Opinion
No. 1020195.
Decided May 23, 2003.
Appeal from Madison Circuit Court (CV-01-2520)
Huntsville Utilities, John Thomas, and Jimmy Stanley appeal from the denial of their motion to compel Consolidated Construction Company ("CCC") to arbitrate its claims against them. We affirm.
Facts
On October 19, 1999, CCC and Huntsville Utilities entered into an agreement entitled "Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum." Pursuant to that agreement, CCC was to serve as the general contractor for renovations totaling $7,722,200 to the offices of Huntsville Utilities. Subparagraph 4.6.1 of that agreement provided:
This agreement was a form contract drafted by the American Institute of Architects.
"4.6.1. Any claim arising out of or related to the Contract, except to aesthetic effect and except those waived as provided for in Subparagraphs 4.3.10, 9.10.4 and 9.10.5, shall, after decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of Paragraph 4.5."
Huntsville Utilities had hired J.H. Partners Architecture and Interiors, P.C. ("J.H. Partners"), as the architect for the renovations; J.H. Partners drafted plans and specifications for the renovation project. David Ely of J.H. Partners was named as the architect of record; Barry Broom, also an employee of J.H. Partners, was responsible for contract administration on the renovation project.
CCC, a corporation organized under the laws of Delaware, subcontracted the roofing work to Andrew W. Tjelmeland d/b/a Stahl Sheet Metal ("Stahl"), a Tennessee sole proprietorship doing business in Alabama. Stahl did not perform any work in Alabama, however; it immediately subcontracted the roofing work to Phil Morgan Roofing Company, an Alabama sole proprietorship. Phil Morgan Roofing Company performed all of the roofing work on the renovation project. CCC also hired a Florida firm, Conway Enterprises ("Conway"), to perform waterproofing at the project site. According to the record, all other subcontractors retained by CCC were based in Alabama.
It appears that the roofing work did not go well; the work by Phil Morgan Roofing Company was the basis of a breach-of-warranty claim by CCC, and Huntsville Utilities later hired Denard Moore, a Tennessee company, to repair the roof.
According to CCC, it encountered substantial construction problems, design errors, and poor site conditions, which required CCC to perform substantial additional work and for which CCC says it is entitled to additional compensation. According to CCC, those problems — the design and specification errors and the site conditions — also delayed completion of the project. CCC contended that J.H. Partners failed to respond to requests for information, refused to work with CCC, interfered with CCC's performance of its contract, and otherwise performed in an unprofessional manner.
In November 2001, CCC sued J.H. Partners, Jones Herrin Architect/Interior Design, David Ely, and Barry Broom in the Madison Circuit Court, alleging professional negligence and breach of contract. In January 2002, CCC amended its complaint to add as defendants Stahl (the original roofing subcontractor), Stahl's insurer, Bituminous Casualty Corporation ("BCC"), and Phil Morgan d/b/a Phil Morgan Roofing Company (Stahl's Alabama sub-subcontractor). Stahl is a Tennessee resident who was doing business in Alabama. BCC is a corporation organized under the laws of Illinois with its principal place of business in Illinois. Morgan is an Alabama resident. Against Stahl and Morgan, CCC alleged negligence and breach of express warranties. Against BCC, CCC alleged breach of an insurance contract.
J.H. Partners had formerly been known as Jones Herrin Architect/Interior Design.
In May 2002, CCC added Huntsville Utilities and two of its employees, John Thomas and Jimmy Stanley, as defendants (hereinafter referred to collectively as "the Huntsville Utilities defendants"). Against Huntsville Utilities, CCC asserted claims alleging breach of the construction contract, breach of warranty, and vicarious liability for the architect's negligence pursuant to a theory of respondeat superior. CCC also alleged unjustified and unexcused interference by Thomas and Stanley, as employees and agents of Huntsville Utilities, with CCC's contractual performance. A few months later, the claims asserted against all of the out-of-state defendants were settled or dismissed with prejudice.
On June 19, 2002, the Huntsville Utilities defendants filed a motion to dismiss, to compel arbitration, and/or for sanctions (hereinafter referred to as the "motion to compel arbitration"), relying upon the arbitration provision contained in the agreement between Huntsville Utilities and CCC.
On July 29, 2002, CCC filed another complaint. In that complaint, CCC clarified its allegations against J.H. Partners, Huntsville Utilities, Thomas, and Stanley. That complaint alleged negligence, breach of warranty, fraud, suppression, defamation, and tortious interference with CCC's contractual relationship with Huntsville Utilities and with CCC's subcontracts. On August 14, 2002, CCC again filed an amended complaint to allege that Huntsville Utilities had violated § 8-29-1, Ala. Code 1975, known as Alabama's Prompt Pay Act.
On September 6, 2002, the Huntsville Utilities defendants filed the affidavits of Thomas and Stanley and various invoices from out-of-state suppliers in support of their motion to compel arbitration. On October 1, 2002, the trial court denied the motion to compel arbitration, relying upon the five factors adopted by this Court in Sisters of the Visitation v. Cochran Plastering Co., 775 So.2d 759 (Ala. 2000).
The Huntsville Utilities defendants appeal from the denial of their motion to compel arbitration, raising the following issues:
"A. Whether this Court [in Sisters of the Visitation] impermissibly limited the United States Supreme Court's broad interpretation of Section 2 of the Federal Arbitration Act by applying the [United States v.]Lopez[, 514 U.S. 549 (1995),] `substantial effects' standard to individual transactions involving interstate commerce?
"B. Whether the circuit court erred in holding that a renovation project involving a contractor incorporated in Delaware, three out-of-state subcontractors, two out-of-state insurers, and the purchase and shipment of materials from twenty different states did not substantially affect interstate commerce?"
