Petition for Writ of Certiorari — Home Buyers Warranty Corp. II v. Lopez

In The

Supreme Court of the United

October Term, 1993

+

HOME BUYERS WARRANTY CORPORATION IL, and

NATIONAL HOME INSURANCE COMPANY,

Petitioners,

JULIETTE G. LOPEZ,

Respondent.

¢

On Petition For A Writ Of Certiorari

To The Supreme Court Of Alabama

*

PETITION FOR A WRIT OF CERTIORARI

+

PrHiur S. Grorere, Jr.

Counsel of Record

CARPENTER & GIDIERE

904 Union Bank Tower

60 Commerce Street

Montgomery, AL 36104

(205) 834-9950

Counsel for Petitioners

Of Counsel:

Epwarp A. DAUER

PopHaM Hark SCHNOBRICH

& KAUFMAN, Lr.

1200 Seventeenth Street

Denver, CO 80202

and

Daniet P. Levitt

Kay Coityer & Boose

One Dag Hammarskjold Plaza

New York, NY 10017

December 1993

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

ee

QUESTIONS PRESENTED

1. Whether the Alabama Supreme Court’s re-inter-

pretation of “involving commerce,” for purposes of Sec-

tion 2 of the Federal Arbitration Act, to apply only to

transactions where the parties subjectively “contemplated

substantial interstate activity” - a restrictive reading

avowedly adopted in order to promote the state’s own

anti-arbitration policy — is inconsistent with the intent of

Congress as interpreted by this Court and the federal

Courts of Appeals.

2. Whether “involving commerce” in Section 2 of

the Federal Arbitration Act should be interpreted to

exploit the full reach of the Commerce Clause, rather than

be given the restrictive scope specially created for the

federal Act by the Alabama Supreme Court.

3. Whether the Alabama Supreme Court's restric-

tive re-interpretation of Section 2 wrongly makes the

Federal Arbitration Act inapplicable to a wide variety of

transactions intended to be covered, thereby threatening

to marginalize the important body of federal substantive

and procedural FAA law developed by this Court over

the past several decades - by shrinking the number and

kind of cases to which it would apply.

li

LIST OF PARTIES

Two parties involved at earlier stages of this litiga-

tion are not named as parties in this petition. Aronov

Realty Company and Jack Deal, although defendants in

the original action, did not participate in the appeal to the

Alabama Supreme Court, whose decision is sought to be

reviewed.

Parent companies:

Home Buyers Warranty Corporation II (“HBW”) is a

wholly owned subsidiary of Builders Structural Services

Incorporated II (“BSSI II”).

National Home Insurance Company (A Risk Reten-

tion Group) (“NHIC”) is owned by its approximately

12,000 member-owner-homebuilders. One of them,

Holden Construction Management, Inc., a wholly owned

subsidiary of BSSI II, owns all the Class B common

shares, which constitute 95 per cent of the common share

equity of NHIC. The Class A common shares, constituting

5 per cent of the common share equity, are owned by the

other member-owner-homebuilders.

Subsidiaries:

Neither HBW nor NHIC has any subsidiaries.

iii

TABLE OF CONTENTS

QUESTIONS PRESENTED ..............0..00eeeee.

TN TE in a

TABLE OF AUTHORITIES.... ..............00005.

ee ec nacesecscvectececes

ee, Coir cei be avaucsvnvencaverss'

CONSTITUTIONAL AND STATUTORY PROVI-

PC CtCccheGek eebeeheVebwadeeiseesdeservoess

WEARS EMEC CFF BES CABG occ vccccccscrecccveses

REASONS FOR GRANTING THE WRIT ...........

I. The Alabama Supreme Court's re-interpretation of

9 U.S.C. Section 2 impermissibly restricts the FAA,

and therefore the federal substantive and pro-

cedural law linked to it, to transactions where the

parties subjectively “contemplated substantial

interstate activity” — contrary to the intent of Con-

gress as interpreted by this Court...............

II. The Alabama Supreme Court's re-interpretation

of 9 U.S.C. Section 2 conflicts with decisions of

the federal Courts of Appeals.................

Ill. The Alabama Supreme Court’s decision shrink-

ing the FAA’s application in Alabama, and

excluding a wide range of transactions intended

to be covered, threatens to marginalize the

important body of federal substantive and pro-

cedural law under the FAA...................

CONCLUSION ............. sie ay Rees

10

14

iv

TABLE OF CONTENTS - Continued

Page

APPENDIX

Opinion of Supreme Court of Alabama, Aug. 20,

IOSD nrcvcrvndcercacesvsccenvesccssecsvesvouns App. i

Order of Montgomery County Circuit Court, Oct.

OU ee oo dah at hessevrnntceberssssnedsunees App. 11

Order of Supreme Court of Alabama, Sept. 24,

WGDS .ccvcccccccsvccccscevevecesvsssoerencans App. 16

Text of 9 U.S.C. Sections 1 and 2.............. App. 17

Text of Code of Alabama 1975, Section 8-1-41(3)

ccbbubesuess aeaaUkb sine shabecesss ere eedaes¥ss App. 18

Text of Ex parte Jones, 1993 WL 262036 (Ala.), __

So. 2d __. (July 16, 1993).......-.. see eeeeees App.

19

Vv

TABLE OF AUTHORITIES

Page

Cases:

Allied-Bruce Terminix Companies, Inc. v. Dobson,

1993 Ala. LEXIS 800, ___ So. 2d ___ (August 13,

Bennish v. North Carolina Dance Theater, Inc., 108

N.C. App. 42, 422 S.E.2d 335 (N.C. Ct. of App.

«SP Se Sem erg yy anc ey vet me Oe eS TND ETN pe SOKO me! 13

Burke County Public Schools Bd. of Ed. v. Shaver

Partnership, 303 N.C. 408, 279 S.E.2d 816 (1981) .... 13

Continental Grain Co. v. Beasley, Ala. LEXIS 669,

— 2 pee | ee rere 5, 18

Del E. Webb Constr. v. Richardson Hosp. Authority,

Ee Wades Be CR GA. SO rnd chev bsonasnbaxeress 15

Ex parte Brice Building Co., 607 So. 2d 132 (Ala.

RD Pa ape bae BNE eile Lan Seer wine ay the CREE 5

Ex parte Costa & Head (Atrium), Ltd., 486 So. 2d

rae Bi | i ope ey ee 4, 5, 12, 15

Ex parte Jones, 1993 WL 262036 (Ala.), __ So. 2d

cians, SEO Bile ROR a 644s CA Rad Ah db cieenkebedes 5, 6, 9

Ex parte Warren, 548 So. 2d 157 (Ala.), cert. denied

sub nom Jim Skinner Ford, Inc. v. Warren, 493 U.S.

Gee Cc hich 0 Heck sdewel orndteo eee 4, 12, 18

Foster v. Turley, 808 F.2d 38 (10th Cir. 1986)......... 15

Henderson v. Superior Ins. Co., 1993 Ala. LEXIS 812,

mmm Oe Oe 5, (A@Rust 20, 1990)... 6252s 6, 17, 18, 19

Lopez v. Home Buyers Warranty Corp. II, 1993 Ala.

LEXIS 818, __ So. 2d __ (August 20, 1993) .. passim

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware,

414 U.S. 117 (1973)...... seen eeeeeeeeeececnsnees 11

vi

TABLE OF AUTHORITIES - Continued

Page

Mesa Operating Limited Partnership v. Louisiana

Intrastate Gas Corp., 797 F.2d 238 (5th Cir. 1986) .... 15

Metro Industrial Painting Corp. v. Terminal Constr.

Co., 287 F.2d 382 (2d Cir. 1961)........-eeeeeeeees 12

Moses H. Cone Memorial Hospital v. Mercury Constr.

Corp., 460 U.S. 1 (1983)... .. cc cceccceseeceees 6, 7, 11

Perry v. Thomas, 482 U.S. 483 (1987)............ 6, 7, 10

Prima Paint Corp. v. Flood & Conklin Mfg. Corp., 388

US. B95 (1967) ..ccccccsccccessesssececedseses passim

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)....... 7

Snyder v. Smith, 736 F.2d 409 (7th Cir. 1984), cert.

denied, 469 U.S. 1037 (1985)..........--555. 14, 15, 16

Southland Corp. v. Keating, 465 U.S. 1 (1984)

cevecavevacsecadceesevsseneee 6, 10, 11, 14, 19

The Terminix Int. Co. LP v. Jackson, 1993 Ala. LEXIS

803, __ So. 2d __. (August 13, 1993)........... 6, 17

Willis v. Dean Witter Reynolds, 948 F.2d 305 (6th

Che. 1998) occ ccccccscvctstccvckcceussceneahaawenes 16

STATUTES:

9 U.S.C. Gectlon 2 occ ccccvcodecevevesceneseveven passim

15 U.S.C. Sections 3901, ef 80q.....ccccsccccccccecsces 3

Code of Alabama 1975, Section 8-1-41(3) ........... 2, 8

OTHER AUTHORITIES CITED:

Bynam & Pugh, “Enforcing Arbitration Agree-

ments in Alabama: A Double Dilemma,” 54 Ala-

bama Lawyer 38 (January 1993)............. pated dies 9

No.

