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

In THE

Supreme Court of the uited States

OCTOBER TERM, 1995

DocTor’s ASSOCIATES, INC. and NicK LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO, ET UX..

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

REPLY BRIEF FOR PETITIONERS

MARK R. KRAVITz *

JEFFREY R. BABBIN

WIGGIN & DANA

One Century Tower

P.O. Box 1832

New Haven, CT 06508-1832

(203) 498-4400

H. BARTOW FARR, ITT

FARR & TARANTO

2445 M Street, N.W.

Washington, D.C. 20087

(202) 775-0184

* Counsel of Record

WILSON - Eres Printing Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

Page

I. MONTANA’S ARBITRATION NOTICE STAT-

UTE IS NOT A GROUND FOR THE REVOCA-

TION OF ANY CONTRACT WITHIN THE

MEANING OF SECTION 2 .....0.20.00002-----ccee-- 3

Il. THE FEDERAL ARBITRATION ACT PRE-

EMPTS STATE-LAW LIMITATIONS ON EN-

FORCING ARBITRATION AGREEMENTS ...... 15

CGE ccncnsnvantacticcretinssnctinatnennintanatniaaminantjsininagenias 19

ii

TABLE OF AUTHORITIES

CASES Page

Allied-Bruce Terminix Companies v. Dobson, 115

EE Cee passim

American Airlines, Inc. v. Wolens, 115 S. Ct. 817

ENS SEES: Soe Ss SORT Se 8,18

Brill v. Catfish Shaks of America, Inc., 727 F. Supp.

ee i cn css tsideddncencersgentnn 12

Broemmer v. Abortion Services of Phoeniz, Ltd.,

B40 PBS 1GIS CATS. IGGB) ........00000ccccrcccrceccceseceseees 13

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

REE LS cn 17

Chor v. Piper, Jaffray & Hopwood, Inc., 862 P.2d

aa nccttematmnsencnsnanoen 12, 14, 15

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

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

8 ET 13

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213

SN ES A ee 4,16

Downey v. Christensen, 825 P.2d 557 (Mont.

SS eS a 14

First Options of Chicago, Inc. v. Kaplan, 115 S. Ct.

9 SRE ER SF OO 6, 19

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

ESS SE 8, 18, 17

Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal.

(OSES SIME a SEGRE 7

Keating v. Superior Court, 645 P.2d 1192 (Cal.

1982), rev’d, Southland Corp. v. Keating, 465

SE ee 13

King v. Postal Annex, Inc., CV-94-011-GF (D.

4 14

Larsen v. Opie, 771 P.2d 977 (Mont. 1989) ..... 15

Leibrand v. National Farmers Union Property &

Casualty Co., 898 P.2d 1220 (Mont. 1995)... 15

Mastrobuono v. Shearson Lehman Hutton, Inc., 115

Ee 6

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) —....... 7, 8, 13, 16,

17, 19

lii

TABLE OF AUTHORITIES—Continued

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Co., 460 U.S. 1 (1983) ......................... 5, 10

Passage v. Prudential-Bache Securities, Inc., 727

P.2d 1298 (Mont. 1986), cert. denied, 480 U.S.

EE he a 14

Perry v. Thomas, 482 U.S. 483 (1987) .. cciiiaanaiacieaiedl passim

Prima Paint Corp. v. Flood & Conklin Manufactur-

ing Co., 388 U.S. 396 (1967) —............ 16

Rodriguez de Quijas v. Shearson/American Ex-

press, Inc., 490 U.S. 477 (1989) ........................ 13, 15, 17

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

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

(1990) ... 9

Scherk v. Alberto-Culver Co., 417 US. 506 (1974). 10, 16

Securities Industry Association v. Connolly, 883

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

956 (1990) .............. | 8, 9, 10

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

U.S. 220 (1987) wf, 10,13, 17

Snap-On Tools Corp. v. Vetter, 838 F. Supp. 468

(D. Mont. 1993) _.. 14

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

Vimar Seguros y Reaseguros, S.A. v. M/V Sky

Reefer, 115 S. Ct. 2322 (1995) 13

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

ses of Leland Stanford Junior University, 489

RE ees eee ee 1

Vukasin v. DA. Devidson é Co., 185 P.2d 713

(Mont. 1990) 14

Wheeler v. St. Joseph Hospital, 133 Cal. Rptr. 175

(Cal. Ct. App. 1976) 14

STATUTES AND REGULATIONS

9 U.S.C. § 2......... 2

16 C.F.R. Part 436 12

LEGISLATIVE HISTORY

Hearing on S. 4213 and S. 4214 before the Subcom-

mittee of the Senate Committee on the —e

67th Cong., 4th Sess. (1923) . rae 16

iv

TABLE OF AUTHORITIES—Continued

Montana Senate Judiciary Committee minutes

SS aan

MISCELLANEOUS

Restatement (Second) of Contracts § 211 ...............

