When Does a Transaction Involve “Commerce” Implicating the Federal Arbitration Act

Kentucky Court of Appeals Addresses When a Transaction Involves

“Commerce” Implicating the Federal Arbitration Act

      In a recent decision, the Kentucky Court of Appeals addressed the question of when a particular transaction involves “commerce” such that the Federal Arbitration Act, rather than the Kentucky Arbitration Act, is controlling.  This question can be crucial in that the Kentucky Arbitration Act is far more restrictive than the Federal Arbitration Act, enforcing arbitration agreements only if they provide that the arbitration will take place within the Commonwealth of Kentucky.  If the agreement is governed by the federal law there is no such limitation.  Nissan v. Hurt, 2013 WL 5592372 (Ky. App.  Oct. 11, 2013) (Not To Be Published)

      The Hurts contracted to purchase a vehicle from Nissan.  Thereafter, they sought to void the contract on the basis that Nissan had falsified the credit application associated therewith.  In turn, Nissan moved that the trial court compel arbitration pursuant to an arbitration clause contained in the agreement between Hurt and Nissan.  The trial court denied that motion on the basis that the arbitration clause at issue did not require arbitration in Kentucky as required by Ally Cat, LLC v. Chauvin, 724 S.W.3d 451, 455 (Ky. 2009).  Essentially, it was held that “the transaction did not involve interstate commerce so as to bring it within the purview of the Federal Arbitration Act.”  Nissan appealed that determination. 

      An agreement to arbitrate will be enforced under the Federal Arbitration Act when the contract at issue “evidenc[es] a transaction involving commerce.”  9 U.S.C. § 2.  In turn, “commerce” is defined as “commerce among several States.”  9 U.S.C. § 1.  The Court of Appeals also referenced certain ruling of the United States Supreme Court indicating that the “involving commerce” component of the Federal Arbitration Act is “functionally equivalent” to the “affecting commerce” term used with respect to the powers afforded Congress under the Commerce Clause.

      Applying these principles, the Court of Appeals found that the transaction between Hurt and Nissan involved interstate commerce.  While it was “a transaction between a Kentucky resident and a Kentucky business concerning a vehicle located in Kentucky,” it also involved interstate commerce in that the vehicle had been transported between various states and the credit application had been submitted to an out-of-state processing facility.  Further, that credit application specified that it would place the transaction with GMAC in either New Mexico or Michigan or a GMAC affiliate in Arizona. 

       It will be interesting to see what are ultimately determined to be the outer limits of “involving commerce” and thereby preserving the application of the Kentucky Arbitration Act.  For example, if this transaction had not involved an out-of-state lender, would the mere fact that the vehicle had moved across state lines be sufficient?