The Lawletter Vol 40 No 5
In a matter of first impression, the New York Supreme Court, Appellate Term, recently ruled that a state law prohibiting mandatory arbitration clauses in consumer contracts was preempted by the Federal Arbitration Act ("FAA"). In Schiffer v. Slomin’s, Inc., No. 2013-1867NC, 2015 WL 1566198 (N.Y. App. Term Mar. 30, 2015), consumers filed a lawsuit against a security systems provider that sold and installed home security systems. The complaint contained causes of action against the security systems provider for breach of contract, breach of warranty, and fraud. In response, the security systems provider filed a motion to compel arbitration pursuant to an unsigned contract provided to the buyers that contained a mandatory arbitration clause.
A New York state law, General Business Law section 399-c, generally prohibits mandatory arbitration clauses in consumer contracts. The Schiffer plaintiffs were homeowners-consumers; therefore, the arbitration clause the security systems provider sought to enforce was void under New York state law.
The court found that section 399-c "is a categorical rule prohibiting mandatory arbitration clauses in consumer contracts." Id. at *3. Under preemption principles, this state law is displaced by conflicting federal law, i.e., the FAA, at least where the transaction at issue has a nexus with interstate commerce. Id. Because the evidence showed that the security systems provider did business in several states, a sufficient nexus with interstate commerce existed "to require preemption of the FAA over contradictory New York law." Id.
Schiffer follows a national trend among courts to defer to the FAA and its presumption in favor of arbitration whenever any doubt exists as to whether a given dispute is subject to mandatory arbitration. As Schiffer also demonstrates, state legislation that categorically prohibits mandatory arbitration of a certain class of claims conflicts with, and is preempted by, the FAA. It is only in those rare cases wherein no nexus to interstate commerce is shown that the state law prohibiting arbitration may be enforced.