Amicus Curiae Brief — Doctor's Associates, Inc. v. Casarotto

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_ Supreme Court, U.S.

€ FILED

No. 95-559 NOV 21 1995

OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

DOCTOR’S ASSOCIATES, INC.

and NICK LOMBARDI,

Petitioners,

Ve

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Petition for a Writ of Certiorari to

the Supreme Court of Montana

BRIEF FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION AND THE SECURITIES

INDUSTRY ASSOCIATION, AS AMICI CURIAE

SUPPORTING PETITIONERS

JOHN F. VERHEY

Counsel of Record

Lewis G. RUDNICK

RUDNICK & WOLFE

203 North LaSalle Street

Suite 1800

Chicago, Illinois 60601

(312) 368-4000

Counsel for Amici Curiae

MATTHEW R. SHAY

THE INTERNATIONAL

FRANCHISE ASSOCIATION

1350 New York Avenue, N.W.

Suite 900

Washington, D.C. 20005

(202) 628-5000

WILLIAM J. FITZPATRICK

SECURITIES INDUSTRY

ASSOCIATION

120 Broadwa

New York, 10271

(212) 608-1500

Midwest Law Printing Co., Chicago 60610, (312) 321-0220

A ri

i

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES ................. ii

INTEREST OF THE AMICI CURIAE ....... 1

SUMMARY OF ARGUMENT ................ 5

QD 00-00 0bndaceusnksseedconsacccenss 8

THIS COURT SHOULD DECIDE WHETHER A

STATE STATUTORY NOTICE PROVISION

FOR ARBITRATION IS PREEMPTED BY THE

FEDERAL ARBITRATION ACT ........... 8

A. The Montana Supreme Court’s Decision

Disregards Prior Decisions Of This Court

And Other Lower Federal Courts .... 8

B. The Montana Supreme Court’s Decision

Distorts This Court’s Reasoning In Volt . 12

Il.

THE MONTANA SUPREME COURT'S DECI.-

SION REPRESENTS UNSOUND PUBLIC

PUGS cccccccccccccccccvcesesececeseves 14

‘i

TABLE OF AUTHORITIES

CASES PAGE

Albright v. Edward D. Jones & Co., 571 N.E.2d

1329 (Ind. Ct. App. 1991), cert. denied, 113 S.

eure See oes tcooeceocese ll

Allied-Bruce Terminix Companies, Inc. v. Dobson,

Cs 0654 080ssneccececee passim

American Physicians Service Group, Inc. v. Port

Lavaca Clinic Assoc., 843 S.W.2d 675 (Tex. Ct.

App. 1992) (en banc), writ of error denied (Tex.

Se EEE + a 06ns00ccvececesecnocececs 11

Carnival Cruise Lines, Inc. v. Shute, 111 S. Ct.

oie i es eb ecbesecee 17

Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995

EE ee ll

David L. Threlkeld & Co., Ine. v. Metallpesellechaft

Ltd. (London), 923 F.2d 245 (2d Cir.), cert. dis-

missed, 501 U.S. 1267 (1991) ............... ll

Gilmer v. Interstate/Johnson Lane Corp., 111 S. Ct.

EE 15

Mastrobuono v. Shearson Lehman Hutton, Inc.,

ED oc oc cop oncenecboces 4

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

er , Oe CED oc ccccccceccoceces 15

Perry v. Thomas, 482 U.S. 483 (1987) ..... 5, 9, 12, 13

Securities Indus. Ass’n v. Connolly, 883 F.2d 1114

(1st Cir. 1989), cert. denied, 495 U.S. 956 (1990) . ll

Shearson/American Express, Inc. v. McMahon, 482

OE 15

Southland Corp. v. Keating, 465 U.S. 1 (1984) ...

pdobnbdnedsoneesdetéseckboosceesoebes 5, 9, 10, 12, 13

Volt Information Sciences, Inc. v. Board of Trustees

of Leland Stanford Junior University, 489 U.S.

ee tee eee ke een aanied 6, 8, 10, 12, 13

Webb v. R. Rowland & Co., 800 F.2d 803 (8th Cir.

