Hicks Unlimited v. UniFirst ( 2023 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Hicks Unlimited, Inc., Petitioner,
v.
UniFirst Corporation, A Massachusetts Corporation,
Respondent.
Appellate Case No. 2021-001042
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from Anderson County
R. Scott Sprouse, Circuit Court Judge
Opinion No. 28158
Heard March 29, 2023 – Filed June 14, 2023
REVERSED
James S. Eakes, of Allen & Eakes, and David James
Brousseau, of McIntosh, Sherard, Sullivan & Brousseau,
both of Anderson, for Petitioner.
Ian Douglas McVey, of Turner Padget Graham & Laney,
PA, of Columbia, and Jude C. Cooper, of Fort Lauderdale,
Florida, both for Respondent.
JUSTICE HILL: Hicks Unlimited, Inc. contracted to rent uniforms for its
employees from UniFirst Corporation. The contract contained an arbitration
provision stating all disputes between them would be decided by binding arbitration
to be conducted "pursuant to the Expedited Procedures of the Commercial
Arbitration Rules of the American Arbitration Association [AAA] and shall be
governed by the Federal Arbitration Act [FAA]."
A dispute arose. After some procedural wrangling, UniFirst moved to compel
arbitration. Hicks contended the arbitration agreement was unenforceable because
it did not comply with the notice requirements of South Carolina's Arbitration Act
(SCAA). S.C. Code Ann. §§ 15-48-10 to –240 (2005 & Supp. 2022). UniFirst
responded that the arbitration provision was governed by the FAA, which preempts
the SCAA's notice provision. The circuit court denied the motion to compel
arbitration, ruling the contract did not implicate interstate commerce and, therefore,
the FAA did not apply. The circuit court further ruled the arbitration provision was
not enforceable because it did not meet the SCAA's notice requirements.
UniFirst appealed. The court of appeals reversed, holding arbitration should have
been compelled because the contract involved interstate commerce and, therefore,
the FAA preempted the SCAA. We granted Hicks' petition for a writ of certiorari to
review the court of appeals' ruling that the FAA applied.
I.
Whether a contract involves interstate commerce and, therefore, whether the FAA
preempts the SCAA, is a question of law we review de novo. Bradley v. Brentwood
Homes, Inc., 398 S.C. 447, 453, 730 S.E.2d 312, 315 (2012). We will not, however,
disturb the factual findings of the circuit court that have rational support in the
record. Id.II.
Hicks contends the court of appeals erred in ruling the contract involved interstate
commerce. UniFirst, on the other hand, argues there is no need to address the
interstate commerce issue because the parties agreed by contract that any dispute
between them would be resolved by binding arbitration and that the arbitration "shall
be governed by" the FAA. UniFirst believes this is enough to summon the FAA's
preemption power, knocking out the SCAA notice requirement. See Volt Info. Scis.,
Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 477 (1989)
(although the FAA contains no express preemption provision, state laws are
preempted to the extent they conflict with federal law in the sense that their
application would undermine the goals and policies of the FAA).
We reject UniFirst's argument. A provision in an arbitration agreement declaring
that the FAA applies is not a fait accompli. The FAA owes its existence to Congress'
constitutional power to regulate interstate commerce. The heart of the FAA is 9
U.S.C. § 2, which states:
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, or the refusal to perform the
whole or any part thereof, or an agreement in writing to
submit to arbitration an existing controversy arising out of
such a contract, transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract
....
We construe UniFirst's argument to be that parties may agree to have their dispute
arbitrated by the FAA's methods and procedure, even if their contract only involves
intrastate commerce. But the FAA does not furnish a set procedure for how the
arbitration should go; that type of architectural detail is found in the AAA rules,
which the parties had already settled on. What UniFirst is really asking us to do is
to bless the principle that parties may agree—preemptively—that a court may apply
the FAA's federal preemption power to their contract without first peeking behind
the curtain to ensure interstate commerce is involved.
