Federal Arbitration vs State Rights

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PROS AND CONS OF REAL ESTATE MEDIATION. Mediation is an informal procedure that often results in a mutually satisfactory settlement within a few days if the mediator does a good job and the parties are cooperative. The cost and time involved is usually minimal.

By agreeing to mediation, the parties do not give up any legal rights, but they often come to a win-win result with neither party being 100 percent satisfied nor disappointed.

PROS AND CONS OF REAL ESTATE BINDING ARBITRATION. If both the home buyer and seller agreed in writing to binding arbitration, that means they gave up substantial future legal rights in return for a relatively quick judgment by the arbitrator who hears all the evidence and then renders a binding decision.

The primary rights given up by the parties to an arbitration when signing the arbitration clause include the right to a jury trial, right to court room rules of evidence, and the right to appeal the arbitrator’s decision.

Even if the arbitrator’s decision involves a mistake of fact or the law, it is still binding on the parties. Rare exceptions could occur if a party can prove the arbitrator was bribed or had an undisclosed conflict of interest. But overturning an arbitrator’s decision is virtually impossible.

Before signing a mediation and/or arbitration clause, home buyers and sellers should fully understand the legal consequences. Many real estate attorneys suggest not giving up legal rights at the time of signing a home sales contract. However, if a buyer-seller dispute later arises and it cannot be resolved without litigation, at that time the parties can decide if they want to go to binding arbitration rather than a court trial.
These types of one-sided provisions, such as binding-arbitration clauses, judicial-reference provisions and “jury-trial waivers,” have been discussed at length by our state appellate courts over the last ten years.
Arbitration provisions are often viewed as merely an alternative forum for consumers to resolve disputes. Consumer
advocates, however, argue that a pre-dispute arbitration agreement is also a pre-determined resolution for consumers, and, therefore, a limit to their due process rights.

13 Additionally, litigating in a court of law provides essential access to necessary case law – to support potential legal claims, which is not available in arbitration proceedings.
14 Furthermore, limited grounds exist for appealing an arbitration outcome, leaving consumers with few alternatives
other than accepting the resolution as determined by the arbiter.

15 Unfortunately for consumers, “as employed in the United States, pre-dispute mandatory arbitration is designed to preclude effective redress by consumers and to substantially reduce or eliminate the beneficial effects of favorable judicial precedent and legislation.”
16 The use of arbitration as an alternative forum may also have the effect of altering the enforcement scheme contemplated by the legislature in enacting consumer protection legislation.
However, the right to bring a lawsuit may be limited by an arbitration provision.
-the Texas Supreme Court held that the Supremacy Clause in the United States Constitution trumped any
applicable State law, such as the Texas Deceptive Trade Practices Act.
Therefore, it is becoming less likely that a jury will have an opportunity to resolve a complaint.
light of the contractual predominance and judicial enforcement of arbitration clauses, the consumer is often left
with few ways to avoid an arbitration clause. Most consumer disputes must now be settled through arbitration.

Presuming a buyer and seller are unable to resolve their after-sale dispute either by a friendly settlement or by mediation, if both parties signed the arbitration clause then the next step is for the home buyer to notify the seller of the dispute and the buyer’s desire for binding arbitration as provided in the sales contract.

At this point, in addition to summarizing their positions on the dispute, the buyer and seller, or more likely their attorneys, will suggest names of local arbitrators. These are often retired judges or active attorneys with expertise in the field. If the parties cannot agree on an arbitrator, then each side suggests an arbitrator and the two arbitrators then select another arbitrator to handle the case.

The chosen arbitrator then arranges a hearing date when the parties will present their evidence. The setting is usually a conference room rather than a formal court room. The arbitrator then hears the evidence and witness testimony as well as asking appropriate questions.

The arbitration is often quite informal. After hearing all the evidence, the arbitrator usually renders a written binding decision, which the prevailing party can then take to the local court for entry or confirmation, just like a regular court judgment.