Standard of Review
This Court's standard of review of an order granting or denying a motion to compel arbitration is de novo. First American Title Ins. Corp. v. Silvernail, 744 So.2d 883, 886 (Ala. 1999); Crimson Indus., Inc. v. Kirkland, 736 So.2d 597, 600 (Ala. 1999); Patrick Home Ctr., Inc. v. Karr, 730 So.2d 1171 (Ala. 1999).
Discussion
"A. Whether this Court [in Sisters of the Visitation] impermissibly limited the United States Supreme Court's broad interpretation of Section 2 of the Federal Arbitration Act by applying the [United States v.]Lopez[, 514 U.S. 549 (1995),] `substantial effects' standard to individual transactions involving interstate commerce?"
The Huntsville Utilities defendants first challenge the denial of their motion to compel arbitration by arguing that the "substantial-effect-on-interstate-commerce" standard, applied by the trial court and adopted by this Court in Sisters of the Visitation, violates binding federal precedent. The Huntsville Utilities defendants argue that the standard currently required under Alabama law to trigger application of § 2 of the Federal Arbitration Act ("the FAA") places an impermissibly high burden on parties seeking to enforce arbitration agreements.
We see no need to revisit this issue. See Sisters of the Visitation, supra. We simply observe that the United States Supreme Court has recognized that Congress has authority to regulate three broad channels of activities under its commerce power: (1) "the use of the channels of interstate commerce"; (2) "the instrumentalities of interstate commerce"; and (3) "those activities having a substantial relation to interstate commerce." United States v. Lopez, 514 U.S. 549, 558-59 (1995) (citations omitted). Category three — "those activities having a substantial relation to interstate commerce" — is the only one that applies to Congress's attempt to regulate a private party's agreement to submit a dispute to arbitration. As the Supreme Court recognized inLopez, the proper test under this category "requires an analysis of whether the regulated activity "`substantially affects' interstate commerce." 514 U.S. at 559. See also Maryland v. Wirtz, 392 U.S. 183, 197 n. 27 (1968) ("Neither here nor in Wickard [v. Filburn, 317 U.S. 111 (1942)], has the Court declared that Congress may use a relatively trivial impact on commerce as an excuse for broad general regulation of state or private activities.").
In § 2 of the FAA, Congress seeks to enforce private agreements as to the forum in which private disputes may be resolved. However, if a transaction lacks a substantial effect on interstate commerce, we find no field of application for congressional regulation. We find no error in requiring that a transaction have a "substantial effect" on interstate commerce in order to trigger § 2 of the FAA in state courts.
"B. Whether the circuit court erred in holding that a renovation project involving a contractor incorporated in Delaware, three out-of-state subcontractors, two out-of-state insurers, and the purchase and shipment of materials from twenty different states did not substantially affect interstate commerce?"
In Brown v. Dewitt, Inc., 808 So.2d 11 (Ala. 2001), a plurality of this Court stated:
"On the issue of whether a dispute is subject to the FAA, the party moving for arbitration has the burden of proving the existence of a contract containing a written arbitration clause and relating to a transaction that substantially affects interstate commerce. See Sisters of the Visitation [v. Cochran Plastering Co., 775 So.2d 759 (Ala. 2000),] citing United States v. Lopez, 514 U.S. 549, 559, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995). If the party seeking to enforce the arbitration agreement fails to make such a showing, then the opposing party has no burden of resisting arbitration and the motion should be denied. See Ex parte Greenstreet, Inc., 806 So.2d 1203 (Ala. 2001); Ex parte General Motors Corp., 769 So.2d 903 (Ala. 1999)."
Here, the Huntsville Utilities defendants seek to compel arbitration. Thus, the issue in this case is whether they have carried their burden of proof by making a "prima facie showing that an agreement to arbitrate exists in a contract relating to a transaction substantially affecting interstate commerce." Ex parte Greenstreet, 806 So.2d 1203, 1209 (Ala. 2001). We conclude that the Huntsville Utilities defendants have not met this burden.
In Sisters of the Visitation, supra, this Court addressed a motion to compel arbitration and the movant's burden of proof regarding the degree of effect on interstate commerce required to trigger the application of the FAA. In that case, we identified five factors relevant to determining whether a particular transaction substantially affects interstate commerce so as to trigger application of the FAA: (1) the citizenship of the parties and any affiliation they might have with out-of-state entities; (2) where the tools and equipment used at the project site originated; (3) the intrastate versus interstate allocation of costs and services involved in the project; (4) the potential for subsequent movement across state lines; and (5) the degree of separability of the instant transaction from other interstate contracts. As noted in Sisters of the Visitation, our analysis of these factors is necessarily fact-intensive, and we are limited to the facts contained in the record.
The record in this case reveals the following:
1. Citizenship of the Parties: Huntsville Utilities is a municipal entity that provides gas, water, and electric utility services to the residents and businesses of Huntsville. Thomas and Stanley are Alabama residents. Although CCC is organized under the laws of Delaware, it maintains its only place of business in Alabama. We fail to see how CCC's incorporation under the laws of Delaware substantially impacts interstate commerce in this transaction because CCC's sole office is in Alabama and its contract with Huntsville Utilities was to be performed in Alabama.
We recognize that out-of-state parties were originally involved in this action; however, all of the claims against those out-of-state parties have been resolved, and each of the remaining parties is an Alabama resident. We find no affiliation between the remaining parties and any out-of-state entities. Our analysis of this factor reveals that the citizenship of the parties does not establish that the transaction had a substantial effect on interstate commerce.
In their brief, the Huntsville Utilities defendants argue that CCC retained three out-of-state subcontractors: Stahl, Conway, and Denard Moore. From our understanding of the facts, it was Huntsville Utilities, and not CCC, that retained Denard Moore. Further, we understand that Stahl did not actually perform any work in Alabama but subcontracted the work to Phil Morgan Roofing Company, an Alabama sole proprietorship.