L. Cunningham et al., Corbin on Contracts § 559A

SE AR TT ASAT Re

W. Michael Garner, Franch. & Distr. Law & Prac.

SEITE nestclesianinstedsditicliiieteriiaertesceticeistininateeatenaditnieameniinmi alain

David J. Kaufman, An Introduction to Franchising

and Franchise Law, in Franchising 1992: Busi-

ness and Legal Issues 9 (Practising Law Inst.

ae Ee een LA

I. Macneil et al., Federal Arbitration Law (1995) ..

Lydia B. Parnes, Federal Trade Commission Regu-

lation of Franchising, in Franchising 1992: Busi-

ness and Legal Issues 99 (Practising Law Inst.

ed., 1992) ........... Sa ds rt OE

7,13

12

4, 13,

16, 19

Sie ee

Supreme Court of the Hnited States

OcToBer TerRM, 1995

No. 95-559

Doctor's ASSOCIATES, INC. and Nick LOMBARDI,

. Petitioners,

PAUL CASAROTTO, ET UX.,

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

REPLY BRIEF FOR PETITIONERS

Not satisfied with the reasoning of the Montana Su-

preme Court, or even with their own ts to that

court, respondents now offer two newly crafted arguments

in support of the decision below. They no longer main-

tain, as the Montana Court did in each of its

opinions, that Volt Information Sciences, Inc. v. Board

of Trustees of Leland Stanford Junior University, 489

U.S. 468 (1989), narrowed the preemptive scope of Sec-

tion 2 of the Federal Arbitration Act (“FAA”) to permit

Section 2, and thus that decision does not support the

Montana Supreme Court's refusal to enforce the parties’

agreement to arbitrate.

Accordingly, respondents devote most of their brief to

an effort to fit the Montana notice statute directly into

2

the text of Section 2, which provides that written arbitra-

tion agreements involving interstate commerce are “valid,

irrevocable, and enforceable, save upon such grounds as

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

tract.” 9 U.S.C. § 2. Respondents’ newly found argu-

ment proceeds in two steps. They first claim that Mon-

tana may, under its common law relating to adhesion

contracts, invalidate arbitration clauses contained in

standardized contracts because arbitration agreements are

“unexpected” unless conspicuously disclosed. Resp. Br.

at 24. Respondents then claim that Montana’s notice

statute merely codifies, and is a “particularized applica-

tion” of, this supposed common law principle that would

have allowed the Montana courts “to invalidate the arbi-

tration provision in this case and in others as well.” /d.

Accordingly, respondents argue, the notice statute falls

within Section 2’s savings clause as a ground for “revo-

cation of any contract.”

Respondents’ new arguments are as unavailing as their

original ones. First, even if respondents were correct that

the notice statute merely codifies Montana’s common law

relating to adhesion contracts, this Court has made it

clear that, as a matter of federal law, a court may not

rely upon the uniqueness of an agreement to arbitrate,

and a state’s suspicion of that method of dispute resolu-

tion, as a basis for a state law holding that enforcement of

the arbitration agreement is unconscionable or “adhesive.”

And this is true whether the court is applying a state’s

statute, such as the notice statute, or its common law.

Permitting courts to refuse enforcement of arbitration

agreements unless they are more prominently highlighted

than other terms of a standardized contract on the ground

that arbitration is “unexpected” would wholly eviscerate

Congress's intent to place arbitration agreements on the

same footing as other contracts. Second, even if the FAA

somehow permitted a state to invalidate arbitration agree-

ments on the ground that they are “unconscionable” or

“unexpected” unless they are conspicuously disclosed in

3

standardized contracts, the statute here goes far beyond

any such principle, invalidating all arbitration agreements

not meeting unique conditions—regardless of the cir-

cumstances of the agreement or the relative bargaining

power of the parties.

Inevitably, therefore, respondents must argue that even

though Montana’s notice law is not a ground for revoca-

tion of contracts generally, the FAA nevertheless does not

preempt state laws intended to provide “notice” of an

arbitration provision to persons deemed in need of special

protection. Beyond the obvious fact that Montana's law

is not so limited, respondents have advanced no argu-

ments that would warrant this Court overruling its nu-

merous decisions holding that enforcement of arbitration

agreements is a matter of federal law and that the broad

principle of enforceability embodied in Section 2 is not

subject to any limitations under state law.

I. MONTANA’S ARBITRATION NOTICE STATUTE

IS NOT A GROUND FOR THE REVOCATION OF

ANY CONTRACT WITHIN THE MEANING OF

SECTION 2

A. This Court has acknowledged “that a party may

assert general contract defenses such as fraud to avoid

enforcement of an arbitration agreement” under the sav-

ings clause of Section 2. Southland Corp. v. Keating, 465

U.S. 1, 16 n.11 (1984) (emphasis added). However,

this Court has also made it clear in numerous decisions

that a state may apply its laws to an agreement to arbi-

trate only “if that law arose to govern issues concerning

the validity, revocability, and enforceability of contracts

generally.” Perry v. Thomas, 482 U.S. 483, 493 n.9

(1987); see Allied-Bruce Terminix Cos. v. Dobson, 115

S. Ct. 834, 843 (1995); Gilmer v. Interstate/Johnson

Lane Corp., 500 U.S. 20, 33 (1991); Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987).

Thus, a “state-law principle that takes its meaning pre-

cisely from the fact that a contract to arbitrate is at issue

4

does not comport with [the] requirement[s] of § 2.”