+

In The

Supreme Court of the United States

October Term, 1993

°

HOME BUYERS WARRANTY CORPORATION II, and

NATIONAL HOME INSURANCE COMPANY,

Petitioners,

JULIETTE G. LOPEZ,

Respondent.

+

On Petition For A Writ Of Certiorari

To The Supreme Court Of Alabama

+

PETITION FOR A WRIT OF CERTIORARI

¢

Home Buyers Warranty Corporation II (“HBW”) and

National Home Insurance Company (“NHIC”) respect-

fully petition for a writ of certiorari to review the judg-

ment of the Supreme Court of Alabama in this case.

+

OPINIONS BELOW

The opinion of the Alabama Supreme Court, not yet

reported, is reproduced in the Appendix at App. 1-10.

The opinion of the Circuit Court of Montgomery County,

1

Alabama, likewise not reported, is reproduced in the

Appendix at App. 11-15.

JURISDICTION

The opinion of the Alabama Supreme Court was

released on August 20, 1993. (App. 1-10) Petitioners’

timely application for rehearing was overruled on Sep-

tember 24, 1993. (App. 16) This Court has jurisdiction to

consider this petition under 28 U.S.C. Section 1257(a).

+

CONSTITUTIONAL AND STATUTORY PROVISIONS

The federal constitutional provisions involved are the

Commerce Clause of Article I, Section 8, and the Suprem-

acy Clause of Article Vi. The statutory provisions

involved are Sections 1 and 2 of the Federal Arbitration

Act, 9 U.S.C. Sections 1 and 2, and Section 8-1-41(3) of the

Code of Alabama 1975, as amended. These provisions are

reproduced in the Appendix, at App. 17-18.

+

STATEMENT OF THE CASE

In 1988, petitioner HBW, a Colorado corporation,

from its service office in Denver, issued a home buyers

warranty covering specified potential defects on a new

house in Montgomery, Alabama. The warranty agreement

provided that HBW’s representative would inspect the

house, and that any claims under the warranty be filed

either in Denver, or at the Colorado company’s regional

office in Tucker, Georgia. HBW maintains no office or

personnel in Alabama.

In August of 1989 the Montgomery house was resold

to respondent and her husband, who at the time were in

Key West, Florida. Closing documents shuttled back and

forth between Key West and Montgomery by fax and

private courier. The new buyers executed the closing

documents in Key West, assisted by their lawyer, who

was also in Key West. The warranty transferred to the

new owner.!

Shortly after respondent moved into the Montgomery

house, she asserts she observed structural defects. She

notified HBW’s regional office in Tucker, Georgia. The

Denver service office replied, sending respondent the

necessary claims forms and other information. Despite a

clause in the warranty agreement requiring arbitration, in

April 1991 respondent sued HBW on the agreement in

Montgomery County circuit court. HBW moved to

enforce the agreement’s arbitration clause. Although Ala-

bama law prohibits specific enforcement of predispute

arbitration agreements, the circuit court found sufficient

involvement of interstate commerce under Section 2 of

the Federal Arbitration Act (the “FAA”), 9 U.S.C. Section

' The warranty is that of the builder. Petitioner HBW is a

warranty administration company which performs warranty-

related tasks for builder members of petitioner NHIC, and for

NHIC. NHIC is a Colorado corporation licensed and regulated

by the Colorado Division of Insurance. It is a risk retention

group organized and operating pursuant to the Federal Risk

Retention Act, 15 U.S.C. Sections 3901 et seq. NHIC insures its

member-owners’ new home warranties in the 48 contiguous

states. The builder here was a member-owner of NHIC.

2, to invoke the federal provision requiring enforcement.

(App. 13-15). On October 19, 1992, the court stayed suit

pending arbitration.

The Alabama Supreme Court granted a writ of man-

damus on August 20, 1993, vacating the circuit court's

order. A majority held the FAA inapplicable, for insuffi-

cient involvement of interstate commerce.? The majority

reached this result because a few weeks earlier, on July

16, 1993, it had dramatically re-interpreted the way Sec-

tion 2 of the FAA applies in Alabama.

Until this past summer, contradictory tests for deter-

mining the sufficiency of “commerce” for FAA purposes

had co-existed in Alabama jurisprudence. Under Ex parte

Costa & Head (Atrium), Ltd., 486 So. 2d 1272 (Ala. 1986)

(“Costa & Head”), the FAA was generally interpreted to

apply when there was the “slightest nexus” with inter-

state commerce - reflecting the court’s then view that the

FAA was intended to exploit the full reach of the Com-

merce Clause. On the other hand, in two narrow catego-

ries of cases — those involving consumer disputes with

automobile dealers and disputes arising out of stock pur-

chase agreements — the court had since 1989 applied a

more restrictive test. That was the test formulated in Ex

parte Warren, 548 So. 2d 157 (Ala.), cert. denied sub nom Jim

2 Lopez v. Home Buyers Warranty Corp. II, 1993 Ala. LEXIS

818, ___ So. 2d ___ (August 20, 1993), reproduced at App. 1-10.

Of the nine sitting justices, one — Justice Ingram — concurred in

the result, while two — Justices Maddox and Adams - dissented.

Both sides raised and briefed the federal issue of the appli-

cability of the FAA and how “involving commerce” should be

interpreted. That issue was decided by the court, and its resolu-

tion objected to by the dissenting justices. (App. 3-10)

Skinner Ford, Inc. v. Warren, 493 U.S. 998 (1989) (“War-

ren’), holding that the FAA applied only where the con-

tracting parties were shown at the time of agreement to

“

have subjectively

activity.”3

contemplated substantial interstate

On July 16, 1993, over the objections of Justices Mad-

dox, Adams and Ingram, the Alabama Supreme Court

formally overruled Costa & Head in favor of Warren. The

new, more restrictive re-interpretation was announced in

two cases decided that day: Ex parte Jones, 1993 WL

262036 (Ala.), __ So. 2d ___ (July 16, 1993); and Continen-

tal Grain Co. v. Beasley, Ala. LEXIS 669, ___ So. 2d ___ (July

16, 1993).4 The majority opinion in the present case can-

didly admitted that Warren's “contemplation” test had

been chosen because it “better promotes our strong pub-

lic policy against the use of predispute arbitration agree-

ments.” (App. 4) For the Court’s convenience, we have

3 By its own terms, and as described in later cases, until

mid-1993 Warren was originally confined to its own “narrow

factual context.” Ex parte Brice Building Co., 607 So. 2d 132 (Ala.

1992). Indeed, the majority in Ex parte Jones,1993 WL 262036, ___

So. 2d ___ (July 16, 1993), admitted that it had “reemphasized”

in prior cases that “Warren ‘has a narrow application.’ ” And

Justice Maddox observed in his Ex parte Jones dissent that War-

ren had in practice only been applied to consumer disputes with

auto dealers, and to disputes arising out of stock purchase

agreements.

4 In Ex parte Jones, a dispute arising out of a stock purchase

agreement, the majority denied arbitration. In Continental Grain,

involving agreements between a foreign corporation and its

Georgia division using Alabama chicken growers to raise poul-

try for interstate markets, the court found the federal Act appli-

cable even under the new test.

Neen

reproduced the text of Ex parte Jones in the Appendix,

starting at App. 19.

A few weeks later, the court applied this more restric-

tive test to deny arbitration to petitioner. Justices Maddox

and Adams again dissented.5 Justice Maddox argued that

the court’s new subjective “contemplation” test was

inconsistent with the FAA’s legislative history, and with

this Court’s decisions in Southland Corp. v. Keating, 465

U.S. 1 (1984), Moses H. Cone Memorial Hospital v. Mercury

Constr. Corp., 460 U.S. 1 (1983), and Perry v. Thomas, 482

U.S. 483 (1987). (App. 7-10)

The present case was only one of four separate cases

in which the Alabama Supreme Court, this past August,

used the new “contemplation” test to deny specific

enforcement of predispute arbitration agreements.® A

5 Justice Ingram concurred in the result.

6 The other three were Allied-Bruce Terminix Companies, Inc.

v. Dobson, 1993 Ala. LEXIS 800 (August 13, 1993), where the

homeowner deliberately replaced his local termite bond to “go

with a national company like Terminix,” used a Veterans

Administration form, and obtained a bond issued in Tennessee

by an Arkansas corporation and guaranteed by a Delaware

limited partnership based in Tennessee; The Terminix Int. Co. LP

v. Jackson, 1993 Ala. LEXIS 803 (August 13, 1993), involving a

Delaware limited partnership based in Tennessee, and a termite

bond issued by an Arkansas company utilizing a Veterans

Administration form and contemplating use of materials

brought in from out-of-state; and Henderson v. Superior Ins. Co.,

1993 Ala. LEXIS 812 (August 20, 1993), involving claims under

an accident insurance policy issued in Atlanta, Georgia, by a

Delaware corporation based in Atlanta with no Alabama office.

Neither of the Lopez dissenters sat in any of these three

cases.

timely petition for rehearing in the present case was

denied on September 24, 1993.

+

REASONS FOR GRANTING THE WRIT

Section 2 of the FAA declares that written agreements

to arbitrate

in any maritime transaction or a contract evi-

dencing a transaction involving commerce

. Shall be valid, irrevocable, and enforceable,

save upon such grounds as exist at law or in

equity for the revocation of any contract.