Although J.H. Partners is not named as a party to this appeal, we note that it is an Alabama professional corporation.
2. Tools and Equipment: We next inquire where the tools or equipment used in connection with this transaction originated (e.g., were they leased or purchased specially for this transaction) and whether they moved in interstate commerce. The record in this case is silent as to whether the tools and equipment used by CCC and/or its subcontractors were leased or purchased specially for use at the Huntsville Utilities renovation project. The record is also silent as to whether those tools moved in interstate commerce. The Huntsville Utilities defendants bore the burden of proof as to this matter, and we conclude that the evidence produced relating to this factor does not indicate that the transaction had a substantial effect on interstate commerce.
3. Allocation of Cost of Services and Materials: We next focus on the allocation of the costs of the services and materials required for this particular project. Does the record contain information from which it can be determined what portion of the cost of the renovation project is allocable to the cost of local labor and materials and what portion is allocable to out-of-state labor and materials? We again note that the parties seeking to compel arbitration — in this case, the Huntsville Utilities defendants — bear the burden of establishing that the transaction at issue in fact substantially affects interstate commerce by showing that the transaction depends upon materials and services moving in interstate commerce.
The parties do not argue that out-of-state workers were used on the renovation project. We also reject the argument by the Huntsville Utilities defendants that we should consider the fact that some of the parties are insured by out-of-state insurers and that those out-of-state insurers are required to attend mediation sessions on the parties' claims against them as evidence indicating that this transaction had a substantial effect on interstate commerce. (Huntsville Utilities defendants' brief at p. 67.) Requiring a party's out-of-state insurer to attend mediation in order to facilitate a settlement of the parties' claims is not the equivalent of that out-of-state insurer's being involved as a party to the underlying transaction.
In this case, Huntsville Utilities and CCC agreed, pursuant to Article 3.4.1.1 of the Supplementary General Conditions of the agreement, that Huntsville Utilities would be responsible for acquiring all of the materials to be used for the renovation project, so that Huntsville Utilities could benefit from its tax-exempt status as a municipal entity. Huntsville Utilities did, in fact, acquire some of the materials for this project through out-of-state companies. The Huntsville Utilities defendants submitted some 499 invoices to document this fact.
We note that in Sisters of the Visitation, we held that the fact that the rental contract for the scaffolding Cochran used in his work was between the Sisters and an out-of-state party was, for that reason, not relevant to our determination of whether Cochran brought tools and equipment to the project site and whether Cochran's tools and equipment had moved in interstate commerce. In Sisters of the Visitation, our analysis of whether the movant or nonmovant had obtained the tools and equipment was limited only to the second factor — where the tools and equipment originated. 775 So.2d at 766.
However, under the third factor, we are addressing the allocation of the costs of services and materials required by the transaction. The materials acquired by Huntsville Utilities through interstate commerce were acquired specifically for the performance of the agreement, and they were expressly referenced in the agreement between Huntsville Utilities and CCC. Thus, even though Huntsville Utilities, rather than CCC, may have acquired those materials, interstate commerce was affected as a direct result of this transaction. We, therefore, consider Huntsville Utilities' acquisition of out-of-state materials relevant to our determination of how to allocate the cost of the services and materials required for this transaction and to our determination of whether the FAA is triggered by this transaction.
As the trial court noted in its order, the Huntsville Utilities defendants submitted an impressive 499 invoices reflecting that the purchase of materials for this project involved interstate commerce to some extent. However, the problem with the Huntsville Utilities defendants' evidentiary showing is that they failed to establish the manner in which and to what extent the purchase of materials involved interstate commerce. The Huntsville Utilities defendants failed to summarize the invoices for the trial court, and nothing before the trial court, other than the 499 individual invoices themselves, attempts to explain or argue their impact. Thus, the Huntsville Utilities defendants failed to explain how to allocate the costs of the materials Huntsville Utilities acquired.
However, CCC did present evidence to the trial court as to how to allocate the cost of those materials. According to the project manager for CCC, who reviewed the 499 invoices submitted by the Huntsville Utilities defendants, materials ordered from out-of-state suppliers and shipped directly to the Huntsville project site from locations outside of Alabama accounted for only 3.4% of the total contract price of $7,722,200. The trial court relied upon this testimony in its order denying the motion to compel arbitration. The Huntsville Utilities defendants failed to rebut this testimony in any way.
Affidavit of Ed Hamrick, CCC's project manager for the Huntsville Utilities agreement.
We note that to their brief filed with this Court, the Huntsville Utilities defendants attached three appendices, attempting to summarize its invoices, performing mathematical calculations, and arguing the impact of its calculations. However, the brief contains no citation to where in the record the appendices can be found, because they are not to be found in the record. Nor did the Huntsville Utilities defendants present to the trial court the arguments contained in its brief regarding the calculations it performed using the invoices. Therefore, this evidence is not properly before this Court, and it may not be considered on appeal in determining whether this transaction had a substantial effect on interstate commerce. We conclude that the Huntsville Utilities defendants failed to meet their burden of making a record from which this Court could determine what portion of the contract price was allocable to interstate versus intrastate commerce, as required under Sisters of the Visitation.
Appendix A represents a listing of and the total of all "payments remitted out-of-state for materials shipped from out-of-state and in-state vendors." Appendix B represents a listing and the total of "payments remitted to out-of-state vendors for materials shipped directly to the construction site." Appendix C represents a listing and the total of "payments remitted to offices of out-of-state vendors for materials shipped from their in-state offices."
4. Subsequent Movement Across State Lines: Under this factor, this Court must determine if the object of the contract is capable of subsequent movement across state lines; if not, our analysis of this factor need go no further. If so, we must determine if the movement of that object will have a subsequent substantial effect on interstate commerce.