Perry, 482 U.S. at 493 n.9. By its plain language, the

FAA preempts any state-law precept that makes arbitra-

tion agreements any less enforceable, less valid, or less

irrevocable than other contract terms. See Terminix, 115

S. Ct. at 843; see generally Petz. Br. at 12-19.’

To convince this Court that Montana’s notice statute

is, in fact, a ground for the revocation of any contract,

respondents seek to argue, first, that the parties’ agree-

ment to arbitrate would be void under Montana’s general

common law relating to adhesion contracts and, second,

that Montana’s notice statute merely “codifies” this com-

mon law principle. Resp. Br. at 24. At the outset, it

bears noting that the trial court rejected respondents’

argument below that the parties’ arbitration agreement in

this case violated Montana’s common law of adhesion;

that respondents then abandoned that argument on appeal

in favor of their claim that petitioners failed to comply

with the mandatory requirements of Montana’s notice

statute; * and that neither of the opinions of the Montana

Supreme Court below ever even mentioned the purported

common law principles of adhesion now proffered by re-

spondents, let alone suggested that the parties’ agreement

in this case was void under Montana’s common law.

1 Thus, the leading treatise on the FAA observes that “a state

law singling out arbitration for more restrictive treatment than

does its general contract law violates Prima Paint . . .; Southland

... 5 and Perry....” 2 1. Macneil, et al., Federal Arbitration Law

§ 10.8.1, at 10:69 n.19 (1995) (citations omitted) (hereinafter

Federal Arbitration Law).

2 Respondents made a common law adhesion contract argument to

the trial court in their February 12, 1993 brief, and supported that

argument with an affidavit by respondent Paul Casarotto (App.

86-87). By ordering arbitration, the trial court implicitly rejected

the argument, and respondents then abandoned their common law

defense on appeal. (Appellants’ Briefs, filed Dec. 2, 1993, Feb. 8,

1994, and Apr. 8, 1994); see Dean Witter Reynolds Inc. v. Byrd,

470 U.S. 213, 216 n.2 (1985).

5

Nevertheless, even if one assumes arguendo that Mon-

tana’s notice statute is identical to its common law, that

fact would not supply a different answer to the question

posed by this petition. The same principles of federal

law that are set forth in petitioners’ main brief would

also prevent Montana from refusing to enforce the par-

ties’ arbitration agreement under its common law on the

ground that a perfectly ordinary agreement to arbitrate

in a standardized contract, such as the one involved here,

is “unconscionable,” “adhesive” or “unexpected.” Under

the FAA, Montana courts may not, as respondents urge,

make a virtue out of that state’s century-old refusal to

enforce arbitration agreements,’ and its desire to preserve

access to its courts, by deciding that arbitration agree-

ments are as a class especially “unexpected” or “impor-

tant” and therefore unenforceable unless displayed more

conspicuously than the other terms in a contract. It

makes no difference whether such a public policy ema-

nates from the state legislature, as in the case of the

notice statute, or from judicial development of common

law principles. Perry, 482 U.S. at 492 n.9. For arbi-

tration agreements within its scope, the FAA makes any

state policy disfavoring arbitration agreements 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.” Terminix, 115 S. Ct.

at 843; see Moses H. Cone Memorial Hosp. v. Mercury

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

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

made this point quite clear. There, the party seeking to

be relieved of his arbitration obligation similarly argued

that his arbitration agreement constituted an “unconscion-

* Montana was one of the last states to adopt some form of

arbitration law in 1985, in the wake of Southland. See Montana

Senate Judiciary Comm. minutes at 6 (Jan. 21, 1985), lodged by

respondents with the Court. Even then, Montana enacted several

deviations from the Uniform Arbitration Act. See Petr. Br. at

17 n.9.

6

able, unenforceable contract of adhesion” under Califor-

nia’s common law. 482 U.S. at 492-93 n.9. In discussing

this common law argument, the Court emphasized that

a Sstate-law principle, “whether of legislative or judicial

origin,” that took its meaning precisely from the fact

that an agreement to arbitrate was at issue does not com-

ply with the savings clause of Section 2, because that

clause is limited to grounds that exist for the revocation

of “contracts generally.” Jd. Thus, even though in theory

any contract provision might be held to be “unconscion-

able,” the Court instructed that “[a] court may [not] rely

on the uniqueness of an agreement to arbitrate as a basis

for a state-law holding that enforcement would be uncon-

scionable, for this would enable the court to effect what

we hold the state legislature cannot.” /d.; accord South-

land, 465 U.S. at 16 n.11.

Just last Term, this Court in Terminix reaffirmed this

construction of Section 2. The Court declared in no

uncertain terms that under the savings clause of Sec-

tion 2, “[s]tates may not [] 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. “[A]ny such state

policy [is] unlawful... .” 7d.

If, therefore, as respondents now claim, Montana courts

always, or even presumptively,* invalidate arbitration

* As construed by respondents, Montana’s law replaces the federal

presumption in favor of arbitration with a state presumption

against arbitration. However, the FAA establishes, as a matter of

federal law, that any doubts concerning arbitrability “ ‘should be

resolved in favor of arbitration, whether the problem at hand is the

construction of the contract language itself or an allegation of

waiver, delay or like defenses to arbitration.’” Mastrobuono v.