[Emphasis supplied]

This statute, reflecting a strong national policy favoring

arbitration, was intended to “revers[e] centuries of judi-

cial hostility to arbitration agreements.” Scherk v. Alberto-

Culver Co., 417 U.S. 506, 510 (1974). This Court zealously

enforces the statute, “notwithstanding any state substan-

tive or procedural policies to the contrary.” Moses H. Cone

Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24

(1983). Since Prima Paint Corp. v. Flood & Conklin Mfg.

Corp., 388 U.S. 395 (1967), this Court has eliminated one

state-created barrier after another to implementation of

the FAA’s pro-arbitration policy, and has created a body

of federal substantive and procedural law controlling in

both federal and state courts - applicable in those cases

where the FAA itself applies through Section 2. In the

course of developing this body of law, the Court has

recognized that Congress intended the FAA to apply

“within the full reach of the Commerce Clause.” Perry v.

Thomas, 482 U.S. 483, 490 (1987).

Alabama maintains a contrary state public policy

hostile to arbitration. By statute it strictly prohibits

enforcement of predispute arbitration agreements, except

where federal law preempts.? The Alabama Supreme

Court has now created a device to widen the scope of

Alabama’s anti-arbitration policy at the expense of the

federal policy strongly favoring arbitration. The device is

as simple as it is impermissible. Attack the federal policy

at its weakest link — that is, cut back the reach of the FAA,

and therefore the federal substantive and procedural law

inextricably linked to it, by shrinking the meaning of the

key jurisdictional phrase “involving commerce.” Once the

jurisdictional reach of the FAA is shrunk, the body of

federal substantive and procedural law developed by this

Court in connection with the FAA would only apply to

the shrunken number of cases that can satisfy this nar-

rower, and highly subjective, jurisdictional test.

In Alabama, “involving commerce” no longer means

that the FAA applies to any transaction with the “slight-

est nexus” to interstate commerce, or even to transactions

“affecting” commerce. Instead, in Alabama, the FAA now

only applies - and predispute arbitration clauses are only

specifically enforceable and the related federal law appli-

cable — where the contracting parties are found to have

subjectively “contemplated substantial interstate activity”

7 Code of Alabama, 1975, Article 8-1-41 includes among

“obligations [which] cannot be specifically enforced: . . .

(3) An agreement to submit a controversy to arbitration.”

when they agreed to arbitrate. The key in many cases will

be personal affidavits from parties seeking to avoid arbi-

tration, or to avoid some aspect of the body of federal law

that accompanies the FAA, that they “had not contem-

plated substantial interstate activity” when they volun-

tarily entered into contracts containing agreements to

arbitrate.®

The decision of the Alabama Supreme Court conflicts

with decisions by this Court and by several of the federal

Courts of Appeals. Should the Alabama decision stand,

the important federal policy strongly favoring arbitration

would have only a stunted application in Alabama and in

other states which do not enforce predispute arbitration

agreements. Moreover, courts bent on preserving anoma-

lous state limitations upon arbitration would be tempted

to use the subjective “contemplation” test in order to

limit the scope both of the FAA itself and of the federal

substantive and procedural law linked to it.

8 Justice Maddox’ Ex parte Jones dissent (App. 25) noted

that commentators in Alabama had criticized the Warren test for

its “subjectivity,” citing Bynam & Pugh, “Enforcing Arbitration

Agreements in Alabama: A Double Dilemma,” 54 Alabama Law-

yer 38, 43 (January 1993). The authors wrote: “The Warren sub-

jective test encourages the party seeking to avoid arbitration to

fabricate, after the fact, his alleged ‘state of mind’ at the time of

contracting to avoid the enforcement of an unambiguous writ-

ten clause.”

10

I. The Alabama Supreme Court’s re-interpretation

impermissibly restricts the FAA, and therefore the

federal substantive and procedural law linked to it,

to transactions where the parties subjectively “con-

templated substantial interstate activity” — contrary

to the intent of Congress as interpreted by this

Court

Southland Corp. v. Keating, 465 U.S., at 16, recognizes

that, in creating the FAA, “Congress intended to foreclose

state legislative attempts to undercut the enforceability of

arbitration agreements.” There, the Court confronted a

California ban on arbitration of claims brought in state

court under a state franchise investment law, on the the-

ory that the FAA did nothing more than create a pro-

cedural remedy for cases brought in federal court. This

Court gave that position short shrift. In language perti-

nent here, the Court held that in enacting the FAA:

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.

465 U.S., at 14.

In Perry v. Thomas, 482 U.S. 483 (1987), the Court held

that the FAA preempted provisions of the California

Labor Code purporting to exempt wage claims from arbi-

tration. In its decision, Section 2 of the FAA was

described, 482 U.S., at 490, as

11

a statute that embodies Congress’ intent to pro-

vide for the enforcement of arbitration agree-

ments within the full reach of the Commerce Clause.

[Emphasis supplied]?

As demonstrated by the dissenting opinions in such cases

as Southland, Mercury Construction, Perry and Prima Paint,

the FAA’s legislative history left room for honest dis-

agreement about aspects of the original intent. These

have included whether the FAA applies to state, as well

as federal, court proceedings; whether important substan-

tive areas regulated by various federal statutes are

beyond the reach of the FAA; whether states may carve

out substantive areas for exclusion from the FAA; and

whether the states may interpose procedural obstacles of

their own invention, such as court determination of

“fraud in the inducement” defenses. But Prima Paint and

subsequent cases have settled such disagreements.

Nor should it any longer be open to question that, as

this Court held in Perry, Section 2 was intended fully to

exploit the reach of the Commerce Clause. If Perry is

correct, enforceability under the FAA, and application of

the federal substantive and procedural law linked to it,

cannot be restricted to those arbitration agreements

* This broad interpretation of Section 2 was not casually

uttered. To reach its result, the Court had to distinguish its

earlier decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Ware, 414 U.S. 117 (1973). Ware had held that the same California

Code provisions did not conflict with the federal securities

regulatory scheme and were not preempted. The Court distin-

guished Ware on the ground that, unlike the FAA, the federal

scheme involved there did not require “nationwide uniformity”

of dispute resolution, manifested no intent to require arbitra-

tion, and had a narrower jurisdictional base.

12

where the contracting parties are found to have subjec-

tively “contemplated substantial interstate activity.”

The Alabama Supreme Court’s decision to the con-

trary was not based on any examination of the legislative

history, or even on analysis of this Court’s decisions.

Instead, the majority simply chose Warren's more restric-

tive “contemplation” test, which the court had itself

always confined to its “narrow factual context,” over the

more expansive “slightest nexus” test of Costa & Head.

And it did so precisely because it believes the more

restrictive test better accommodates Alabama’s public

policy against specific enforcement of predispute arbitra-

tion agreements.

In Warren, too, the majority had omitted to review

either the legislative history or this Court’s decisions.

Instead, it had lifted language — out of context — from

dictum in a concurring opinion in Metro Industrial Paint-

ing Corp. v. Terminal Constr. Co., 287 F.2d 382 (2d Cir.

1961). Metro was an exceedingly easy case, whatever the

jurisdictional standard, for it arose out of an agreement

made in New York between Connecticut and New Jersey

contractors and a New York subcontractor under which

the New York sub performed painting services at Home-

stead Air Force Base in Florida, using out-of-state person-

nel and materials. Judge Lumbard’s concurring opinion

addressed the “involving commerce” question, not for the

purpose of restricting the reach of the FAA, but to sug-

gest that what mattered was not whether people or goods

actually crossed state lines (parties opposing arbitration

13

had argued that all the painting work was in fact per-

formed in one Florida county), but whether the agree-

ment on its face “evidences interstate traffic.” 287 F.2d, at

387.10

North Carolina’s Supreme Court, which sometimes

relies on Judge Lumbard’s “contemplation” language,

does so not to further an anti-arbitration policy, but to

broaden the reach of the FAA and rebut arguments that it

does not apply, e.g., where contractual performance was

exclusively in-state. See Burke County Public Schools Bd of

Ed v. Shaver Partnership, 303 N.C. 408, 279 S.E.2d 816,

818-19 and n.8 (1981), where a lower court had perversely

read Prima Paint to require “actual physical interstate

shipment of goods.” The state supreme court cited Metro

as one of several cases applying the FAA despite the fact

that the contracted-for performance was entirely local.'!

In short, the Alabama Court has stood Metro on its

head, using dictum in a concurring opinion in an easy

case — language intended to repel an attack on the FAA -

10 Indeed, Judge Lumbard observed the arbitration agree-

ment in Metro was, in any event, enforceable under New York

state law, as well as under the FAA. 287 F.2d, at 388 n.3.

'! Burke County involved a repealed, but arguably still

applicable North Carolina statute interpreted, despite ostensi-

bly favorable language, to forbid specific enforcement of predis-

pute arbitration agreements. A new statute, effective August 1,

1973, made such agreements specifically enforceable. 279

S.E.2d, at 818 n.5.

See also, Bennish v. North Carolina Dance Theater, Inc., 108

N.C. App. 42, 422 S.E.2d 335 (N.C. Ct. of App. 1992), where the

court emphasized North Carolina’s present pro-arbitration pol-

icy, and cited the Lumbard language to make clear that the FAA

applies to personal service contracts.

ee

14

as a device to broaden the reach of Alabama’s own anti-

arbitration policy at the expense of the FAA and the

federal body of law linked to it.