In this case, the Huntsville Utilities defendants concede that because of the nature of the contract — the renovation of Huntsville Utilities' offices — the object of this transaction is incapable of subsequent movement across state lines. Thus, under this factor, the transaction cannot have a substantial effect on interstate commerce.
5. Degree of Separability From Other Contracts: As to the degree of separability of this transaction from other contracts, we stated inSisters of the Visitation:
"[W]e must look to the effect Cochran's contract will in fact have on those other contracts that do have a substantial effect on interstate commerce, if Cochran's contract is held to fall outside the reach of the FAA and thus be subject to state-law defenses to the enforcement of arbitration clauses. The record before us does not clearly indicate whether the repair-and-restoration project is complete, although the materials before us refer to costs incurred in corrective work made necessary by Cochran's alleged breach; those references indicate that the project has been completed. In any event, the Sisters do not contend that the delays or distraction attendant to litigation, as opposed to the ostensibly simpler mode of dispute resolution afforded by arbitration, would disrupt the performance of the other contracts that have a substantial effect on interstate commerce. Therefore, recognizing the separability of this economic activity between the Sisters and Cochran does not substantially disrupt those activities that are subject to the FAA, because Cochran's contract cannot be said to substantially affect interstate commerce by reason of its impact on other contracts that do substantially affect interstate commerce."
We find no evidence indicating that this transaction, which is now complete, is so related to other contracts having a substantial effect on interstate commerce that a finding that it falls outside the FAA will disrupt those other contracts. Thus, this factor does not counsel in favor of finding that the transaction had a substantial effect on interstate commerce.
Conclusion
Because the transaction evidenced by the agreement between CCC and Huntsville Utilities does not substantially affect interstate commerce, we affirm the trial court's denial of the motion to compel arbitration filed by the Huntsville Utilities defendants.
AFFIRMED.
Houston, Lyons, Johnstone, and Woodall, JJ., concur.
Moore, C.J., concurs in the result.
See, Brown, and Harwood, JJ., dissent.
The main opinion continues this Court's restrictive reading of the federal commerce power begun in Sisters of the Visitation v. Cochran Plastering Co., 775 So.2d 759 (Ala. 2000). Today, this Court further restricts the consequent application of the Federal Arbitration Act ("the FAA") within the State of Alabama. I respectfully dissent.
The main opinion rests on the decision in Sisters of the Visitation, in which a majority of this Court held that an agreement to arbitrate is not enforceable under the FAA unless the individual transaction to which that agreement applies itself has a "substantial effect" on interstate commerce that implicates the commerce clause power of Congress. 775 So.2d at 764. The main opinion thus effectively rejects the holding of the Supreme Court of the United States in Wickard v. Filburn, 317 U.S. 111 (1942), that, in considering the reach of the commerce power, courts should look to the aggregate effect of such individual transactions.
The main opinion's application of Sisters of the Visitation runs afoul of Wickard in a second way. In Wickard, the United States Supreme Court rejected the notion that Congress's commerce power depends in any way on whether the effect on interstate commerce is "direct" or "indirect." 317 U.S. at 122-25. The main opinion applies the following principle established in Sisters of the Visitation: whether "`local' actions or actions with only an `indirect' influence on interstate commerce" have a substantial effect on interstate commerce so as to implicate the federal commerce power depends on this Court's judgment as to "how critical" it is that such transactions be reached by Congress. 775 So.2d at 764. The main opinion thus ignores the instruction of the United States Supreme Court in Wickard that the reach of the commerce power does not depend on whether an effect is "direct" or "indirect." See 317 U.S. at 122-25.
Finally, a majority of this Court today further limits the extent to which the United States Supreme Court's interpretation of the scope of the Commerce Clause applies within the State of Alabama. Specifically, the main opinion applies the Sisters of the Visitation test by parsing the subject transaction — a $7.72 million construction contract for the renovation of the offices of Huntsville Utilities — into its constituent parts and considers whether an individual component of the transaction by itself has a substantial effect, as a majority of this Court understands that term, on interstate commerce. After so applying this Court's Sisters of the Visitation test, the main opinion concludes that Huntsville Utilities, John Thomas, and Jimmy Stanley (referred to collectively as "the Huntsville Utilities defendants")did not demonstrate that this transaction had a substantial effect on interstate commerce.
Sisters of the Visitation and Its Progeny
In Sisters of the Visitation, the Sisters had contracted with an in-state contractor to renovate a chapel located in Alabama and owned by the Sisters. Pursuant to an arbitration provision in the contract, the Sisters sought arbitration of their dispute with the contractor. As I noted in my dissent to that opinion, the majority there held that the FAA can apply to a contract only if that "individual transaction `substantially affect[s]' interstate commerce." 775 So.2d at 782 (See, J., dissenting).