Shearson Lehman Hutton, Inc., 115 S. Ct., 1212, 1218 n.8 (1995)

(emphasis added) (quoting Moses H. Cone, 460 U.S. at 24-25) ;

see First Options of Chicago, Inc. v. Kaplan, 115 S. Ct. 1920, 1924

(1995). “{Bly skewing the otherwise hospitable inquiry into arbi-

7

agreements contained in standardized contracts as “un-

expected” unless they are more prominently disclosed than

the other terms of the contract, that state-law principle

would violate the express terms of Section 2 and the clear

teachings of Southland, Perry and Terminix. For such

courts would, then, be applying a state-law principle that

took its meaning solely from the fact that the subject

matter of the term claimed to be “unexpected” is an

agreement to arbitrate.

There is no reason why Perry’s holding regarding the

impact of the FAA on a state’s application of its law of

unconscionability should have any less force when a state

seeks, instead, to invalidate an arbitration clause based

upon its common law relating to adhesion contracts. In-

evitably, both doctrines reflect value judgments that are

made about what types of agreements courts will and will

not enforce. See Restatement (Second) of Contracts

§ 211 cmt. F (adhesion principles are “closely related to

the policy against unconscionable terms”). Montana

courts surely would not refuse to enforce a term in a

standardized agreement that was considered to be favor-

able to a franchisee, or a term in a contract of adhesion

that provided for litigation of all disputes in the courts—

even if such terms were not “conspicuously” disclosed.

3 L. Cunningham et al., Corbin on Contracts § 559A,

supp. 374 (1994) (“what courts aim at doing is dis-

tinguishing good adhesion contracts which should be en-

forced from bad adhesion contracts which should not”).°

trability,” the Montana law stands in direct conflict with Section 2.

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

614, 627 (1985).

5 Under ordinary common law principles, courts do not always or

even usually invalidate the provisions of a contract of adhesion.

Corbin on Contracts § 559A, at supp. 374. “Thus, a contract of

adhesion is fully enforceable according to its terms unless certain

other factors are present which, under established legal rules—

legislative or judicial—operate *> render it otherwise.” Graham

v. Scissor-Tail, Inc., 623 P.2d 165, 172 (Cal. 1981) (citations

omitted). Comment F to Section 211 of the Restatement (Second)

Therefore, if, as respondents claim, Montana courts in-

validate arbitration agreements contained in standardized

contracts as “unexpected” unless they are “conspicuously”

disclosed, they must do so precisely because the clause in

question involves arbitration. Yet, Section 2 prohibits

states from making value judgments about whether to en-

force arbitration agreements—under either the doctrine

of unconscionability or adhesion—that rely upon the fact

that an agreement to arbitrate in particular is at issue.

See, e.g., Terminix, 115 S. Ct. at 843; Perry, 482 USS.

at 492-93 n.9; Southland, 465 U.S. at 16 n.11; see also

Mitsubishi, 473 U.S. at 628; cf. American Airlines, Inc.

v. Wolens, 115 S. Ct. 817, 826 n.8 (1995) (state law

contract principles may be preempted to the extent they

seek to effectuate a state public policy, rather than the

intent of the parties).

Accordingly, lower courts have consistently rejected

arguments, like those made by respondents, that have

sought to justify statutory regulation of arbitration,

through notice or similar requirements, on the ground that

a state could instead impose the same requirements under

the state’s common law of adhesion. Expressly relying

on this Court’s decision in Perry, the First Circuit in

Securities Industry Ass'n v. Connolly, 883 F.2d 1114 (lst

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

Massachusetts could also pass legislation declaring

all contracts of adhesion presumptively unenforce-

able. Such a rule would apply to arbitration agree-

ments, among others. But Massachusetts may not

say (judicially, legislatively, or in a _ regulatory

mode) that “adhesion contracts are especially bad

when arbitration is included, so we will therefore

ban, or place gyves and shackles upon, only those

adhesive contracts which contain arbitration clauses.”

of Contracts describes the circumstances under which courts will

invalidate “unexpected” terms in a contract of adhesion as limited

to “bizarre or oppressive” terms or terms that “eliminate[] the

dominant purpose of the transaction.”

9

That kind of value judgment is foreclosed precisely

because the FAA ordains that the state’s appulse

toward arbitration agreements must be the same as

its approach to contracts generally.

Id. at 1121.° Similarly, in Saturn Distribution Corp. v.

Williams, 905 F.2d 719 (4th Cir.), cert. denied, 498

U.S. 983 (1990), the Fourth Circuit held:

If Virginia uniformly barred the formation of non-

negotiable contractual terms or declared all contracts

of adhesion to be presumptively unenforceable, then

the statute at issue would not be at odds with gen-

eral contract law. .. . However, . . . Virginia does

not always, or even usually, presume adhesive con-

tracts to be unenforceable. Instead, Virginia adheres

to the general rule that: “The use of a standard

form contract between two parties of admittedly un-

equal bargaining power does not invalidate an other-

wise valid contractual provision”. . . .

Thus, we hold that the statute is preempted because,

as in Southland, it treats arbitration agreements more

harshly than other contracts. . . .

Id. at 725-26."

6 The court in Connolly went on to observe: “Although any fraud-

ulent, adhesive, or economically coerced agreement to arbitrate

would be challengeable, the Supreme Court has suggested that such

challenges must not only be brought on grounds common to con-

tracts generally, but must also be proven on the facts of the individ-

ual case, not automatically shunted to one side according to practices

governing the formation of arbitration agreements as a class of

contracts.” 883 F.2d at 1121 n.5 (citing Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477, 484 (1989) ).

