Impact Preemption: A New Theory of Federal Arbitration Act Preemption

Abstract

The United States Supreme Court has expanded its arbitration preemption jurisprudence to unprecedented and unexplained bounds, ultimately creating a new type of preemption, herein coined “impact preemption.” As applied by the Court, the scope of impact preemption is broader even than field preemption. The future policy implications of impact preemption are significant. Impact preemption shifts the balance of regulatory power in the dual federal-state arbitration system toward the federal courts and away from state regulatory authorities, contrary to the language and legislative history of the Federal Arbitration Act (FAA). In addition, impact preemption has the potential to undermine the stability of the national arbitration system for consumers and contracting parties who utilize arbitration agreements in commerce.

This Article traces the history of three fundamental flaws in prior Supreme Court rulings that ultimately resulted in the creation of impact preemption. First, the Court failed to define arbitration for approximately ninety years, and when it finally did so, the Court defined arbitration with a pro-business bias. Second, the Court failed to conduct a preemption analysis or to specify the type and scope of preemption it applied to arbitration. Third, as a result of the first two failures, the Court allowed the preemptive effect of the FAA to expand dramatically over time, notwithstanding its statutory language and legislative history, a failure that culminated in the creation of impact preemption.

Impact preemption raises serious federalism issues because it does not require a conflict between federal and state law. Taken to its logical conclusion, the Court’s impact preemption analysis may prohibit states from regulating any aspect of arbitration that potentially “impacts” the arbitration process. This Article urges the Supreme Court to return to the classic roots of conflict preemption analysis under the FAA. A return to these conflict preemption principles would restore the balance of regulatory power between the states and the federal government, and would restore a measure of predictability for consumers and contracting parties who use the national arbitration system to conduct commerce.

Keywords: arbitration, preemption, Federal Arbitration Act

JEL Classification: K19, K39, K49