the main issues in this case, we must set forth three items of legal background.

First, the basic purpose of the Federal Arbitration Act is to overcome courts' refusals to enforce agreements to arbitrate. See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 474, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989). The origins of those refusals apparently lie in "'ancient times,'" when the English courts fought "'for extension of jurisdiction -- all of them being opposed to anything that would altogether deprive every one of them of jurisdiction.'" Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 211, n. 5, 100 L. Ed. 199, 76 S. Ct. 273 (1956) (Frankfurter, J., concurring) (quoting United States Asphalt Refining Co. v. Trinidad Lake Petroleum Co., 222 F. 1006, 1007 (SDNY 1915), in turn quoting Scott v. Avery, 5 H. L. Cas. 811 (1856) (Campbell, L. J.)). American courts initially followed English practice, perhaps just "'standing . . . upon the antiquity of the rule'" prohibiting arbitration clause enforcement, rather than "'upon its excellence or reason.'" Bernhardt v. Polygraphic Co., supra, at 211, n. 5 (quoting United States Asphalt Refining Co., supra, at 1007). Regardless, when Congress passed the Arbitration Act in 1925, it was "motivated, first and foremost, by a . . . desire" to change this antiarbitration rule. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 220, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985). It intended courts to "enforce [arbitration] agreements into which parties had entered," ibid. (footnote omitted), and to "place such agreements 'upon the same footing as other contracts,'" Volt Information Sciences, Inc., supra, at 474 (quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974)).

Second, some initially assumed that the Federal Arbitration Act represented an exercise of Congress' Article III power to "ordain and establish" federal courts, U.S. Const., Art. III, § 1. See Southland Corp. v. Keating, 465 U.S. 1, 28, n. 16, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984) (O'CONNOR, J., dissenting) (collecting cases). In 1967, however, this Court held that the Act "is based upon and confined to the incontestable federal foundations of 'control over interstate commerce and over admiralty.'" Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 405, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967) (quoting H. R. Rep. No. 96, 68th Cong., 1st Sess., 1 (1924)). The Court considered the following complicated argument: (1) The Act's provisions (about contract remedies) are important and often outcome determinative, and thus amount to "substantive," not "procedural," provisions of law; (2) Erie R. Co. v. Tompkins, 304 U.S. 64, 71-80, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), made clear that federal courts must apply state substantive law in diversity cases, see also Hanna v. Plumer, 380 U.S. 460, 465, 14 L. Ed. 2d 8, 85 S. Ct. 1136 (1965); therefore (3) federal courts must not apply the Federal Arbitration Act in diversity cases. This Court responded by agreeing that the Act set forth substantive law, but concluding that, nonetheless, the Act applied in diversity cases because Congress had so intended. The Court wrote: "Congress may prescribe how federal courts are to conduct themselves with respect to subject matter over which Congress plainly has power to legislate." Prima Paint, supra, at 405.

Third, the holding in Prima Paint led to a further question. Did Congress intend the Act also to apply in state courts? Did the Federal Arbitration Act pre-empt conflicting state antiarbitration law, or could state courts apply their antiarbitration rules in cases before them, thereby reaching results different from those reached in otherwise similar federal diversity cases? In Southland Corp. v. Keating, supra, this Court decided that Congress would not have wanted state and federal courts to reach different outcomes about the validity of arbitration in similar cases. The Court concluded that the Federal Arbitration Act pre-empts state law; and it held that state courts cannot apply state statutes that invalidate arbitration agreements. Id., at 15-16.

We have set forth this background because respondents, supported by 20 state attorneys general, now ask us to overrule Southland and thereby to permit Alabama to apply its antiarbitration statute in this case irrespective of the proper interpretation of § 2. The Southland Court, however, recognized that the pre-emption issue was a difficult one, and it considered the basic arguments that respondents and amici now raise (even though those issues...