Petitioners Brief — Doctor's Associates, Inc. v. Casarotto

In THE

Supreme Court of the United States

OCTOBER TERM, 1995

Docror’s ASSOCIATES, INC. and Nick LOMBARDI,

Petitioners,

Vv.

PAuL CASAROTTO, ET UX.,

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

BRIEF FOR PETITIONERS

Marx R. Kravitz *

JEFFREY R. BABBIN

WIGGIN & DANA

One Century Tower

P.O. Box 1832

New Haven, CT 06508-1882

(208) 498-4400

H. BARTOW FARR, IIT

FARR & TARANTO

2445 M Street, N.W.

Washington, D.C. 20087

(202) 775-0184

* Counsel of Record

- Witson - Evrae Proerrine Co., lec. - 789-0096 - WasHINGeTON, D.C. 80001

-

: Pot ee Pe) >

QUESTION PRESENTED

Whether Section 2 of the Federal Arbitration Act (9

U.S.C. § 2)—which makes written agreements to arbi-

trate “valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation

of any contract”—preempts a state law that makes agree-

ments to arbitrate, but not other agreements, unenforce-

able unless a specific notice of the arbitration agreement

is placed on the first page of the contract.

ii

STATEMENT PURSUANT TO RULE 24.1(b)

Daniel L. Hudson, Deb Hudson, and D&D Subway

Corporation are parties to the proceedings in the Mon-

tana Eighth Judicial District Court. They were not par-

ties to the appeal in the Supreme Court of Montana and

are omitted from the caption in this Court.

The list required by Rule 29.6 can be found on page ii

of the Petition for a Writ of Certiorari.

Page

QUESTION PRESENTED ..n.........:ccccccessceeesecceseveneeseees i

STATEMENT PURSUANT TO RULE 24.1(b) .......... ii

TABLE OF AUTHORITIES 2..0..........0.c.cccccccsecceeseceseeeees iv

cr 1

Ee 1

STATUTORY PROVISIONS INVOLVED ..................... 2

EEE 2

SUMMARY OF ARGUMENT .0.0.0000......cccccccccscceceeeeeeeees 9

ARGUMENT .. — - 12

I. THE FEDERAL ARBITRATION ACT PRE-

EMPTS MONTANA'S STATUTORY RESTRIC-

TION ON ENFORCEMENT OF ARBITRA-

TION AGREEMENTS . sopennenpeeane 12

A. Montana’s Arbitration Notice Requirement

Places Montana Law in Direct Conflict with

B. Volt Does Not Support the Montana Supreme

Court’s Erroneous eee of the

Scope of Section 2 . , 19

Il. THE MONTANA SUPREME COURT'S DE-

CISION THREATENS TO DISRUPT THE

NATIONAL POLICY OF ENFORCING ARBI-

TRATION AGREEMENTS .............. ae 23

3

iv

TABLE OF AUTHORITIES

CASES Page

“< Beals Co. v. Rhode Island Hospital, 292 A.2d

FS SO ee 28

Allied-Bruce Terminiz Companies v. Dobson, 115

QO GQ OES passim

Bunge Corp. v. Perryville Feed & Produce, Inc.,

685 S.W.2d 887 (Mo. 1965) ................................. 16, 23

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585

SER Es a aes n anne 25

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

RE eS 16, 23

David L. Threlkeld & Co. v. Metaligesellachaft Ltd.,

923 F.2d 245 (2d Cir.), cert. dismissed, 501 U.S.

fi 16, 22, 23

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 218

EC 12

Doctor's Associates, Inc. v. Casarotto, 115 S. Ct.

A EES 5 «LE 1,8

Dowd v. First Omaha Securities Corp., 495 N.W.2d

ar ES EO EN 22

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

FRE cert ee 12, 18, 25

Godwin v. Stanley Smith & Sons, 386 S.E.2d 464

YS ee 28

Hefele v. Catanzaro, T27 S.W.2d 475 (Mo. Ct. App.

ee ee ee 28

Joder Building Corp. v. Lewis, 569 A.2d 471 (Vt.

AA ELEC OTL 1 TLE T TE ALN: | E 28

King v. Postal Annex, Inc., No. CV-94-011-GF

) § & ee 16, 23

Mastrobuono v. Shearson Lehman Hutton, Inc.,

116 8. Ce. 1818 (1906) ........................... 10, 17, 20, 21, 27

McCarney v. Nearing, Staats, Prelogar & Jones,

866 S.W.2d 881 (Mo, Ct. App. 1998) .............. 28

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 4738 U.S. 614 (1985) ........ 12, 24, 25, 29

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Co., 460 U.S. 1 (19838) .......... 10, 12, 13, 18, 24

Perry v. Thomas, 482 U.S. 483 (1987) ........ 10, 15, 18, 19,

v

TABLE OF AUTHORITIES—Continued

Page

Rodriguez de Quijas v. Shearson/American Exr-

press, Inc., 490 U.S. 477 (1989) WW .. 18

Saturn Distribution Corp. v. Williams, 905 F.2d

719 (4th Cir.), cert. denied, 498 U.S. 983

0 FRE RS SS ee ee eee 22

Scherk wv. Alberto-Culver Co., 417 U.S. 506

EES se ee ee ae ee 12, 25

Securities Industry Association v. Connolly, 883

F.2d 1114 (1st Cir. 1989), cert. denied, 495 U.S.

956 (1990) ............ ae 16, 22, 23

Shearson/American Express, Inc. v. McMahon,

-. 2, — , es 12, 18, 15, 19, 24, 25

Snap-On Tools Corp. v. Vetter, 888 F. Pe

REE ES A en . 16, 28

Southland Corp. v. Keating, 465 US. 1 (1984). passim

Stewart Organization Inc. v. Ricoh Corp., 487

REESE ESS RE TE NS Ss 25

The Bremen v. Zapata Off-Shore Co., 407 US. 1

EE Me Boe 25

Volt Information Sciences, Inc. v. Board of Trus-

tees of Leland Stanford Junior University, 489

U.S. 468 (1989) ..passim

Webb v. R. Rowland & Co., 800 F.2d 808 (8th Cir.

pe aia EE en et 16, 23

Woermann Construction Co. v. Southwestern Bell

a. Co., 846 S.W.2d 790 (Mo. Ct. dined

1993) . eal 28

STATUTES

0 4 eae sainicettetiiilh scsinandeitmnsbdedl passim

EES oe Se 21

EEE aaa ine 21

CE EE 1

Cal. Bus. & Prof. Code § 7191 (West 1995) .........

26

Cal. Health & Safety Code § 1363.1 (West Supp.

RRP AEE 8 eee) a SE 26

Cal. Ins. Code § 10123.19 (West Supp. 1996) et Se 26

Cal. Ins. Code § 11512.38 (West Supp. 1996) . 26

vi

TABLE OF AUTHORITIES—Continued

Page

Conn. Gen. Stat. § 52-408 (1995) 0... 7

Ga. Code Ann. § 9-9-2(c) (8), (9) (Michie Supp.

EE er re ee 26, 27

lowa Code Ann. § 679A.1(2)(c) (West 1987) ...... 26

Mo. Ann. Stat. § 485.460 (Vernon 1992) ................. 26, 28

Mont. Code Ann. § 27-5-114(2) (1995) ................. 27

Mont. Code Ann. § 27-5-114(4) (1995) .2, 3, 6, 12, 17, 28

R.I. Gen. Laws § 10-3-2 (Supp. 1995) .................... 26

S.C. Code Ann. § 15-48-10(a) (Law. Co-op. Supp.