INTRODUCTION Federal Arbitration Act Preemption
A growing number of lawsuits are doomed without regard to their merits.
...in a practice that is impossible to square with that understanding of FAA preemption, courts have traditionally nullified arbitration clauses to advance a range of state interests, including preserving substantive rights under state law.
Nevertheless, the U.S. Supreme Court held... that state public policy is not a permissible basis for striking down an arbitration clause. As a result, lower courts are now compelling arbitration—often through gritted teeth—of lawsuits that are destined to fail. http://georgetownlawjournal.org/files/2013/07/Horton.pdf
Californias home owners arbitration contracts Google search results
covers home sale contracts and arbitration

The pivotal Southland Corp. Case

Southland Corp. v. Keating Federal Arbitration authority versus State Law and Rights.


A number of Supreme Court cases have dealt with the preemption of state laws by the Federal Arbitration Act:
Southland Corp. v. Keating, 465 U.S. 1 (1984) - Established the applicability of the FAA to contracts under state law)

The Federal Arbitration Act provides for contractually-based compulsory and binding arbitration, resulting in an arbitration award entered by an arbitrator or arbitration panel as opposed to a judgment entered by a court of law. In an arbitration the parties give up the right to an appeal on substantive grounds to a court.

The Federal Arbitration Act requires that where the parties have agreed to arbitrate, they must do so in lieu of going to court.

Southland Corp. v. Keating, 465 U.S. 1 (1984), is a United States Supreme Court decision concerning arbitration.
It applies where the transaction contemplated by the parties "involves" interstate commerce and is predicated on an exercise of the Commerce Clause powers granted to Congress in the U.S. Constitution.

It was originally brought by 7-Eleven franchisees in California state courts, alleging breach of contract by the chain's then parent corporation. They, Southland Corp., pointed to the arbitration clauses in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights possessed under that law. A 7-2 majority opinion held that the Federal Arbitration Act (FAA) applied to contracts signed--executed under state law.

Once an award is entered by an arbitrator or arbitration panel, it must be "confirmed" in a court of law. Once confirmed, the award is then reduced to an enforceable judgment, which may be enforced by the winning party in court, like any other judgment. Under the Federal Arbitration Act awards must be confirmed within one year; while any objection to an award must be challenged by the losing party within three months.
An arbitration agreement may be entered "prospectively"—that is, in advance of any actual dispute; or may be entered into by disputing parties once a dispute has arisen.

Partial preemption of State law:

Section 2 of the Federal Arbitration Act declares that arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions generally, such as unconscionability or duress. Consequently, most state law that disfavors the enforcement of arbitration agreements will be preempted by the FAA.[3] State laws that govern the procedures of arbitration, but do not affect its enforcement, are outside the Act's preemptive scope.

The decision was a turning point in the use of arbitration in American contract law, when it was followed with other decisions limiting the authority of states to regulate arbitration. It has been described as "perhaps the most controversial case in the Supreme Court's history of arbitration jurisprudence."[1] Its legal foundation has been examined and disputed, and some critics have found the FAA's legislative history directly contradicts the court's holding. One scholar has even found the decision an unconstitutional infringement of states' power over their own courts. Mandatory prebinding arbitration clauses became widespread,..

Proponents of arbitration pointed to its success in reducing crowded court dockets, while consumer advocates charged that the arbitration process was biased in favor of large corporations and against consumers, many of whom were far poorer and legally unsophisticated. They would be joined in calling for it to be overturned (unsuccessfully) in a later case by 20 state attorneys general.

"Arbitration is not a good place to enforce important rights set forward in a statute that is complicated."

"Contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts", Chief Justice Warren Burger wrote. "In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration,"... and that the arbitration agreements could only be voided "upon such grounds as exist... for the revocation of any contract" Burger declared.

In creating a substantive rule applicable in state as well as federal courts, Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements.

