In Allied-Bruce Terminix Companies v. Dobson, the United States Supreme Court held that section 2 of the Federal Arbitration Act ("FAA) was applicable to contract actions which were brought in state court. The controversy began with a house originally owned by Mr. and Mrs. Gwin in Fairhope, Alabama. In 1987, the Gwins purchased a lifetime termite protection plan from the local Allied-Bruce Terminix office, a franchise of Terminix International. The termite protection plan was to protect the house "'against the attack of subterranean termites,' to reinspect the house periodically, to provide any 'further treatment found necessary,' and to repair, up to $100,000, damage caused by new termite infestations." The contract also contained an arbitration clause which indicated "any controversy or claim.., arising out of or relating to the interpretation, performance or breach of any provision of this agreement shall be settled exclusively by arbitration. In 1991, the Gwins had Allied-Bruce reinspect the house because the Dobsons were interested in purchasing the house. The house was given a clean bill of health. As soon as the Dobsons bought the house, they discovered that it was swarming with termites. Allied-Bruce was not able to adequately remedy the infestations. The Dobsons sued the Gwins, Allied-Bruce, and Terminix International in an Alabama state court, claiming breach of contract, fraud and negligence. The Gwins cross-claimed against Allied-Bruce and Terminix International. Allied-Bruce and Terminix requested a stay, pending arbitration, as indicated in the plan's contract and by application of section 2 of the FAA. The state court denied the stay by applying the restrictive "substantial contemplation" test to determine if the FAA was applicable. That test only allows the application of the FAA where "at the time [the parties entered into the contract] and accepted the arbitration clause, they contemplated substantial interstate activity."' The court found that the FAA did not apply to this contract and instead applied the Alabama law which makes "written, predispute arbitration agreements invalid and 'unenforceable.'" Allied-Bruce and Terminix appealed to the Alabama Supreme Court which upheld the denial of the stay, finding that the FAA was inapplicable to this contract "because the connection between the termite contract and interstate commerce was too slight." The court applied the substantial contemplation test, which Allied-Bruce and Terminix appealed to the Supreme Court, which reversed both decisions of the lower courts.
Lauri Washington Sawyer, Note, Allied-Bruce Terminix Companies v. Dobson: The Implementation of the Purposes of the Federal Arbitration Act or an Unjustified Intrusion into State Sovereignty?, 47 Mercer L. Rev. 645 (1996).