State Vs. Federal: Whose Law Controls
By Mitchell S. Ostwald
The U.S. District Court recently addressed the issue of whether state law as specified by a contract rather than the Federal Arbitration Act (FAA), is the controlling law. The court held that by specifying state contract law, it governs notwithstanding that by enacting the FAA, "Congress declared a national policy favoring arbitration. "
In Portland General Electric Company v. US Bank Trust National Association (99-35189, United States Court of Appeals, 9th Circuit) the higher court found that the contract at issue specified Oregon law as controlling and sets out an appraisal procedure. The District Court treated the appraisal decision as an arbitration award and analyzed the case under FAA and confirmed the appraisal. However, Oregon courts treat appraisals under common law contract principles rather than under the Rubric of arbitration. The 9th Circuit reversed this decision, holding that state law, not the FAA, governs review of the appraisal decision.
In 1974, PGE and the trust signed a lease agreement whereby PGE leased two turbine generators for a term of 25 years. Upon the expiration of the 25-year term, PGE had the option to either renew at the "fair market rental value" or purchase the turbine generators at their "fair market sales value. "
The lease set out a procedure for determining fair market value, including a provision that in the event the parties were unable to reach a mutual agreement on the property's value, either party could petition the American Arbitration Association to appoint an independent qualified equipment appraiser. The agreement was governed by Oregon law.
Shortly after receiving the appraisal, US Bank Trust sought to vacate the appraisal on grounds that in contravention of the lease, the appraisal was not performed by the appointed appraiser and that the appraiser acted fraudulently or engaged in other misconduct in rendering the appraisal.
The Disctrict Court determined that the FAA governed, and that the only grounds upon which the trust could challenge the merits of appraisal were under the limited grounds set forth in the FAA. Thereafter, the court confirmed the appraisal and dismissed their counter claims. The court did note that unlike California, Oregon's arbitration statute does not define "arbitration" to include appraisals.
Even in the 9th Circuit opinion, this case didn't hinge upon the hairsplitting over the definition of appraisal versus arbitration. One circuit judge, in his concurring opinion, questioned whether it is counter intuitive to look to state law to define a term in a federal statute on a subject as to which Congress has declared the need for national uniformity.
Once again, the courts attempt to move forward in creating a clear, unequivocal definition (and perhaps a set of rules) for binding arbitration.
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