II. The Alabama Supreme Court’s re-interpretation of

Section 2 conflicts with decisions of the federal

Courts of Appeals

The Alabama Supreme Court’s decision that “involv-

ing commerce” requires that the parties subjectively

“contemplated substantial interstate activity” conflicts

with decisions by several of the federal Courts of

Appeals.

The leading case is Snyder v. Smith, 736 F.2d 409,

417-18 (7th Cir. 1984), cert. denied, 469 U.S. 1037 (1985).

Snyder involved a partnership whose sole function was to

own real property in Harris County, Texas, but whose

partners all lived in Illinois when the partnership was

formed. At issue was a dispute over the price to be paid

for a deceased partner’s interest. Appellant unsuc-

cessfully argued that it was not enough to show that the

transaction “affected commerce,” and disputed the suffi-

ciency of “any casual and sporadic activities in which the

partnership engaged.” On these facts, the appellate court

found the FAA applicable. It noted that Prima Paint had

declined to limit the FAA to interstate shipment of goods,

as the losing party there had argued. And it construed

Southland’s statement that “involving commerce” was not

a limitation on the statute but a “qualification” as “sug-

gest[ing] that Congress intended the [FAA] to apply to all

ee

15

contracts that it constitutionally could regulate.” 736 F.2d,

at 418.12

In the Fifth Circuit, the FAA applies to all contracts

“relating to interstate commerce.” The Court of Appeals

so held in Mesa Operating Limited Partnership v. Louisiana

Intrastate Gas Corp., 797 F.2d 238, 243-44 (5th Cir. 1986),

citing the legislative history, Prima Paint, and Snyder. At

issue was a take-or-pay contract over royalty gas owned

by the State of Louisiana, produced in Louisiana by Mesa,

and transported and sold to customers entirely in Louisi-

ana. It was sufficient to invoke the FAA that Mesa part-

ners lived in Texas, and sometimes traveled to and

otherwise communicated with Louisiana. In Del E. Webb

Constr. v. Richardson Hosp. Authority, 823 F.2d 145, 147-48

(Sth Cir. 1987), the Court of Appeals not only followed

Mesa, but expressly rejected an argument that for FAA

purposes the interstate commerce must be “substantial.”

Webb arose out of a construction dispute where all the

construction was in Texas, Webb maintained an office in

Texas to run the project, and issued all payroll checks in

Texas. The court found it sufficient that employees and

construction materials crossed state lines, and that the

mails were used.

The Alabama Supreme Court decision also conflicts

with the Tenth Circuit’s decision in Foster v. Turley, 808

F.2d 38, 40-41 (10th Cir. 1986), arising out of an agreement

to purchase half of a New Mexico mine. The buyer Foster

lived in Oregon, on at least one occasion sent trucks to

12 Back in 1986, when the Alabama Supreme Court fash-

ioned its own “slightest nexus” test, it relied explicitly on

Snyder. Costa & Head, 486 So. 2d, at 1275.

16

New Mexico, proceeds were sent to him in Oregon, and

the mine’s products were sometimes milled and sold

outside of New Mexico. The court had no difficulty on

these facts. And it, too, held that “involving commerce” is

to be construed as “coextensive with congressional power

to regulate under the Commerce Clause,” in reliance on

Prima Paint and Snyder. 808 F.2d, at 40.!9

III. The Alabama Supreme Court’s decision shrinking

the FAA’s reach in Alabama, and excluding a wide

range of transactions intended to be covered,

threatens to marginalize the important body of

federal substantive and procedural law under the

FAA

The decision sought to be reviewed is no fluke. For it

represents a deliberate effort to shrink the reach of the

FAA, and will inevitably curtail application, in Alabama

and many other states, of the body of federal substantive

and procedural law which this Court has developed since

Prima Paint.

In many jurisdictions, the FAA is interpreted to

require specific enforcement of predispute arbitration

agreements, and therefore compliance with this Court's

FAA-related decisions — in all transactions where the

fullest reach of the Commerce Clause justifies its applica-

tion. But in Alabama, the FAA now applies only where

13 In a slightly different context, the Sixth Circuit has like-

wise concluded that Section 2 “was meant to extend the appli-

cability of the Act and its exclusions to the scope of Congress’

power under the Commerce Clause...” Willis v. Dean Witter

Reynolds, 948 F.2d 305, 310 (6th Cir. 1991).

17

the courts find that the contracting parties subjectively

“contemplated substantial interstate activity.”

Among the immediate consequences of the new test,

and we needn’t speculate because they are alre'y

reflected in a half-dozen Alabama Supreme Court deci-

sions, are these:

1. The FAA, and this Court’s FAA-related decisions,

no longer apply in Alabama to home buyers warranties

issued by out-of-state companies with no local presence —

even where the home buyer negotiates to buy his or her

new home from outside the state, uses means of interstate

commerce to facilitate the purchase, files claims as

required in offices outside the state, and receives claims

information from out-of-state. Lopez v. Home Buyers War-

ranty Corp., supra.

2. The FAA, and this Court’s FAA-related decisions,

no longer apply in Alabama to termite bonds issued by

out-of-state national companies with no local presence -

even where the owner deliberately replaces a local bond

with a national one, uses a Veterans Administration form,

and has the home inspected by persons traveling from

out-of-state and who use out-of-state materials. Terminix

Int. Co. LP v. Jackson, supra, and Allied-Bruce Terminix

Companies, Inc. v. Dobson, supra.

3. The FAA, and this Court’s FAA-related decisions,

no longer apply in Alabama to claims arising out of

accident insurance policies issued by out-of-state com-

panies with no local presence, so long as the insured

deals with a local agent. Henderson v. Superior Ins. Co.,

supra.

18

4. The FAA, and this Court’s FAA-related decisions,

no longer apply in Alabama to claims against dealers

selling cars manufactured out-of-state and subject to a

whole panoply of federal regulation —- even where the

parties have agreed in writing “That the motor vehicle

described in this sale document has been heretofore trav-

eling in interstate commerce and has an impact upon

interstate commerce,” so long as the party opposing arbi-

tration asserts, contrary to the written agreement, that

“substantial interstate activity” was not “contemplated.”

Ex parte Warren, 548 So.2d, at 158.14

Indeed, Warren and Henderson together suggest the

court’s intention to limit the FAA only to the most obvi-

ously interstate transactions between commercial busi-

nesses like the ones in Continental Grain, excluding from

its reach all transactions between Alabama consumers, on

the one hand, and local merchants, agents and other

businessmen — regardless whether the transactions have a

nexus with, or relate to or affect interstate commerce.

There is no basis in the legislative history, or this Court's

decisions, for such a restrictive view of the FAA.

5. Except in obvious cases like Continental Grain, all

that it may take in Alabama to avoid the FAA and this

Court’s FAA-related decisions is a boiler-plate affidavit

asserting the subjective proposition that the affiant “did

not contemplate substantial interstate activity” when vol-

untarily agreeing to arbitrate future disputes. See, e.g.,

14 Justice Maddox, dissenting, wrote that he “cannot make

a distinction between a contract to buy stock [held subject to the

FAA in prior Alabama decisions] and a contract to buy an

automobile.” Ex parte Warren, 548 So. 2d, at 161.

xa

19

Henderson v. Superior Ins. Co., supra, where such an affi-

davit was accorded significant weight.!>

One by one, this Court has eliminated substantive

and procedural obstacles raised by states to the pro-

arbitration policy reflected in the FAA. The Court has, for

example, rejected contentions that the FAA, and the fed-

eral substantive and procedural law iinked to it, only

apply in federal court, that they have no application in

the face of the federal scheme regulating securities or

state schemes regulating wage claims, that they don’t

apply to international antitrust claims or to certain age

discrimination claims, that certain kinds of disputes are

not really suited to arbitration and are better left to the

courts, and that the FAA only applies to transactions

involving physical shipment of goods across state lines.

The Court has always recognized the special impor-

tance of policing how the FAA is treated in state courts,

since the vast bulk of litigation arguably subject to the

statute takes place in the state courts. The Alabama

Supreme Court’s attempt to shrink the reach of the FAA

represents, therefore, a serious threat to the objectives

which led Congress to enact the FAA and this Court to

police its enforcement.

The most immediate victims of this deviant re-inter-

pretation are the parties to the wide range of transactions

1S The Alabama decision invites costly and time-consuming

peripheral litigation over the truth of such subjective state-

ments, as well as over the “substantiality” of the interstate

activity involved. This Court has pointed out that a “core pur-

pose” of the FAA was to avoid such costly delays. Southland, 460

U.S., at 7-8

20

which now seem to be excluded from the FAA in Ala-

bama. These include transactions involving home buyer

warranties, termite bonds, accident insurance policies,

and the purchase of consumer goods including auto-

mobiles so long as local dealers and agents are used.

This more restrictive jurisdictional test is likely to

spread not only to states like Mississippi and Nebraska

with public policies hostile to arbitration agreements, but

also to the many states whose own laws carve out catego-

ries of disputes from arbitration, or interpose various

procedural hurdles to arbitration. This Court has been

vigilant not to permit the FAA to be whittled away by

such state-created hazards. But where restrictive and sub-

jective interpretations of “involving commerce” render

the FAA inapplicable, these state hazards will come in

through the back door.

