Article on The Federal Arbitration Act and Instruments

One of the most divisive recent issues in American civil justice has been the widespread use of arbitration clauses in consumer and employment contracts. At the center of this storm is the Federal Arbitration Act (the “FAA”).Congress passed the FAA in 1925 to make agreements to arbitrate specifically enforceable and thus provide merchants with a quicker and cheaper alternative to litigation.  But in the last three decades, the Supreme Court of the United States has dramatically expanded the statute’s scope, declaring that it embodies a “liberal federal policy favoring arbitration,” preempts state law, and governs statutory claims.  The Court’s interpretation of the FAA has ignited an “arbitration war”: “a battle over whether the United States will increasingly have a privatized system of justice.” On one side are courts and scholars who argue that arbitration facilitates access to justice and reduces litigation costs, thus allowing businesses to lower prices and raise wages. On the other side are those who claim that fine print dispute resolution terms deprive individuals of their rights and that the Court has allowed the FAA to run roughshod over state law. 

Recently, however, there has been a surge of interest in arbitration in a different field: wills and trusts. This movement is easy to understand. Probate is notoriously litigious.And disputes over estate plans are only expected to become more common. In the next half-century, Americans will bequeath $41 trillion–the largest intergenerational wealth transfer in history. Testators and settlors also must divide this bounty among an increasingly fragmented group of loved ones. Forty percent of current marriages are not first marriages, and over four million households include stepchildren and stepparents.  Even when these blended families are harmonious, they are a fertile source of will contests. In addition, the number of Americans who are over eighty-five will double by 2030 and double again by 2050. With greater longevity comes more age-related infirmities, which often are the springboard for incapacity and undue influence claims. Thus, in an effort to prevent time-consuming and estate-depleting litigation, a rising number of testators and settlors are placing arbitration clauses in their dispositive instruments.

The issue of whether arbitration clauses in wills and trusts are enforceable “is unresolved in almost every jurisdiction.”  Some courts have prohibited the arbitration of incapacity and undue influence claims on public policy grounds  or because the legislature has given probate courts exclusive jurisdiction over such matters. Other judges have nullified arbitration clauses in testamentary instruments for the simple reason that state arbitration statutes only apply to “contracts.” On the other side of the spectrum, the American Arbitration Association has promulgated rules for wills and trusts cases, and legislatures in Florida and Arizona have passed laws that expressly authorize probate arbitration in various contexts.  Similarly, the International Chamber of Commerce has recently created a task force to study arbitration clauses in trusts. 

The budding debate about testamentary arbitration has yet to consider the proverbial elephant in the room: the FAA.  If the statute applies to arbitration clauses in estate plans, it has the potential to transform probate dispute resolution, as it has swept through the rest of the civil justice system. This Article considers that issue and reaches two main conclusions. First, it argues that the FAA likely governs arbitration clauses in wills and trusts. To be sure, Congress almost certainly meant to limit the FAA to arbitration clauses in “contracts.” Nevertheless, in the topsy-turvy world of federal arbitration law, the blueprint written by Congress is just one factor in how the Court interprets the statute. As several Justices and scholars have noted, the Court has “abandoned all pretense of ascertaining congressional intent[,] . . . building instead, case by case, an edifice of its own creation.”  To further its pro-arbitration agenda, the Court has not required that an arbitration clause be embedded in a document that satisfies the black letter test for contractual validity. Instead, the Court has predicated the FAA’s applicability on the mere fact that the parties can plausibly be said to have agreed to arbitrate. Because estate plans create a network of consensual, contract-like relationships, some testamentary arbitration clauses trigger the FAA.

Second, the Article argues that the FAA should be less objectionable in probate than it is in the consumer and employment settings. Critics argue that the Court’s interpretation of the FAA suffers from two main flaws: (1) it permits corporations to deprive individuals of their rights on a non-consensual basis, and (2) it has all  but precluded states from regulating arbitration.  Several factors diminish these concerns in the context of wills and trusts. For one, differences between adhesion contracts (which usually go unread) and testamentary instruments (which stem from a more robust form of assent) make testamentary arbitration more palatable. Moreover, there are significant holes in the FAA’s coverage of estate-related matters, leaving ample room for state regulation. For instance, the Judiciary Act of 1789 does not give federal courts jurisdiction over “core probate” issues–petitions to administer an estate or nullify a will. Thus, reading the FAA to encompass these cases would be perverse: it would not only extend federal power into a sphere that has long been the exclusive province of the states, but it would mean that the FAA creates federal arbitration law that federal courts cannot enforce. As a result, the FAA does not govern these disputes. Likewise, the FAA’s controversial separability doctrine–the fiction that arbitration clauses are their own, independent contracts nestled within broader “container” contracts–applies in a diluted form to estate plans. These limits on the FAA give states an opportunity to develop their own probate arbitration principles.

The Article proceeds in three parts. Part I traces the evolution of testamentary arbitration. It reveals that courts have long disagreed about whether arbitration clauses in wills and trusts are enforceable. It then shows that the majority of recent cases have invalidated testamentary arbitration clauses, creating serious tension between state and federal arbitration law. Part II examines whether the FAA applies to arbitration clauses in estate plans. It analyzes the FAA’s text and legislative history and concludes that Congress intended to limit the statute to arbitration clauses in “contracts.” However, Part II then explains why, as a matter of federal common law, the FAA now governs arbitration clauses in wills and trusts. Finally, Part III considers how several challenging aspects of the Court’s reading of the FAA– including the scope of the agreement to arbitrate, the boundaries of the statute, the separability doctrine, and preemption–would function in the testamentary milieu. By doing so, it illustrates that the statute can be imported into probate in a way that ameliorates some of its flaws.