The reach of the Federal Arbitration Act (FAA) was expanded recently by the New York Appellate Division, First Department in Rita Cusimano v. Andrew Schnurr.  The court unanimously held that the FAA applies to agreements governing entities that own and invest in commercial real estate.  The decision specifically gave the term “commerce,” in the context of the act, a broad reach thus expanding the applicability of the act to an increased amount of commercial disputes.

Cusimano concerned three family-owned entities with interests and investments in commercial real estate.  The businesses involved were franchises of two national chains, CVS and Marriott.  Although the franchises and the dispute seemed to only concern intrastate activities and thus not fall under the FAA’s limited jurisdiction, the businesses were a part of national chains which made the nature of their activities have national effect, therefore satisfying the contemplation of the interstate commerce requirement of the FAA.  Since the matter was considered subject to the FAA, the previously litigated questions, including the statute of limitations, were up to the arbitrator’s determination.

The court held that a transaction can involve commerce merely by “affecting commerce,” elaborating that the federal law applies to transactions that merely fall “within the flow of interstate commerce.”  The court determined that the proper inquiry is “whether the economic activity in question represents a general practice that bears on interstate commerce in a substantial way.”  This holding thus takes a very broad view as to the application of the FAA.

To determine if a case already in the litigation stage could be submitted to arbitration, the court also applied a “three-prong analysis that involve[d] time elapsed between litigation and arbitration; amount of litigation; and prejudice to the opposing party.”  The holding demonstrates that a case can be in the litigation stage and still have the litigation dismissed in favor of arbitration.  For example here, over a year of litigation took place and the court still held that it did not constitute a delay that amounted to prejudice, reasoning that there was not substantial motion practice or discovery.

The reach of the FAA is potentially very broad based on the decision in Cusimano.  Because of the expansion of the FAA to include more commercial transactions, there is a potential for court crowding and delays because more disputes can potentially fall under the jurisdiction of the FAA.  Even cases that are first initiated in courts can be submitted to arbitration if dismissed without prejudice.  This will clog courts with claims that will likely end outside of the court system.  Therefore, parties can begin litigation and subsequently move to have their case arbitrated if the case does not proceed in their favor.  This creates two opportunities to resolve the same case without being precluded from doing so by res judicata.  The room for inconsistent holdings, by a judge and by an arbitrator, poses a problem with the expansion of the definition of commerce.  On the other hand, the broadening of the definition of commerce for the FAA could also decrease pressure on the court system in the long run.  If more cases can proceed to arbitration,   parties could pursue arbitration as an alternative remedy to traditional litigation thus decreasing the courts’ dockets.