Transcript

IN THE SUPREME COURT OF THE UNITED STATES

ALLIED-BRUCE TERMINIX COMPANIES, INC. AND TERMINIX INTERNATIONAL COMPANY, Petitioners, v. G. MICHAEL DOBSON, ET AL.

No. 93-1001

October 4, 1994

The above-captioned matter came on for oral argument before the Supreme Court of the United States on Tuesday, October 4, 1994.

APPEARANCES:

H. BARTOW FARR, III, ESQ., Washington, D.C.; on behalf of the Petitioners.

ALLAN R. CHASON, ESQ., Bay Minette, Alabama; on behalf of the Respondents.

PROCEEDINGS

10:02 a.m.

CHIEF JUSTICE REHNQUIST: We'll hear argument first this morning in Number 93-1001, Allied-Bruce Terminix Companies, Inc. v. Michael Dobson.

Mr. Farr.

ORAL ARGUMENT OF H. BARTOW FARR ON BEHALF OF THE PETITIONERS

MR. FARR: Thank you, Mr. Chief Justice, may it please the Court:

The Alabama law applied by the courts below declaring all predispute arbitration agreements to be unenforceable as a matter of public policy, embodies precisely the sort of hostility to arbitration that prompted Congress to enact a Federal arbitration act in the first place.

Nevertheless, the Alabama courts held that the Federal law did not apply to this case, saying that the reach of the act is limited to transactions in which the parties contemplated substantial interstate activity. We think this reading of Federal law is too narrow, for several reasons.

First, the best reading of the language and history of the act indicates that Congress meant to exercise its Commerce power fully, except as it is specifically provided in the definitions and the exceptions contained in section 1 of the act, and second, the benefits to commerce that Congress sought to obtain through enforcement of arbitration agreements -- greater certainty in dealings, lower litigation costs, fewer litigation delays, and ultimately the lower cost of goods and services -- apply to all transactions within the scope of the Commerce power, not just to some of them.

QUESTION: Mr. Farr, I suppose -- now, this act was adopted in what year?

MR. FARR: 1925, Justice O'Connor.

QUESTION: Right, and as of that time, I suppose we didn't have as broad a view of Commerce power as we have today?

MR. FARR: Well, Your Honor, the best evidence I think that we have of that in 1925 is first of all Congress' own view as reflected briefly in the House report, which indicated that the Commerce power extended to all contracts relating to interstate commerce.

QUESTION: Well, you would acknowledge, though, that we had a narrower view of the Commerce Clause power in 1925 than we have today?

MR. FARR: Just O'Connor, I think it was not uniformly as broad as it is today. I would certainly admit that.

However, if one looks, for example, at the brief that was submitted on behalf of the ABA to Congress in 1924, actually, I believe, that refers to a very broad definition of the Commerce power, indicating that it reached not just matters that in fact involved the crossing of State lines, but purely intrastate matters that had an effect on interstate commerce.

QUESTION: Well, of course, my view, as expressed in the Southland case, is that Congress didn't intend to do more in this Federal Arbitration Act than affect what happens in Federal courts. This Court has rejected that view.

I still think that was correct, but faced with Southland, do you think that we should properly give some meaning to the words that Congress used involving Commerce, evidencing, the word evidencing -- do the use of those words indicate some narrower reach of the statute than you would have us adopt?

There are many laws out there among the States that try to protect consumer contracts from having arbitration clauses, and preserving the rights of people to sue, and your view would sweep all of those aside, and I'm concerned that that wasn't what Congress had in mind.

MR. FARR: Well, Justice O'Connor, let me make two points, if I may. Of course I would say that the Court ought to give meaning to the words that Congress used, as I hope to explain this morning. I don't think that those words support a narrow interpretation of the act.

But before, perhaps, I turn to that, I'd like to make clear that the issue regarding the construction of the scope of the act overlaps with but is not the same issue, precisely, as the issue whether the act preempts State law.

The Court has said that the Federal act does not occupy the field, and does not preempt all State law. For example, I think it is understood now that State laws of general applicability can be applied to arbitration agreements and, indeed, the language of section 2 itself, which provides that they can be provoked on grounds applicable to any contract would suggest that, and the court in the Stanford University case indicated that the parties could in fact incorporate State law.

QUESTION: Mr. Farr, can I ask -- this is a very interesting point that you're making. If Alabama had a statute similar to, say, I think Georgia has one of these statutes that, there's a dollar limit and they exclude consumer contracts of this kind. Would you say, then, the Federal act would not apply here, if Alabama had a statute like that, rather than just a 100 percent policy against --

MR. FARR: No, I would say, without knowing exactly the details of the transaction, the act might well apply but would not necessarily preempt whatever the State law is.

QUESTION: Where the State law says certain contracts are not subject to arbitration, certain consumer contracts are not, how could it apply without preempting it? That's what I don't quite understand.

MR. FARR: Well, if that's -- if the definition of the law is a very narrow law that is aimed at arbitration agreements itself, I think in fact it probably would be preempted --

QUESTION: I see.

MR. FARR: -- to the extent the Federal act applies.

But the point that I'm making is that State law as a whole is not preempted by the Federal Arbitration Act. There may be particular State laws --

QUESTION: You mean, the rules of whether the company is liable on the merits are not preempted, you mean.

MR. FARR: Well, I mean, perhaps even rules that go to the construction of the contract, or rules that deal with --

QUESTION: The rules that deal with whether or not the Arbitration Clause is enforceable would always be preempted, I would think.

MR. FARR: Well, let me try to use an example.

If, for example, a contract was signed by someone representing that they have authority to sign for a corporation and they do not, that can be applied to make the arbitration agreement, as well as any other parts of the contract, unenforceable.