DT iL ihiede lissatudshcuddbuceaeaees ll

STATUTES

ee re ee 5, 9, 10

No. 95-559

In THE

Supreme Court of the United States

OcToBER TERM, 1995

DOCTOR’S ASSOCIATES, INC.

and NICK LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Petition for a Writ of Certiorari to

the Supreme Court of Montana

BRIEF FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION AND THE SECURITIES

INDUSTRY ASSOCIATION, AS AMICI CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE AMICI CURIAE

The International Franchise Association (“IFA”), founded

in 1960, is the oldest and largest trade association in the

world representing the interests of franchising. IFA has

more than 750 franchisor members and, since first inviting

franchisees to join in 1993, has already attracted more than

27,000 franchisee members. IFA serves as a resource center

for current and prospective franchisors and franchisees,

state and federal government agencies, and the public. IFA

also represents the interests of franchising before legisla-

ties

tures, the courts, and the public. The Association has been

instrumental in promoting balanced legislation to regulate

franchising practices in the United States.

A franchise is a contractual relationship in which the

franchisor, the owner of a business concept and associated

trademarks or service marks, authorizes a franchisee to

conduct a business that is identified by the franchisor’s

marks and uses the franchisor’s format and operating sys-

tem. The contractual relationship is defined by a franchise

or license agreement, which sets forth the respective obliga-

tions of the franchisor and franchisee. To promote uniformi-

ty in their franchise networks, franchisors utilize standard-

ized agreements. However, such “form” agreements are fre-

quently subject to negotiation. An increasing number of

franchising companies, in an effort to resolve disputes with

their franchisees in the least costly, least disruptive and

most expeditious manner possible, include in their franchise

agreements an undertaking to resolve disputes by arbitra-

tion, binding on both the franchisor and the franchisee.

Such agreements obligate the parties to arbitrate disputes,

usually under the auspices of the American Arbitration

Association or similar organization, and often in the home

state of the franchisor. In the past year alone, almost 400

arbitrations involving franchise relationships were initiated

with the American Arbitration Association.

The Security Industry Association (“SIA”) is a not-for

profit corporation formed under the laws of Delaware. SIA

interests of more than 700 securities firms in North Amer-

ica, which collectively account for 90% of securities firms’

revenue in the United States.

The relationship between SIA members and their custom-

ers, particularly those who borrow money from members, or

who trade in options, is sometimes governed by a written

==

agreement which contains a clause requiring the arbitration

of disputes. Most of these agreements also contain a choice

of law provision. SIA has a deep concern that these agree-

ments be enforced in accordance with the terms of the Fed-

eral Arbitration Act (“FAA”). SIA has been a successful

plaintiff against the Commonwealth of Massachusetts and

the State of Florida in cases to enforce arbitration clauses

despite restrictive state laws or regulations. Consistent en-

forcement of arbitration agreements is important to both

SIA members and their customers since inconsistent en-

forcement of the FAA will lead to uncertainty and confusion

for both parties to the contract.

Historically, many state courts and state legislatures

have looked with disfavor on arbitration, especially when it

occurred as the result of a pre-dispute agreement to arbi-

trate. Whether this reluctance to honor agreements to arbi-

trate stemmed from the belief that arbitration did not

afford the same procedural or substantive safeguards as

litigation, or whether it grew out of the states’ desire to pre-

serve in-state forums for their citizens, the end result was

that arbitration agreements were routinely disregarded.

With the passage of the FAA and rigorous enforcement of

arbitration agreements under the FAA, especially by federal

courts, most state courts and legislatures grudgingly

accepted arbitration as a legitimate means of resolving dis-

putes. In the past several years, however, a backlash has

occurred. A number of states, including Montana, have en-

acted statutes under the guise of ensuring that arbitration

agreements are freely entered into that seriously under-

mine the enforceability of agreements to arbitrate, and

courts have upheld the validity of these statutes despite the

preemptive reach of the FAA. One of the most prevalent

examples of such legislation is the Montana statute that is

the subject of the Montana Supreme Court’s two decisions

untien

below.’ That statute requires that notice of the existence of

an agreement to resolve disputes by arbitration be dis-

played on the first page of the contract in underlined, cap-

ital letters, a requirement that is applicable only to arbitra-

tion agreements, not to contracts generally. While federal

courts have consistently struck down anti-arbitration

statutes of this type on preemption grounds, a growing

number of state courts, of which the Montana Supreme

Court is but the latest example, have held otherwise, per-

mitting states to single out arbitration agreements for un-

favorable treatment.

Amici are vitally concerned about this case because per-

mitting the most recent decision of the Montana Supreme

Court to stand, particularly after this Court’s summary

vacatur and remand of the case for consideration in light of

Allied-Bruce Terminix Companies, Inc. v. Dobson, 115 S. Ct.