Since our decision in Sisters of the Visitation in March 2000, this Court has routinely denied a party the right to arbitration where the party has failed to prove that the individual transaction substantially affects interstate commerce. See Bowen v. Security Pest Control, Inc., [Ms. 1010783, February 28, 2003] ___ So.2d ___ (Ala. 2003) (denying arbitration in an action brought by homeowners against a pest-control contractor); McConnell Auto. Corp. v. Jackson, [Ms. 1010006, November 1, 2002] ___ So.2d ___ (Ala. 2002) (denying arbitration in an action brought by a cash purchaser of a used car); Alafabco, Inc. v. Citizens Bank, [Ms. 1010703, August 30, 2002] ___ So.2d ___ (Ala. 2002) (denying arbitration in an action by a builder against the bank that provided financing for the builder's projects); Brookfield Constr. Co. v. Van Wezel [Ms. 1010353, June 28, 2002] ___ So.2d ___ (Ala. 2002) (denying arbitration in an action brought by homeowners against a construction company); Aronov Realty Brokerage, Inc. v. Morris, 838 So.2d 348 (Ala. 2002) (denying arbitration in an action brought by a purchaser of a condominium unit against a real estate brokerage firm, a real estate agent, and a condominium association); Liberty Nat'l Life Ins. Co. v. Douglas, 826 So.2d 806 (Ala. 2002) (refusing to compel arbitration where an employee of an insurance company sued her employer); Ex parte Kampis, 826 So.2d 819 (Ala. 2002) (denying arbitration in an action brought by a purchaser of a house against a contractor); Alternative Fin. Solutions, LLC v. Colburn, 821 So.2d 981 (Ala. 2001) (denying arbitration where borrowers brought an action against lenders challenging the legality of certain loans); Ex parte Learakos, 826 So.2d 782 (Ala. 2001) (denying arbitration in an action brought by a purchaser of a house against a real estate company and its agents).
This Court also has taken a very narrow view of what constitutes interstate commerce outside the area of arbitration. See DecisionQuest, Inc. v. Hayes, [Ms. 1011391, May 2, 2003] ___ So.2d ___ (Ala. 2003) (See, J., dissenting).
This Court has also applied Alabama's door-closing statute, § 10-2B-15.02, Ala. Code 1975, to deny a party the right to arbitrate in cases that substantially affect interstate commerce, but where the Court found sufficient intrastate activity to trigger the door-closing statute and to hold the arbitration contract void. See Brown v. Pool Depot, Inc., [Ms. 1011032, Dec. 20, 2002] ___ So.2d ___ (Ala. 2002) (denying arbitration and finding the contract void under the door-closing statute where the interstate contract for the sale of a swimming pool included in the sale price installation of the pool); Community Care of America of Alabama, Inc. v. Davis, [Ms. 1010454, Sept. 13, 2002] ___ So.2d ___ (Ala. 2002) (finding that Community Care demonstrated a nexus with interstate commerce but that the contract was void because Community Care was not qualified to do business in Alabama).
The Court of Civil Appeals of Alabama, applying Sisters of the Visitation, also has routinely denied a party the right to arbitrate a dispute where the party has not proven that the individual transaction substantially affected interstate commerce. See Washington Mutual Fin., LLC v. Steele, [Ms. 2010820, Jan. 10, 2003] ___ So.2d ___ (Ala.Civ.App. 2003) (denying arbitration where a lender brought an action against a borrower); Dilsaver v. Roger's Foundation Repair Co., [Ms. 2010391, Dec. 30, 2002] ___ So.2d ___ (Ala.Civ.App. 2002) (denying arbitration where a homeowner brought an action against a contractor).
Aggregation and the FAA
The Supreme Court of the United States stated in United States v. Lopez, 514 U.S. 549, 556-57 (1995), that for a federal statute that regulates commercial transactions to be a valid exercise of Congress's Commerce Clause power, the aggregate nationwide participation in that activity — not the individual transaction in isolation — must "substantially affect" interstate commerce. Lopez, 514 U.S. at 556-57. This "substantial-effect" test — used to determine the constitutionality of a statute under the Commerce Clause — is not a new standard created in Lopez, but has been the test of a statute's constitutionality since the early twentieth century. 514 U.S. at 555-57.
Once it has been determined that, in enacting a statute, Congress acted within the scope of its Commerce Clause power, the question whether that statute reaches certain activities does not depend on whether the individual act, when considered separately from all similar acts, has a substantial effect on commerce. As the Supreme Court of the United States made clear in Wickard, Filburn's "trivial" production of wheat to be consumed on his own farm could be reached by the Agricultural Adjustment Act because Filburn's wheat production and consumption, considered along with the similar production and consumption of thousands of other farmers, produced a substantial effect on interstate commerce. 317 U.S. at 127. The standard established by the United States Supreme Court is that "`where a general regulatory statute bears a substantial relation to commerce, the de minimis character of individual instances arising under that statute is of no consequence.'" Lopez, 514 U.S. at 558 (quoting Maryland v. Wirtz, 392 U.S. 183, 197 n. 27 (1968)).
In weighing the effect of an activity on interstate commerce, courts are to consider the aggregate effect of that type of activity on interstate commerce. Wickard, 317 U.S. at 124-28; see also Hodel v. Virginia Surface Mining Reclamation Ass'n, 452 U.S. 264, 277 (1981); Tefco Fin. Co. v. Green, 793 So.2d 755, 759 (Ala. 2001.
In United States v. Ballinger, 312 F.3d 1264 (11th Cir. 2002), the United States Court of Appeals for the Eleventh Circuit discussed theLopez restriction on the application of the Commerce Clause, stating:
"The talismanic repetition over the years of the phrase `fullest extent' of congressional commerce power has led some to confuse this concept of the outer limits of congressional authority for an independent grant of authority. . . .
"Perhaps this confusion springs from a failure to distinguish between regulation of economic as opposed to non-economic activity. When the regulated intrastate activity is a commercial or economic one, the Constitution permits the required substantial effect on interstate commerce to be located in the aggregate impact of the regulated activity upon interstate commerce. Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942). . . . The Constitution permits such aggregation of effects to justify congressional regulation of purely intrastate economic activity when the absence of such regulation would undercut a larger regulatory scheme affecting interstate commerce. Lopez, 514 U.S. at 561, 115 S.Ct. 1624.
"No such aggregation of local effects is constitutionally permissible in reviewing congressional regulation of intrastate, non-economic activity. United State v. Morrison, 529 U.S. 598, 617, 120 S.Ct. 1740, 146 L.Ed.2d 658 (2000) [striking down the Violence Against Women Act as an unconstitutional federal regulation of intrastate, noneconomic, criminal behavior]. . . . No aggregation of local effects is permissible to elevate a non-economic activity's insubstantial effect on interstate commerce into a substantial one in order to support federal jurisdiction. [Lopez, supra]."