It's possible if a State law, for example, had -- a State had a law that said, all provisions that are not on the face of the contract must be separately initialed by the parties, then it seems to me that one could say that's not something that aims at arbitration, not something that is intended to make arbitration more difficult itself.

QUESTION: If the State law, as I think the Georgia law does say, said that for an arbitration clause to be enforceable that paragraph of the contract has to be initialed, even though nothing else has to, that would be unenforceable.

MR. FARR: That would be. That would be preempted by the Federal, no question, and I should make clear to -- just by way of clearing up any of this introduction, as far as this case is concerned there is no question in our mind that the Alabama law being applied here has to be preempted. This is -- the Alabama law that we are talking about here says, we do not enforce arbitration agreements simply because they're an arbitration agreement.

QUESTION: Mr. Farr, may I ask you to be entirely clear about this? I believe that Justice Stevens was referring to his position in Southland that the State could carve out certain kinds of contracts like franchise agreements, and you have given, do I understand you correctly, to say no, that can't be done?

MR. FARR: I think I can't give an absolutely clear answer for every case, because it depends on the particular nature of the State law. At least the way I believe the correct analysis would be is that one would look at the nature of the State law, how broadly does the State law apply? If it applies to all the agreements, including arbitration agreements, that seems to me it puts it on the side where it is not preempted. If it applies exclusively to arbitration agreements, it clearly puts it on the side of the line where it is preempted.

QUESTION: Why is that, Mr. Farr? I mean, it seems to me the conflict with Federal policy is just as severe in either case. Whether it's sort of a penalty against a State for singling out arbitration agreements, I mean, as far as the conflicts with Federal law is concerned, whether it's a general law or a specific law addressed to arbitration agreements, it has the same result.

MR. FARR: But I think one starts with the language of section 2, and the language of section 2 says that agreements to arbitrate, within the field, which I will discuss this morning, are enforceable save on grounds that are sufficient for revocation of any contract and, therefore, it seems to me that, when one is looking at State law seeking to be applied to an arbitration agreement and seeking to say that it makes it enforceable, one -- the first inquiry, naturally, one makes is, is this grounds for revocation of any contract?

QUESTION: Then the answer to the question 1 posed is, you cannot carve out from arbitration specific kinds of contracts. You can't carve out consumer contracts, franchise contracts, particular categories of contracts to exempt them from arbitration.

MR. FARR: From arbitration specifically, I do not believe that you can consistently with the Federal act.

QUESTION: Mr. Farr, given the language of section 2, though, the key language seems to be a contract evidencing a transaction involving commerce.

You wouldn't say that that language would cover everything that Congress might have covered had it wished to exercise its Commerce Clause power to the limit, would you?

MR. FARR: Well, this, I should point out, is not a statute in which Congress has made specific findings to which the Court has to defer saying that we believe a specific activity affects interstate commerce and then directly regulates that activity.

With that exception, though, however, we do believe that the correct reading of this language in fact does indicate that Congress intended to reach all contracts that are within its power under the Commerce Clause. The word "involving" commerce, for example, the word "involving" is, among its meanings, synonymous with the word "affecting."

QUESTION: But it's certainly, it can also be read to be less sweeping than "affecting."

MR. FARR: It could, I agree.

QUESTION: "Affecting" has been almost a word of art in our Commerce Clause jurisdiction, whereas "involving" hasn't.

MR. FARR: Well, Mr. Chief Justice, the fact is that if one goes back, I think one cannot fairly say that the use of the word "affecting" as a term of art was common and recognized in 1925. I don't think that can fairly be attributed to Congress until sometime, probably after Schechter and perhaps even further after that, in the late 1930's.

So if one is looking here -- and the first thing one notices is that Congress, of course, did not use the word "in" commerce, even though that is, in fact, used in section 1 of the act at a different point. It used the word "involving," and the Court in 1923, in a case cited in our brief, United States v. Luskey, at least gave that word quite a generous reading in another context.

Furthermore, it seems, quite frankly, that when the House report talks about having relied on the interstate commerce power, it talked about that power, as I mentioned before, extending to contracts relating to interstate commerce, and on the two occasions, it seems to me, where the Court has given some indication of how it was reading that language, it seems apparent on both occasion that it read it very, very broadly.

QUESTION: What about Bernhardt v. Polygraphic? It didn't seem to read it very, very broadly there.

MR. FARR: Well, Justice Ginsburg, I think in fact it did read the language broadly, if one looks at the inquiry that the Court made. It said, we first look to whether the -- essentially the duties this person were performing were in commerce, whether the person was producing goods for commerce, or whether the person was engaged in activities that affected commerce, which is precisely the test that we think is the right test.

QUESTION: Well, it didn't really say it had to do, it said it did not do any of those three things.

But you would not deny, would you, that that contract could be regulated by the Federal -- under the Commerce power, the contract involved in Bernhardt.

MR. FARR: Well, the contract involved in Bernhardt, it's not clear from that, there's almost no discussion of what the facts are as to what the duties were that the person undertook.

My own view is that Bernhardt on the facts would come out the other way, but I think the test, at least the inquiry, is exactly the right inquiry that the Court should apply, whether in fact it's either in commerce, whether it's producing goods for commerce, or whether the activity affects commerce.

QUESTION: Well, that's not the way Justice Douglas stated the question.

Let me ask you this: are there any appellate court decisions or are there a significant number -- the act's been on the books now for 70 years. Have there been consumer contracts that appellate courts have said are subject to this statute?

MR. FARR: I don't think, at least in one's that I'm aware of, that there are decisions about consumer contracts one way or the other.