RE ee ey rere 26

Tenn. Code Ann. § 29-5-302(a) (Supp. 1995) ....... 26

Tex. Civ. Prac. & Rem. Code Ann. § 171.001(b),

Ff Fr 27

Tex. Rev. Civ. Stat. Ann. art. 224(b), (c) ............ 27

Vt. Stat. Ann. tit. 12, §5652(b) (Supp. 1995)... 26

MISCELLANEOUS

Uniform Arbitration Act (1955), 7 U.LA. 1

(West 1985 & Supp. 1995) .................................. 17

Martin Domke, 2 Domke on Commercial Arbitra-

tion App. VII(A) (rev. ed. 1995) —.................... 25

Henry C. Strickland, The Federal Arbitration

Act’s Interstate Commerce Requirement: What's

Left for State Arbitration Law?, 21 Hofstra L.

SS Fo SER ae 23, 27

In THE

Supreme Court of the United States

OcTosper Term, 1995

No. 95-559

Doctor's ASSOCIATES, INC. and Nick LOMBARDI,

7 Petitioners,

PAUL CASAROTTO, ET UX.,

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

BRIEF FOR PETITIONERS

OPINIONS BELOW

The opinion of the Supreme Court of Montana is re-

ported at 901 P.2d 596. The prior opinion of the Mon-

tana Court in this case is reported at 268 Mont.

369, 886 P.2d 931. Both opinions are reprinted in full

in the Joint Appendix at 48-59 and 12-47, respectively.

The oe ae eee ee

reported at 115 S. Ct. 2552. The order of the Montana

Eighth Todicial District Court is not reported but is re

n full in the Joint Appendix at 10-11.

JURISDICTION

The Supreme Court of Montana entered judgment on

August 31, 1995. The petition for a writ of certiorari

was filed on October 2, 1995, and was granted on Janu-

ary 5, 1996. The jurisdiction of this Court is invoked

pursuant to 28 U.S.C. § 1257(a).

printed in

2

STATUTORY PROVISIONS INVOLVED

Section 2 of the Fed*ral Arbitration Act, 9 U.S.C.

§ 2, provides:

Validity, irrevocability, and enforcement of agree-

ments to arbitrate

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusa! 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.

Section 27-5-114(4), Montana Code Annotated, pro-

vides:

Notice that a contract is subject to arbitration pur-

suant to this chapter shall be typed in underlined

capital letters on the first page of the contract; and

unless such notice is displayed thereon, the contract

may not be subject to arbitration.

The full text of Section 27-5-114, which governs the

validity of arbitration agreements under Montana law, is

set out in an appendix to this brief.

STATEMENT

This case arises from the refusal of the Montana Su-

preme Court to enforce an agreement by the parties to

arbitrate their disputes. The court did not reach that

result because the parties had failed to comply with the

requirements under federal law for enforcing an agree-

ment to arbitrate. Quite the opposite. It is undisputed

that the parties’ agreement to arbitrate met every require-

ment of Section 2 of the Federal Arbitration Act

(“FAA”), 9 U.S.C. § 2, which makes written arbitration

3

agreements involving interstate commerce “valid, irrevo-

cable, and enforceable, save upon such grounds as exist

at law or in equity for the revocation of any contract.”

Nevertheless, the Montana Supreme Court held that the

agreement was unenforceable because it did not comply

with a state law—applicable only to arbitration agree-

ments—that invalidates agreements to arbitrate unless

notice that a contract is subject to arbitration is typed

in underlined capital letters on the first page of the con-

tract. See Mont. Code Ann. § 27-5-114(4) (1995). In

so doing, the court rejected Petitioners’ argument that the

notice requirement is preempted by Section 2 of the FAA.

App. 21-28.

Petitioner Doctor's Associates, Inc. (“DAI”) is the na-

tional and international franchisor of “Subway” sandwich

shops. App. 83; see App. 10. At the time of this dispute,

DAI had sold a total of over 8,500 Subway franchises

throughout the United States. App. 84. Today, Subway

has sold more than 10,000 franchises nationwide. Peti-

tioner Nick Lombardi is DAI’s Development Agent in

Montana. See App. 13. During the events in question,

DAI was a Connecticut corporation with its principal

place of business in Milford, Connecticut. App. 84.

In April 1988, DAI entered into a franchise agree-

ment with Paul Casarotto, which permitted Casarotto to

open a Subway sandwich shop in Montana. App. 64-78.’

The franchise agreement was a standard contract that

DAI used with all its franchisees throughout the United

States. The agreement authorized Casarotto to operate

a Subway sandwich shop and granted him a license to

use DAI’s federally-registered “SUBWAY” trademarks

and service marks. App. 65. It also contained an express

arbitration clause providing that “[a]ny controversy or

claim arising out of or relating to this contract or the

breach thereof shall be settled by Arbitration in accord-

— ——EE

' Two months later, he traveled to DAI’s headquarters in Connec-

ticut to attend training sessions for new franchisees. App. 87.

4

ance with the Commercial Arbitration Rules of the Amer-

ican Arbitration Association.” App. 75.* Another section

of the franchise agreement stated that “[t]his Agreement

shall be governed by and construed in accordance with

the laws of the State of Connecticut.” App. 77. Just

above the signature block, the agreement provided:

“Each of the parties hereto acknowledges that he has

read and understands this Agreement and consents to be

bound by all of its terms and conditions.” App. 78.°

When a dispute later arose, Casarotto ignored the

agreement to arbitrate and filed an action against DAI,

2 The full text of the arbitration clause (App. 75) provides as

follows:

Any controversy or claim arising out of or relating to this

contract or the breach thereof shall be settled by Arbitration in

accordance with the Commercial Arbitration Rules of the

American Arbitration Association at a hearing to be held in

Bridgeport, Connecticut and judgment upon an award rendered

by the Arbitrator(s) may be entered in any court having juris-

diction thereof. The commencement of arbitration proceedings

by an aggrieved party to settle disputes arising out of or relat-

ing to this contract is a condition precedent to the commence-

ment of legal] action by either party. The cost of such a pro-

ceeding will be borne equally by the parties.

® Paul Casarotto filed an affidavit in the Montana state district

court, averring that “I read the agreement over before I signed it,”

although he goes on to state that “no one ever told or explained to

me that the agreement contained an arbitration clause or that the

agreement was to be interpreted according to the laws of the State

of Connecticut.” App. 87. DAI also provided Casarotto a detailed

franchise offering circular that contained the following statement

on the first page: “READ ALL OF YOUR CONTRACT CARE-

FULLY. BUYING FRANCHISE [sic] IS A COMPLICATED

INVESTMENT. TAKE YOUR TIME TO DECIDE. IF POSSI-

BLE, SHOW YOUR CONTRACT AND THIS INFORMATION TO

AN ADVISOR, SUCH AS A LAWYER OR AN ACCOUNTANT.”

App. 62. The offering circular stated that the franchise agreement

provided for binding arbitration of any claim of breach of the

agreement in accordance with the Commercial Rules of the American

Arbitration Association at a hearing to be held in Bridgeport,

Connecticut, with costs to be borne equally by the parties. App. 63.

