C.A.: State Law Banning Forced Arbitration Preempted
The Federal Arbitration Act preempts a California law that bars enforcement of predispute arbitration agreements in construction and design defect disputes, the Third District Court of Appeal has ruled... The defendants asked Judge Suzanne Kingsbury to compel Shepard to comply with a binding arbitration clause in the real estate purchase agreement.  Shepard opposed the motion on the basis of Code of Civil Proceedure Sect. 1298.7, which permits a purchaser of real property to pursue defect litigation regardless of any arbitration clause.

C.A.: State Law Banning Forced Arbitration Preempted

By KENNETH OFGANG, Staff Writer
Monday, March 26, 2007

The Federal Arbitration Act preempts a California law that bars enforcement of predispute arbitration agreements in construction and design defect disputes, the Third District Court of Appeal has ruled.

The justices Thursday reversed an El Dorado Superior Court judge’s ruling that John T. Shepard could not be forced to arbitrate with the builder of his house in the Cottonwood Park development in Placerville. Shepard claims that a plumbing pipe installed by Edward Mackay Enterprises, Inc. and Cottonwood Development and their subcontractor, Gary Lewis Construction, leaked and damaged his house and possessions.

The defendants asked Judge Suzanne Kingsbury to compel Shepard to comply with a binding arbitration clause in the real estate purchase agreement. Shepard opposed the motion on the basis of Code of Civil Procedure Sec. 1298.7, which permits a purchaser of real property to pursue defect litigation regardless of any arbitration clause.

The defendants responded that the clause had to be enforced under the federal act, which makes valid and enforceable any arbitration provision in a contract “evidencing a transaction involving commerce.” They attached declarations from five materials suppliers averring that they supplied materials for the development from outside the state.

Kingsbury ruled that the declarations were inadequate to demonstrate that the transaction involved interstate commerce, and denied the motion.

But Justice Coleman Blease, writing for the appellate court, said Shepard was bound by the arbitration clause.

The U.S. Supreme Court, the justice explained, gives the phrase “involving commerce” the broadest possible interpretation permitted by the Commerce Clause. He cited Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, which held that the FAA preempted an Alabama law banning predispute arbitration clauses in contracts, with respect to a contract between a homeowner and the local office of a pest control company.

Because the pest control company itself did business in multiple states and the materials used by the company came from outside Alabama, the court held, the transaction involved interstate commerce.

Three prior Court of Appeal decisions have dealt with whether Sec. 1298.7 is preempted by the FAA, Blease noted.

In two of the cases, the court said interstate commerce was involved, based on the use of out-of-state materials and out-of-state subcontractors and designers, the use of interstate mail and telephone calls to communicate with those involved, reliance on interstate advertising and marketing, and the use of Federal Housing Administration financing. 

In a third case, however, the Court of Appeal held that the contractor failed to show that the transaction involved interstate commerce.

Shepard’s case, however, “involved an activity having a substantial relation to interstate commerce,” Blease wrote.

The declarations presented by the defendants, the justice explained, showed that the carpet and vinyl flooring for the house, some of the hardware and doors, the trusses, the windows, and the kitchen appliances were made outside the state or from materials that were shipped to California from outside the state.

There is no requirement, Blease went on to say, that there be a relationship between interstate commerce and the alleged defects that are the subject of the dispute. “On the contrary, the language of section 2 of the FAA indicates the pertinent question is whether the contract evidences a transaction involving interstate commerce, not whether the dispute arises from the particular part of the transaction involving interstate commerce,” he wrote.

The case is Shepard v. Edward Mackay Enterprises, Inc., 07 S.O.S. 1397.

Metropolitan News-Enterprise
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