Once free of FAA compulsion, even those states

whose own laws do enforce predispute arbitration agree-

ments will regain the right under state law to carve out

exceptions. Courts everywhere will now be free — in cases

found to be outside the newly restricted jurisdiction of

the FAA — to declare that wage claims, franchise disputes,

or state RICO claims are not suitable for arbitration. And

they will regain the right to interpose such procedural

obstacles as court adjudication of “fraud-in-the induce-

ment” defenses, the right of parties unilaterally to revoke

their agreements to arbitrate, extraordinary requirements

that arbitration clauses must be signed by the parties’

counsel and not by the parties alone, unusual rules for

determining when the right to arbitrate has been waived,

and special rules governing the remedies allowable

through arbitration. These are obstacles to arbitration

21

which would not, or might not, be tolerated where the

FAA does apply.

In short, the Alabama Supreme Court's re-interpreta-

tion of “involving commerce” threatens to unravel much

of what this Court’s FAA decisions have accomplished

since Prima Paint.

CONCLUSION

The Alabama Supreme Court has deliberately chosen

to shrink “involving commerce,” in order to promote the

state’s anti-arbitration policy at the expense of the

national policy strongly favoring arbitration. Its restric-

tive re-interpretation is inconsistent with the intent of

Congress, as interpreted by this Court and the federal

Courts of Appeals. “Involving commerce” now means

one thing in Alabama, something else in the federal

Courts of Appeals and many other states. As a result,

decades of this Court’s FAA-related decisions are threat-

ened to be marginalized even in states whose own laws

22

enforce predispute arbitration agreements. This is an area

where the Court’s guidance is urgently needed.

Respectfully submitted,

Puiu S. Grprere, Jr.

Counsel of Record

CARPENTER & GIDIERE

60 Commerce Street

904 Union Bank Tower

Montgomery, AL 36104

(205) 834-9950

Counsel for Petitioners

Of Counsel:

Epwarp A. DAUER

PorpHAM Hatik SCHNOBRICH

& KAuUFMAN, Ltp.

1200 Seventeenth Street

Denver, CO 80202

and

Danie P. Levitt

Kay Coityer & Boose

One Dag Hammarskjold Plaza

New York, NY 10017

December 21, 1993

App. 1

SUPREME COURT OF ALABAMA

SPECIAL TERM, 1993

1920330

Juliette G. Lopez

v.

Home Buyers Warranty Corporation, et al.

Appeal from Montgomery Circuit Court

(CV-91-897)

SHORES, JUSTICE.

Juliette Lopez filed an “appeal” from an order of the

Circuit Court of Montgomery County compelling her to

arbitrate her claims against Home Buyers Warranty Cor-

poration II (“Homes Buyers”). The issue here is whether a

claim based on a homeowner’s warranty is subject to

arbitration under the provisions of the Federal Arbitra-

tion Act (“FAA”), 9 U.S.C. §§ 1-15.

Because “a petition for a writ of mandamus is the

proper means to test a trial court’s granting of a motion

to arbitrate,” Ex parte Alexander, 558 So.2d 364, 365 (Ala.

1990), we treat Lopez’s filing, although it was in the form

of an appeal, as a petition for a writ of mandamus requir-

ing the Montgomery Circuit Court to vacate its order

compelling arbitration. See A.G. Edwards & Sons, Inc. v.

Clarke, 558 So.2d 358, 360 (Ala. 1990). We grant the writ.

Mrs. Lopez and her husband purchased a house in

Montgomery, Alabama, from Mr. and Mrs. Glen Browder

on August 31, 1989. The Browders had listed the house

with, and the sale was conducted in part through agents

App. 2

of, Aronov Realty Company, Inc. (“Aronov”). The

Lopezes executed the closing documents on the house

while they were in Key West, Florida.! The house was

covered by a Home Buyers warranty against specified

defects. This warranty was issued in 1988 from the Home

Buyers office in Denver, Colorado, to the Browders, as the

original homeowners. Under the terms of the warranty, a

Home Buyers representative was to inspect the house

during its construction. The warranty coverage trans-

ferred to the Lopezes when they bought the house from

the Browders.

Mrs. Lopez moved into the house in June 1990;

shortly thereafter, she noticed cracks in the floors and

noticed other structural defects. Her attorney notified

Home Buyers’ regional office in Tucker, Georgia, by letter

dated March 1, 1991, of her potential claim under her

Home Buyers warranty. A representative from Home

Buyers’ warranty service office in Denver, Colorado,

wrote Mrs. Lopez on March 6, 1991, and informed her of

the procedure for filing a claim for coverage of structural

damage under her warranty. On April 19, 1991, Mrs.

Lopez sued Home Buyers for recovery of the costs of

structural repairs to her house. She also sued Aronov,

alleging fraud in regard to the sale of the house.

Home Buyers moved to dismiss, or, in the alternative,

to compel arbitration under the terms of the arbitration

1 The closing documents were sent back and forth between

Key West and Montgomery by fax and by private courier. Mr.

and Mrs. Lopez closed the purchase on their house with the help

of their attorney, who was also in Key West.

App. 3

clause contained in the warranty. That arbitration clause

States, in part:

“Should the Builder or the Homebuyer(s) dis-

agree with the Insurer’s decision to deny the

claim as recommended by the Service, the con-

testing party shall call for conciliation with the

Service or an arbitration to be conducted by the

American Arbitration Association (A.A.A.), or

other mutually agreeable arbitration service at

the Service’s expense. . . . The voluntary dispute

settlement process provided herein shall be a

condition precedent to the commencement of

any litigation by any party to compel compli-

ance with the warranty documents or to seek

relief for any dispute arising out of this pro-

gram.”

On October 19, 1992, the trial court ordered Mrs. Lopez io

submit her claims against Home Buyers to arbitration

under the terms of the warranty contract. The claims

against Aronov have been stayed pending our ruling on

the enforceability of the arbitration clause. Although the

trial court’s order compelling arbitration purported to

“dismiss” Mrs. Lopez’s claims against Home Buyers, we

understand that “dismissal” to be in reality a stay of the

proceedings against Home Buyers pending arbitration.

Under Alabama law, the specific enforcement of a

predispute arbitration agreement violates public policy

unless federal law preempts state law. See § 8-1-41(3),

Ala. Code 1975; Wells v. Mobile County Bd. of Relators, Inc.,

387 So.2d 140, 144 (Ala. 1980); Bozeman v. Gilbert, 1 Ala.

90, 91 (1840). “The FAA applies to a transaction within

this state if the contract [1] involves interstate commerce

and [2] contains an arbitration clause voluntarily entered

App. 4

into by the parties.” A.J. Taft Coal Co. v. Randolph, 602

So.2d 395, 397 (Ala. 1992), citing Ex parte Alabama Oxygen

Co., 452 So.2d 860 (Ala. 1984). To determine whether

federal law preempts our public policy against enforce-

ment of predispute agreements to arbitrate, we must

examine whether the warranty agreement containing the

arbitration provision involves interstate commerce. Ex

parte Jones, [Ms. 1920249, July 16, 1993], __ So.2d __

(Ala. 1993).

Home Buyers argues that the warranty agreement

involves interstate commerce, and, because this dispute

arose out of the warranty agreement, that the FAA must

apply. In so arguing, Home Buyers relies on the “slightest

nexus” test of Ex parte Costa & Head (Atrium), Ltd., 486 So.

2d 1272 (Ala. 1986), wherein the existence of the slightest

nexus between an agreement and interstate commerce

would bring the agreement within the ambit of the FAA,

thus allowing enforcement of a predispute arbitration

provision within the agreement. Id. at 1275.

However, we have recently overruled the Costa &

Head “slightest nexus” test in favor of the more reasoned

approach of the “contemplation” test applied in Ex parte

Warren, 548 So. 2d 157 (Ala.), cert. denied sub nom Jim

Skinner Ford, Inc. v. Warren, 493 U.S. 998 (1989). Ex parte

Jones, supra, __ So.2d at __. The Warren test examines

whether the parties “contemplated substantial interstate

activity” at the time they entered into the contract and

accepted the arbitration clause.* Ex parte Waren, supra, at

2 The standard in Warren better promotes our strong public

policy against the use of predispute arbitration agreements. Its

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App. 5

160. Whether the parties contemplated substantial inter-

state commerce is, of course, to be determined by the

facts and circumstances of each case.

The trial court applied the slightest nexus test when

it compelled arbitration:

“After hearing oral arguments and after

consideration of the briefs and memoranda sub-

mitted by the parties, the Court has determined

that the facts surrounding the Home Buyers

contract do support a finding that the contract

has at least [the] slightest nexus with interstate

commerce so as to bring the contract under the

purview of the FAA. Some of the facts support-

ing this finding are as follows: Home Buyers is a

Colorado corporation and Plaintiff is an Ala-

bama resident; if Plaintiff is not satisfied with

the builder’s performance, she must send an

application to either Georgia or Colorado; the

Home Buyers district office for the State of Ala-

bama is in Tucker, Georgia; and the Home

Buyers Claims & Warranty Service Office is in

Denver, Colorado. As stated previously, the

above facts indicate that the Home Buyers con-

tract has at least [the] ‘slightest nexus’ with

interstate commerce.”