3

Lombardi and others in the Montana Eighth Judicial Dis-

trict Court, Cascade County.* The suit alleged that

Casarotto had entered into the franchise agreement and

had opened a Subway store on the west side of Great

Falls in reliance on representations of DAI and Lombardi

that he would have an exclusive right to open another

store in a different part of town when that location be-

came available. Casarotto claimed that, contrary to his

understanding with DAI and Lombardi, they had awarded

the other location to another franchisee and that they

had interfered with efforts to sell his store. The com-

plaint asserted state-law contract, tort and statutory

claims against DAI and Lombardi. Amended Verified

Complaint, filed Nov. 4, 1992; see App. 13-14.

Citing the arbitration provisions in the franchise agree-

ment, DAI and Lombardi moved in the state district

court to dismiss or stay the lawsuit pending arbitration.

They argued that Section 2 of the FAA required arbitra-

tion of the claims; that the FAA preempted state laws

that impede enforcement of any agreement to arbitrate;

and that, to the extent state law was even relevant, Mon-

tana law was inapplicable because the contract specified

the parties’ choice of Connecticut law, under which the

agreement to arbitrate was enforceable. See App. 15.

DAI also filed with the American Arbitration Association

a Demand for Arbitration of Casarotto’s claims. App.

79-82; see App. 11.

* The suit named Pau! Casarotto and his wife, Pamela Casarotto,

as plaintiffs. Paul and Pamela Casarotto asserted claims against

defendants other than DAI and Lombardi with whom they did not

have an arbitration agreement. Those claims were not the subject

of the opinions and orders below. With respect to the claims as-

serted against DAI and against Lombardi as DAI’s Development

Agent, only Paul Casarotto had entered into the franchise agree-

ment, and it is clear from the complaint that only he, and not his

wife, is asserting claims against DAI and Lombardi. See Amended

Verified Complaint, filed Nov. 4, 1992, Counts 9, 11 and 13. How-

ever, the opinions below referred to the plaintiffs in the plural and

treated both plaintiffs alike.

6

The Montana district court granted Petitioners’ motion

to stay the lawsuit as against them pending arbitration.

The court found that the parties’ franchise agreement

involved interstate commerce within the meaning of Sec-

tion 2, that the agreement’s arbitration clause encom-

passed the claims against DAI and Lombardi, and that

DAI had properly demanded arbitration of those claims.

Accordingly, the court stayed the litigation against DAI

and Lombardi “until the arbitration has been had in

accordance with the terms of the arbitration agreement.”

App. 10-11.

The Montana Supreme Court reversed. The court did

not question that the arbitration agreement met all the

requirements of federal law. The court also left undis-

turbed the district court’s rulings that the agreement

involved interstate commerce and covered the claims

against DAI and Lombardi, and that DAI’s arbitration

demand complied with the agreement. The Montana Su-

preme Court nonetheless refused to enforce the arbitra-

tion agreement because it did not comply with a provision

of Montana’s arbitration act, see Mont. Code Ann.

§ 27-5-114(4) (1995), which makes an arbitration agree-

ment unenforceable unless the contract containing that

agreement also contains a notice, in underlined capital

letters on its first page, that it is subject to arbitration.

The Montana statute, by its terms and as interpreted by

the Montana Supreme Court (App. 20-21), affects the

enforceability of arbitration agreements but not other

types of contracts.

The decision of the Montana Supreme Court not to

enforce the agreement to arbitrate proceeded in several

steps. First, before reaching the question whether the

FAA preempts state arbitration law, the court determined

that it would apply Montana law to the franchise agree-

ment. Although the parties had explicitly provided in

their contract that it would be construed in accordance

with Connecticut law, the Montana Supreme Court re-

jected that selection and ruled that Montana law governed,

7

reasoning that the state’s arbitration notice statute (which

has no counterpart in Connecticut law) embodied a fun-

damental public policy that could not be thwarted by the

parties’ choice of a different state’s law. According to

the court, the public policy of requiring notice of a con-

tractual arbitration clause reflected state legislative con-

cerns that Montanans receive sufficient notice before

agreeing to a dispute resolution method that was poten-

tially inconvenient, expensive and devoid of the proce-

dural safeguards of a judicial proceeding. App. 20-21.

Having decided that the parties’ contract was governed

by Montana law, and because the contract did not contain

the notice required by Montana law, the Montana Su-

preme Court next considered whether the FAA preempted

Montana’s arbitration notice statute. The court acknowl-

edged decisions of this Court holding that Section 2 of

the FAA created federal substantive law binding on the

states on the issue of the enforceability of arbitration agree-

ments, App. 21-23, but interpreted Volt Information Sci-

ences, Inc. v. Board of Trustees of Leland Stanford Junior

University, 489 U.S. 468 (1989), as retreating from ear-

lier authority by allowing courts to deny enforcement of

arbitration agreements based on state arbitration laws

so long as those laws do not “undermine the goals and

policies of the FAA.” App. 24-26. The court declined

to follow decisions by several federal courts of appeals

and one state supreme court that had held similar state

notice requirements preempted by the FAA, because those

decisions either preceded Volt or, according to the Mon-

y court, contained little or no reference to Volt. App.

The Montana court thus concluded that “we must rely

on our own analysis of whether Montana’s notice require-

5 Connecticut law is virtually identical to the FAA in the condi-

tions it imposes for enforcing agreements to arbitrate. See Conn.

Gen. Stat. § 52-408 (1995).

8

ment undermines the goals and policies of the FAA.”

App. 27. The court observed that a notice statute ensuring

that parties had “knowingly” entered into an arbitration

agreement was consistent with the policies underlying the

FAA, and therefore was not preempted, because “the

FAA does not require parties to arbitrate when they have

not agreed to do so.” App. 27. The court thus held that

the agreement to arbitrate, but no other term of the fran-

chise agreement, was unenforceable.°

Last Term, this Court vacated the judgment of the

Montana Supreme Court and remanded the case for fur-

ther consideration in light of Allied-Bruce Terminix Com-

panies v. Dobson, 115 S. Ct. 834 (1995), which had

been decided after the Montana court rendered its deci-

sion. Doctor's Associates, Inc. v. Casarotto, 115 S. Ct.

2552 (1995). The Montana Supreme Court ignored Pe-

titioners’ request to brief and argue the issues on remand,

App. 57 (Gray, J., dissenting), and, on August 31, 1995,

it “reaffirm[ed] and reinstate[d]” the December 1994 opin-

ion that this Court had vacated. App. 54.

In its decision on remand, the Montana Supreme Court

first summarized its prior opinion, emphasizing again that

its decision was based on an analysis of Volt that pre-

emption is determined by whether the notice statute under-

mines the goals and policies of the FAA. App. 57. The

court then observed that, because this case did not involve

a “state law which made arbitration agreements invalid

and unenforceable,” and because the parties’ agreement

indisputably involved interstate commerce, “we can find

nothing in the [Terminix] decision which relates to the

issues presented to this Court in this case.” App. 53. In

*The author of the court’s opinion also wrote separately to

express his “personal observation” that federal appellate judges

had unnecessarily and inappropriately deprived individuals of access

to a system of justice available only in the courts. App. 29-33.

Three of the seven Justices on the Montana Supreme Court dis-

sented from the court’s opinion. App. 34-47.

9

particular, the court saw nothing in Terminix that re-

quired it to modify its analysis of Volt “that state law

is only preempted to the extent that it ‘stands as an ob-

stacle to the accomplishment and execution of the full

purposes and objectives of Congress.” App. 54 (quot-

ing Volt, 489 U.S. at 477).