This we cannot do. The FAA is a sequential whole whose enforcement and
preemption power may only be called upon when the dispute arises against the
backdrop of a written provision in a "maritime transaction or a contract evidencing
a transaction involving commerce." 9 U.S.C. § 2. The Supreme Court long ago
announced that the FAA menu is not a la carte. In Bernhardt v. Polygraphic Co. of
America, the Court confronted an issue instructive to the problem before us. 350
U.S. 198 (1956). Mr. Bernhardt sued his employer in a Vermont state court. The
employer removed the suit to federal district court and then sought to stay the court
action and compel arbitration pursuant to 9 U.S.C. § 3, contending the parties had
an agreement to arbitrate all disputes before the AAA. Id. at 199. The district court
denied the stay, ruling Vermont law provided arbitration agreements were revocable
by any party up to the time of award. The Court of Appeals reversed. Id. The
Supreme Court reversed the Court of Appeals, holding the FAA did not apply
because there was no evidence the contract evidenced a maritime transaction or one
involving interstate commerce. Id. at 200–02.
What is revealing for our purpose here is that the Court in Bernhardt took direct aim
at and shot down the notion that a party could invoke the stay provision of § 3 of the
FAA even when the underlying contract did not satisfy § 2's interstate commerce
requirement. Id. at 201 (noting the Court of Appeals had floated the idea that § 3
"stands on its own footing. It concluded that while § 2 makes enforceable arbitration
agreements in maritime transactions and in transactions involving commerce, § 3
covers all arbitration agreements even though they do not involve maritime
transactions or transactions in commerce. We disagree with that reading of the
Act"). The Court has since reaffirmed Bernhardt and this core principle. See New
Prime Inc. v. Oliveira, 139 S. Ct. 532, 537 (2019) ("[A]ntecedent statutory
provisions limit the scope of the court's powers under §§ 3 and 4. Section 2 provides
that the [FAA] applies only when the parties' agreement to arbitrate is set forth as a
'written provision in any maritime transaction or a contract evidencing a transaction
involving commerce.'"). As the Court explained:
[T]o invoke its statutory powers under §§ 3 and 4 to stay
litigation and compel arbitration according to a contract's
terms, a court must first know whether the contract itself
falls within or beyond the boundaries of §§ 1 and 2. The
parties' private agreement may be crystal clear and require
arbitration of every question under the sun, but that does
not necessarily mean the Act authorizes a court to stay
litigation and send the parties to an arbitral forum.
Id. at 537–38; see also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.
395, 405 (1967) ("[I]t is clear beyond dispute that the federal arbitration statute is
based upon and confined to the incontestable federal foundations of 'control over
interstate commerce and over admiralty.'" (emphasis added) (quoting
H.R.Rep.No.96, 68th Cong., 1st Sess., 1 (1924); S.Rep.No.536, 68th Cong., 1st
Sess., 3 (1924))). In Southland Corp. v. Keating, the Supreme Court explained that
Congress had to rely on its Commerce Clause power to make the FAA apply in state
courts, which meant the FAA's "reach would be limited to transactions involving
interstate commerce." 465 U.S. 1, 14 (1984); see also id. at 14–15 ("We therefore
view the 'involving commerce' requirement in § 2, not as an inexplicable limitation
on the power of the federal courts, but as a necessary qualification on a statute
intended to apply in state and federal courts.").
We hold that a party seeking to compel arbitration under the FAA must demonstrate
that the contract implicates interstate commerce. Just as the parties may not prove
the requisite connection to interstate commerce by agreeing their transaction or
relationship "contemplates" interstate commerce, they may not make the connection
by declaring or contemplating the FAA will govern. Instead, the party pushing
arbitration must prove the contract involves "commerce in fact." Allied-Bruce
Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281 (1995). To the extent Munoz v.
Green Tree Fin. Corp. and Damico v. Lennar Carolinas, LLC have been read as
allowing parties to agree the FAA preempts South Carolina law without an
accompanying demonstration the contract involves interstate commerce, we clarify
now they do not. Munoz, 343 S.C. 531, 542 S.E.2d 360 (2001); Damico, 430 S.C.
188, 844 S.E.2d 66 (Ct. App. 2020), aff'd in part, rev'd in part, 437 S.C. 596, 879
S.E.2d 746 (2022). Consistent with our holding here, the Munoz and Damico courts
held the FAA preempted South Carolina law only after finding the contracts at issue
involved interstate commerce in fact. Munoz, 343 S.C. at 539, 542 S.E.2d at 363–
64; Damico, 430 S.C. at 196, 844 S.E.2d at 70.
There are Texas cases to the contrary. See, e.g., In re Kellogg Brown & Root, 80
S.W.3d 611, 617 (Tex. App. 2002) ("We hold that when, as here, the parties agree
to arbitrate under the FAA, they are not required to establish that the transaction at
issue involves or affects interstate commerce.") This line of cases has proceeded
unadorned by any logic or reasoning that we can find, and we decline to join it.