Mrs. Lopez contends that there is insufficient

involvement with interstate commerce to require arbitra-

tion, because the house was built in Alabama by an

Alabama builder for an Alabama resident and was listed

“contemplation” test is to be applied exclusively in determining

whether a contract involves interstate commerce for purposes of

applying the FAA to arbitration disputes. Continental Grain Co.

v. Beasley, [Ms. 1920241, July 16, 1993], __ So.2d __ (Ala. 1993).

App. 6

for sale through an Alabama real estate agency. Home

Buyers points to possible interstate activity by the

Lopezes during their purchase and financing of the

house, to support its contention that there was sufficient

involvement with interstate commerce to require arbitra-

tion. “However, for the FAA to apply, the agreement that

contains the predispute arbitration provision must

involve interstate commerce.” Ex parte Jones, supra, ___

So.2d at __ (emphasis original). That agreement in this

case is the Home Buyers warranty, not the contract for

purchase of the house. The warranty does not involve

“the production of articles to be shipped in interstate

commerce,” Continental Grain Co., supra, __ So.2d at ___;

nor does it require the use of specific materials made by

and shipped from out-of-state manufacturers. Ex parte

Brice Bldg. Co., 607 So.2d 132, 134 (Ala. 1992); Maxus, Inc.

v. Sciacca, 598 So.2d 1376, 1379 (Ala. 1992).

Although Home Buyers contends that under the war-

ranty Mrs. Lopez would have to file a claim in either

Georgia or Colorado, we have determined that “[t]he

mere use of the telephone and mail by persons in differ-

ent states to communicate about activity that is purely

local” is not a sufficient contact with interstate commerce

to require application of the FAA. First Real Estate Corp. of

Alabama v. Brown Marx Tower Ltd. Partnership, (Ms. 1911779,

May 7, 1993] __ So.2d __ (Ala. 1993).3 Furthermore,

3 Although First Real Estate Corp. applied the old “slightest

nexus” test in finding insufficient involvement with interstate

commerce to require arbitration, its reasoning is certainly appli-

cable to the stricter test required by Ex parte Warren and Ex parte

Jones. In First Real Estate Corp., a New York partnership and an

Alabama corporation with its principal place of business in New

App. 7

it is the scope of the contract containing the arbitration

clause, and not the place of performance, that determines

the applicability of the FAA when using the “contempla-

tion” test. Continental Grain Co., supra, citing Circle “S”

Industries, Inc. v. Berryman, 613 So.2d 329, 331 (Ala. 1993).

In this case, we find no evidence that the parties

contemplated substantial interstate activity when they

entered into the warranty contract. Therefore, the FAA

does not apply. We hold that, under the “contemplation”

test, Mrs. Lopez is not required to submit her warranty

claims with Home Buyers to arbitration. See Ex parte

Alexander, 558 So.2d 364, 366 (Ala. 1990). The writ is due

to be granted for the foregoing reasons.

WRIT GRANTED.

Hornsby, C. J., and Almon, Houston, Steagall, and

Kennedy, JJ., concur.

Ingram, J., concurs in the result.

Maddox and Adams, JJ., dissent.

Juliette G. Lopez v. Home Buyers Warranty Corp., et al.

MADDOX, JUSTICE (dissenting).

I disagree with the majority’s use of the “contempla-

tion” test for determining whether the particular transac-

tion involves interstate commerce for purposes of the

Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq.

Furthermore, I disagree with the majority’s conclusion

York were found to have insufficient contacts with interstate

commerce in a dispute over an Alabama corporation’s manage-

ment of their property within Alabama.

App. 8

that the trial court erred in compelling arbitration of Mrs.

Lopez’s claims.

The threshold question is whether the FAA applies to

this case. If the Act applies, as I believe it does, then the

predispute arbitration agreement is enforceable, see 9

U.S.C. § 2, and whether the agreement would otherwise

be unenforceable under Alabama law, see Ala. Code 1975,

§ 8-1-41(3), would be immaterial.

Does the home warranty agreement involve inter-

state commerce so as to invoke the FAA and thereby

render the arbitration agreement enforceable? I believe

that it does.

Section 2 of the FAA provides, in pertinent part, that

“[a] written provision in any maritime transaction or a

contract evidencing a transaction involving interstate

commerce to settle by arbitration a controversy thereafter

arising out of such contract or transaction . . . shali be

valid, irrevocable, and enforceable.” As the United States

Supreme Court has held, in enacting this section, “Con-

gress 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. . .. Congress has

thus mandated the enforcement of arbitration agree-

ments.” Southland Corp. v. Keating), 465 U.S. 1, 10 (1984).

The Supreme Court noted in Keating that the FAA “per-

mits ‘partics to an arbitrable dispute [to move] out of

court and into arbitration as quickly and easily as possi-

ble,” 465 U.S. at 7 (quoting in part Moses H. Cone Memorial

Hospital v. Mercury Construction Corp., 460 U.S. 1, 22

(1983)) (bracketed words added in Keating. The Supreme

a a ”

App. 9

Court also noted: “Contracts to arbitrate are not to be

avoided by allowing one party to ignore the contract and

resort to the courts. Such a course could lead to pro-

longed litigation, one of the very risks the parties, by

contracting for arbitration, sought to eliminate.” Id.

The United States Supreme Court has also charac-

terized the FAA as “a statute that embodies Congress’

intent to provide for the enforcement of arbitration agree-

ments within the full reach of the Commerce Clause.”

Perry v. Thomas, 482 U.S. 483, 490 (1987). The House

Judiciary Committee Report on the arbitration bill also

reflects Congress’ intent. That report states in part: “Arbi-

tration agreements are purely matters of contract, and the

effect of the bill is simply to make the contracting party

live up to his agreement. He can no longer refuse to

perform his contract when it becomes disadvantageous to

him. An arbitration agreement is placed upon the same

footing as other contracts, where it belongs.” H. R. Rep.

No. 96, 68th Cong., Ist Sess. 1 (1924); see also Ex parte

Alabama Oxygen Co., 433 So. 2d 1158, 1170 (Ala. 1983)

(Maddox, J., dissenting). In Alabama Oxygen, after remand

from the United States Supreme Court for further consid-

eration in light of Keating, this Court adopted my dissent

as its opinion. Ex parte Alabama Oxygen Co., 452 So. 2d

860, 861 (Ala. 1984); see also Ex parte McKinney, 515 So. 2d

693 (Ala. 1987).

This Court held in Ex parte Costa & Head (Atrium),

Ltd., 486 So. 2d 1272 (Ala. 1986), that “[t]he requirement

of the FAA that an arbitration agreement ‘involve inter-

state commerce’ has been construed very broadly so that

the slightest nexus of the agreement with interstate com-

merce will bring the agreement within the ambit of the

App. 10

FAA.” 486 So. 2d at 1275 (citations omitted). I realize that

a majority of this Court rejected this “slightest nexus” test

in Ex parte Jones, [Ms. 1920249, July 16, 1993] ___ So. 2d

__ (Ala. 1993), but I believe that Jones is wrong. See Jones,

_. So. 2d at ___ (Maddox, J., dissenting); and Continental

Grain Co. v. Beasley, |Ms. 1920241, July 16, 1993] So. 2d

_. (Ala. 1993) (Maddox, J., concurring in the result).

For the reasons cited by the trial court in that part of

its order quoted in the majority opinion, I believe that the

home warranty agreement, which was transferred to Mrs.

Lopez, meets the “slightest nexus” test and that the trial

court properly compelled arbitration of the claims; there-

fore, I respectfully dissent.

ee eee

—-

App. 11

IN THE CIRCUIT COURT OF

MONTGOMERY COUNTY, ALABAMA

JULIETTE G. LOPEZ,

Plaintiff, CASE NO.

VS. CV-91-897

HOME BUYERS WARRANTY

CORPORATION II; JACK DEAL;

and ARONOV REALTY

COMPANY, INC., et al.,

Defendants.

i

ORDER

This matter has been submitted to this Court upon a

Motion to Dismiss or in the Alternative to Require Plain-

tiff to Submit to Arbitration, filed by Defendant Home

Buyers Warranty Corporation II (Home Buyers). The

Plaintiff, Juliette Lopez, argues that arbitration is not

proper in this case.

The contract upon which Plaintiff's case is based

contains the following language: “VII. Conciliation and

Arbitration — Should the Builder or Homebuyer(s) dis-

agree with the Insurer’s decision to deny the claim as

recommended by the Service, the contesting party shall

call for conciliation with the Service or an arbitration to

be conducted by the American Arbitration Association

(A.A.A.), or other mutually agreeable arbitration ser-

vice....” Plaintiff asserts two grounds as to why the

arbitration clause in the contract is not enforceable

against her: (1) Plaintiff never signed the contract, and

therefore, has not agreed to submit herself to arbitration;

App. 12

and (2) Under § 8-1-41, Code of Alabama, 1975, an agree-

ment to submit a controversy to arbitration cannot be

specifically enforced. This court addresses both of these

issues as follows.

With regard to Plaintiff's first argument, the Court

finds that Plaintiff's complaint is based upon the contract

containing the arbitration clause set out above. The con-

tract was originally between the former owners of the

house in question (the Browders) and Home Buyers. Nei-

ther Plaintiff nor her late husband signed the contract.

This Court notes that generally, “persons who are not

parties to a contract are not bound by the provisions of

that contract.” A. L. Williams & Associates, Inc. v.