Chastising the majority for what they believed was an

“arrogant and cavalier approach to this important case

on remand from the United States Supreme Court,” three

of the court’s seven Justices dissented on the basis that

the majority had misread Volt and that Terminix had

reaffirmed the supremacy of the FAA on the issue of

enforceability of agreements to arbitrate. App. 57-58.

The dissent took sharp exception to the majority’s rush to

decision without even the benefit of briefs or argument,

and it concluded that “one must assume that the Court is

simply unwilling to consider any analysis that would

require a change in the result it remains determined to

reach.” App. 57.

SUMMARY OF ARGUMENT

Section 2 of the Federal Arbitration Act provides that

written arbitration agreements are “valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9 U.S.C. § 2

(emphasis added). There is no question here that the

parties agreed to arbitrate any disputes between them and

no question that the agreement, which involved interstate

commerce, is within the bounds of Section 2. Neverthe-

less, the Montana Supreme Court refused to enforce the

parties’ arbitration agreement for one, and only one,

reason: failure to comply with a state statute requiring

that notice of an agreement to arbitrate (but no other

contractual term) be typed in underlined capital letters

on the first page of a contract. The court thus applied

Montana’s public policy that was admittedly suspicious of

arbitration to prohibit enforcement of the arbitration pro-

10

vision, but no other term, of a binding and lawful franchise

agreement.

This decision is directly at odds both with the plain

language of Section 2 and with the teachings of numerous

decisions of this Court construing that language. Section

2 plainly commands, as a matter of federal law, that an

arbitration agreement involving interstate commerce be

enforced, subject to only one limitation: “save upon such

grounds as exist . . . for the revocation of any contract.”

9 U.S.C. §2. This broad principle of enforceability

embodied in Section 2 “is [not] subject to any additional

limitations under state law.” Southland Corp. v. Keating,

465 US. 1, 11 (1984) (emphasis added). Moreover,

this Court has repeatedly read the language of Section 2—

most recently in Terminix—to prohibit a state from sin-

gling out agreements to arbitrate and placing them on a

different “footing” from other contracts. See Terminix,

115 S. Ct. at 838-39, 843; Perry v. Thomas, 482 U.S.

483, 489-91 & 492 n.9 (1987); Southland, 465 U.S. at

10-16; Moses H. Cone Memorial Hosp. v. Mercury Constr.

Co., 460 U.S. 1, 24 (1983).

Yet Montana has done precisely what federal law says

it may not do—impose upon arbitration agreements con-

ditions to enforceability that do not apply to all contracts.

Although the Montana Supreme Court purported to find

authority for that action in Volt, that decision does not

permit state courts to override the wishes of the contract-

ing parties and refuse to enforce arbitration agreements

on state-law grounds that are inapplicable to other types of

agreements. See, e.g., Mastrobuono v. Shearson Lehman

Hutton, Inc., 115 §. Ct. 1212, 1215-16 (1995); Terminix,

115 S. Ct. at 843; see also Volt, 489 U.S. at 478-79. To

the contrary, Volt makes resoundingly clear that the wishes

of the parties, not any contrary wishes of state officials

or judges, are controlling. Accordingly, consistent with

this Court’s long line of decisions construing Section 2,

every federal court of appeals and state supreme court that

11

has considered this issue other than the Montana court,

both before and after Volt, has held that the FAA pre-

empts state laws conditioning enforcement of arbitration

agreements on compliance with notice requirements that

apply to arbitration agreements alone. See infra note 8.

Were the Court now to ignore the clear language of

Section 2 and retreat from its own consistent construc-

tion of that language, it would effect an immediate and

sweeping change in the national policy favoring arbitra-

tion—from uniform enforcement of arbitration agreements

throughout the United States, to endless questions about

enforceability (and inevitably contradictory answers) de-

pending on which state’s law applies and whether that

state has chosen to impose conditions on enforceability

that do not apply to other contracts. This concern over

“permit/ting] States to override the declared policy re-

quiring enforcement of arbitration agreements,” South-

land, 465 U.S. at 17 n.11, is not hypothetical. In addi-

tion to Montana, at least nine states—most recently, Cali-

fornia—have enacted arbitration laws that deny enforce-

ment of arbitration agreements solely on the basis of the

parties’ failure to include a specified form of notice (which

differs from state to state) that their contract is subject to

arbitration. See infra Part Il. More generally, numerous

states have placed a variety of conditions on enforcement

of agreemc.ils to arbitrate that do not apply to contracts

generally. See id. Taken together, these state laws stand

as a direct impediment to achieving the national uniform-

ity contemplated by Section 2, leaving those like DAI,

who transact business in multiple states, subject to the

vagaries of differing, even inconsistent, state arbitration

laws, all contrary to Congress’s express intent in enact-

ing the FAA. Southland, 465 U.S. at 16.

12

ARGUMENT

I. THE FEDERAL ARBITRATION ACT PREEMPTS

MONTANA'S STATUTORY RESTRICTION ON EN-

FORCEMENT OF ARBITRATION AGREEMENTS.

The question presented is straight‘orward. May Mon-

tana refuse to enforce an otherwise valid agreement to

arbitrate because it does not comply with state notice re-

quirements applicable to arbitration agreements but not

to other types of agreements? The plain language of Sec-

tion 2, as well as this Court's consistent reading of that

language, make unmistakably clear that Montana may

not. Section 2 expressly and directly preempts the appli-

cation of Montana’s arbitration notice statute, Mont. Code

Ann. § 27-5-114(4) (1995), to agreements involving in-

terstate commerce.

A. Montana’s Arbitration Notice Requirement Places

Montana Law in Direct Conflict With Federal Law.

Congress enacted the FAA in order to “revers[e] cen-

turies of judicial hostility to arbitration agreements,”

Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11

(1974), by “placfing] arbitration agreements ‘upon the

same footing as other contracts."” Jd. (quoting H.R.

Rep. No. 96, 68th Cong., Ist Sess. 1, 2 (1924)); see

Volt, 489 U.S. at 474; Gilmer v. Interstate/Johnson Lane

Corp., 500 U.S. 20, 24 (1991). In order to accomplish

this overarching goal and thereby promote the “federal

policy favoring arbitration,” Congress “create[d] a body

of federal substantive law of arbitrability, applicable to

any arbitration agreement within the coverage of the Act.”

Moses H. Cone Memorial Hosp. v. Mercury Constr. Co.,

460 U.S. 1, 24 (1983); see Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985).

For transactions within its scope, the FAA requires courts

“rigorously [to] enforce agreements to arbitrate.” Dean

Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985);

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

13

U.S. 220, 226 (1987). That obligation is binding upon

federal and state courts alike. Terminix, 115 S. Ct. at

838-39; Southland, 465 U.S. at 15.

The answer to the question presented begins, of course,

in the language of the FAA itself. See Shearson/American

S. at 225. Section 2 is the “primary sub-

Stantive provision” of the Act. Gilmer, 500 U.S. at 24.

It sets forth “a congressional declaration of a liberal fed-

eral policy favoring arbitration agreements,” Moses H.

Cone, 460 U.S. at 24, and expresses Congress's intent “to

mandate enforcement of all covered arbitration agree-

ments.” /d. at 26 n.34.

