Just in time to participate in Arbitration Nation’s (unplanned) series on legislative nullification of arbitration agreements, the Ninth Circuit Court of Appeals ruled last week that the Carmack Amendment nullifies pre-dispute arbitration agreements in interstate shipment contracts. Smallwood v. Allied Van Lines, Inc., ___ F.3d ___, 2011 WL 4927404 (9th Cir. 2011). The Ninth Circuit affirmed the district court’s denial of defendant’s motion to compel arbitration.
At issue in Smallwood was whether an individual who had hired a moving company could pursue his tort and contract claims against the moving company in federal court, or whether the arbitration clause in the contract between the individual and the moving company was enforceable. (The facts of this case read like a movie synopsis– the individual wanted his firearms put into storage in the United States, but the shipper mistakenly sent the firearms to the individual’s new residence in the United Arab Emirates. This caused the UAE to arrest the man, put him in prison, “trick him into pleading guilty to smuggling firearms,” and begin deportation proceedings against him.)
Both the district court and the Ninth Circuit held that the Carmack Amendment, a federal law that governs the terms of contracts for interstate shipment by train or truck, precluded the arbitration clause in the moving contract. The Court noted that the Carmack Amendment is intended to protect shippers “from being forced to submit to foreign arbitration as a condition of contracting with a carrier of household goods.” The statute provides that a shipper can bring a civil action in a U.S. district court where the carrier operates or where the damage occurred. 49 U.S.C. 14706(d)(1)-(2). Furthermore, the statute explicitly prohibits a carrier from requiring a shipper to agree to arbitrate before a dispute arises. The combination of statutory language in those sections was sufficient to convince the Ninth Circuit that Congress intended the Carmack Amendment, which was amended multiple times after the Federal Arbitration Act was passed, to create an exception to the FAA. Therefore, the arbitration clause in the contract was unenforceable and the plaintiff may proceed in federal court.