312 F.3d at 1270.
The FAA provides:
"A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
9 U.S.C. § 2. "The [FAA] preempts contrary state law (specifically, contrary law based on Ala. Code 1975, § 8-1-41(3), and public policy) and renders enforceable a written predispute arbitration agreement but only if that agreement appears in a contract evidencing a transaction that `involves' interstate commerce." Southern United Fire Ins. Co. v. Knight, 736 So.2d 582, 585-86 (Ala. 1999); see Tefco Fin. Co. v. Green, 793 So.2d 755 (Ala. 2001).
Alabama Code 1975, § 8-1-41(3), makes void any agreement to arbitrate future, as opposed to present, disputes.
The Supreme Court of the United States has broadly interpreted the term "involving commerce" as the "functional equivalent" of the phrase "affecting commerce." Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 274 (1995). Congress's use of the phrase "affecting commerce" "normally signals Congress' intent to exercise its Commerce Clause powers to the full . . . ." 513 U.S. at 273.
The Supreme Court of the United States in its opinion in Allied-Bruce Terminix Cos. v. Dobson made clear the standard for the application of the FAA to an individual contract. The FAA provides in pertinent part that "[a] written provision in . . . a contract evidencing a transactioninvolving commerce . . . shall be valid . . . ." 9 U.S.C. § 2 (emphasis added). The Court held in Allied-Bruce Terminix that the requirement in the FAA that an individual contract involve interstate commerce should be read in the broadest possible terms because the word "involving" signals "an intent to exercise Congress' commerce power to the full." 513 U.S. at 277. Congress intended that the FAA's "`control over interstate commerce [would reach] not only the actual physical interstate shipment of goods but also contracts relating to interstate commerce.'" 513 U.S. at 274 (quoting H.R. Rep. No. 96, 68th Cong., 1st Sess., 1 (1924)).
Thus, I believe this Court erred when it held in Sisters of the Visitation that a particular contract, in order to be enforceable under the FAA, must itself have a substantial effect on interstate commerce. I believe the main opinion errs again today in applying the Sisters of the Visitation standard to this case to determine "whether a particular transaction substantially affects interstate commerce so as to trigger application of the FAA." ___ So.2d at ___ (emphasis added).
Direct/Indirect Test
A majority of this Court erred in Sisters of the Visitation in a second important way when it held that whether "`local' actions or actions with only an `indirect' influence on interstate commerce" have a substantial effect on commerce is determined by "how critical the regulation of all similarly situated persons' activity is to the accomplishment of the primary purpose of a statute drawn to regulate an activity clearly having a substantial effect on interstate commerce." 775 So.2d at 764. The Supreme Court of the United States in Wickard expressly rejected the "direct-/indirect-effects" test for determining whether a transaction had a burden on interstate commerce, stating:
"[E]ven if appellee's activity be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce and this irrespective of whether such effect is what might at some earlier time have been defined as `direct' or `indirect.'"
In Sisters of the Visitation, a majority of this Court, interpreting this aspect of Wickard, stated:
"[W]e conclude that the question whether the actions of an individual, which actions standing alone would be considered `local' actions or actions with only an `indirect' influence on interstate commerce, may be considered to have a substantial influence on interstate commerce is to be determined by considering how critical the regulation of all similarly situated persons' activity is to the accomplishment of the primary purpose of a statute drawn to regulate an activity clearly having a substantial effect on interstate commerce."
775 So.2d at 764. In thus interpreting Wickard, this Court modified the United States Supreme Court's holding in Wickard to exclude local or indirect effects unless those effects are sufficiently "critical" to the primary purpose of the statute. In the language recited from Wickard, the United States Supreme Court expressly rejected this kind of direct/indirect analysis; it was rejected for good reason, because of the infinite malleability of the concept of directness. Wickard, 317 U.S. at 125.
317 U.S. at 125. The Supreme Court of the United States stated inAllied-Bruce Terminix Cos., that a contract is subject to the FAA if it merely evidences a transaction that "affects commerce." 513 U.S. at 276. The Supreme Court stated that to be subject to the FAA a contract does not have to evidence a transaction that is itself "`substantially' interstate." 513 U.S. at 269. That is, the individual transaction evidenced by the contract may itself be what a majority of this Court characterizes as a "local" transaction. Thus, today's main opinion errs when it applies Sisters of the Visitation and declines to find a substantial effect on interstate commerce based on its conclusion that, "We find no evidence indicating that this transaction, which is now complete, is so related to other contracts having a substantial effect on interstate commerce that a finding that it falls outside the FAA will disrupt those other contracts." ___ So.2d at ___.
Applying and Extending Sisters of the Visitation
Today the main opinion compounds the errors created by the standard set out in Sisters of the Visitation by parsing the $7,722,200 construction contract for the renovation of Huntsville Utilities' offices into its constituent parts and considering whether an individual component of this transaction by itself has a substantial effect, as a majority of this Court understands that term, on interstate commerce. The main opinion applies the Sisters of the Visitation five-factor test to determine whether this particular transaction substantially affects interstate commerce by considering:
"(1) the citizenship of the parties and any affiliation they might have with out-of-state entities; (2) where the tools and equipment used at the project site originated; (3) the intrastate versus interstate allocation of costs and services involved in the project; (4) the potential for subsequent movement across state lines; and (5) the degree of separability of the instant transaction from other interstate contracts."