The language of Section 2 is unequivocal. A written

agreement to arbitrate in any contract involving an inter-

State transaction is “valid, irrevocable, and enforceable”

as a matter of federal law. 9 U.S.C. § 2. To that broad

declaration of congressional policy confirming the validity,

and requiring the enforcement, of arbitration agreements,

Section 2 provides only one explicit, and explicitly limited,

exception: agreements to arbitrate may be deemed unen-

forceable only “upon such grounds as exist at law or in

equity for the revocation of any contract.” Jd. (emphasis

added). As a matter of simple English, therefore, Section

2 permits courts to apply state laws applicable to contracts

generally, but not state laws singling out arbitration agree-

ments for disfavored treatment. Terminix, 115 S. Ct. at

843; see Southland, 465 U.S. at 16.

The Court has repeatedly confirmed this reading of

Section 2. Thus, = een elie ¢ teen Mae

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

Court could Siventa dune Wa Gates 00 Gio aatioes

ability of arbitration provisions governed by the Federal

Arbitration Act: they must be part of a written maritime

contract or a contract ‘evidencing a transaction involving

commerce’ and such clauses may be revoked upon

‘grounds as exist at law or in equity for the revocation

of any contract."” Jd. at 10-11 (footnote omitted).

Having set out what the language of the FAA distinctly

commands, the Court could “see nothing in the Act in-

dicating that the broad principle of enforceability is sub-

ject to any additional limitations under state law.” /d.

at 11 (emphasis added); see id. at 10 (“Congress .

withdrew the power of the states to require a judicial

forum for the resolution of claims which the contracting

parties agreed to resolve by arbitration” ).

Accordingly, the Court held that a state franchise law

requiring judicial consideration of disputes governed by

the arbitration clause of the parties’ franchise agreement

“directly conflicts with § 2 of the Federal Arbitration Act

and violates the Supremacy Clause.” /d. at 10. The con-

flict was “direct” because the defense to arbitration found

in California’s franchise law was “not a ground that exists

at law or in equity ‘for the revocation of any contract,’ ”

id. at 16 n.11, but rather was “a ground that exists for

the revocation of arbitration provisions in contracts sub-

ject to” the state law. /d. California's law, therefore,

failed to place arbitration agreements “‘upon the same

footing as other contracts, where it belongs.’” /d. at 16

(internal quotation marks and citation omitted); see id.

at 17 n.11."

* The holding of Southland is especially applicable here. Like

this case, Southland involved a national franchisor, whose standard

franchise agreement required all disputes arising out of the agree-

ment to be settled by arbitration in accordance with the rules of

the American Arbitration Association. See Southland, 465 U.S. at

3-4. The Southland franchisees sued in state court alleging mis-

representations (see id. at 4), and in both cases, the state courts

refused to enforce an agreement to arbitrate out of deference to a

state statute embodying a public policy suspicious of arbitration in

the particular circumstances presented. See id. at 20-21 (Stevens,

J., dissenting in part). Moreover, Southland and this case raise the

same generic legal issue: whether a state law, “which invalidates

certain arbitration agreements covered by the Federal Arbitration

Act, violates the Supremacy Clause.” /d. at 3.

oe

15

In Perry v. Thomas, 482 U.S. 483 (1987), the Court

again emphasized that the text of Section 2 is the only

source of limitations on the enforceability of arbitration

agreements involving interstate commerce: “An agree-

ment to arbitrate is valid, irrevocable, and enforceable,

as a matter of federal law, save upon such grounds as

exist at law or in equity for the revocation of any con-

tract.” Id. at 492 n.9 (emphasis in original; citations

and internal quotation marks omitted). By the express

terms of that sole limitation on enforceability, state law,

whether of legislative or judicial origin, is applicable only

if that law governs the validity, revocability, and enforce-

ability of contracts generally. /d. at 493 n.9. As this

Court explained, “A state-law principle that takes its

meaning precisely from the fact that a contract to arbi-

trate is at issue does not comport with this requirement

of §2.” Jd. Therefore, the Court instructed, under

Section 2

[a] court may not, then, in assessing the rights of liti-

gants to enforce an arbitration agreement, construe

that agreement in a manner different from that in

which it otherwise construes nonarbitration agree-

ments under state law. Nor may a court rely on the

uniqueness of an agreement to arbitrate as a basis

for a state-law holding that enforcement would be

unconscionable, for this would enable the court to

effect what we hold today the state legislature cannot.

Id.; see Shearson/American Express, 482 U.S. at 226.

Just last Term in Allied-Bruce Terminix Companies v.

Dobson, 115 S. Ct. 834 (1995), this Court reaffirmed

the principles established in Southland and Perry. It is

true, as the Montana Supreme Court noted, that much

of the opinion in Terminix is devoted to construing the

interstate commerce of Section 2, which is not

at issue here. But Terminix also again made clear that

Section 2 preempts state laws that single out arbitration

agreements for unfavorable treatment. This Court thus

restated its longstanding interpretation of Section 2:

16

“States may not. . . decide that a contract is fair enough

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

fair enough to enforce its arbitration clause.” Terminix,

115 S. Ct. at 843. In the clearest possible terms, the

Court declared that the FAA “makes any such state policy

unlawful, for that kind of policy would place arbitration

clauses on an unequal ‘footing,’ directly contrary to the

Act’s language and Congress’s intent.” /d. (emphasis

added ) .*

Both the FAA itself and the cases of this Court con-

struing it thus establish that Section 2 directly preempts

* While the Montana Supreme Court saw nothing in Terminiz

relevant to this case, Justice O'Connor, in her concurrence in

Terminiz, recognized that the effect of the decision in Terminiz

would be to preempt statutes identical to the Montana notice statute:

The reading of §2 adopted teday will displace many state

statutes carefully calibrated to protect consumers, see, ¢.g.,

Mont. Code Ann. § 27-5-114(2) (b) (1993) (refusing to enforce

arbitration clauses in consumer contracts where the considera-

tion is $5,000 or less), and state procedural requirements aimed

at ensuring knowing and voluntary consent, see, ¢.g., 8.C. Code

Ann. § 15-48-10(a) (Supp. 1993) (requiring that notice of

arbitration provision he prominently placed on first page of

contract).

115 8. Ct. at 843 (emphasis added).

Except for the Montana Supreme Court, all federal courts of

appeals and state supreme courts that have considered whether the

FAA preempts a state arbitration notice requirement have found

preemption. See David L. Threlkeld & Co. v. Metaligesellachaft Ltd.,

923 F.2d 245, 249-50 (2d Cir.), cert. dismissed, 501 U.S. 1267

(1991); Securities Indus. Ass'n v. Connolly, 883 F.2d 1114, 1120

(Ist Cir. 1989), cert. denied, 495 U.S. 956 (1990); Webb v. R.

Rowland & Co., 800 F.2d 803, 806-07 (8th Cir. 1986) ; Collins Radio

Co. v. Ex-Cell-O Corp., 467 F.2d 995, 997-99 (8th Cir. 1972);

Bunge Corp. v. Perryville Feed & Produce, Inc., 685 8.W.2d 837,

839 (Mo. 1985) (en banc); see also King v. Postal Annez, Inc.,

No. CV-94-011-GF, slip op. at 4-6 & 6 n.5 (D. Mont. Dec. 14, 1995)

(concluding that Montana Supreme Court’s decision in Casarotto

“is without merit”); Snap-On Tools Corp. v. Vetter, 8838 F. Supp.

468, 472 (D. Mont. 1998) (Montana notice requirement preempted

by FAA).