7 Likewise, it is irrelevant that Montana law may also require

certain types of installment contracts to include conspicuous notice

of particular rights or omissions. See Resp. Br. at 5. Such “spe-

cialized provisions applicable only to certain types of contracts do

not form a cohesive general law or pattern of laws applicable to

most contracts,” as contemplated by Section 2’s savings clause.

Saturn, 905 F.2d at 726 n.5; see Southland, 465 U.S. at 16 n.11.

10

Finally, to accept respondents’ argument that courts

may use common law principles of adhesion to deny en-

forcement of arbitration agreements, but not other terms,

in standardized contracts would open a gaping hole in

the fabric of national uniformity that Congress sought to

create in enacting the FAA. After all, Congress passed

the FAA to overcome judicial reluctance to enforce arbi-

tration agreements. Terminix, 115 S. Ct. at 839;

McMahon, 482 U.S. at 225; Scherk v. Alberto-Culver

Co., 417 U.S. 506, 510-11 (1974). Courts should, there-

fore, “be on guard for artifices in which the ancient suspi-

cion of arbitration might reappear.” Connolly, 883 F.2d

at 1119; see McMahon, 482 U.S. at 226; Moses H. Cone,

460 U.S. at 24-25. If a state like Alabama, whose statu-

tory ban on pre-dispute arbitration was found to be pre-

empted in Terminix, could perpetuate a public policy

suspicious of arbitration by having its courts simply de-

clare pre-dispute arbitration agreements (but no other

terms) in standardized contracts to be “unconscionable,”

“adhesive” or “unexpected,” it would be able to achieve

through its common law that which this Court has ex-

plicitly held it may not do by statute. See Terminix, 115

S. Ct. at 843; Perry, 482 U.S. at 493 n.9; Southland,

465 U.S. at 16 n.11. Because the FAA makes any such

state policy, whether of legislative or judicial origin, un-

lawful, see Terminix, 115 §S. Ct. at 843, respondents’

claim that Montana’s notice statute merely embodies its

common law does not save the statute from preemption

by the FAA.

B. Respondents also fail in their recent effort to re-

cast the notice statute as merely a codification of Mon-

tana’s common law relating to adhesion contracts. As an

initial matter, it is abundantly clear from the face of the

notice statute itself that this law has nothing to do with

8 Neither in their briefs in the Montana Supreme Court nor in

their two oppositions to certiorari before this Court did respondents

ever suggest that Montana’s notice statute codified that state’s

common law of adhesion.

11

Montana’s common law of adhesion, which undoubtedly

is why the Montana Supreme Court in its multiple opin-

ions below explaining this statute never once mentioned

the phrase “adhesion contract,” let alone discussed Mon-

tana’s common law of adhesion.’ By its plain language,

the Montana statute bars enforcement of the arbitration

term of every contract that omits the precise form of notice

prescribed by the statute, regardless whether the term was

bargained-for or non-negotiable; whether arbitration was

unusual or expected; whether the transaction involved two

corporations of equal bargaining power or a consumer; or

whether the clause was specifically discussed and ex-

plained, or (as here) was read by each of the parties.

See supra n.6. Thus, the Montana Supreme Court voided

the parties’ agreement to arbitrate without regard to any

facts other than the fact that the franchise agreement did

not have the prescribed notice. To the extent, therefore,

that respondents’ arguments are founded on the notion that

Montana enacted this statute to provide special protec-

tions for particular categories of parties or types of con-

tracts, they are obviously off the mark.

Respondents are equally wrong in their claim that a

neutral application of Montana’s general common law

relating to adhesion contracts would void the parties’

arbitration agreement in this case. There is nothing re-

markable about this transaction or the arbitration term it-

self (which is a typical arbitration provision) that would

cause a court in Montana or anywhere else to invalidate

the parties’ arbitration agreement as an invalid contract

of adhesion.

® That the Montana Supreme Court does not share respondents’

novel construction of the notice statute is also borne out by the

court’s analysis of the choice of law issue. The Montana Supreme

Court voided the parties’ choice of Connecticut law, not on the

basis of Montana’s common law policies regarding adhesion con-

tracts, but rather because of a public policy, evidenced by the notice

statute, that is suspicious of arbitration as potentially inconvenient,

expensive and devoid of the procedural safeguards attendant to

judicial proceedings. App. 20-21.

12

Certainly, the presence of a dispute resolution clause

is hardly unexpected in a franchise agreement.” As is

true of so many commercial transactions today, “no fran-

chise structure would be complete without providing for

what happens in the event of a dispute between the fran-

chisor and its franchisees. . . . [A]rbitration or litigation

must be specified.” David J. Kaufman, An Introduction

to Franchising and Franchise Law, in Franchising 1992:

Business and Legal Issues 9, 41 (Practising Law Inst.

ed., 1992)." Thus, commentators have observed that

“the theory underlying judicial refusal to enforce adhesion

contracts—that the offeror does not expect the offeree to

read and be familiar with them—is not consistent with

the disclosure obligations imposed upon franchisors, the

size and seriousness of the business transaction, and the

extent of the responsibilities to be undertaken by the

1° Indeed, Mr. Casarotto had considerably more disclosure of con-

tract terms than is the case with most commercial! contracts because

DAI complied with its disclosure requirements under the Federal!