III.
Although we have held the parties may not avail themselves of FAA preemption
without satisfying 9 U.S.C. § 2's commerce requirement, we must still address the
court of appeals' conclusion that the contract between Hicks and UniFirst implicated
interstate commerce. The court of appeals reached its conclusion after noting the
following points: UniFirst shipped the uniforms from Kentucky to South Carolina,
and Hick's payments were made to and deposited by UniFirst in Massachusetts, the
site of UniFirst's headquarters and board of directors.
The phrase "involving commerce" as used in the FAA is "the functional equivalent
of the more familiar term 'affecting commerce'—words of art that ordinarily signal
the broadest permissible exercise of Congress' Commerce Clause power." Citizens
Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003). The Commerce Clause grants
Congress the power to regulate (1) the use of channels of interstate commerce; (2)
instrumentalities of interstate commerce, or persons or things in interstate
commerce; and (3) activities having a substantial relation to interstate commerce.
United States v. Morrison, 529 U.S. 598, 609 (2000); see also Cape Romain
Contractors, Inc. v. Wando E., LLC, 405 S.C. 115, 122, 747 S.E.2d 461, 464 (2013).
To ascertain whether a contract involves interstate commerce, the court examines
"the agreement, the complaint, and the surrounding facts," including any affidavits
submitted. Dean v. Heritage Healthcare of Ridgeway, LLC, 408 S.C. 371, 380, 759
S.E.2d 727, 732 (2014) (quoting Bradley, 398 S.C. at 455, 730 S.E.2d at 316);
Zabinski v. Bright Acres Assocs., 346 S.C. 580, 594, 553 S.E.2d 110, 117 (2001)
("Both the United States Supreme Court and this Court have relied on affidavits
when determining whether a transaction involves interstate commerce."). The
inquiry is fact dependent and focuses on what the specific contract terms require for
performance. The party claiming the FAA preempts state law bears the burden of
proving the contract involves interstate commerce. Bradley, 398 S.C. at 458, 730
S.E.2d at 317–18.
Under the FAA, "Congress' Commerce Clause power 'may be exercised in individual
cases without showing any specific effect upon interstate commerce' if in the
aggregate the economic activity in question would represent 'a general practice . . .
subject to federal control.'" Citizens Bank, 539 U.S. at 56–57 (citation omitted).
Unlike the banking industry at issue in Citizens Bank, the uniform supply business
is not an activity that is, in general, subject to federal control. Reviewing the
contract, the pleadings, and surrounding facts reveals that the contract was between
a Massachusetts company and a South Carolina company. There is no other sign the
contract was to be performed using instrumentalities or channels of interstate
commerce, or that the uniform supply involved any thing or matter located beyond
South Carolina's borders.
The problem we see with the court of appeals' conclusion is that the points it relied
upon to find the contract between Hicks and UniFirst involved interstate commerce
debuted too late: they first appeared in UniFirst's motion to alter or amend and were
never mentioned by the circuit court. The court of appeals could not use them to
rescue UniFirst's interstate commerce argument. See Johnson v. Sonoco Prods. Co.,
381 S.C. 172, 177, 672 S.E.2d 567, 570 (2009) ("An issue may not be raised for the
first time in a motion to reconsider."); Spreeuw v. Barker, 385 S.C. 45, 68–69, 682
S.E.2d 843, 855 (Ct. App. 2009) (stating evidence that first appeared as attachment
to a Rule 59(e), SCRCP motion cannot be considered on appeal). At any rate, the
points came from assertions made by UniFirst's counsel. They are not mentioned in
the pleadings, not apparent from the language of the contract, nor supported by
affidavits or other evidence. It was error to rely on them in deciding whether the
contract involves interstate commerce. See McClurg v. Deaton, 395 S.C. 85, 86 n.1,
716 S.E.2d 887, 887 n.1 (2011) ("[A m]emorandum in support of a motion is not
evidence."); 6 C.J.S. Arbitration § 70 ("Statements in motions and briefs do not
constitute evidence to be considered by a trial court when ruling on a motion to
compel arbitration.").
In sum, because the contract between Hicks and UniFirst did not involve interstate
commerce in fact, the order of the circuit court denying UniFirst's motion to compel
arbitration is affirmed, and the court of appeals' opinion is
REVERSED.
BEATTY, C.J., KITTREDGE, FEW and JAMES, JJ., concur.