QUESTION: Mr. Farr, as I understand your proposal, you would decide whether this contract involves, or whether it evidences a transaction involving commerce ex post. That is, if there's a contract for the purchase a sale of widgets, you wouldn't look at that contract to see whether it specifically contemplates the transportation of widgets interstate commerce, but rather you'd look to see what actually transpired, isn't that right?

MR. FARR: That's correct.

QUESTION: So at the time you sign the contract, you don't really know whether it's going to be arbitrable under the Federal law or not, do you?

MR. FARR: Well, when you're signing the contract you are agreeing to arbitrate your disputes under the agreement, and I think the natural presumption is that you are in fact intending to go ahead and agree.

QUESTION: Yes, but one side can be rolling the dice and saying, you know, there is -- I'm signing this standard form contract that has an arbitration provision, but inasmuch as I don't intend this contract to actually involve interstate materials, my contemplation is that this thing won't be covered.

It seems like a very strange test as to whether a contract is enforceable, or as to what it imposes on the parties, to look to later events and see what happens later, but that is really what you're proposing.

If it turns out that the contract involves interstate commerce, we will retroactively say that Federal law requires the arbitration agreement to be enforced despite State law. If it turns out that it doesn't involve interstate commerce, then we won't.

I find that -- I don't know of any other instance in the law where we sit around and wait to decide whether the provision is valid or not.

MR. FARR: Well, Justice Scalia, it seems to me that in fact when Congress includes a reference to interstate commerce as a jurisdictional nexus in a statute, that the rule frankly is exactly the opposite. I am not aware of any Federal statute in which Congress requires a nexus to interstate commerce for jurisdictional reasons in which Congress requires the person subjected to the law to have an intent about interstate commerce --

QUESTION: But they are not laws --

MR. FARR: -- in order to be covered.

QUESTION: But they are not laws involving contracting. This is a law specifically involving contracting. It validates and renders enforceable despite State law the particular contractual provision, and you usually don't validate or invalidate contracts ex post.

MR. FARR: Well, it involves contracts which relate to transactions involving commerce, so one is looking --

QUESTION: More precisely, it involves contracts evidencing a transaction involving commerce, which could be read to mean that the contract must show on its face that it involves interstate commerce, so if the contract says, I will buy and sell widgets now located in Ohio which will be brought to me in Pennsylvania, then it would qualify, but if it just says, I will buy and sell widgets, it doesn't qualify. That's a possible reading.

MR. FARR: I agree it's a possible reading. What I'm saying is that I really don't think the reading makes any sense, because what that attributes to Congress is an intent, first of all, as I say, to require some sort of subjective intention about interstate commerce, which I think would be unprecedented with respect to any Federal law, and the second thing --

QUESTION: Not a subjective intention at all, an objective one, one that is recited in the contract. If it's not recited, it's not there. Whatever their subjective intentions were, we don't care. Does the contract evidence interstate commerce? If it does not evidence it, the FAA doesn't apply.

MR. FARR: But what's lacking from all of that -- I mean, this in a sense is perhaps a variation of what the Alabama court applied as its test and what Judge Lumbard applied -- is any explanation for why, in fact, Congress would want to put that kind of limitation into the act, to make the coverage of the act turn on what's on the face of the contract or, as the Alabama courts would have it, the subjective intention.

QUESTION: So you could know at the outset whether this provision that you're agreeing to is enforceable or not.

MR. FARR: But that assumes --

QUESTION: That's a good reason.

MR. FARR: But that assumes an intention on the part of someone who is signing the contract to say, I am signing on the face of the contract an agreement that in the event disputes arise between us we will go to arbitration.

However, my secret, undisclosed knowledge, is that I believe this to be an intrastate transaction and therefore this will be unenforceable in certain States. I -- it makes no sense to me, frankly --

QUESTION: Mr. Farr, if it's --

MR. FARR: -- to think Congress wanted to pin it onto that.

QUESTION: If it's a question of what's recited on the face of a contract, and this is a form contract, the person, in this case Terminix, drawing the contract, would say on the face of it this is a contract involving commerce, and I guess the consumer wouldn't have much of a choice about what the contract says.

MR. FARR: Well, Justice Ginsburg, I believe that's correct, but in a way that seems to me to point up why the real question ought to be whether the transaction does, in fact, involve interstate commerce.

I don't think that Congress wanted people to be able to enforce arbitration agreements outside what Congress' power would typically be simply by making a recitation in the contract, so the question would still be, even if there was the recitation in the contract, does the contract in fact involve interstate commerce, and I think that's what the test ought to be even if there is no recitation in the contract about what --

QUESTION: Why did you say earlier that it's entirely an after-the-fact determination? There certainly were elements in this case where one could say, I mean, the company being from out of State, the contract having been purportedly executed out of State --

MR. FARR: Well, that's correct, Justice Ginsburg. I mean, the contract here does in fact show an agreement between Terminix International, which is a national company headquartered in Tennessee, and the --

QUESTION: Mr. Farr, if it were in all other respects --

MR. FARR: -- respondents, located in Alabama.

QUESTION: -- a local agreement, would you say the fact that a parent company of a contracting party is an out-of-State concern would be sufficient to make the act applicable?

MR. FARR: It -- I think it might depend on what particular duties they are undertaking under the contract. Now, here --

QUESTION: Say they guarantee performance of the contract.

MR. FARR: If they're guaranteeing performance of the contract, I think that an arbitration agreement in that should be enforceable as a matter of Federal law, and would be within the coverage.

QUESTION: If we were to say, as we've sometimes suggested in the antitrust area, that the contract must have a substantial effect on interstate commerce, do you have any idea how this case would come out?

MR. FARR: I mean, if one is looking to this particular transaction, I mean, it is a transaction of relatively modest size, I suppose. I mean, I think it is directly within the flow of interstate commerce.