834 (1995), will encourage other state courts and legisla-

tures to undertake similar steps to undercut the enforce-

ability of agreements to arbitrate and further thwart the

strong federal policy favoring arbitration. As a result, fran-

chisors and securities firms that include arbitration pro-

visions in their form agreements will either be forced to

tailor their agreements to the laws of 50 different states or

forgo the many advantages inherent in the arbitration proc-

ess. Even now, the inconsistent treatment of arbitration

agreements caused by state notice provisions introduces

* The Montana Supreme Court’s most recent opinion in this case,

dated August 31, 1995, together with the special concurrence and

dissent, is printed as A to the Petition for a Writ of

Certiorari filed with Court in this case. The Montana

Supreme Court’s initial opinion in this case, dated December 15,

1994, together with the special concurrence and dissents, is

printed as Appendix B to the Petition for a Writ of Certiorari.

References to the lower court’s opinions are designated “App. A”

and “App. B,” respectively, followed by a page reference.

unflien

great uncertainty into the enforcement of those agreements

and spawns satellite litigation over the enforceability of the

notice provisions that threatens to erase the benefits of

economy and efficiency that arbitration was originally in-

tended to produce.

Pursuant to Rule 37.2 of the Rules of this Court, IFA and

SIA, respectfully submit this brief as amici curiae in sup-

port of petitioners. Because many IFA members, both fran-

chisors and franchisees, and many securities firms, utilize

arbitration as a means of resolving disputes, IFA and SIA

have a substantial interest in the outcome of this case and

are able to provide an additional and broader prospective

on the issues presented. IFA and SIA believe this brief will

assist the Court in analyzing and resolving these issues.

The parties have consented to the filing of this brief, and

their written consents have been filed with the Clerk of

Court.

SUMMARY OF ARGUMENT

In the decision below, the Montana Supreme Court per-

sists in underestimating the preemptive reach of Section 2

of the FAA by holding that Montana’s notice requirement

for arbitration agreements does not violate the Supremacy

Clause. In doing so, the Montana Supreme Court continues

to disregard two controlling decisions of this Court, South-

land Corp. v. Keating, 465 U.S. 1 (1984), and Perry v.

Thomas, 482 U.S. 483 (1987), both of which held that states

may not restrict the enforceability of agreements to arbi-

trate except on “grounds as exist at law or in equity for the

revocation of any contract.” 9 U.S.C. § 2. Since Montana’s

notice requirement is directed exclusively at arbitration

provisions and not at any other contractual terms, it is pre-

empted by the FAA. In addition to conflicting with South-

land and Perry, the Montana Supreme Court’s decision also

runs directly contrary to the decisions of the three federal

calles

courts of appeals that have addressed the issue, all of which

held that state arbitration notice requirements are pre-

empted by the FAA. Instead of following these decisions,

the court below in its initial opinion relied on two inter-

mediate state courts in Indiana and Texas that upheld sim-

ilar notice provisions. Review of the decision below is neces-

sary to signal to state courts and legislatures that, for pur-

poses of preemption under the FAA, burdening the enforce-

ability of arbitration agreements with a notice provision is

no different than declaring those agreements unenforceable

per se.

By maintaining that Montana’s notice provision does not

undermine the goals and policies of the FAA because it en-

sures consensual arbitration, the Montana Supreme Court

also continues to distort this Court’s holding in Volt Infor-

mation Sciences, Inc. v. Board of Trustees of Leland Stan-

ford Junior University, 489 U.S. 468 (1989). The decision in

Volt was premised on the notion that the primary purpose

of the FAA is to enforce privately negotiated agreements to

arbitrate, even where those agreements allow for arbitra-

tion to be stayed pending the resolution of related litiga-

tion. Because the parties here chose the AAA’s Commercial

Arbitration Rules and Connecticut law, not Montana law,

to govern their arbitration agreement, Volt requires that

their choice be upheld and not, as the Montana Supreme

Court reasoned, that another state’s law be substituted that

would invalidate the parties’ agreement to arbitrate. In

addition, although in Volt this Court observed that the FAA

does not entirely preempt state arbitration laws and in par-

ticular state laws governing the procedures under which

arbitration is conducted, the Montana Supreme Court per-

verted this holding into a license to enforce a state arbitra-

tion law that went to the very substance of the right to

arbitrate, prohibiting arbitration from occurring altogether.