___ So.2d at ___.
First, the main opinion considers the citizenship of the parties, but excludes from its consideration all those transactions emanating from Huntsville Utilities' general construction contract with CCC, including the various subcontracts with out-of-state entities, that involve nonparties to the legal action before us. The main opinion looks only at the transactions between CCC and Huntsville Utilities, holding;
"We recognize that out-of-state parties were originally involved in this action; however, all of the claims against those out-of-state parties have been resolved, and each of the remaining parties is an Alabama resident. We find no affiliation between the remaining parties and any out-of-state entities. Our analysis of this factor reveals that the citizenship of the parties does not establish that the transaction had a substantial effect on interstate commerce."
___ So.2d at ___ (footnotes omitted).
The main opinion chooses to disregard from its analysis parties that worked on the construction project; instead, the main opinion equates the "transaction" with "this [legal] action," and in determining whether the transaction substantially affects interstate commerce the main opinion considers only those parties affected by the transaction who remain parties to "this action." The main opinion concludes that because both of the remaining parties to the action are Alabama residents, the transaction does not affect interstate commerce.
Second, the main opinion considers the tools and equipment used in this transaction, stating: "The record in this case is silent as to whether the tools and equipment used by CCC and/or its subcontractors were leased or purchased specially for use at the Huntsville Utilities renovation project." ___ So.2d at ___. The main opinion does not consider the aggregate effect on interstate commerce of the purchasing of tools and equipment by contractors and subcontractors, see Wickard 317 U.S. at 124-28; instead, the main opinion considers only whether those contractors who worked on this project purchased or leased tools in interstate commerce specifically for use in this one transaction, the renovation of the Huntsville Utilities offices.
Third, the main opinion considers the allocation of costs for services and materials. The main opinion concedes that "Huntsville Utilities did, in fact, acquire some of the materials for this project through out-of-state companies. The Huntsville Utilities defendants submitted some 499 invoices to document this fact." ___ So.2d at ___. The main opinion concedes that Huntsville Utilities spent at least $260,000 on materials from out-of-state suppliers. Nevertheless, the main opinion finds that this transaction did not substantially affect interstate commerce because CCC demonstrated that the 499 invoices "accounted for only 3.4% of the total contract price of $7,722,200." ___ So.2d at ___ (footnote omitted). The main opinion thus concludes that this transaction did not substantially affect interstate commerce because the $260,000 spent on materials in interstate commerce constituted only a small percentage of the value of the entire transaction.
Justice Harwood dissents from the main opinion. He concludes that substantially more than $306,238.09 (a figure arrived at by totaling the invoices to out-of-state entities) was spent in interstate commerce and that this particular transaction substantially affected interstate commerce. Although Justice Harwood does not here endorse the extension of the Sisters of the Visitation test that today's opinion represents, he does accept and apply the test itself.
Fourth, the main opinion considers subsequent movement across state lines. The main opinion holds that because "the object of this transaction [a renovated office building] is incapable of subsequent movement across state lines," ___ So.2d at ___, this transaction does not substantially affect interstate commerce. The main opinion does not consider whether the operation of the office building by Huntsville Utilities affects interstate commerce; instead, the main opinion considers only whether the building itself will move in interstate commerce now that its renovation has been completed.
Finally, the main opinion considers "the degree of separability of this transaction from other contracts," ___ So.2d at ___. The main opinion holds: "We find no evidence indicating that this transaction, which is now complete, is so related to other contracts having a substantial effect on interstate commerce that a finding that it falls outside the FAA will disrupt those other contracts." ___ So.2d at ___.
The FAA and This Agreement
The Huntsville Utilities defendants demonstrated that the contractual agreement to arbitrate falls within the scope of the FAA because the contract of which the arbitration agreement is a part evidences a transaction involving interstate commerce. See Allied-Bruce Terminix, 513 U.S. at 281. The transaction involved out-of-state entities, and Huntsville Utilities purchases significant supplies and materials from vendors in 20 different states. The Huntsville Utilities defendants have shown that the contract between Huntsville Utilities and CCC provides for binding arbitration and that a representative of CCC signed that contract. The trial court erred in denying the Huntsville Utilities defendants' motion to enforce the written arbitration agreement contained in the contract. I would reverse the trial court's order denying the motion to compel arbitration; therefore, I respectfully dissent.
I respectfully dissent. I disagree with the conclusion that this $7,722,200 project/contract transaction did not substantially affect interstate commerce. Unlike the situation in Sisters of the Visitation v. Cochran Plastering Co., 775 So.2d 759 (Ala. 2000), where "the transaction" was between the project owner and one of the various project subcontractors, we are here dealing with the transaction between the project owner (Huntsville Utilities) and the general contractor (Consolidated Construction Company). Thus, the entire contract, i.e., the entire project transaction, must be considered, and it is its effect on interstate commerce that is critical, not just the effect of one or more subcontracts. Consolidated Construction Company ("CCC") is a corporation organized under the laws of Delaware. The fact that it maintains its only place of business in Alabama is relevant in this state-court proceeding, but does not alter the fact that it is a citizen of Delaware. Three out-of-state subcontractors were involved in performance of the general contract: Andrew W. Tjelmeland d/b/a Stahl Sheet Metal, a Tennessee resident, to whom the original roof work was subcontracted; Denard Moore, a Tennessee corporation, which was hired to do reroofing work on the building; and Conway Enterprises, a waterproofing subcontractor located in Mims, Florida. The Stahl contract called for CCC to pay Stahl Sheet Metal $352,000 for the roofing work. The fact that Stahl turned around and sub-subcontracted that work out to an Alabama roofing company does not affect the fact that it was Stahl who was paid $352,000 in the first instance.
I do not deem it determinative that any particular entity participating in an aspect of the total project was or was not later sued, or did or did not settle the claims asserted against it. The effect of the project on interstate commerce must be analyzed in terms of its actual components, not by the fortuitous circumstance of who subsequently became, or remained, a party to the litigation.