Trade Commission’s (“FTC”) Franchise Rule, 16 C.F.R. Part 436.

See generally Lydia B. Parnes, Federal Trade Commission Regula-

tion of Franchising, in Franchising 1992: Business and Legal Issues

99 (Practising Law Inst. ed., 1992). DAI’s franchise offering cir-

cular informed Mr. Casarotto of the arbitration provision and

gave him a written notice from the FTC of the need to read

the contract carefully and to review it with a business advisor

such as a lawyer. Petr. Br. at 4 n.3; App. 62-63. Mr. Casarotto

received two copies of the offering circular, the first, two months

before he signed the franchise agreement, and the second, two

weeks before he signed. Appendix to Appellees’ Br., Exh. 1 (between

p. 10 and p. 11), filed Jan. 14, 1994, in the Montana Supreme Court.

11 Paul Casarotto admits that “I read the agreement over before

I signed it.” App. 87. While he claimed in the trial court-—before

abandoning his adhesion contract argument on appeal—that he did

not appreciate the meaning of the arbitration clause or realize that

he was waiving his right of access to court, id., there is no gen-

eral state-law principle requiring a franchisor to explain the mean-

ing of a contract term to a franchisee. See e.g., Chor v. Piper,

Jaffray & Hopwood, Inc., 862 P.2d 26, 30 (Mont. 1993); Brill v.

Catfish Shaks of America, Inc., 727 F. Supp. 1035, 1039 n.6 (E.D.

La. 1989).

13

franchisees.” 2 W. Michael Garner, Franch. & Distr. Law

& Prac. § 8:27 (1990) (footnote omitted ).

Courts have, therefore, repeatedly recognized that arbi-

tration clauses are to be expected in franchise agreements

and similar business relationships involving standard-form

contracts.” Thus, in Keating v. Superior Court, 645 P.2d

1192 (Cal. 1982), rev'd on other grounds, Southland

Corp. v. Keating, 465 U.S. 1 (1984), a class action in-

volving 7-Eleven franchisees, the California Supreme

Court observed that arbitration of disputes, even those

relating to a franchise relationship set forth in a contract

of adhesion, “is generally considered to be a mutually

advantageous process,” and that “provision for arbitration

in a commercial context is quite common, and reasonably

to be anticipated.” Jd. at 1198.”

12 See, e.g., Rodriguez de Quijas v. Shearson/American Erpress,

Inc., 490 U.S. 477 (1989) (“standard customer agreement”) :

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)

(“Uniform Application for Securities Industry Registration”) :

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

614 (1985) (standard “Distributor Agreement”) ; Southland Corp.

v. Keating, 465 U.S. 1 (1984) (standard franchise agreement).

The Restatement (Second) of Contracts accepts and even applauds

the utility of standardization, see id. § 211 cmt. a, and it is widely

acknowledged that “standardization, uniformity in the operation of

the system, and the opportunity to learn how to run a business are

what the franchisee pays for, and these benefits cannot exist with-

out standardized terms enforceable upon al! units in the system.”

Garner, Franch. & Distr. Law & Prac. § 8:27.

18 See, e.g., Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer,

115 8S. Ct. 2322, 2325 (1995) (shipping agreement); McMahon,

482 U.S. at 227 (brokerage agreement) ; David L. Threlkeld & Co.

v. Metallgesellechaft Ltd., 923 F.2d 245, 249 (2d Cir.), cert. dis-

missed, 501 U.S. 1267 (1991) (trading agreement).

Indeed, the revocation of an arbitration clause as outside a

party’s “reasonable expectations” is virtually unprecedented. See

generally 2 Federal Arbitration Law § 19.3.3. Respondents can cite

only two cases that have voided arbitration provisions in adhesion

contracts, neither of which dealt with a commercial transaction.

See Resp. Br. at 19-20. Broemmer v. Abortion Services of Phoeniz,

14

The Montana Supreme Court itself has recognized that

arbitration clauses in nonnegotiable standardized contracts

are “common” and are not considered unexpected as a

matter of Montana’s common law. Passage v. Prudential-

Bache Sec., Inc., 727 P.2d 1298, 1301-02 (Mont. 1986)