The Montana Supreme Court’s conclusion that the FAA

—_

mandates the enforcement only of those arbitration agree-

ments that are entered into “knowingly,” which Montana’s

notice provision is purportedly designed to promote, flies in

the face of the FAA’s insistence that arbitration agreements

be placed on the same footing as other agreements. Because

of the purported solicitude for arbitration of the majority of

the Montana Supreme Court, when in fact its decision and

the statute it enforced are based on hostility to arbitration

agreements, it is crucial that this Court grant review of the

Montana Supreme Court’s most recent decision in this case

to discourage similar attempts by state courts and legisla-

tures to undermine the FAA on the pretext of furthering its

goals and policies.

The Montana Supreme Court’s decisions below are also

premised on judicial and legislative hostility to arbitration,

which has long been discredited by this Court in view of the

many advantages that arbitration affords over traditional

litigation. These advantages include speed, economy, adjud-

icative expertise and the capacity to preserve long-term re-

lationships once the dispute is resolved. To enforce statutes

like Montana’s either would deprive the parties to a fran-

chise relationship of these advantages altogether, or would

seriously impede the use of arbitration in the franchise

relationship by forcing franchisors to tailor their contract

documents to meet the arbitration requirements of 50 dif-

ferent states. Moreover, the Montana Supreme Court’s rea-

soning is based on unsupported and unfounded assumptions

regarding the negotiability of arbitration agreements and

the role of forum-selection clauses in those agreements.

The popularity and growth of arbitration has been expo-

nential in recent years, as more and more businesses utilize

this effective dispute resolution technique to avoid the cost

and delay associated with traditional litigation. As a result,

review of the decisions below, which introduce rationales

that substantially curtail the enforceability of agreements

= Ss

to arbitrate and raise issues of great importance under the

FAA and the Supremacy Clause, will have enormous sig-

nificance for a large and growing segment of American busi-

ness. These are compelling reasons for this Court’s review.

ARGUMENT

L.

THIS COURT SHOULD DECIDE WHETHER A STATE

STATUTORY NOTICE PROVISION FOR ARBITRATION IS

PREEMPTED BY THE FEDERAL ARBITRATION ACT

In maintaining that the FAA does not preempt Montana’s

statute requiring that a contract containing an arbitration

agreement include a conspicuous notice to that effect on the

face of the contract, the Montana Supreme Court continues

to disregard two of this Court’s controlling precedents and

a substantial number of lower federal court decisions that

flatly refute the Montana Supreme Court’s holding. In so

doing, the Montana Supreme Court has severely restricted

the preemptive reach of the FAA. Moreover, to justify its

hostility to arbitration, the Montana Supreme Court per-

sists in distorting this Court’s holding in Volt Information

Sciences, Inc. v. Board of Trustees of Leland Stanford

Junior University, 489 U.S. 468 (1989), to the point of

emasculating the enforceability of agreements to arbitrate

under the FAA.

A. The Montana Supreme Court’s Decision Disregards

Prior Decisions Of This Court And Other Lower Fed-

eral Courts

In the decision below, the Montana Supreme Court “re-

affirm[ed] and reinstate[d]” its prior holding that the Mon-

tana notice provision is not preempted by Section 2 of the

FAA because the notice requirement does not undermine

the goals and policies of the FAA. App. A at 7a. In so doing,

however, the Montana Supreme Court continues to disre-

__ ‘

uiliien

gard this Court’s controlling decisions in Southland Corp.

v. Keating, 465 U.S. 1 (1984), and Perry v. Thomas, 482

U.S. 483 (1987). In holding that a provision of the Califor-

nia Franchise Investment Law requiring judicial consider-

ation of claims brought under the statute was preempted by

the FAA, this Court in Southland declared that state law

may limit the enforceability of agreements to arbitrate only

upon “ ‘grounds as exist at law or in equity for the revoca-

tion of any contract.’ ” 465 U.S. at 11 (quoting 9 U.S.C. § 2)

(emphasis added). Likewise, in Perry, this Court struck

down a provision of the California Labor Code, which pre-

cluded arbitration of wage collection claims, on the ground

that the California law did not “[arise] to govern issues con-

cerning the validity, revocability, and enforceability of con-

tracts generally,” but rather “(took] its meaning precisely

from the fact that a contract to arbitrate is at issue.” 482

U.S. at 492 n. 9.

The Montana statute at issue here is preempted by the

FAA because it clearly “takes its meaning precisely from

the fact that a contract to arbitrate is at issue.” Montana

does not require that any other contractual provision be

flagged with a conspicuous notice provision on the first page

of the contract. Arbitration agreements alone are burdened

with this requirement in Montana—burdened, in that the

absence of such a notice renders the agreement to arbitrate

unenforceable. Under this Court’s decisions in Southland

and Perry, therefore, the Montana statute is preempted by

the FAA.