O'Connor : "The Court's decision is impelled by an understandable desire to encourage the use of arbitration, but it utterly fails to recognize the clear congressional intent underlying the FAA. Congress intended to require federal, not state, courts to respect arbitration agreements."[16]

"One rarely finds a legislative history as unambiguous as the FAA's", she wrote. Its sponsor in the House had assured his colleagues the bill's sole goal was to make arbitration agreements enforceable; committee reports and American Bar Association (ABA) briefs on it repeatedly described it as purely procedural. Its drafter had assured two subcommittees that Congress would not "[direct] its own courts ... [to] infringe upon the provinces or prerogatives of the States ... There is no disposition therefore by means of the Federal bludgeon to force an individual State into an unwilling submission to arbitration enforcement."[18]

The hearing transcripts and other records of the FAA's passage also stated clearly that Congress relied on its power to regulate the federal courts and not the Commerce Clause, she pointed out. The House subcommittee's report had explicitly stated that the FAA was procedural and not substantive. "Plainly, a power derived from Congress' Art. III control over federal court jurisdiction would not, by any flight of fancy, permit Congress to control proceedings in state courts", O'Connor concluded.

"Today's decision is unfaithful to congressional intent, unnecessary, and, in light of the FAA's antecedents and the intervening contraction of federal power, inexplicable", she concluded. "Although arbitration is a worthy alternative to litigation, today's exercise in judicial revisionism goes too far."

Southland and subsequent decisions held that state courts have no basis other than standard defenses to contract validity for staying arbitration, ... California now requires that an arbitrator disclose any potential conflicts of interest to parties prior to the arbitration,
California's courts generated two more cases addressing the preemption issue.
In Volt Information Sciences v. Stanford University, the Court unanimously declined to compel arbitration under the FAA since the contract between the parties agreed that it would be governed by California law, which limited the arbitrable issues.

O'Connor, Scalia and Thomas have not been the only critics of Southland and its take on Congress's intent in passing the FAA. It has been called "remarkable for its preemption holding that blatantly ignores legislative intent", "extraordinarily disingenuous" and "painfully misleading".

Margaret Moses, an international arbitration scholar at Loyola University Chicago School of Law, has traced Southland to a series of misreadings in its predecessor decisions that make the original FAA "unrecognizable" in its current judicial incarnation. she argued, the court failed to limit the scope of the decision. This set the stage for Justice William J. Brennan, Jr. to assert in dicta in Cone both that the FAA made arbitration a national policy and that it applied to the state courts, without support for either assertion. Again, the legislative history of the act showed that it had been meant merely to allow federal courts to permit arbitration. "The so-called policy favoring arbitration appears to be one created by the judiciary out of whole cloth,"

[O'Connor voted with the majority this time, writing in a separate concurrence that although her opinion had not changed since her Southland dissent a decade before, stare decisis dictated that she uphold that case since too many contracts would be voided if it was overturned. Antonin Scalia he felt that case had been wrongly decided and, with the question of FAA preemption before the Court again, he voted to overturn it, not seeing stare decisis as an impediment. "I shall not in the future dissent from judgments that rest on Southland. I will, however, stand ready to join four other Justices in overruling it, since Southland will not become more correct over time, [and] the course of future lawmaking seems unlikely to be affected by its existence."
Thomas's dissent

Thomas filed a longer dissent critiquing the majority opinion in Southland and expanding on O'Connor's dissent in that case. "In my view, the Federal Arbitration Act (FAA) does not apply in state courts", he began. As Stevens had in Perry, he noted the 35 years between the act's passage and the first suggestion (in Robert Lawrence) that it applied in state courts as well. "The explanation for this delay is simple: The statute that Congress enacted actually applies only in federal courts. Federal courts, he noted, had refused to apply state arbitration statutes in federal cases to which the FAA did not apply, because it was not considered substantive. "In short, state arbitration statutes prescribed rules for the state courts, and the FAA prescribed rules for the federal courts".
Thomas was the lone dissenterin another California case the next year where the majority ruled that state law providing for administrative dispute resolution was also pre-empted by the FAA.

David Schwartz of Wisconsin Law School, author of an amicus filed in Bazzle, has argued that the reach Southland gives the FAA is unconstitutional even if it were clearly intended to apply to state courts "and no one has noticed." He joins with the dissenting justices and other critics in finding it "properly seen as procedural when viewed from any angle." To Schwartz, it also constitutes a federally mandated restructuring of state courts.]

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