17

any state law that singles out arbitration agreements for

disfavored treatment. Montana’s law does precisely that,

however. For it plainly singles out and subjects arbitra-

tion agreements to an “additional limitation{] under state

law” (Southland, 465 U.S. at 11) that is not applicable

to other contractual provisions. By its terms and as in-

terpreted by the Montana Supreme Court, Montana’s stat-

ute does not affect the validity of contracts generally; it

limits enforcement only of arbitration agreements as part

of a state policy disfavoring arbitration.’ As the Montana

Supreme Court candidly acknowledged, the notice statute

was borne of a legislative mistrust of “a procedure as

potentially inconvenient, expensive, and devoid of pro-

cedural safeguards as the one provided for by the rules

of the American Arbitration Association.” App. 21.”

* The notice statute, Mont. Code Ann, § 27-5-114(4) (1995), is

part of the Montana Uniform Arbitration Act. However, it is a

deviation from the Uniform Arbitration Act (1955), 7 U.L.A. 1

(West 1985 & Supp. 1995), which contains no notice requirement.

Montana has enacted other provisions refusing to enforce arbitra-

tion in certain types of contracts, set forth in the appendix to this

brief, which also are deviations from the uniform act. Montana

enacted its arbitration act in 1985 in the wake of the Court's deci-

sion in Southland.

1© This same anti-arbitration policy caused the Montana Supreme

Court to make a second, related error: its decision to apply Mon-

tana law despite the parties’ explicit contractual choice of Connecti-

cut law. The Montana court relied on a state policy hostile to

arbitration as the reason for applying Montana law to the agree-

ment under conflict-of-laws principles and then proceeding to

invalidate the agreement under that same policy. If it were not

for the arbitration notice requirement that Petitioners argue is

preempted by Section 2, the court below would not have reached

its conclusion that the Connecticut law chosen by the parties

(which has no special notice requirement) was offensive to Mon-

tana’s public policy. App. 20-21. Cf. Mastrobuono, 115 8. Ct. at

1219 (reading choice-of-iaw clause in manner intended to give

effect to parties’ agreement to arbitrate); Volt, 489 U.S. at 475-

76 (due regard must be given to federal policy favoring arbitration

when applying general state-law principles); id. at 479 (parties’

expectations should be enforced where it would not do “violence

18

In short, Montana law embodies precisely the type of

focused hostility toward arbitration that Congress sought

to overcome when it enacted the FAA. Terminix, 115

S. Ct. at 838. The Montana Supreme Court claims that

the Montana notice provision is not hostile to arbitration

because it does not invalidate all arbitration agreements

as did the Alabama law in Terminix, but “simply” ensures

that Montanans knowingly enter into arbitration agree-

ments. App. 53. Section 2, however, expresses Con-

gress’s considered judgment that in light of historical

antipathy toward arbitration, permitting such differential

State-law treatment of arbitration agreements would

“wholly eviscerate congressional intent to place arbitra-

tion agreements upon the same footing as other con-

tracts.” Southland, 465 U.S. at 17 n.11. This Court has

consistently held, therefore, that any state policy of offer-

ing special protection to signatories of arbitration agree-

ments that is not accorded contracts generally is directly

contrary to the mandates of Section 2 and the policies

underlying the FAA. Southland, 465 U.S. at 16 n.11;

see Perry, 482 U.S. at 493 n.9. Section 2 requires en-

forcement of arbitration agreements within its scope, as

the agreement here assuredly is, “notwithstanding any

State substantive or procedural policies to the contrary.”

Moses H. Cone, 460 U.S. at 24 (emphasis added).

This is not to say, of course, that Montana cannot

protect its citizens from the effects of contractual over-

reaching. Congress did not disable the states from apply-

ing general principles of unconscionability to arbitration

agreements. Terminix, 115 S. Ct. at 843; see Rodriguez

de Quijas v. Shearson/American Express, Inc., 490 U.S.

477, 483-84 (1989). But a state may not single out

arbitration agreements for special treatment out of a con-

to the policies behind the FAA”). In any event, because the

Montana statute is preempted by Section 2, it is not necessary for

this Court to reach out and decide whether the Montana Supreme

Court's conflict-of-laws analysis was independently flawed by its

dependence on a statute evidencing hostility toward arbitration.

19

cern that those agreements in particular may be the

product of unequal bargaining power. Terminix, 115

S. Ct. at 843. Thus, “{a]bsent a well-founded claim that

an arbitration agreement resulted from the sort of fraud

or excessive economic power that ‘would provide grounds

for “the revocation of any contract,”’” the FAA man-

dates enforcement of the arbitration agreement. Shear-

son/American Express, 482 U.S. at 226 (quoting Mitsu-

bishi, 473 U.S. at 627). By ignoring that mandate, Mon-

tana has “place[d] arbitration clauses on an unequal

‘footing’ with other contract terms, “directly contrary

to the Act’s language and Congress’s intent.” Terminix,

115 S. Ct. at 843; see Southland, 465 U.S. at 15-16.

Under the Supremacy Clause, therefore, Montana’s statute

“must give way.” Perry, 482 U.S. at 491.

B. Volt Does Not Support the Montana Supreme

Court’s Erroneous Interpretation of the Scope of

Section 2.

In its initial opinion, the Montana Supreme Court

appeared to concede that the decisions in Southland and

Perry, standing alone, would require enforcement of the

arbitration agreement here. App. 21-23. The court found

its way around Southland and Perry, however, by con-

struing this Court’s decision in Volt Information Sciences,

Inc. v. Board of Trustees of Leland Stanford Junior Uni-

versity, 489 U.S. 468 (1989), as limiting preemption to

circumstances where the state law would “undermine the

goals and policies of the FAA.” App. 26. Applying this

approach to Section 2, the court concluded that Mon-

tana’s law was consistent with the goals and policies of

the FAA. App. 27-28. On remand from this Court, the

Montana court confirmed that this reading of Volt was

the sole basis for its decision that Section 2 did not pre-

empt the Montana notice statute. See App. 50-53.

The Montana court’s reliance on Volt is indefensible.

To begin with, of course, the court below did just the

opposite of what the state court did in Volt. Whereas the

20

state court in Volt applied the law chosen by the parties

to the contract, the court here refused to honor the parties’

choice-of-law clause (to the extent that clause can even

be said to relate to the issue of enforceability), stating

that Connecticut law was contrary to Montana's public

policy embodied in the arbitration notice statute. App.

21." While the state court in Volt enforced the parties’

agreement to arbitrate, the Montana court voided their

agreement.

As this Court recently explained in Mastrobuono v.

Shearson Lehman Hutton, Inc., 115 §. Ct. 1212, 1216

(1995), Volt held that the FAA requires courts “to en-

force privately negotiated agreements to arbitrate, like

other contracts, in accordance with their terms.” Volt,

489 U.S. at 478. In other words, the “FAA's pro-arbi-

tration policy does not operate without regard to the

wishes of the contracting parties,” Mastrobuono, 115

S. Ct. at 1216, at least when giving effect to those wishes

would not do “violence to the policies behind the FAA.”

Volt, 489 U.S. at 479. Nothing in Volt even implies that

state courts are free, as the Montana Supreme Court

considered itself to be, to disregard the parties’ agreement

to arbitrate on the basis of a state’s legislative or judicial

hostility toward arbitration.

Having ignored the parties’ wishes, the Montana court

proceeded to make another mistake by concluding that

Volt had narrowed the preemptive scope of Section 2.

