Citing SCOTUS Precedent, Vermont Supreme Court Holds FAA Applies and Preempts State Law
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By George H. Friedman, SAA Publisher & Editor-in-Chief

In a case of first impression, the Vermont Supreme Court in a unanimous 5-0 holding – with two “reluctant” occurrences – finds that: 1) the Federal Arbitration Act (“FAA”) is to be construed broadly as to interstate commerce; 2) the FAA preempts a Vermont statute requiring a separate “Acknowledge of Arbitration;” 3) FAA section 2 requires that arbitration agreements be put on the “same footing” as contracts in general; and 4) the sole grounds for moving to vacate are those articulated in the FAA.

Masseau v. Luck, 2021 VT 9 (Feb. 19, 2021), has a fact pattern that reminds us of several Supreme Court cases we will discuss later. Here, homeowners sued a national home inspection service for failing to disclose the presence of asbestos. The firm countered by moving successfully to compel arbitration based on the predispute arbitration agreement (“PDAA”) in the parties’ contract. The appeal in Masseau focuses on these core issues: 1) the FAA’s applicability; 2) the PDAA’s validity and enforceability under Vermont law; and 3) whether the eventual Award could be challenged on “manifest disregard of the law” grounds. The Court holds for the inspection firm across the board, citing SCOTUS precedent along the way.

The FAA is Construed Broadly as to Interstate Commerce

Citing Citizen’s Bank vs. Alafabco, 539 U.S. 52 (2003), and Allied-Bruce Terminix v. Dobson, 513 U.S. 265 (1995), the Court holds that the FAA is to be construed broadly as to its applicability and interstate commerce: “… the reach of the FAA extends to the full extent of Congress’s authority under the Commerce Clause. Second, the transaction between the parties in this case falls within the broad scope of Congress’s authority under the Commerce Clause.”

Vermont’s Law is Preempted by the FAA

The Vermont Arbitration Act in 12 V.S.A. § 5652(b) requires a separate “Acknowledgement of Arbitration” provision that was admittedly not present here. Citing among other cases Southland v. Keating, 465 U.S. 1 (1984), and Doctor's Associates v. Casarotto, 517 U.S. 681 (1996), the Court finds that the Vermont law is preempted by the FAA: “Because the FAA applies, it preempts the notice and acknowledgment requirement of the VAA. Although the U.S. Supreme Court has held that state law may be applied ‘if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally,’ courts cannot invalidate arbitration agreements under state laws applicable only to arbitration provisions…. The FAA therefore preempts the VAA to the extent that the VAA requires a specific notice and acknowledgment” (citation omitted).

The Award Cannot Be Vacated for a Mistake of Law

The case proceeded to arbitration and an Award was eventually rendered in the inspection service’s favor. The homeowners moved without success to vacate the award on the basis of “manifest disregard of law.” What was the problem? “They [homeowners] argue that the arbitrator manifestly disregarded the law here by declining to credit their factual allegations and dismissing them as ‘conclusory’ when he was required to accept them as true for the purposes of his evaluation of inspectors’ motion to dismiss….” The Court holds that under Hall Street v. Mattel552 U.S. 52 (2008), the sole grounds for moving to vacate are those articulated in the FAA. And, while “manifest disregard of the law” may still be viable under Hall Street, Awards cannot be vacated for what here is alleged to be an ordinary error of law: “We do not decide whether ‘manifest disregard’ of the law is a basis for vacating an arbitrator’s award because we conclude that any error in the arbitrator’s legal analysis did not rise to the level of ‘manifest disregard.’”

(ed: We think the case was rightly decided. **Chief Justice Reiber, joined by Justice Cohen, “reluctantly” concurs: “I write separately to make the point that the FAA was not intended to apply in this instance, and this outcome deprives the citizens of our state a remedy under the Vermont Arbitration Act (VAA) that offers greater protection than the FAA.”)