law-FAA-arbitration | contract formation | contract avoidance | void contracts | unconscionable | unenforceable
contractual provisions | arbitration clauses
ROLE OF STATE LAW CONTRACT FORMATION PRINCIPLES
Section 2 of the FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (emphasis
added). Thus, an agreement to arbitrate is valid under the FAA if it meets the requirements of the general
contract law of the applicable state. In re AdvancePCS Health L.P., 172 S.W.3d 603, 606 (Tex. 2005) (citing
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). In determining the validity of an agreement
to arbitrate under the FAA, courts must first apply state law governing contract formation. See 9 U.S.C. § 2;
First Options, 514 U.S. at 944. The United States Supreme Court has repeatedly emphasized that “state law,
whether of legislative or judicial origin, is applicable [to the determination of the validity of an agreement to
arbitrate] if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts
generally.” Perry v. Thomas, 482 U.S. 483, 493 n.9 (1987). Thus, courts “may not . . . invalidate arbitration
agreements under state laws applicable only to arbitration provisions.” Doctor’s Assocs., Inc. v. Casarotto, 517
U.S. 681, 687 (1996); see also Perry, 482 U.S. at 493 n.9 (“A state-law principle that takes its meaning
precisely from the fact that a contract to arbitrate is at issue does not comport with [section 2].”).
However, the purpose and language of the FAA require only that agreements to arbitrate be placed “upon the
same footing as other contracts.” Doctor’s Assocs., 517 U.S. at 687 (quoting Scherk v. Alberto-Culver Co., 417
U.S. 506, 511 (1974)) (emphasis added); see also H.R. Rep. No. 68-96, at 1 (1924) (noting that by enacting
section 2, Congress sought to place agreements to arbitrate “upon the same footing as other contracts, where
[they] belong[]”). Perry makes clear that state courts may not fashion special rules regarding the enforceability
of arbitration contracts per se. See Perry, 482 U.S. at 492 n.9. Furthermore, once an enforceable contract to
arbitrate is found, there is a strong federal presumption in favor of arbitration such that myriad doubts — as to
waiver, scope, and other issues not relating to enforceability — must be resolved in favor of arbitration. See, e.
g., In re FirstMerit Bank, 52 S.W.3d 749, 752 (Tex. 2001); Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896,
898–99 (Tex. 1995). However, a state court must initially determine — through the neutral application of its
own contract law — whether an enforceable agreement exists in the first instance, and whether “generally
applicable contract defenses . . . may be applied to invalidate arbitration agreements without contravening” the
policies of the FAA. Doctor’s Assocs., 517 U.S. at 687. Thus, in this case, if a contract limiting damages or
restricting other remedies under the Workers’ Compensation Act is generally unenforceable under Texas law,
an arbitration contract with these same limitations will also be unenforceable.
Nevertheless, under Texas law, as with any other contract, agreements to arbitrate are valid unless grounds
exist at law or in equity for revocation of the agreement. The burden of proving such a ground — such as
fraud, unconscionability or voidness under public policy — falls on the party opposing the contract. See
FirstMerit Bank, 52 S.W.3d at 756. Thus, while we reject Poly-America’s assertions that we must apply a
presumption favoring arbitration in assessing whether the parties entered into an enforceable agreement
under Texas law and that the FAA preempts Texas public policies that may make certain contractual
provisions generally unenforceable, Luna nevertheless bears the burden to establish that the challenged
provisions are unenforceable.
In re Poly-America, LP, 262 S.W.3d 337 (Tex. 2008) (arbitration in employment context, FAA, retaliatory
discharge, employment law, limitation of remedies, unconscionability argument challenge sustained, offending
provision stricken, but remainder of arbitration agreement given effect)
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