Indeed, this Court had no occasion in Volt even to con-

sider the preemptive force of Section 2 with regard to

the enforcement of arbitration agreements. Rather, Volt

involved state rules of procedure that this Court observed

were .“manifestly designed to encourage resort to the

'' The court also failed to address the parties’ agreement ( App.

75) to conduct the arbitration proceedings under the American

Arbitration Association’s Commercial Arbitration Rules, which do

not impose any arbitration notice requirement. See Mastrobuono,

115 8S. Ct. at 1218.

21

arbitral process.” Volt, 489 U.S. at 476; see id. at 472,

474. The state rules in that case did not render the

parties’ agreement unenforceable; the rules affected only

the timing of the arbitration. See id. at 479.

By misusing Volt, the Montana Supreme Court sought

to grant itself a license to ignore the express requirements

of Section 2 and to make its own case-by-case determi-

nation whether a particular state law “undermines” the

FAA’s goals. The court purported to base that authority

(App. 27) on the statement by this Court that the FAA

does not “occupy the entire field of arbitration.” Volt,

489 U.S. at 477. But in Volt, this Court looked to

whether the state procedures in question “would under-

mine the goals and policies of the FAA” only because

the FAA had not “displaced state regulation in [the]

area” governed by the state rules. Jd. at 477-78. While

the FAA might be silent about the procedural situation

presented in Volt, Section 2 speaks in the clearest possible

terms to the circumstances under which an agreement to

arbitrate must be enforced. Terminix, 115 S. Ct. at 843;

Perry, 482 U.S. at 489-90; Southland, 465 U.S. at 10-11,

16. Therefore, state laws that place arbitration agree-

ments “on an unequal ‘footing’” by definition undermine

the goals of the FAA. Terminix, 115 S. Ct. at 843; see

also Mastrobuono, 115 S. Ct. at 1216 (FAA ensures

12 As described by the Court, the conflict with federal law as-

serted in Volt was not with Section 2 of the FAA, but with Sections

3 and 4, which provide the procedural mechanisms to enforce the

substantive rights conferred by Section 2 and which, according to

the Court, do not “confer a right to compel arbitration ... at

any time.” Id. at 474, 476-77; 9 U.S.C. §§3, 4. Moreover, unlike

the California rules, “the FAA itself contains no provision de-

signed to deal with the special practical problems that arise in

multiparty contractual disputes when some or all of the contracts

at issue include agreements to arbitrate.” /d. at 476 n.5. Because

the procedural question before the Court in Volt was not addressed

by the FAA, the California state court’s interpretation of the

contract as incorporating state rules of arbitration did not im-

permissibly conflict with the FAA. I/d. at 477-78.

22

enforcement of agreement to arbitrate punitive damages

claims “even if a rule of state law would otherwise ex-

clude such claims from arbitration” ).

Nothing in Volt itself, therefore, detracts from the hold-

ings in Southland and Perry that under Section 2 of the

FAA, parties may be assured that their agreement to

arbitrate will be enforced. See Terminix, 115 S. Ct. at

838-39. Indeed, both the Second and First Circuits have

found preemption of arbitration notice requirements simi-

lar to Montana's after the decision in Volt. See David L.

Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245,

249-50 (2d Cir.), cert. dismissed, 501 U.S. 1267 (1991);

Securities Indus. Ass'n v. Connolly, 883 F.2d 1114, 1120

(Ist Cir. 1989), cert. denied, 495 U.S. 956 (1990).

The First Circuit correctly distinguished Volt on the

ground that, unlike the arbitration notice requirement, the

California rules applied in Volt “did not impinge on the

validity or enforceability of the arbitral contract.” Con-

nolly, 883 F.2d at 1119 n.3." Even after Volt, therefore,

Section 2 must still be read to preempt state laws, like

the Montana law, that make an arbitration agreement un-

enforceable even though another type of agreement would

be held valid.

18 In Saturn Distribution Corp. v. Williams, 905 F.2d 719, 723-27

(4th Cir.), cert. denied, 498 U.S. 983 (1990), the Fourth Circuit

considered and rejected the same argument accepted by the Mon-

tana Supreme Court: “the notion ... that the [state] statute

may be harmonized with the FAA because it only ensures ‘con-

sensual rather than forced arbitration.’” Jd. at 726 (quoting

Saturn Distribution Corp. v. Williams, 717 F. Supp. 1147, 1151

(E.D. Va. 1989)). The Fourth Circuit concluded that Volt “is

not to the contrary.” /d.; see also Dowd v. First Omaha Sec. Corp.,

495 N.W.2d 36, 41 (Neb. 1993).

23

Il. THE MONTANA SUPREME COURT'S DECISION

THREATENS TO DISRUPT THE NATIONAL POL-

ICY OF ENFORCING ARBITRATION AGREE-

MENTS.

The decision below is not only contrary to the express

terms of Section 2, the teachings of this Court, and the

holdings of every federal court of appeals and state su-

preme court to have addressed the issue, but also, if

affirmed, the decision would seriously disrupt the national

uniformity that Congress sought to achieve when it chose

to put arbitration agreements on the same footing as

other contracts. Arbitration agreements like the one in

this case have flourished nationwide as a chosen means

of resolving disputes in a wide array of business and

consumer contexts. Financial institutions, franchisors,

distributors, manufacturers, and a multitude of other com-

panies conducting interstate businesses now regularly in-

clude standard arbitration provisions in their contracts.

See generally Henry C. Strickland, The Federal Arbitra-

tion Act's Interstate Commerce Requirement: What's Left

for State Arbitration Law?, 21 Hofstra L. Rev. 385,

429-54 (1992). The case law on arbitration notice re-

quirements alone illustrates the degree to which national

and international economies have come to rely on arbitra-

tion in a host of circumstances. See, e.g., Threlkeld, 923

F.2d at 246-47 (contract between member of foreign

commodities exchange and American trader); Connolly,

883 F.2d at 1116 (customer agreement with securities

broker); Webb, 800 F.2d at 804-05 (same): Collins, 467

F.2d at 996 (purchase agreement between manufacturer

and its parts supplier); Bunge, 685 S.W.2d at 838 (com-

mercial contract for bulk purchase of soybeans); King v.

Postal Annex, Inc., No. CV-94-011-GF, slip op. at 2

(D. Mont. Dec. 14, 1995) (franchise agreement); Snap-

On Tools Corp. v. Vetter, 838 F. Supp. 468, 472 (D.

Mont. 1993) (dealership agreement).

Thus, the FAA is, as it was intended, serving to foster

a “federal policy favoring arbitration” in a variety of

24

business and consumer settings. Moses H. Cone, 460

U.S. at 24; see Shearson/American Express, 482 U.S. at

226; Perry, 482 U.S. at 489. The setting of this case is

a prime example of the potential benefits of arbitration.

A franchise agreement typically involves a continuing

business relationship in which disputes can, from time to

time, occur. Arbitration is therefore favored by both

franchisors and franchisees as an effective and efficient

means of resolving disputes in that ongoing relationship.

See Amici Curiae Brief of International Franchise Associ-

ation and Securities Industry Association at 1-2. Arbitra-

tion “‘minimiz[es] hostility and is less disruptive of on-

going and future business dealings among the parties’ ”

than litigation in the courts. Terminix, 115 S. Ct. we 843

(quoting H.R. Rep. No. 97-542, at 13 (1982)).

tration also “avoid{s] ‘the delay and expense of aioe.

tion,’ ” and therefore “appeal[s] ‘to big business and little

business alike, . corporate interests [and] . . . indi-

viduals.” Id. at 842 (quoting S. Rep. No. 536, 68th

Cong., Ist Sess., 3 (1924)).