One of the provisions of the contract between Huntsville Utilities and CCC was that CCC would not begin work on the renovation project until it had "obtained insurance covering all operations pertained thereto . . . nor shall [CCC] allow any sub-contractor to commence work on his sub-contract until all similar insurance required of the Sub-Contractor has been obtained and approved." Furthermore, the required insurance had to protect not only CCC but also Huntsville Utilities, the architect, the owner's project representative, and any subcontractors. This Court has on several occasions held that the contractually required procurement of coverage, where the coverage is obtained from an out-of-state insurer and/or the premiums are remitted out of state, is a relevant consideration in determining the aggregate effect of a transaction on interstate commerce. Chesser v. AmSouth Bank, [Ms. 1002021, Sept. 27, 2002] ___ So.2d ___ (Ala. 2002); AmSouth Bank v. Dees, [Ms. 1010361, Oct. 4, 2002] ___ So.2d ___ (Ala. 2002); and Ballard Servs., Inc. v. Conner, 807 So.2d 519, 522 (Ala. 2001). Stahl's insurer, Bituminous Casualty Corporation, is a corporation organized under the laws of, and having its principal place of business in, Illinois.
Most importantly, however, in my opinion, is the fact, as established by the affidavits of John Thomas and Jimmy Stanley, submitted on behalf of the motion to compel arbitration filed by them and Huntsville Utilities, and corroborated by the total of 499 invoices attached to the affidavits, that materials for the project were ordered from vendors located in 19 states other than Alabama. Although, as the main opinion points out, Huntsville Utilities could have done a much better job organizing and explaining that voluminous presentation to the trial court, its failure to do so does not detract from the fact that the invoices were properly before the trial judge and constitute a part of the record on this appeal, and that each shows the physical address of the vendor, the address to which payments were to be remitted (sometimes different from the physical address), and the amount of the invoice. Although it would have been an onerous task for the trial court to review each invoice to determine for each the state of origin of the materials in question, the address for remittance of payment, and the total amount due under different invoices submitted by the same vendor for different purchases, the "prima facie" magnitude of the total of out-of-state purchases and/or remittances involved could easily have been sampled by a cursory study of the invoices.
For example, easily located among the body of invoices are the following big amount, single-page invoices: $70,200 for wheel systems purchased from SEMCO, Inc., located in St. Louis, Missouri; $66,380 for carpet purchased from Mannington Commercial located in Calhoun, Georgia; $52,085 for elevators purchased from Dover Elevators located in Memphis, Tennessee; and $37,367.38 for drywall purchased from The Formetal Co., Inc., located in Forest Park, Georgia. Also, various invoices from other out-of-state companies are easily located that, even without an attempt to maintain a "running total" of the amounts of that vendor's various charges, are soon recognized as representing, in the aggregate, many thousands of dollars of purchased materials.
Even a one-time scanning of the collected invoices acquaints the reviewer with the fact that they represent many hundreds of thousands of dollars. I agree with the main opinion that Huntsville Utilities' neat and discriminating reformulations and analyses of that raw data by means of the three appendices attached to its brief to this Court cannot be considered because no such orderly arrangement and attendant mathematical calculations and totals were provided to the trial judge. Nonetheless, all of the raw data analyzed by those appendices was available to the trial judge in the invoices submitted to him, and, in my judgment, that data was sufficient, for the purpose of the prima facie showing Huntsville Utilities, Thomas, and Stanley were required to make, to demonstrate a very significant dollar-volume impact on interstate commerce, both with respect to the volume and dollar value of materials shipped into this state for the renovation project, and the volume and dollar value of the remittances flowing out of this State in connection with the project.
The main opinion focuses on the fact that the project manager for CCC reviewed all of those invoices and calculated that they "accounted for only 3.4% of the total contract price of $7,722,200." ___ So.2d at ___ (footnote omitted). I have read the materials in the record relating to that calculation, and I have several reservations about the process employed. For one thing, the CCC project manager excluded all materials that were shipped by out-of-state suppliers to subcontractors or distributors in Alabama prior to their final delivery to the project. By this and other processes, he whittled the 499 invoices down to only 40, consisting of materials purchased from out-of-state suppliers and shipped from locations outside of Alabama directly to the project. Furthermore, with respect to the 40 invoices the CCC project manager thus deemed eligible for consideration, "[a] total of $11622.00 has been deducted from each [of the three] invoice[s] generated by Dover Elevators to reflect the shipment of components which were shipped to Alabama prior to their final delivery to the project." The resulting "allowed" Dover Elevators invoices thus total "only" $28,022, $33,912, and $40,463. Even after the CCC project director self-selected the narrow group of 40 invoices, and applied significant discounts to the three invoices of Dover Elevators, he still derived a total of $306,238.09. My review of the invoices suggests that a much larger number, and dollar total, of invoices is eligible for consideration, given that all of the materials were specifically ordered, invoiced, and provided for the renovation project, and that a much larger total of remittances to out-of-state addresses than just $306,238.09 is reflected by the invoices. Nonetheless, $306,238.09 is not "chicken feed." If the total transaction had involved $306,238.09, we would not hesitate to say that that sum of money would substantially impact interstate commerce. It is my belief that in some cases, the amount of money shown to be allocable to purchases of materials ordered and shipped from out-of-state is of such magnitude as to dispense with the further analysis of that amount's proportional relationship to the total contract price, or the ratio between the two dollar totals. In that regard, if 80 percent of a $500 contract were allocable to materials shipped directly from out of state, I would not be disposed to consider that the $400 in question had a substantial impact on interstate commerce. Conversely, if "only 3.4%" of a one-billion dollar contract were allocable to out-of-state purchases, I would be disposed to consider the resulting $34,000,000 to impact interstate commerce substantially.
Brown, J., concurs.