In a recent decision, the South Carolina Supreme Court held that mere agreement by parties to arbitrate under the Federal Arbitration Act is, without more, insufficient to preempt South Carolina’s Arbitration Act.
In Hicks Unlimited, Inc. v. Unifirst Corp., A Mass. Corp., 439 S.C. 623, 889 S.E.2d 564 (2023), the South Carolina Supreme Court emphatically rejected the argument that parties to a contract may agree to have arbitration governed by the Federal Arbitration Act (“FAA”) rather than South Carolina’s Arbitration Act (“SCAA”) where the underlying contract does not implicate interstate commerce. Writing for a unanimous court, Justice Hill observed that Unifirst, the party seeking to compel arbitration,
…argues there is no need to address the interstate commerce issue because the parties agreed by contract that any dispute between them would be resolved by binding arbitration and that the arbitration “shall be governed by” the FAA. UniFirst believes this is enough to summon the FAA’s preemption power, knocking out the SCAA notice requirement. See Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) (although the FAA contains no express preemption provision, state laws are preempted to the extent they conflict with federal law in the sense that their application would undermine the goals and policies of the FAA). We reject UniFirst’s argument. A provision in an arbitration agreement declaring that the FAA applies is not a fait accompli.Id. at 629 – 30, 89 S.E.2d 567. [emphasis added].
Instead, the Court held, the party seeking to compel arbitration under the FAA must demonstrate that the contract implicates interstate commerce in fact. To implicate interstate commerce, a contract must involve something within the purview of the Commerce Clause of the Constitution of the United State, namely, “1) the use of channels of interstate commerce; (2) instrumentalities of interstate commerce, or persons or things in interstate commerce; and (3) activities having a substantial relation to interstate commerce.” United States v. Morrison, 529 U.S. 598, 609, 120 S.Ct. 1740, 146 L.Ed.2d 658 (2000). In determining whether a contract involves interstate commerce, a court will examine “the agreement, the complaint, and the surrounding facts,” including any affidavits submitted. Dean v. Heritage Healthcare of Ridgeway, LLC, 408 S.C. 371, 380, 759 S.E.2d 727, 732 (2014).
With this ruling, South Carolina businesses must ensure that when entering a contract containing an arbitration agreement governed by the FAA, the contract implicates interstate commerce in fact. Where available, an agreement to arbitrate under the FAA is almost universally preferred by businesses to an agreement to arbitrate under the SCAA; the SCAA subjects parties seeking to compel arbitration to a host of requirements, and excepts a growing number of causes of action, that the FAA does not. See e.g. Aiken v. World Fin. Corp. of South Carolina, 373 S.C. 144, 644 S.E.2d 705 (2007) (allowing parties to avoid valid agreements to arbitrate where a claim arises from an opponent’s “outrageous tortious conduct”). To learn more about arbitration agreements and proactive measures for protecting your business, contact us.
This website is for information purposes only. The information should not be construed to constitute formal legal advice or the formation of an attorney/client relationship. A result achieved on behalf of one client does not necessarily indicate similar results can be obtained for other clients. For information, contact Greg Studemeyer at (803) 393-4399.