State Supremacy over the Federal Arbitration Act?

Okay, so the New Hampshire Supreme Court did not actually say its state arbitration law trumped the federal act. But the NH court did say that its state courts would not be obligated to follow certain terms of the Federal Arbitration Act. Interpreting a situation that all parties agreed was an action in interstate commerce, the NH court nonetheless concluded that sections 9-11 of the FAA did not apply to an action to confirm or vacate, since the action had been brought in state court instead of federal court. Thus, the state court was free to overrule an arbitration award based on standards in the state arbitration law, instead of upholding the award which would come from application of the FAA standard.

The underlying dispute was over the breakup of a financial management firm. An ousted partner recovered from the firm in the first arbitration. Then, when the firm recapitalized, the former partner sought additional compensation under a claw back provision, and a second arbitration panel awarded her further compensation. This second arbitration award was the one at issue. The state trial court held, under a “plain mistake” standard in the state arbitration laws, that the second award was barred by principles of res judicata. On appeal, the former partner argued that the arbitration was governed by the FAA, and the award should be upheld under FAA standards.

The NH Supreme Court decision notes that the other side did not dispute that the transaction was one in interstate commerce. Just the same, it held that the state court was free to apply the state arbitration standards for upholding or vacating an award, and the FAA standards would only apply if the action to confirm/vacate were in the federal courts. Citing a 1989 US Supreme Court decision, the NH court noted that the “FAA contains no express preemptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.” Since the NH arbitration law allows a court to vacate an award for plain mistake “if it determines that an arbitrator misapplied the law to the facts,” the trial court was free to vacate the award on principles of res judicata.

The NH high court held that an action to compel arbitration under section 2 of the FAA could be enforced in either state or federal court, as the language of section 2 applies to any transaction in interstate commerce. Per the NH court, though, the state court in an action to confirm or vacate need not be bound by sections 9-11 of the FAA, since those sections specifically reference the federal courts. Thus, the state court could follow the state standards in an action to confirm or vacate. Sections 10 and 11 of the FAA indeed refer to federal district courts. However, section 9 refers first to the court that has been specified in the arbitration clause, and then goes on to discuss an application in the federal courts if the arbitration clause has not specified any court for enforcement of the award (the clause in question referred only to “any court having jurisdiction”). The case is Finn v. Ballentine Partners, LLC (June 14, 2016). An interesting decision that will engender discussion about the scope of the FAA vis-à-vis the state courts.