(enforcing arbitration clause in fourteenth paragraph of

broker’s customer agreement form, in same typeface as

other clauses), cert. denied, 480 U.S. 905 (1987). Thus,

federal and state courts in Montana have enforced arbitra-

tion agreements contained in standardized franchise con-

tracts.* Indeed, in Chor v. Piper, Jaffray & Hopwood,

Inc., 862 P.2d 26 (Mont. 1993), the Montana Supreme

Court rejected a common law contract of adhesion de-

fense that was founded on testimony virtually identical

to Casarotto’s claim in this case—that Chor “did not fully

understand the legal impact” of an arbitration provision

she had read. Consistent with the law generally, the Mon-

tana court held that “a party cannot avoid the legal con-

sequences of an agreement simply by later claiming that

she did not understand the impact of the plain language

of the contract on her legal rights.” /d. at 30; see also

Vukasin v. D.A. Davidson & Co., 785 P.2d 713, 715

Ltd., 840 P.2d 1013 (Ariz. 1992), was not decided under the FAA,

and contrary to respondents’ arguments here, it rejected “the invi-

tation to attempt to establish some ‘bright-line’ rule of broad

applicability.” Wheeler v. St. Joseph Hospital, 133 Cal. Rptr. 775

(Cal. Ct. App. 1976), also was not decided under the FAA. Not

only did the court rely on a viewpoint contrary to the FAA—that

the patient “forfeit[ed] a valuable right” by agreeing to arbitrate,

id. at 786—it also contrasted the hospital setting to commercial

contracts where the presence of a dispute resolution clause, includ-

ing an arbitration agreement, is reasonably to be expected. /d. at

786-88 & n.12.

14 See King v. Postal Annez, Inc., CV-94-011-GF (D. Mont. Dec.

14, 1995) (franchise agreement); Snap-On Tools Corp. v. Vetter,

838 F. Supp. 468 (D. Mont. 1993) (dealership agreement from

1990); Downey v. Christensen, 825 P.2d 557 (Mont. 1992) (donut

shop franchise agreement from 1987).

15

(Mont. 1990) (rejecting similar claim); Larsen v. Opie,

771 P.2d 977, 978 (Mont. 1989) (same).

Contrary to respondents’ claim, therefore, the parties’

arbitration agreement in this case would be fully enforce-

able under general principles of Montana’s common law—

unless, of course, Montana were to alter that law so as to

make arbitration agreements less enforceable than other

contractual provisions. As a consequence, respondents

and the Montana Supreme Court (led by the dissenter in

Chor) turned to the only avenue left to invalidate the

parties’ agreement to arbitrate—a specialized notice stat-

ute that places agreements to arbitrate on a different foot-

ing from other contract terms. That statute, however, as

we have explained, is in direct and irreconcilable conflict

with Section 2 of the FAA.

Il. THE FEDERAL ARBITRATION ACT PREEMPTS

STATE-LAW LIMITATIONS ON ENFORCING

ARBITRATION AGREEMENTS.

Finally, respondents ask this Court to imply a new

exception to Section 2 on the ground that the FAA should

not preempt “state attempts to ensure that parties know

that the contract they are signing includes an arbitration

provision.” Resp. Br. at 25. As petitioners demonstrated

in their main brief, however, this Court has previously

rejected identical invitations to undercut the nationwide

uniformity that Congress sought to achieve in enacting

the FAA. Petr. Br. at 13-18. Respondents provide no

compelling reason to depart from that established prece-

dent here.

% There is also no cause for this Court to assume, as respond-

ents do, that when he decided to enter the sandwich shop business,

Mr. Casarotto could not have found another franchisor that did not

require arbitration or could not simply have operated a sandwich

business without seeking the benefits of a franchise arrangement,

and thereby have avoided a provision that he apparently now finds

disagreeable. See Rodriguez de Quijas, 490 U.S. at 484; Leibrand

v. National Farmers Union Prop. & Cas. Co., 898 P.2d 1220, 1227

(Mont. 1995) ; Chor, 862 P.2d at 30.

16

In enacting the FAA, Congress sought broadly to over-

come judicial and legislative hostility to arbitration.

Terminix, 115 S, Ct. at 839; Scherk, 417 U.S. at 510-11.

To that end, Congress chose to make its own assessment

of when agreements to arbitrate will be enforced, “unen-

cumbered by state-law constraints.” Southland, 465 U.S.

at 13. The congressional policy of “rigorously enforc[ing]

agreements to arbitrate,” Dean Witter Reynolds, 470 U.S.

at 221, is reflected in the minimal requirements imposed

by the FAA—that the agreement to arbitrate be part of

a written contract evidencing a transaction involving in-

terstate commerce and that it be irrevocable except upon

grounds for the revocation of any contract. Because

“Congress intended to foreclose state legislative attempts

to undercut the enforceability of arbitration agreements,”

this Court has recognized that the FAA’s “broad principle

of enforceability is [not] subject to any additional limita-

tions under state law.” Southland, 465 U.S. at 11, 16;

see Perry, 482 U.S. at 489."°

Congress, therefore, left no room for “a state policy

of providing special protection for franchisees,” consum-

ers or any other group. Southland, 465 U.S. at 17 n.11

(internal quotation marks omitted); see Mitsubishi, 473

U.S. at 628; 2 Federal Arbitration Law § 19.1.1., at

19:4-5 (under Southland and Perry “state legislation re-

quiring greater information or choice in the making of

agreements to arbitrate than in other contracts is pre-

empted”). Accordingly, this Court has repeatedly enforced

16 Respondents never quote or even cite the governing passages in

Perry and Southland, choosing instead to argue on the basis of

legislative history cited in a dissenting opinion and general princi-

ples of preemption and to ignore this Court’s already abundant

jurisprudence on the scope of the FAA. See Resp. Br. at 26-28.

It is clear from the Senate Hearing cited by respondents that Con-

gress added Section 1 of the FAA to address the concerns quoted

in respondents’ brief. Hearing on S. 4213 and S. 4214 before the

Subcommittee of the Senate Committee on the Judiciary, 67th

Cong., 4th Sess. 9 (1923); see Prima Paint Corp. v. Flood &

Conklin Mfg. Co., 388 U.S. 395, 402-03 n.9 (1967).