Virtually any test you can use, frankly, I think reaches this contract, because it is an interstate agreement, there are materials moving across State lines in order to perform the contract -- I would be hard-pressed to say that one contract viewed in isolation has a substantial effect on interstate commerce, but I don't think that that is what Congress is requiring, again, when it is using the term, transactions involving commerce. I mean, the --

QUESTION: You mentioned at the start of your argument that in many statutes Congress makes findings that the particular activity affects commerce.

Actually, the result of your argument here is just as if Congress did make those findings in this case. That's the purport of your argument, is it not, i.e. that arbitration contracts affect interstate commerce? I mean, that --

MR. FARR: Well, I -- no, I think particular -- particular arbitration contracts are found within that definition.

For example, Congress has criminal laws that apply to transactions in or affecting commerce, and the courts must decide whether in fact a particular transaction involves -- I mean, excuse me, is in or affecting commerce based on that standard.

Now, the courts apply a generous standard, assuming, I think correctly in those cases, as we think here, that Congress is intending to exercise its power to the fullest extent.

QUESTION: Suppose we replicate a situation like Wickard v. Filburn, where one farmer in Ohio agrees with his neighbor to sell him 50 bushels of wheat, and they have an arbitration agreement in it, and nobody claims that the wheat ever went anywhere except across the local road, but I suppose if you apply Wickard v. Filburn you'd say, well, if he hadn't sold that 50 bushels of wheat to his neighbor, he might have sold it to somebody else that might have baked some bread that went in interstate commerce.

Now, is that contract subject to the Federal Arbitration Act?

MR. FARR: Mr. Chief Justice, I don't think so, in the absence of congressional findings. I think there, the relationship by any of the normal standards that the court applies without findings would be too attenuated.

Let me point out --

QUESTION: Mr. Farr, may I ask you a related question? If the clause in question is not to be regarded as an implicit finding, what does it add? In other words, why is the act any different with this clause from what it would be without it?

Because if the act did not have this arguable limitation on it, and it were applied to a transaction which is claimed not to involve commerce in any way, that would be the defense to the attempt to enforce the arbitration agreement, which will be the case here.

So if it simply is a jurisdictional statement, but it is not a finding by Congress that all arbitration are within the jurisdiction, I don't see what function it has.

MR. FARR: Well, Your Honor, I think, again, it serves the same function as defining the class of contracts that Congress was intending to reach, just as, when Congress uses the terms, affecting commerce in criminal statutes, it is indicating what particular acts and transactions it's trying to reach by those statutes, and if one steps back for a second and --

QUESTION: But in fact unless parties attempted to apply the arbitration agreement and to enforce the Federal act in cases which clearly did, or in cases which did not in fact involve commerce, the functioning of the act would be no different.

MR. FARR: Well, if one looks back --

QUESTION: In other words, Congress -- you're saying, in effect, that Congress is saying to the Federal courts, when -- and parties, I suppose, when you refuse to apply this agreement to contracts that do not involve commerce, you're right. That's basically the function of the provision.

MR. FARR: The Congress is saying, we did not intend to, but I think that's important, because in 1925, when Congress was enacting this legislation, it was enacting it against a background of hostility towards enforcement of arbitration agreements, hostility from the very courts that were going to have to interpret the act.

QUESTION: In your judgment, in the absence of this limitation, would there have been a risk of facial invalidity to the statute?

MR. FARR: Oh, I think there would have been a very definite risk in 1925.

QUESTION: So you think that's what they were guarding against.

MR. FARR: I mean, Congress was very concerned in 1925, and I think Judge Medina says this many years later in Robert Lorance, that unless it was very careful and put this on sound jurisdictional grounds, the courts, which did not want to enforce arbitration agreements, would invalidate it as beyond the scope of Congress' power.

QUESTION: Mr. Farr, can I just ask you one -- maybe you want to answer it on your reply. Are you sure about your answer to the Chief Justice's question? You really don't think that would be enforceable, an arbitration clause in the example he gave you?

MR. FARR: That -- my reaction to it is that if one applies the test that the Court applied in Bernhardt, that that would be found to be too attenuated. That is my position.

QUESTION: But you said before --

QUESTION: But you think that's correct, though? That's your position --

MR. FARR: In the absence of findings.

QUESTION: -- and if so, how do you distinguish that contract from this one?

MR. FARR: Because this one, in fact, does involve interstate commerce, that you are dealing with out-of-State dealers. I mean, this is not, in fact, a contract where one has to say this is, everything about it looks local, does it have an effect, it's an agreement with a national company to provide services to someone in another State, and that seems to me is on its face within the Commerce power. The question posed --

QUESTION: But the services -- it isn't where the service is, but where the owner of -- anyway, I won't take any more of your time.

MR. FARR: I'd like to reserve the rest of my time, if I --

QUESTION: Then you're saying it doesn't go the full length of congressional power, because the Chief is giving you an example of something that was held to be within the Commerce power.

MR. FARR: Based on the findings that Congress made.

Congress made findings and then regulated a specific activity, and I think that falls in a different category.

QUESTION: Very well, Mr. Farr.

Mr. Chason, we'll hear from you.

ORAL ARGUMENT OF ALLAN R. CHASON ON BEHALF OF THE RESPONDENTS

MR. CHASON: Mr. Chief Justice, and may it please the Court:

Justice O'Connor asked Mr. Farr if the -- a broad reading of the statue would in fact sweep away State law. That is our position exactly, that a broad reading of section 2, particularly to the limits of the constitutional powers of Congress, would, in fact, sweep away a great amount of State law and, in fact, we cannot imagine congressional intent in 1925 for Congress to regulate contracts where people in a city arrange to have insects in their home sprayed. We cannot imagine a congressional intent to reach that far into traditionally State matters.