Indeed, in a recent pronouncement on the FAA, this

Court reaffirmed that, under its holdings in Southland and

Perry, the FAA preempts state laws that seek to invalidate

arbitration agreements. See Allied-Bruce Terminix Compa-

nies, Inc. v. Dobson, 115 S. Ct. 834 (1995); accord Mastro-

buono v. Shearson Lehman Hutton, Inc., 115 S. Ct. 1212,

1215-16 (1995). In Terminix, this Court decisively rejected

=

a request to overrule Southland and permit state courts to

apply their own anti-arbitration laws regardless of whether

interstate commerce was involved, holding that Southland

was well-established law and that, consequently, Alabama

could not apply its statute barring pre-dispute arbitration

agreements to invalidate an arbitration provision. Terminix,

115 S. Ct. at 838-39. After observing that the “basic pur-

pose of the Federal Arbitration Act is to overcome courts’

refusal to enforce agreements to arbitrate” and to place

those agreements “ ‘upon the same footing as other con-

tracts,’ ” id. at 838 (quoting Volt, 489 U.S. at 474), Justice

Breyer, writing for this Court, concluded that while “States

may regulate contracts, including arbitration clauses, under

general contract law principles and they may invalidate an

arbitration clause ‘upon such grounds as exist at law or in

equity for the revocation of any contract’[,) ... [what

States may not do is decide that a contract is fair enough

to enforce all its basic terms (price, service, credit), but not

fair enough to enforce its arbitration clause,” Terminix, 115

S. Ct. at 843 (quoting 9 U.S.C. § 2) (emphasis in original).

Montana has done precisely what this Court and numer-

ous other federal and state courts over the past decade have

held that it cannot do: It has decided that contracts are fair

enough to enforce all their basic terms, even absent a

special notice designed to bring the existence of those terms

to the parties’ attention, but that arbitration agreements

are not fair enough to enforce without such a notice. Since

this Court in Terminix made clear that state laws that

place arbitration agreements “on an unequal footing” by

definition undermine the goals and policies of the FAA, Ter-

minix, 115 S. Ct. at 843, the Montana Supreme Court's

refusal on remand to apply the principles reaffirmed in Ter-

minix requires plenary review, if not summary reversal.

The Montana Supreme Court’s holding also disregards

the contrary decisions from the three federal courts of

—

appeals that have addressed the issue, all of which have in-

validated arbitration notice provisions similar to the Mon-

tana statute. See, e.g., David L. Threlkeld & Co., Inc. v.

Metallgesellschaft, Ltd. (London), 923 F.2d 245, 249-50 (2d

Cir.), cert. dismissed, 501 U.S. 1267 (1991) (invalidating a

Vermont statute that required agreements to arbitrate to be

“prominently displayed” in contracts and signed by the par-

ties); Securities Indus. Ass’n v. Connolly, 883 F.2d 1114,

1120 (1st Cir. 1989), cert. denied, 495 U.S. 956 (1990) (in-

validating a state regulation requiring full written disclo-

sure of “the legal effect of the pre-dispute arbitration con-

tract or clause”); Webb v. R. Rowland & Co., 800 F.2d 803,

806-07 (8th Cir. 1986) (invalidating a requirement that con-

tracts highlight the existence of arbitration clauses in 10-

point capital letters); Collins Radio Co. v. Ex-Cell-O Corp.,

467 F.2d 995, 997-99 (8th Cir. 1972) (invalidating a require-

ment that arbitration agreements bear an attorney’s ac-

knowledgement that all parties have been advised of the

agreement’s effects). Instead, the Montana Supreme Court

has joined a growing number of state courts that have rein-

vigorated the former hostility to arbitration by concluding

that arbitration notice provisions do not run afoul of the

FAA. See, e.g., American Physicians Service Group, Inc. v.

Port Lavaca Clinic Assoc., 843 S.W.2d 675, 678 (Tex. Ct.

App. 1992) (en banc), writ of error denied (Tex. Apr. 21,

1993); Albright v. Edward D. Jones & Co., 571 N.E.2d 1329,

1332-33 (Ind. Ct. App. 1991), cert. denied, 113 S. Ct. 61

(1992). In addition, a number of states have similar laws

that single out arbitration agreements for unfavorable

treatment by regulating the placement and acknowledg-

ment of arbitration agreements in certain types of con-

tracts.” Courts in those states could well be encouraged by

2 See Petition for a Writ of Certiorari, at 23 nn. 20 & 21 (citing

statutes).

cetiin

the Montana Supreme Court’s decision below to uphold sim-

ilar anti-arbitration statutes against preemption attacks.