McMahon, 697 F.Supp. 488, 493 (N.D.Ga. 1988). The Plain-

tiff herself relies on a portion of the contract as a basis for

her claims. The A. L. Williams case, supra, logically holds

that this necessarily subjects Plaintiff to all parts of that

contract, including the arbitration clause. “[A] party can-

not have it both ways; it cannot rely on a contract when it

works to its advantage and then repute it when it works

to its disadvantages. Therefore, in this case the court will

not allow [respondent] to assert claims allegedly arising

out of the agreements executed by [a 3rd party] without

requiring her also to abide by the arbitration clauses in

those agreements.” Id. at 494. Plaintiff cannot adopt the

contract as a basis for her claims without agreeing to the

arbitration clause as well. Therefore, Plaintiff's first argu-

ment that she is not subject to the arbitration clause since

she never signed the contract is without merit.

Plaintiff's second argument as to why she should not

be required to submit her claims to arbitration is that in

Alabama, agreements to submit a matter to arbitration

App. 13

are not enforceable. Home Buyers, however, argues that

the Federal Arbitration Act (FAA) applies to this contract,

preempting Alabama law, and therefore, the arbitration

clause should be upheld. Where it applies, the FAA pro-

vides for the enforcement of arbitration agreements. A. G.

Edwards & Sons, Inc. v. Syrrud, 597 So.2d 197 (Ala. 1992).

The FAA applies where the contract in question “[1] was

one involving interstate commerce . . . and [2] the con-

tract contained an arbitration agreement voluntarily

entered into by the parties.” Ex parte Warren, 548 So.2d

157, 159 (Ala. 1989), cert. denied sub. nom. Jim Skinner Ford,

Inc. v. Warren, 493 U.S. 998 (1989). Since the second prong

of the above FAA applicability test has been met (see

previous discussion regarding Plaintiff's adoption of the

contract), the final question left to be determined by this

Court is whether the contract was one “involving inter-

state commerce.”

The Alabama Supreme Court has issued two seem-

ingly differing opinions on what constitutes “involving

interstate commerce.” In 1986, Ex Parte Costa & Head

(Atrium), Ltd., 486 So.2d 1272, 1975 (Ala.) declared that

“[t]he requirement of the FAA that an arbitration agree-

ment ‘involve interstate commerce’ has been construed

very broadly so that the slightest nexus of the agreement

with interstate commerce will bring the agreement within

the ambit of the FAA.” Home Buyers argues that this

“slightest nexus” test should be applied in the case at bar

to determine whether the contract falls under the FAA.

In 1989, the Alabama Supreme Court stated in Ex

Parte Warren, supra, that the applicable standard for that

case was “ ‘whether at the time [the parties] entered into

[the contract] and accepted the arbitration clause, they

App. 14

contemplated substantial interstate activity.’” Plaintiff

argues that this contemplation of substantial interstate

activity standard should be used in the present case.

The Alabama Supreme Court recently clarified the

law in this area in Ex Parte Brice Building Company,

released July 17, 1992 (Docket No.s 1910190, 1910214), by

stating: “The Warren case was expressly addressed by this

Court with regard to its ‘narrow factual context.’ Implic-

ity, we have cecognized that the Costa standard, rather

than the Warren standard, is the appropriate standard to

utilize within the factual context of this case.” Therefore,

the “slightest nexus” test is the appropriate standard to

be used in the present case to determine whether the FAA

applies to the Home Buyers contract.

After hearing oral arguments and after consideration

of the briefs and memoranda submitted by the parties,

the Court has determined that the facts surrounding the

Home Buyers contract do support a finding that the

contract has at least a slightest nexus with interstate

commerce so as to bring the contract under the purview

of the FAA. Some of the facts supporting this finding are

as follows: Homer Buyers is a Colorado corporation and

Plaintiff is an Alabama resident; if Plaintiff is not satisfied

with the builder’s performance, she must send an appli-

cation to either Georgia or Colorado; the Home Buyers

district office for the State of Alabama is in Tucker, Geor-

gia; and the Home Buyers Claims & Warrant Service

Office is in Denver, Colorado. As stated previously, the

above facts indicate that the Home Buyers contract has at

least a “slightest nexus” with interstate commerce.

App. 15

Therefore, pursuant to the FAA, it is hereby

ORDERED, ADJUDGED and DECREED as follows:

1. Plaintiff shall submit herself to arbitration as per

the terms of the Conciliation and Arbitration clause of the

contract;

2. This action is due to be and is hereby DIS-

MISSED; and

3. Costs of these proceedings are taxed against the

Plaintiff, for which let execution issue.

DONE this the 19th day of October, 1992.

/s/ Joseph D. Phelps

JOSEPH D. PHELPS,

CIRCUIT JUDGE

cc: Jere Beasley

J. Cole Portis

BEASLEY, WILSON

Dennis Bailey

RUSHTON, STAKELY, JOHNSTON & GARRETT

Philip Gidiere

CARPENTER & GIDIERE

App. 16

IN THE SUPREME COURT OF ALABAMA

September 24, 1993

1920330

Juliette G. Lopez v. Home Buyers Warranty Corporation,

et al. (Montgomery: CV-91-897)

NOTICE

The application for rehearing filed in this cause is

overruled. No opinion written on rehearing.

SHORES, J. - Hornsby, CJ., Almon, Houston, Steagall

and Kennedy, JJ., concur;

Maddox and Adams, JJ., dissent

I, Robert G. Esdale, as Clerk of the Supreme

Court of Alabama, do hereby certify that the

foregoing is a full, true and correct copy of the

instrument(s) herewith sat out as same

appear(s) of record in said Court.

Witness my hand this 24 day of Sept. 1993.

/s/ Robert G. Esdale

Clerk, Supreme Court of Alabama

App. 17

9U.S.C.§ 1. “Maritime transactions” and “commerce”

defined; exceptions to operation of title

“Maritime transactions”, as herein defined, means

charter parties, bills of lading of water carriers, agree-

ments relating to wharfage, supplies furnished vessels or

repairs to vessels, collisions, or any other matters in

foreign commerce which, if the subject of controversy,

would be embraced within admiralty jurisdiction; “com-

merce”, as herein defined, means commerce among the

several States or with foreign nations, or in any Territory

of the United States or in the District of Columbia, or

between any such Territory and another, or between any

such Territory and any State or foreign nation, or between

the District of Columbia and any State or Territory or

foreign nation, but nothing herein contained shall apply

to contracts of employment of seamen, railroad

employees, or any other class of workers enyaged in

foreign or interstate commerce. July 30, 1947, c. 392, 61

Stat. 670.

9 U.S.C. § 2. Validity, irrevocability, and enforcement

of agreements to arbitrate

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out

of such contract or transaction, or the refusal to perform

the whole or any part thereof, or an agreement in writing

to submit to arbitration an existing controversy arising

out of such a contract, transaction, or refusal, shall be

re

App. 18

valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation of

any contract.

July 30, 1947, c. 392, 61 Stat. 670.

Code of Alabama 1975

§ §-1-41. Obligations which cannot be specifically

enforced.

The following obligations cannot be specifically

enforced:

* * *

(3) An agreement to submit a controversy

to arbitration;

App. 19

Ex Parte Bruce M. JONES

(Re: Bruce M. JONES,

Charles S. CALDWELL, III and Automatic

Detection Systems, Inc.).

1920249.

Supreme Court of Alabama.

July 16, 1993

KENNEDY, JUSTICE.

This mandamus proceeding stems from a lawsuit

involving a dispute over a stock purchase agreement

between the plaintiff/petitioner, Bruce M. Jones, and the

defendant/respondent Charles S. Caldwell III. Jones

seeks a writ of mandamus requiring the Jefferson County

Circuit Court to set aside its order directing arbitration as

to some of Jones’s claims. We grant the writ.

Caldwell is the majority shareholder and president of

Automatic Detection Systems, Inc. (“ADS”). ADS is an

Alabama corporation that sells, installs, maintains, and

monitors security system equipment. ADS is also a defen-

dant in the underlying action.

Jones owned all of the stock in another Alabama

corporation, Birmingham Protection Systems, Inc.

(“BPS”). In November 1990, Caldwell, individually,

entered into a stock purchase agreement with Jones.

Under the agreement, Jones, as the sole stockholder of

BPS, was to sell Caldwell his BPS stock. This agreement

contained an arbitration provision requiring that disputes

App. 20

regarding the stock agreement be arbitrated. Later, such

disputes arose and Jones sued.!

The trial court ordered arbitration. At issue in this

mandamus proceeding is whether the stock purchase

agreement “involves interstate commerce,” and thus,

invokes the Federal Arbitration Act, which would render

the arbitration provision in the contract enforceable.

Predispute arbitration agreements are not unenforce-

able [sic] under Alabama Law. Ala. Code 1975, s 8-1-41.

If, however, an arbitration agreement was voluntarily

entered into, and relates to a contract involving interstate

commerce, the Federal Arbitration Act, 9 U.S.C. s 1 et seq.

(the “FAA”) applies, and preempts Alabama law. See Ex

parte Alabama Oxygen Co., 433 So.2d 1158 (Ala. 1983)

(Maddox, J., dissenting), review after remand from

United [sic] Supreme Court, 452 So.2d 860 (Ala. 1984)

(adopting views expressed in Justice Maddox’s original

dissent); A. G. Edwards & Sons, Inc. v. Syvrud; 597 So.2d

197 (Ala. 1992). Under the FAA, a predispute arbitration

agreement — in the context of a contract involving inter-

state commerce - is enforceable. Id.