I would like to turn first in this question of statutory construction to the express language of the act. I would like to draw into that the legislative history, because we draw different conclusions from the legislative history as the ones that Mr. Farr has outlined for you.

First, the choice of the word "involving" commerce we believe is important, because, as the Chief Justice has mentioned, traditionally the word "affecting" commerce has been used when Congress wanted to use all of its constitutional power.

The question was asked whether that was a term of art in 1925. Well, we don't -- we can't look into the minds of the Congressmen that voted on that act, but we -- what we can say is that they were aware that they had less than -- that they had more power than to only regulate contracts which were directly in commerce, and the reason I say that is that our cite in footnote 17 of our brief to two cases of that era, and as the Will v. Department of State Police case tells us, that's what we look to, are the authorities of the era.

We don't know, as Justice Scalia mentioned yesterday, exactly what these Congressmen were thinking about in 1925, or whether they read Supreme Court precedent, but nevertheless, in trying to give some meaning to the word "involving" commerce and what Congress might have thought it meant, we cite Your Honors to the Coronado Coal Company case, which was decided in 1922.

QUESTION: You cite the case to Our Honors, I think, you don't cite Our Honors to the case, but that's all right.

MR. CHASON: Yes, sir. Excuse me.

The Coronado Coal Company case, and also to the United Leather Workers case in 1924, both of which preceded the passage of the act in 1925, and the reason that we believe that those cases are important is that they very clearly draw a distinction between the two kinds of powers which the -- which Congress had under the Commerce Clause.

That case talked about the fact that on the one hand Congress had power to regulate matters which were in the current or flow of commerce, and in talking about what was in the current or flow of commerce, they used the words, matters which involve commerce intrinsically, involving commerce intrinsically.

Now, whether that was a specific language that Congress had reference to 2 years later when they passed this act, we cannot know, but that was an authority of the era, and the same language was used again in the United Leather Workers case 2 years later.

Now --

QUESTION: Why doesn't it involve commerce, why isn't it in commerce if I contract with someone to bring in some individuals from out of State to perform services in this State in spraying bugs, and to use bug spray that is manufactured by that company in another State, and will be brought across State lines for the purpose of spraying? That would be involving commerce, wouldn't it? It would be in commerce. I mean --

MR. CHASON: Justice Scalia, that's a difficult question, whether simply the fact that crossing State lines is commerce.

Now, we cited in footnote 16 of our brief the Ware and Leland case and cases which hold that the mere residence of the parties does not amount --

QUESTION: No, but I'm not talking about residence. I'm talking about a contract that specifically says, on its face, you know, party A will send from Pennsylvania into Ohio a workman who will spray the bugs and then go back to Pennsylvania, and they will use for that purpose --

MR. CHASON: I don't know the answer to that question.

QUESTION: Well, sure you do. Why isn't that a contract involving commerce? It clearly is.

MR. CHASON: My difficulty with your hypothetical, Justice Scalia, is that again it is hard to imagine, particularly if the performance of the contract involved consumers, that Congress could have intended to regulate that kind of transaction.

QUESTION: Well, but that's a different point. That's a different point, and the point you were making, I thought, was that this contract did not -- was not in commerce, did not involve commerce. Now, maybe it didn't if you just look at its face, but if you look at the way it played out, what was actually performed, surely that involved commerce.

MR. CHASON: The way this contract was performed was that Terminix, through its local office in the same community where these people lived, sent a truck just a matter of a few blocks, or maybe miles, over to spray insects in their home, and Terminix can only point to two things which might offer some connection with interstate commerce.

They say that the pesticides that were sprayed were made in States other than Alabama and sent there -- we have no way of knowing whether that is true or not -- and then that the companies were organized in States other than Alabama, and we just think that those tenuous kinds of connections with interstate commerce is not what Congress intended.

QUESTION: But that's not tenuous. I mean, when you spray bugs you use two things, you use people to spray and you use the spray. If the spray is coming from another State, surely that's a contract involving interstate commerce.

MR. CHASON: Well, if Your Honor is speaking of the way that the contract was actually performed, we had no way of knowing that. It could not have been within the reasonable expectations of the parties, and I think --

QUESTION: What about, wasn't the original seller of the home didn't say something about, wasn't there testimony, I want to go with a national company instead of a local company?

MR. CHASON: Yes, Your Honor, the --

QUESTION: And may I ask you what you make of this Court's statement in Perry v. Thomas that the FAA embodies Congress' intent to provide for the enforcement of arbitration agreements within the full reach of the Commerce Clause? Did we just get it wrong?

MR. CHASON: Your Honor, I would feel that in the first place that statement in Perry v. Thomas is dictum because it was a State court case where that finding was not necessary to the holding of the case.

Now, questions about the purposes for which -- the breadth of the purposes of liberal Federal policy and so forth might fairly be applied to questions like in Perry v. Thomas, where the issue is not so much what is the jurisdictional reach of the statute, but, rather, the question is, given that the statute reaches this problem, what is the scope of the arbitration agreement?

We would submit that those are two very different inquiries, that the jurisdictional reach of the statute involves matters of federalism which this Court in the Gregory v. Ashcroft line of cases has in recent years relied on, requiring a plain statement rule that Congress --

QUESTION: That was soundly rejected by the Court majority in Southland so far as the Federal Arbitration Act is concerned, any concept of federalism. It was held the Federal Arbitration Act applies in State courts as well as Federal courts.

QUESTION: And you're not suggesting that the reach should be different in Federal and State courts, are you? You're saying that this agreement, whether this case were brought in the State court or the Federal court, that the result should be the same here.