Thus, there is a compelling need for this Court to review—

and reverse—the decision of the Montana Supreme Court

in order to signal to state courts and legislatures that, for

purposes of preemption under the FAA, statutory notice

provisions for arbitration are no less hostile to arbitration

than were the statutes at issue in Southland and Perry.

B. The Montana Supreme Court’s Decision Distorts This

Court’s Reasoning in Volt

In sustaining the Montana statute agzinst a preemption

attack, the Montana Supreme Court persists in its dis-

tortion of this Court’s reasoning in Volt in several respects.

First, the decision below completely disregards the parties’

arbitration agreement. As this Court observed in Volt, the

primary purpose of the FAA is to enforce “privately negoti-

ated arbitration agreements,” and parties to an arbitration

agreement should be “at liberty to chosse the terms under

which they will arbitrate.” 489 U.S. at 472. Here, the par-

ties chose the AAA’s Commerciai Arbitration Rules and

Connecticut law, not Montana /aw, to govern their arbitra-

tion agreement. Since neither Connecticut law nor the

AAA’s rules nor the FAA conditions the enforceability of an

agreement to arbitrate on the existence of a notice provi-

sion, Volt cannot support the result reached by the Mon-

tana Supreme Court. On the contrary, the very notion of

enforcing a notice provision not chosen by the parties to

invalidate an arbitration provision chosen by the parties is

completeiy antithetical to the teaching of Volt and strikes

at the heart of the FAA’s purpose—to ensure that private

agreements to arbitrate are rigorously enforced according

éo their terms.

Second, the Montana Supreme Court’s unduly narrow

interpretation of the scope of federal preemption of state

afin

arbitration laws is impossible to square with Volt. Purport-

edly relying on Volt, the Montana Supreme Court in its

initial opinion declared that Montana’s notice requirement

does not “undermine the goals and policies of the FAA” be-

cause Congress never intended to preempt the entire field

of arbitration and because the FAA does not require parties

to arbitrate when they have not agreed to do so. App. B at

26a. The Montana Supreme Court reaffirmed that holding

in its most recent opinion, finding that Terminix had not

modified the preemption language in Volt on which the

Montana Supreme Court had relied in its earlier opinion.

However, this Court’s statement in Volt that the FAA does

not entirely preempt state arbitration law was made in

reference to a California procedural statute that merely had

the effect of delaying an arbitration until after litigation of

related claims had occurred—and under circumstances

where the parties had chosen that law to govern their arbi-

tration. Thus, the California law affected only the timing of

arbitration, and did not purport to prohibit arbitration alto-

gether. Here, however, the Montana Supreme Court has

interpreted Volt to permit a state to ban arbitration in its

entirety, notwithstanding the existence of an arbitration

agreement enforceable under the laws of the parties’ own

Nor does the justification offered by the Montana Su-

preme Court for its holding—that the FAA mandates the

enforcement only of those arbitration agreements that are

“knowingly” entered into—survive scrutiny. Since the

“knowing” requirement applies only to arbitration agree-

ments and not to contracts generally in Montana, it is pre-

empted under Southland and Perry. Behind Montana’s pre-

occupation with ensuring that arbitration agreements are

“knowingly” entered into lies considerable legislative and

judicial hostility toward arbitration. Because the Montana

Supreme Court’s purported solicitude for arbitration may

=o

encourage other state courts or legislatures to employ sim-

ilar artifices to turn the FAA on its head, it is critical that

this Court grant review of the decision below.

IL.

THE MONTANA SUPREME COURT'S DECISION REPRE-

SENTS UNSOUND PUBLIC POLICY

Arbitration notice provisions like Montana’s not only run

afoul of the Supremacy Clause and Section 2 of the FAA,

but also represent unsound public policy based on discred-

ited judicial and legislative hostility to arbitration. Oppo-

nents of arbitration have long maintained that arbitration

represents an inferior, and inadequate, form of justice com-

pared with traditional litigation because, they say, it de-

prives parties of, among other things, substantive rights

under state statutory and common law, the right to a jury

trial, wide-ranging discovery procedures, a broad right of

appeal, competent adjudicators and, in many cases, an in-

state forum. Detractors of arbitration also question the con-

sensual nature of pre-dispute arbitration agreements, point-

ing out that those agreements are often contained in non-

negotiated form contracts between parties of unequal bar-

concealed in the initial majority opinion of the Montana

Supreme Court, came to the surface in the special concur-

ring opinion of Justice Trieweiler filed with the initial

majority opinion. App. B at 28a-32a. Although the Montana

Supreme Court has since attempted to distance itself from

those sentiments as the basis for its holding, especially in

light of the language in Terminix “extolling the virtues of

arbitration,” App. A at 7a (citing Terminix, 115 S. Ct. at

843), its continuing animosity to arbitration is apparent

when it attributes this Court’s recognition of the benefits of

arbitration to partisan “input” from the AAA. App. A at 7a.