It is thus of particular importance that parties to arbi-

tration agreements like the one here be assured that their

agreements are enforceable, regardless of whether a par-

ticular state is receptive or hostile to arbitration. But the

Montana Supreme Court’s decision creates new uncer-

tainty in the law that threatens to undermine Congress's

support of arbitration as an alternative device for dispute

resolution. By formulating a public policy based on the

perception that arbitration improperly dispenses with pro-

cedural safeguards, see App. 20-21, Montana has sought

to resurrect historical misconceptions about arbitration

that have long since been rejected by this Court. As this

Court has declared, “we are well past the time when

judicial suspicion of the desirability of arbitration and of

the competence of arbitral tribunals [may] inhibit{] the

development of arbitration as an alternative means of

dispute resolution.” Mitsubishi, 473 U.S. at 626-27

25

(1985). More than once, the Court has rebuffed efforts

it

ve

ii

;

tH

A

nity to present their claims. Gilmer, 500 U.S. at 30-3

Shearson/American Express, 482 U.S. at 231-

Court has recognized that arbitration does not require a

party to “forgo [its] substantive rights”; it only “trades

the procedures and opportunity for review of the court-

room for the simplicity, informality and expedition of

arbitration.” Mitsubishi, 473 U.S. at 628."

clearly in the special concurrence penned by the author of the

court’s opinion. Justice Trieweiler scolded federa! courts for their

“naive assumption that arbitration provisions are bargained for,”

know it.” App. 32. That concurring opinion is as vivid a reminder

as one can imagine of the hostility toward arbitration that Con-

gress addressed in the FAA.

% The commercial rules of the American Arbitration Association,

which the parties here chose to govern their arbitration, contain

on Commercial Arbitration App. VII(A) (rev. ed. 1995).

** Montana also looks with disfavor on arbitration agreements

because they may, as here, require travel to other states. See App.

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991) ;

see also Stewart Organization Inc. v. Ricoh Corp., 487 U.S. 22, 33

(1988) (Kennedy, J.. concurring); Southland, 465 U.S. 7;

Scherk, 417 U.S. at 518-19; The Bremen v. Zapata Off-Shor

407 U.S. 1, 17-18 (1972).

26

The rule of law announced by the Montana Supreme

Court is disruptive and unworkable for anyone transacting

business in interstate commerce. The decision below does

tration laws that exist from state to state and their impact

on interstate commerce. State arbitration notice provi-

states impose different notice requirements for contracts

subject to an agreement to arbitrate.” At least six addi-

tional states have enacted differing laws regulating the

notice, placement or acknowledgment of arbitration agree-

ments within certain kinds of contracts; Calin estes

four such statutes in 1994." Furthermore, nume

7 Mo. Ann. Stat. § 435.460 (Vernon 1992) (notice that contract

contains arbitration agreement must be placed adjacent to signa-

ture block in ten-point capital letters); S.C. Code Ann. § 15-48-

10(a) (Law. Co-op. Supp. 1995) (notice that contract is subject

to arbitration shall be typed in underlined capita! letters or rubber-

stamped prominently on first page of contract’; Vt. Stat. Ann. tit.

12, § 5652(b) (Supp. 1995) (parties must sign written acknowledg-

ment of arbitration that contains language provided in statute and

that is prominently displayed in contract).

* Cal. Bus. & Prof. Code § 7191 (West 1995) (arbitration pro-

vision in contracts for work on residential property is unenforce-

able unless printed in certain type and unless accompanied by

specified notice before signature line); Cal. Health & Safety Code

§ 1363.1 (West Supp. 1996) (health care service plans requiring

binding arbitration must include a disclosure of arbitration in

particular terms and in particular location in contract); Cal. Ins.

Code § 10123.19 (West Supp. 1996) (similar requirement for dis-

ability insurance policies) ; Cal. Ins. Code § 11512.33 (West Supp.

1996) (similar requirement for nonprofit hospita! service plans) ;

Ga. Code Ann. § 9-9-2(c) (8), (9) (Michie Supp. 1995) (arbitra-

tion provisions in residentia! real estate contracts and employment

contracts must be separately initialed at the time of contract's

execution); lowa Code Ann. § 679A.1(2)(c) (West 1987) (agree-

ment to arbitrate tort claims must be in separate writing executed

by parties); R.I. Gen. Laws §10-3-2 (Supp. 1995) (arbitration

provisions in insurance contracts must be placed immediately above

parties’ signatures) ; Tenn. Code Ann. § 29-5-302(a) (Supp. 1995)

(arbitration clause in contracts relating to farm or residential

:

Hy

i!

F

z

i

(excluding from arbitration act any contract by an individual

neys); Tex. Prac. & Rem. Code Ann. $171.001(c) (West

Supp. 1996) (personal injury claims excluded from scope of arbi-

tration act except upon advice of counsel to both parties as evi-

by both parties).

statutes from 13 different states) ; see also Mastrobuono, 115 S. Ct.

at 1215 (New York law barring awards of punitive damages in

arbitration).

28

that no party antici ae Son

agreement. Speen emntnmene . applied

know in what state it might be sued and—after the deci-

sion below—which state’s . : . 4

cushe t tae ecuatell atten tiie hes thane cr

ment.” Although Section 2 of the FAA does om

gress sought by enacting the - beperwend yee

arbitration-specific impediment: to the - ae _—

arbitrate their disputes because such + we efforts ad

“ee national li * arbitration.” Southland, —

U.S. at 10. e

By erecting an additional ot me

ments to arbitrate, Montana has viol pee ee na

» Missouri requires notice adjacent to the signature block, while

Montana requires notice on the first page of the contract. See Mo.

Ann. Stat. § 435.460 (Vernon 1992); Mont. Code Ann. § 27-5-

114(4) (1995). So, for example, if the parties selected Missouri

law to govern their contract and they complied with Missouri's

notice statute as a protective measure in the event a court con-

1998), transfer denied (Mo. Jan. 25, 1994) ; Woermann Constr. Co

v. Southwestern Bell Tel. Co., 846 S.W.2d 790, 792-93 (Mo. Ct.

App. 1993) ; Godwin v. Stanley Smith & Sons, 386 S.E.2d 464, 467

(S.C. Ct. App. 1989).

of federal law. 9 U.S.C. §2. Accordingly, this Court

should hold that the Montana notice law is preempted by

the FAA. “Having made the bargain to arbitrate, the

ies} should be held to it... .” Mitsubishi, 473 U.S.

at 628.

H

The judgment of the Supreme Court of Montana should

be reversed. The case should be remanded with instruc-

P.O. Box 1832

New Haven, CT 06508-1832

(208) 498-4400

H. Bartow Fars, IIT

Farr & TARANTO

2445 M Street, N.W.

Washington, D.C. 20037

(202) 775-0184

Dated: ‘February 16,1996 * Counsel of Record

APPENDIX

la

APPENDIX

STATUTE INVOLVED

Section 27-5-114, Montana Code Annotated

27-5-114. Validity of Arbitration agreement—excep-

ee Pe ee ee Re

(4) Notice that a contract is subject to arbitration

pursuant to this chapter shall be typed in underlined capi-

tal letters on the first page of the contract; and unless