17

arbitration clauses in cases involving standardized agree-

ments and unequal bargaining power, even in cases involv-

ing consumers. See, e.g., Terminix, 115 S. Ct. at 483; Gil-

mer, 500 U.S. at 35; Rodriguez de Quijas, 490 U.S. at

484; Southland, 465 U.S. at 16-17; see also Carnival

Cruise Lines, Inc. v. Shute, 499 U.S. 585, 590 (1991)

(forum selection clauses contained in “three pages of fine

print”). Special protection from arbitration agreements,

if any truly is needed, must come from Congress, not state

legislatures or courts. McMahon, 482 U.S. at 226;

Mitsubishi, 473 U.S. at 627.

Not only are respondents unable to harmonize their

position with the language of Section 2 and this Court's

decisions under that section, but they also are unable to

reconcile their desire to let each state set its own require-

ments for enforcing arbitration agreements with the na-

tional uniformity contemplated by Section 2. See Petr.

Br. at 23-29; see also Terminix, 115 S. Ct. at 843-44

(O’Connor, J., concurring) (“my agreement with the

Court’s construction of § 2 rests largely on the wisdom

of maintaining a uniform standard”). They emphasize

that “[sJophisticated market participants transacting busi-

ness in multiple states” must already adhere to a wide

array of state-specific requirements. Resp. Br. at 30-33.

However, respondents say nothing about whether the laws

they cite affect the enforceability of arbitration agree-

ments, an area governed by a federal law that was moti-

vated by a desire for nationwide uniformity. Terminix,

115 S. Ct. at 838-40; Southland, 465 U.S. at 12; Perry,

482 US. at 492 n.9."

With respect to arbitration, the only variation in state

laws that Congress determined that interstate businesses

need be concerned with are the differences that might

17 Surprisingly, respondents rely upon the same California fran-

chise statute that this Court found preempted in Southland as an

example of how companies must cope with varying state regulatory

schemes. Resp. Br. at 31 n.9.

18

arise in the general principles of contract law that fall

within the ambit of Section 2’s savings clause. As this

Court has observed, however, contract law at its core,

such as that incorporated by the savings clause, is not

“diverse, nonuniform and confusing.” American Air-

lines, 115 S. Ct. at 826 n.8 (quoting Cipollone v. Liggett

Group, Inc., 505 U.S. 504, 519 (1992) (plurality opin-

ion) ). Thus, general principles of contract law typically

do not impose contradictory and non-uniform require-

ment in the way that some states have imposed incon-

sistent methods of providing notice of arbitration. See

Petr. Br. at 26 n.17, 28 n.20."

By incorporating state law only “if that law arose to

govern issues concerning the validity, revocability and

enforceability of contracts generally,” Perry, 482 U.S. at

493 n.9; see Terminix, 115 S. Ct. at 843, the savings

clause of Section 2 serves as an important filter for state

laws that discriminate against arbitration. For it is un-

likely that a state would be willing to skew its law ap-

plicable to contracts generally simply to invalidate or bur-

den arbitration agreements. It was, therefore, entirely

consistent for Congress, when it enacted the FAA, to

have included the savings clause to preserve the vitality

18 Respondents forget that although national businesses must deal

with varying state laws, one of the tools they use for that purpose

is to include choice-of-law clauses in their contracts. In this case,

DAI was deprived of its choice of Connecticut law because the

Montana Supreme Court elevated the arbitration-specific notice stat-

ute to the level of a fundamental! public policy. The preemption

analysis that respondents support, therefore, would make the legal

climate more unpredictable for national businesses, because a state

could apply its own particular arbitration notice statute regardless

of the parties’ intent to apply another state’s law. The result in this

case would vary depending on whether respondents had sued in

Montana, Connecticut or Delaware (respondents’ residence since

before this lawsuit was brought), since the latter two states would

certainly have had no reason to have rejected the parties’ choice of

law and applied Montana’s notice requirements to invalidate the

parties’ agreement to arbitrate.

19

of state general contract law—which provides the basic

infrastructure for agreements to arbitrate as well as other

contracts '"—while at the same time preempting state no-

tice laws like Montana’s that impose special requirements

on arbitration agreements that are not imposed on other

contract terms. Terminix, 115 S. Ct. at 843; id. at 843-

44 (O'Connor, J., concurring). As a matter of federal

law, therefore, Montana’s courts must enforce the par-

ties’ agreement to arbitrate. Jd. at 843; Mitsubishi, 473

US. at 628.

CONCLUSION

The judgment of the Supreme Court of Montana

should be reversed.

Respectfully submitted,

MARK R. KRAVITZ *

JEFFREY R. BABBIN

WIGGIN & DANA

One Century Tower

P.O. Box 1832

New Haven, CT 06508-1832

(203) 498-4400

H. BARTOW Fark, IIT

FARR & TARANTO

2445 M Street, N.W.

Washington, D.C. 20037

(202) 775-0184

Dated: April 4, 1996 * Counsel of Record

1 See First Options, 115 S. Ct. at 1924; 2 Federal Arbitration

Law § 10.6.2.1, at 10:27.