There is little question that the Montana Supreme Court's

= =

holding continues to be motivated by a distrust of arbitra-

tion and the benefits it affords.

This Court, however, has repeatedly dismissed as un-

founded the various objections to arbitration noted above

and,* in doing so, has acknowledged the many benefits of

arbitration, including speed, see, e.g., Terminix, 115 S. Ct.

at 843; economy, see, e.g., id.; informality and adaptability

of procedures; see, e.g., Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985); availabil-

ity of expert adjudicators, see, e.g., Mitsubishi, 473 U.S. at

633; and ability to preserve the disputants’ relationship, see

Terminix, 115 S. Ct. at 843. Moreover, as this Court has ob-

served, arbitration offers advantages to large and small

businesses as well as to individuals, notwithstanding that

it is often invoked under a form contract between parties

having unequal bargaining power. See Terminix, 115 S. Ct.

at 843; Gilmer v. Interstate / Johnson Lane Corp., 111 S. Ct.

1647, 1655 (1991).

Permitting the decision below, with its inherent bias

against arbitration, to stand will encourage other state

courts and legislatures to likewise impair the enforceability

of arbitration agreements, with serious repercussions for al!

business relationships that utilize arbitration to resolve dis-

* The various objections to arbitration which this Court has dis-

missed include: 1) its inability to further important social policies,

see Gilmer v. Interstate/Johnson Lane Corp., 111 S. Ct. 1647,

1653 (1991); 2) inherent bias of arbitrators, see id. at 1654; Mitsu-

bishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,

634 (1985); 3) lack of discovery procedures, see Gilmer, 111 S. Ct.

at 1654-55; 4) lack of meaningful judicial review, see Shear-

son/American Express, Inc. v. McMahon, 482 U.S. 220, 232

(1987); incompetence of arbitrators, see McMahon, 482 US. at

a 111

S. Ct. at 1655; and 7) that it Ee See

power, Gilmer, 111 S. Ct. at

uff

tion enjoys widespread use in the franchise community, in

large part because it offers many advantages to franchisors

and franchisees over traditional litigation. It is typically

much less expensive than litigation because of the absence

of, or limitations on, pleading requirements, motion prac-

nonpayment of royalty fees, involve relatively small

amounts of money, arbitration enables the parties to re-

solve these disputes economically without incurring legal

expenses equivalent to the entire value of the claim. More-

over, the great majority of franchisors are relatively small

companies and, like many franchisees, cannot afford the

high cost associated with pursuing or defending claims in

a judicial forum.

The elimination or reduction in scope of motion practice,

discovery and pretrial procedures in arbitration also makes

it generally much quicker than litigation. The relative

speed with which arbitrations proceed from the initial filing

of the arbitration demand to the issuance of an award and,

if necessary, confirmation of the award by a court, not only

will in most cases cost the parties less in attorneys’ fees but

also will enable them to resume their relationship more

quickly without the continuing disruptive influence of a

pending lawsuit. Similarly, the informality and often less

adversarial nature of arbitration enhance the prospect that

the franchisor and franchisee will be able to honor their

contractual obligations while the arbitration is pending and

because they typically run for a period of ten to twenty

years. Since disputes are more likely to arise in a relation-

ship of that length, arbitration offers a method for resolving

those disputes while preserving the long-term nature of the

aiifian

relationship. Moreover, because arbitration is more flexible

with regard to scheduling times and places of hearings, it

tends to be less disruptive of the day-to-day operations of

franchisors and franchisees alike, an important consider-

ation in light of the fact that many franchisors and franchi-

sees are small businesses with limited personnel. Finally,

arbitration also offers the parties to a franchise relationship

the option of having an individual experienced in franchis-

ing adjudicate their dispute. Because franchising is a

unique form of business organization and is subject to a

wide array of registration, disclosure and relationship laws,

franchising expertise is often a sought-after qualification of

arbitrators chosen to decide franchise disputes.