MR. CHASON: I think that the Court needs to resolve the question concerning the jurisdictional reach of the statute, whether the statute applies in State or Federal court. That question needs to be answered.

QUESTION: Well, the text of the statute doesn't draw any distinction between State or Federal courts if it's applicable. Is there some different test for one where suit is brought in State court? Is that what you're arguing?

MR. CHASON: Justice O'Connor, our reading of the legislative history is that first it was intended to apply as a procedural matter in Federal court, but given --

QUESTION: Well, are you arguing that Southland be overruled?

MR. CHASON: Yes, Your Honor. That is one of the issues that we have raised, and the brief that has been joined in by the Attorneys General of 20 States, in which we join.

QUESTION: Then you would have a different result, if that's your theory, if the, say Gwins, who are also defendants, if they moved to a State outside Alabama so you would have a diversity case, so the defendants could have removed -- if you make a difference between the substantive law applicable in State and Federal court, and the, then you get into the whole mess that Erie was intended to eliminate, right?

MR. CHASON: I would admit, Justice Ginsburg, that there are difficulties in the application of this act, as was fully pointed out in the majority and dissenting opinion in Southland. We feel like Southland was wrongly decided, and I -- there's not -- I can't say too much to add to what has already been said in the amici brief which was filed by the States Attorney generals or in the dissenting opinion in that case.

QUESTION: It was a square holding. It would be sort of hard to overrule it without upsetting a lot of reliance, I suppose, upon it. There have to be a lot of contracts in which arbitration provisions have been inserted with the full expectation, in light of Southland, that they'd be valid.

MR. CHASON: Justice Scalia --

QUESTION: It's precisely the kind of a case where it's, especially in a field involving contracting, it's very hard to go back and overrule a prior decision without upsetting a lot of reliance.

MR. CHASON: Justice Scalia, the only thing I can say to you in response to that is that I don't believe that the significance of Southland was fully appreciated until cert was granted in this case. Now, whether that's an answer to your question or not, I don't know, but I truly believe that, and that was the point made by the Attorneys General in their brief.

QUESTION: Is one of the implications of your position that it is within the control of the parties to determine whether the Federal act is going to apply because they simply can be explicit in their original contract as to whether they understand that commerce will be affected or implicated?

MR. CHASON: Yes, Your Honor. We feel that the contemplation of the parties test says something about the reasonable expectations of the parties at the time they entered into the contract.

QUESTION: Well, is their statement of that contemplation in the original contract going to be conclusive, on your theory? If, you know, if a restaurant owner in Iowa contracts with a fish supplier for lobsters, and they put in the contract the performance of this contract will in no way implicate interstate commerce, does that control?

QUESTION: Are these out-of-State lobsters you're talking about?

QUESTION: Well, I left that term unstated. I wanted to leave some sport in the question.

(Laughter.)

QUESTION: Is that provision going to be conclusive as to the applicability of the Federal act?

MR. CHASON: If I understand your question, Justice Souter, it would be that the parties contemplate interstate commerce but in fact there is none?

QUESTION: Well, no. I was thinking that they would like to live in a dream world in which there are Iowa lobsters --

(Laughter.)

QUESTION: -- and in fact there aren't any, and it might even be suggested that no reasonable restaurant owner or fish supplier could so assume, but they put that in their contract very explicitly. Nothing, no implications on interstate commerce in the performance of this contract. Is that going to be conclusive, on your theory?

MR. CHASON: I don't know the answer to your question, and if I could be permitted to explain why I don't know, I can say that we view the contemplation of the parties test as an attempt to look at the practical consequences of what happened in the transaction under inquiry, and to give effect to what the reasonable expectations of the parties were.

QUESTION: Well, if it's reasonable expectations, then I suppose the answer to my question is no, that's not going to be conclusive.

MR. CHASON: The notions of foreseeability, Your Honor, are not foreign to our --

QUESTION: So there's no way, I guess what I'm getting at is, there's no way, I gather, then, to simplify the administration that your position would sort of foist upon the courts, because no matter, no matter what the statement by the parties in their contract about what they contemplate, any one of them would be free at any time, I suppose, to say well, that just wasn't reasonable, and therefore I shouldn't be bound by it.

MR. CHASON: One of the -- one of the objections that Terminix --

QUESTION: Well, is it -- do you agree? Do you agree? A party could always wiggle out by saying that just was not reasonable.

MR. CHASON: Not if the test is objective, which we say that it is. Not if the contemplation of the parties is evidenced by the contract, as --

QUESTION: Then isn't it much too easy, in a form contract, for the party who is writing the contract just to put in anything? We contemplate interstate commerce, and then the person, the homeowner really doesn't have any choice about what the contract's going to say on its face.

MR. CHASON: Again, we get back to questions about, what are the reasonable expectations of the parties, and what could they foresee, what could they reasonably foresee?

QUESTION: But if you're going to go by what's on the face of the contract, isn't it so that in the case of a form contract, the party who writes the contract can put anything they want on the face of it?

MR. CHASON: Yes, Your Honor.

QUESTION: If you have an objective test, that will be the end of it. The contract says this contract contemplates interstate commerce, and if this contract says that, then what happens to the contemplation of commerce test? Is the only thing -- this case can't simply be about that the form left out one sentence.

MR. CHASON: I agree with that, Your Honor. I think there are some -- the contemplation of the parties test is a judge-made rule made in 1961, and it seems to me that it is a different question from the jurisdictional question that is first, that the first -- that the Court would come to first.

We do not embrace every construction, every comma in the contemplation of the parties test. We recognize that there are possibly some difficulties with it, and that's the reason I tried to answer Justice Souter's question in terms of, it's hard to say on a particular hypothetical fact situation that yes, this would or would not pass the test.