At the outset, we note that ADS was not a party to

the stock purchase agreement. Thus, ADS has no stand-

ing to seek enforcement of the arbitration provision

therein, and it would be error for the trial court to compel

! There are also disputes between the parties as to an “inde-

pendent consulting agreement” between ADS and Jones, but the

issues here relate solely to the trial court’s order requiring the

arbitration of claims arising under the stock purchase agree-

ment.

App. 21

arbitration of claims against ADS, under this arbitration

provision. We do not necessarily read the trial court’s

order to so require, but we address this question nonethe-

less, because the parties suggest that they so read the trial

court’s order.

We turn to the dispositive issue before us, whether

the agreement between Caldwell and Jones involved

“interstate commerce.” In this regard, Caldwell, citing Ex

parte Costa & Head (Atrium), Ltd., 486 So.2d 1272, 1275

(Ala. 1986), argues that even the “slightest nexus” of an

agreement with interstate commerce will bring the agree-

ment within the scope of the FAA. See Ex parte Brice

Building Co., 607 So.2d 132 (Ala. 1992). Caldwell dis-

cusses, in this regard, ADS and BPS’s interstate connec-

tions outside the agreement. Caldwell concedes that the

stock purchase agreement between himself and Jones

makes no reference to any interstate matters. However,

for the FAA to apply, the agreement that contains the

predispute arbitration provision must involve interstate

commerce.

Our review of the record indicates that the agreement

relates to the sale of all the stock in an Alabama corpora-

tion (located solely within Alabama), between two Ala-

bama businessmen, negotiating within Alabama to create

an agreement consisting of duties and obligations to be

performed within Alabama. Based on these facts, we hold

that the FAA does not apply.

Although one could reasonably conclude that the

agreement had not even the “slightest nexus” with inter-

state commerce, we reach our holding by applying the

standard set out in Ex parte Warren, 548 So.2d 157 (Ala.

App. 22

1989), for determining whether a contract involves inter-

state commerce, rather than the Costa “slightest nexus”

standard. The Warren standard is “[W]hether at the time,

[the parties] entered into [the contract] and accepted the

arbitration clause, they contemplated substantial inter-

state activity.” 548 So.2d at 160 (quoting Metro Industrial

Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 387

(2d Cir. 1961) (emphasis in Metro), cert. denied, 368 U.S.

817 (1961).

In Warren the Court declined to apply the Costa

“slightest nexus” standard and implicitly overruled it in a

“narrow” set of circumstances. Warren, 548 So.2d at 160.

Warren, which involved a retail automobile sales con-

tract, had a very limited applicability, as was indicated by

the Warren opinion itself and as subsequent cases sug-

gested. Noting this, we observed in Ex parte Brice Bldg.

Co., 607 So.2d 132 (Ala. 1992); “The Warren case was

expressly addressed by this Court with regard to its

‘narrow factual context.’ ... “In H.L. Fuller Constr. Co. v.

Industrial Dev. Bd. of [the] Town of Vincent, 590 So.2d

218 (Ala. 1991), decided after Warren, we restated the

Costa standard. H.L. Fuller Constr. involved a construc-

tion contract. ... We restated the Costa standard, but did

not go on to apply it... . “In Roscoe v. Jones, 571 So.2d

1043 (Ala. 1990), another construction contract case, we

reemphasized that Warren has a ‘narrow application.’ Id.

at 1046.” 607 So.2d at 134. (Emphasis original.)

To resolve any inconsistency or confusion generated

by the existence of two different standards, and deter-

mining, as we now do, that Warren represents a more

reasoned approach than the Costa standard, we overrule

any case inconsistent with Warren to the extent that it

App. 23

states a different standard for determining the involve-

ment of interstate commerce.

In this case, because the FAA does not apply, Ala-

bama law renders the arbitration provision unenforce-

able. Ala. Code 1975, s 8-1-41; Wells v. Mobile County Bd.

of Realtors, Inc., 387 So.2d 140 (Ala. 1980).

WRIT GRANTED.

Hornsby, C. J., and Almon, Shores, Houston, and Steagall,

JJ., concur.

Maddox and Ingram, JJ., dissent.

MADDOX, JUSTICE (dissenting).

I respectfully dissent. I disagree with the majority as

to the applicable test for determining whether a transac-

tion involves interstate commerce for purposes of the

FAA. I also believe that the stock purchase agreement

containing an arbitration clause involves interstate com-

merce and, therefore, that the trial court properly granted

the motion to compel arbitration.

I.

In determining whether a transaction involves inter-

state commerce, I believe that the “slightest nexus” test

set forth in Ex parte Costa & Head (Atrium), Ltd., 486 So.

2d 1272 (Ala. 1986), and not the “contemplation” test set

forth in Ex parte Warren, 548 So. 2d 157 (Ala.), cert.

denied sub nom. Jim Skinner Ford, Inc. v. Warren, 493

U.S. 998 (1989), provides the proper analysis. See Warren,

548 So. 2d at 160-63 (Maddox. J., dissenting). Although

App. 24

the majority concludes “that Warren represents a more

reasoned approach than the Costa standard,” So. 2d at,

the majority also recognizes that Warren “had a very

limited applicability, as was indicated by the Warren

opinion itself and as subsequent cases suggested.” So. 2d

at.

Indeed, Warren's “contemplation” test has been

applied in only two contexts — those involving auto-

mobile sales contracts between dealers and consumers,

see Warren and Ex parte Williams, 555 So. 2d 146 (Ala.

1989), and those, like this present case, involving stock

purchase agreements. See Ex parte Clemants, 587 So. 2d

317 (Ala. 1991). That this Court has applied the “contem-

plation” test sparingly indicates “that Warren has a ‘nar-

row application.’ ” Ex parte Brice Building Co., 607 So. 2d

132, 134 (Ala. 1992) (quoting in part Roscoe v. Jones, 571

So. 2d 1043, 1046 (Ala. 1990)). In contrast, in addition to

cases involving construction contract disputes, such as

Brice Building Co., this Court has also recently applied

the “slightest nexus” test in a number of other contexts.

See First Real Estate Corp. of Alabama, Inc. v. Brown

Marx Tower Ltd., [Ms. 1911779, May 7, 1993] So. 2d (Ala.

1993) (real estate management agreement); Circle S.

Industries, Inc. v. Berryman, 613 So. 2d 329 (Ala. 1993)

(consent judgment involving agreement not to compete),

Garikes, Wilson, & Atkinson, Inc. v. Episcopal Foundation

of Jefferson County, Inc., 614 So. 2d 447 (Ala. 1993) (con-

tract for architectural services); and A. J. Taft Coal Co.,

Inc. v. Randolph, 602 So. 2d 395 (Ala. 1992) (mining

lease).

oo

App. 25

Because this Court had already adopted the “slight-

est nexus” test in Costa & Head, its adoption of the

“contemplation” test in Warren has been criticized as

“creating a double standard.” Stanley D. Bynum & J.

David Pugh, Enforcing Arbitration Agreements in Ala-

bama: A Double Standard Dilemma, 54 Ala. Law, 38, 43

(January 1993). Bynum and Pugh wrote that Costa &

Head “brought Alabama law generally in line with the

majority of other jurisdictions” but that Warren “is incon-

sistent with all other jurisdictions that have addressed the

issue.” Id. at 38-39 and 41. The authors particularly crit-

icized Warren's “contemplation” test for its subjectivity.

Id. at 43.

I do not think that the United States Supreme Court's

denial of the petition for certiorari in Warren should be

viewed as that Court’s imprimatur of the “contempla-

tion” test, because a denial of a petition for certiorari has

no significance in regard to the merits. Parker v. Ellis, 362

U.S. 574, 576 (1960).?

Based on the foregoing, I believe that the “slightest

nexus” test gives more effect to Congress’s intent in

enacting the FAA, which was “to provide for the enforce-

ment of arbitration agreements within the full reach of

2 For example, last year the United States Supreme Court

denied a petition for certiorari review raising the issue of

whether the principle of Batson v. Kentucky, 476 U.S. 79 (1986),

applies to gender-based peremptory strikes, Murphy v. State,

596 So. 2d 42 (Ala. Cr. App. 1991), cert. denied, U.S., 113 S. Ct. 86

(1992), but in another case that Court has recently granted a

certiorari petition raising the same issue. J.E.B. v. State, 606 So.

2d 156 (Ala. Civ. App. 1992), cert. granted, U.S., [92-1239, May

17, 1993].

App. 26

the Commerce Clause.” Perry v. Thomas, 482 U.S. 483,

490 (1967). I am unwilling to overrule recent, well-rea-

soned cases applying the test this court adopted in Costa

& Head.

II.

Regarding whether the arbitration agreement in this

case is enforceable, I note that “[a]rbitration clauses con-

tained in contracts involving stock purchases are enforce-

able.” Warren, 548 So. 2d at 161 n.2 (Maddox, J.,

dissenting) (citing Shearson/American Express, Inc. v.

McMahon, 482 U.S. 220 (1987)). I believe that the stock

purchase agreement in this case had at least the “slightest

nexus” with interstate commerce, so that the arbitration

agreement is specifically enforceable pursuant to the

FAA. Consequently, I must respectfully dissent.

Ingram, J., concurs.

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