Moreover, there is nothing inherent in the arbitration

process itself that favors franchisors over franchisees. Con-

trary to the anti-arbitration sentiments expressed in the

initial special concurring opinion of Justice Trieweiler, App.

B at 28a-32a, franchisees are often sophisticated, multi-unit

operators who, on their own behalf or through counsel,

negotiate the terms of their franchise agreements including

whether and under what circumstances arbitra.on of dis-

putes will occur. Although arbitration agreements often pro-

vide for arbitration in the franchisor’s home state, there are

sound business reasons for a franchisor to consolidate dis-

putes with its franchisees in a forum where it can resolve

them as cost-effectively as possible. It is certainly no more

burdensome for an individual franchisee to arbitrate in the

franchisor’s home state than it is for a national franchisor

to arbitrate against multiple franchisees in their respective

home states. Indeed, in light of this Court’s decision in Car-

nival Cruise Lines, Inc. v. Shute, 111 S. Ct. 1522 (1991), up-

holding the enforceability of a non-negotiated choice-of-

forum clause printed on the reverse side of a cruise line

passenger ticket, there is no serious argument that forum

aifien

selection clauses in the franchise relationship—a business

relationship—are not fully enforceable.

Enforcement of arbitration agreements in the franchise

relationship will also produce systemic benefits, econo-

mizing on the scarce judicial resources available for resolv-

ing other disputes where parties may not be in a position

to structure a dispute resolution procedure in advance.

Those scarce judicial resources are consumed not only when

a dispute subject to arbitration is instead resolved in a judi-

cial forum, but also when parties, encouraged by anti-arbi-

tration decisions like those of the Montana Supreme Court

in this case, initiate satellite litigation such as this to chal-

lenge the enforceability of agreerrents to arbitrate. Even if

the franchisor ultimately succeeds on appeal in enforcing

the agreement to arbitrate, significant judicial resources

will often have been spent on both the trial and appellate

level in reaching that result.

Unless the decision of the Montana Supreme Court is re-

versed, franchisors (and franchisees) as well as the judicial

system as a whole will lose the many advantages of arbi-

tration noted above. The decision of the Montana Supreme

Court, if allowed to stand, will encourage state legislatures

to enact a variety of requirements, restrictions and precon-

ditions applicable to arbitration agreements. Although it

may seem theoretically possible for a national franchisor to

track such rules and adjust the arbitration provisions of its

contracts to meet their requirements, in practice this would

prove extremely burdensome and probably impossible. Once

an agreement is signed it cannot be amended to comply

with a subsequently enacted precondition to the enforceabil-

ity of an arbitration agreement. Moreover, it is not clear

under current law that such a legislative enactment would

not be applied to a preexisting contract on the basis that it

did not change substantive rights.

afin

Furthermore, even if national franchisors undertook the

burdensome task of tailoring their contract documents to

meet the varying and often conflicting arbitration laws of

50 different states, they might still not be assured of having

their arbitration agreements enforced, as this case itself

demonstrates. A court—like the Montana Supreme Court in

this case—may simply choose to disregard the parties’

choice-of-law clause out of hostility toward arbitration and

apply state notice requirement or other state anti-arbitra-

tion law that the parties never contemplated would be

applied to their relationship. Since a nationwide franchisor

cannot anticipate in what state it might be sued or what

state’s arbitration statute might apply, it has no effective

means of assuring that it can partake of the benefits of

arbitration that Congress sought to promote by enacting the

FAA. Those benefits will be realized only if state courts and

state legislatures are reminded that attempts to undermine

the enforceability of agreements to arbitrate will not go un-

noticed by this Court. Otherwise, state legislatures will be

unleashed to formulate all manner of requirements for, and

obstacles to, arbitration agreements, and the sound public

policy that underlies the FAA will be subverted. For these

reasons, it is critical to the franchising community that this

Court review the decision of the Montana Supreme Court.

—20—

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

JOHN F. VERHEY MATTHEW R. SHAY

Counsel of Record THE INTERNATIONAL

Lewis G. RUDNICK FRANCHISE ASSOCIATION

RUDNICK & WOLFE 1350 New York Avenue, N.W.

203 North LaSalle Street Suite 900

Suite 1800 W , D.C. 20005

Chi , Illinois 60601 (202)

(312) 868-4000 WILLIAM J. FITZPATRICK

Counsel for Amici Curiae SECURITIES INDUSTRY

ASSOCIATION

120 Broadwa

New York, 10271

(212) 608-1500