QUESTION: But it should be easy to say. The whole reason people enter into an arbitration agreement is, they don't want to litigate.

You've destroyed arbitration agreements of all of their value if you're saying any time you sign one you're going to have to litigate about what the reasonable expectation of the parties was. Even if it's set forth in writing, that won't govern. We need a lawsuit about what our reasonable expectation was. You've destroyed arbitration agreements.

MR. CHASON: Well, Terminix makes that argument, Your Honor, that a practical solution to this problem is just to broadly construe the jurisdictional reach of the statute, and then you don't have to worry about tests, and for practical purposes maybe not all, but almost all contracts would be drawn within the purview of the statute, and we don't think, absent a clear congressional statement, that that was their intent.

QUESTION: You need a clear congressional statement for the proposition that Congress surely could not have intended that every such agreement as this would give rise to a potential lawsuit over arbitration, which was the point of Justice Scalia's question. I mean, do we need a clear statement from Congress to assume that that at least was not in Congress' contemplation?

MR. CHASON: To cover transactions like the one here?

QUESTION: Or any transaction in which there can, there is an invitation to litigation over what is in the contemplation of the parties, or the reasonable contemplation of the parties.

MR. CHASON: Your Honor, my answer to your question is yes, that I do believe you need a clear statement of congressional intent, and I would cite Your Honor to the Gulf Oil v. Copp Paving case, which I believe is very important to our -- the analysis that we would urge this Court to take here.

That case was decided in 1974, and it involved section 2 of the Robinson-Patman Act, and we don't cite it to the Court for the statute that was being reviewed there, but, rather, for the reasons, and that case involved an asphalt plant in California, and the asphalt was going on interstate highways which were contended to be instrumentalities of commerce.

And in the Copp Paving case the Court discussed that those were merely nominal connections with interstate commerce, and that Congress never intended to get involved in those kinds of details, and I believe, Justice Souter, that the Copp Paving case can be read as holding that before Congress will be permitted to get involved in those kinds of essentially local matters, there must be some --

QUESTION: Yes, but that case involved the, that statute deals with transactions in commerce as opposed to the affecting commerce standard in the Sherman Act.

MR. CHASON: Yes, Your Honor.

QUESTION: I really don't think, are you saying this should be read as in commerce and excluding everything affecting commerce?

MR. CHASON: No, Your Honor, the -- it -- as I remember the language of that, of section 2, it was engaged in commerce, and the Court read engaged in to mean the same thing as in.

QUESTION: They same point they made in the Bunte case, yes.

MR. CHASON: Yes, sir.

QUESTION: Do you agree with the Bernhardt formula? Mr. Farr said the formula was right, although in his judgment the result on the facts was wrong. Do you accept that as a proper formula for involving commerce?

MR. CHASON: No, Your Honor, we don't -- we don't -- we rely on the facts of Bernhardt. We feel that this Court would need to overrule Bernhardt on its facts.

QUESTION: But as far as Douglas' statement of what is involving commerce, do you accept that as a proper statement of the law?

MR. CHASON: No, Your Honor. We would not think that affects commerce is the proper test.

QUESTION: So you think that the Court got it wrong on the law but right on the facts in that case, is that --

MR. CHASON: We think it was right on the facts. We think the facts are what the Court should look to, because the facts are clear that it would have been within the Commerce power of Congress to regulate that transaction. Now, whether that part of the test was dicta, I can't say, but we would not accept the test.

QUESTION: It was a declaration of what those words meant in the statute.

MR. CHASON: I can't -- I can't express an opinion on exactly --

QUESTION: You said that the Perry words, that that was dictum, and the Douglas formula was wrong in Bernhardt, so where did the Court have a right answer in the majority opinion?

MR. CHASON: The answer that I would give you, Justice Ginsburg, is that the facts in that case speak very loudly, very clearly, that when a New York company is hiring a New York employee to go to Vermont and run their plant, that if the act reaches as broad as constitutionally permissible, that transaction must be regulated, and that is the position of Terminix in this case, is that's the reach which should be given to this act, and Mr. Farr has admitted that in his statements and in his brief.

QUESTION: Well, no. He says the 50 bushels of wheat transaction would not be covered.

MR. CHASON: If I remember the facts of Wickard v. Filburn, Justice Stevens, one of the relevant facts in that case was that there was some machinery used from out of State.

QUESTION: Well, whether that --

QUESTION: That was not recapitulated in my hypothetical.

(Laughter.)

MR. CHASON: If I could make one point about --

QUESTION: The case isn't famous for that, anyway.

(Laughter.)

QUESTION: I don't recall that machinery.

QUESTION: It's famous for what the Chief, how the Chief Justice described it.

MR. CHASON: If I could make a point about the legislative history, that I really would like to say to I think draw the case into focus, at least as far as the legislative history that Terminix relies on, I think that it's very important -- we don't know exactly what Congress thought or understood about the word "involving" in 1925, but what we do know is that we have these two cases that were on record before them.

We also know that in the subcommittee hearings there was a brief filed by Julius Cohen, who was the principal draftsman of the act. In that brief, he included a section which discussed Congress' authority to do what they were doing. In the brief, he used the words "affecting."

He told Congress about the two kinds of Commerce power that it had. He explained to them that they had this narrower view of commerce, and that they also have control over matters, I believe he used the word "affecting" commerce in one place, and "relating to" commerce in another place.

At the time that he wrote that brief -- and let me also say that after he submitted that brief, there was a House report filed which drew the same distinction. It noted that Congress not only had the power to regulate actual, physical movement of goods in interstate commerce, but it also had the power over contracts which affect commerce.

Now, at the time that that report was written, the bill covered any contracts. The original bill, the language of section 2, covered any contracts. I don't know what happened after that time, but I do know that Congress was informed of the, at least -- I can't say that Congress was informed of the full breadth of the Commerce power, but I do know that they were informed that they had something more than just to regulate transactions in commerce.

Now, after they were informed of that, the bill was amended. The bill was amended 90 days later in the Senate.

QUESTION: Mr. Farr's answer to that is, they were worried about facial invalidity.

MR. CHASON: Well, we don't know why -- what they were worried about. As Justice O'Connor wrote for the Court in the Gregory case, the way Federalism is supposed to work is that it is the power of the ballot box, that is, the political process reigns in Congress when it tries to intrude onto State affairs, provided the Court does not do that, interfere with that effort.

I think an equally likely explanation, Justice Souter, is that during the -- this bill was under, had been filed the previous term. It was under submission in Congress for 2 years.

Now, I don't know what happened during that 2 years, but I would suggest to you that an equally likely possibility is that the people in those congressional districts, or in those Senate districts, objected to the breadth of including any contracts in the bill, and that it was amended to narrow the scope of what section 2 would do. I don't have any concrete proof that that happened, but I would suggest to you that that's just as likely as his explanation for what happened.

QUESTION: But you don't dispute that the main focus of Congress was what the Federal courts were doing in rejecting arbitration agreements, the Federal courts' hostility to arbitration agreements under the era of Swift v. Tyson, when they were declaring general common law. I mean, we're way back in pre-Erie days. It was the hostility of the Federal courts to arbitration that was the principal reason for the Federal Arbitration Act.

MR. CHASON: I would agree with that, Your Honor. I would agree with that, but if I could explain further, if you read the legislative history, if there's one thing that comes out clear, it is that the principal support for the legislation came from trade associations and merchants, and people who would be in the flow of commerce. I cannot imagine that in 1925 Congress intended the jurisdictional reach of this act to cover transact -- spraying insects in Fairhope, Alabama.

Sure there was a purpose to change the common law rule. I don't deny that, but I don't believe that that answers the question. The question is over what jurisdictional field, or what was the jurisdictional reach of the act.

Now, our principal point in contradiction to the one that Terminix has made is that we know, whatever the reach of the act it was something less than affecting commerce.

Now, exactly what it was, we have a difficulty defining a rule to describe it. Now, the contemplation-of-parties test is an effort to do that. That's a judge-made rule. We would suggest that if the jurisdictional inquiry is made, and once the Court gives some definition to the term, involving commerce, then the Court could fashion a rule or a test if it's dissatisfied with the contemplation- of-the-parties test to properly define the jurisdiction of section 2.

QUESTION: Do you have any second choice, other than the contemplation-of-the-parties test?

MR. CHASON: I have not suggested one exactly. I would think that it ought to go something like, or something -- it ought to incorporate notions of reasonable expectations of the parties, and foreseeability of the timely entering into the contract, and not, as the question that was asked by Justice Scalia, that the validity of contracts can only be determined ex post. That can't be the way the rule works. It must -- whether the contract is subject to the act must be capable of determination at the time the contract is made, not ex post.

QUESTION: So your second choice is your first choice.

MR. CHASON: Your Honor, I'm sorry, I don't have all the answers to the questions of exactly what the test would say, and part of that difficulty is that, at least the way I see this case, the first question that the Court needs to address is, what is the jurisdictional reach of the act, and to my way of thinking about it, it seems to me that normally what this Court has done is first determine what the jurisdictional reach of the statute is and then, secondly, try to fashion a test that will lead courts which inquire about that in the right direction, and we feel like something akin to, if not exactly like, the contemplation of the parties test would lead in that direction if the Court construes the jurisdictional reach of the act as we think it should.

QUESTION: Thank you, Mr. Chason.

Mr. Farr, you have 3 minutes remaining.

REBUTTAL ARGUMENT OF H. BARTOW FARR, III ON BEHALF OF THE PETITIONERS

MR. FARR: Thank you, Mr. Chief Justice.

I have just two points that I would like to make. First, with respect to the contemplation of the parties, it has yet at least been explained to my ear why Congress would want the scope of the act to turn on the parties' contemplation about interstate commerce.

The logic of this argument, as I understand it, is that even though the parties solemnly agree in a written contract to arbitrate their disputes, if they do not, on the face of the same contract, say something about interstate commerce, it means that they are not intending Federal law to apply.

In the first place, I don't think that is a logical inference to draw from it and, secondly, I can't imagine that Congress would intend that that undisclosed inference be the basis for deciding whether Federal law applied or not.

The second point I'd like to make is that one has to look, I think, at the reasons that Congress wanted to make arbitration agreements enforceable. They had several thoughts in mind, 1) that it would provide some sort of greater certainty in dealings, but in particular that it would lower the cost of litigation, it would lower delays, or reduce delays that were associated with disputes that arise out of agreements.

Now, what you have in this particular case is simply a contract for the sale of goods and services, a standard, garden-variety contract, one that we believe involves interstate commerce, for sale of a service involving goods to a citizen in another State.

Now, what is there about that contract that makes it inappropriate for arbitration, as Congress viewed arbitration? Indeed, the legislative history talks about dealings such as a farmer selling his potatoes to an out-of-State dealer, and makes reference to that clearly, I think, suggesting that that would be within the coverage of the act.

Now, this may seem like a mundane transaction, if one thinks of interstate commerce in some grand sense, but in fact, arbitration in contracts like this also can reduce costs, can reduce the burden on the courts, and ultimately can reduce prices to the very consumers who sign contracts like this, and those policies clearly apply to what everybody agrees is the scope of the act.

Thank you.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Farr.

The case is submitted.

(Whereupon, at 11:02 a.m., the case in the above-entitled matter was submitted.)