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

SE

Supreme Court, U.& |

FILED

No. 95-559 FEB 16 199g

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

Doctor’s ASSOCIATES, INC. and Nick LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

BRIEF AMICUS CURIAE FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITIONERS

Of Counsel: PATRICIA A. DUNN

PHILLIP E. STANO STEPHEN J. GOODMAN

AMERICAN COUNCIL OF Counsel of Record

LIFE INSURANCE JONES, DAY, REAVIS & POGUE

1001 Pennsylvania Ave.,N.W. 1450G Street, N.W.

Washington, D.C. 20004 Washington, D.C. 20005

(202) 624-2183 (202) 879-3939

Counsel for the Amicus

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TABLE OF CONTENTS

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TABLE OF AUTHORITIES ..................--c-ceccecesceseceeeeeeeeees

INTEREST OF THE AMICUS ................... tasidaialantamapii

STATUTORY PROVISIONS INVOLVED |...

IED ccrerntmnnnimpentrpennesnememeeennipnenseemene .

SUMMARY OF ARGUMENT ....................ccccccccceeeee. —

I. MONTANA CODE ANN. = § 27-5-114(4),

WHICH CONDITIONS THE ENFORCEABIL-

ITY OF ARBITRATION PROVISIONS UPON

STANDARDS THAT OTHER KINDS OF CON-

TRACTUAL PROVISIONS NEED NOT MEET,

IS CONSEQUENTLY PREEMPTED BY SEC-

TION 2 OF THE FEDERAL ARBITRATION

Pe aa re ee

A. Section 2 Of The Federal Arbitration Act

Prevents States From Conditioning The En-

forceability Of Arbitration Provisions Upon

Standards That Other Kinds Of Contractual

Provisions Need Not Meet...

B. Mont. Code Ann. § 27-5-114(4) Conditions

The Enforceability Of Arbitration Provi-

sions Upon Standards That Other Kinds

Of Contractual Provisions Need Not Meet,

And Is Therefore Preempted By Section 2

Of The Federal Arbitration Act ...................

(iii)

iv

TABLE OF CONTENTS—Continued

Il. PERMITTING STATES TO IMPOSE SPE-

CIAL OBSTACLES TO THE ENFORCEMENT

OF ARBITRATION AGREEMENTS WOULD

INCREASE THE COST OF INSURANCE AND

FORCE INSURERS TO COMPLY WITH RE-

QUIREMENTS THAT NO SINGLE STATE

WOULD HAVE IMPOSED...

ee

v

TABLE OF AUTHORITIES

Cases Page

Allied-Bruce Terminix Cos. v. Dobson, 115 S. Ct.

gE Se TE ET ae aE 2, 4, 6, 7,8

Cherry, Bekaert & Holland v. Brown, 582 So.2d

RE eee 10

DeSantis v. Wackenhut Corp., 793 S.W.2d 670

(Tex. 1990), cert. denied, 498 U.S. 1048

EES ae ee al Ss eae 10

Dean Witter Reynolds v. Byrd, 470 US. 213

RS SE cicero eel NA llth boa Aa 6

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

RR aR RE SS Ea NRE RTS Reco 4

Gilmer v. Interstate/Johnson Lane Corp., 500 :

ES eS ee 6

Louisiana Public Service Comm’n v. F.C.C., 476

ES EET, aS a 8

National Glass, Inc. v. J.C. Penney Properties,

Inc., 650 A.2d 246 (Md. 1994) _.............---.... 10

Perry v. Thomas, 482 U.S. 483 (1987) 7,8

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

ASL 6

Rice v. Santa Fe Elevator Corp., 331 U.S. 218

IRE EE LS a eee ar &

Scherk v. Alberto-Culver Co., 417 USS. 506

ESE EN a eS RD 6,8

Shearson/American Express, Inc. v. McMahon,

CT ETT RC Ta 6

Southland Corp. v. Keating, 465 U.S. 1 (1984)... 6,7

Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior Univ., 489

Statutes

iil ee SI NR RC 6

Youngblood v. American States Ins. Co., 866 P.2d

Te a eee 9

Te a 2, 4,6

Iowa Code Ann. § 679A.1(2) (c) (West 1987)... 11

Mo. Ann. Rev. Stat. § 435.460 (Vernon 1992) .... 11

Mont. Code Ann. § 27-5-114(4) (1995) 000000. 2,4

vi

TABLE OF AUTHORITIES—Continued

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

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

oe

Miscellaneous Authority

R. Keeton & A. Widiss, Insurance Law § 2.8

Se

Restatement (Second) of Conflicts of Law § 187

(2) (b) (1988) .......... RE EEN a ae a

Restatement (Second) of Conflicts of Law § 192

Bl ,—E—————— EEE

10

10

IN THE

Supreme Cot of the United States

OCTOBER TERM, 1995

No. 95-559

Doctor’s ASSOCIATES, INC. and NicK LOMBARDI,

» Petitioners,

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Writ of Certiorari to the

Supreme Court of Montana

BRIEF AMICUS CURIAE FOR THE

AMERICAN COUNCIL OF LIFE INSURANCE

IN SUPPORT OF THE PETITIONERS

INTEREST OF THE AMICUS

The American Council of Life Insurance (“ACLI”) is

the largest life insurance trade association in the United

States, representing the interests of more than 600 mem-

ber life insurance companies. These companies currently

underwrite 90.9 percent of the life insurance in force in

legal reserve life insurance companies in the United

States.

Ensuring that states are not permitted to disfavor arbi-

tration agreements, in violation of the Federal Arbitration

Act, is a matter of vital importance to ACLI’s members.

First, these companies employ approximately 250,000 in-

surance sales representatives who have registered with the

National Association of Securities Dealers (“NASD”) to

sell securities and, in conjunction with that registration,

2

have agreed to arbitrate all disputes with their insurer-

employers. Second, a growing number of ACLI’s mem-

bers now use binding arbitration clauses in certain group

annuity contracts, group health policies, and individual

life insurance policies. Because of its genuine interest in

promoting enforcement of arbitration agreements, there-

fore, ACLI submits this brief in order to provide the

Court with the views of the life insurance industry on the

important question presented by this case." ACLI has

previously filed amicus briefs in this Court on issues per-

taining to the interpretation and enforcement of the Fed-

eral Arbitration Act. See Allied-Bruce Terminix Cos. v.

Dobson, 115 §. Ct. 834 (1995).

STATUTORY PROVISIONS INVOLVED

Section 2 of the Federal Arbitration Act, 9 U.S.C.

§ 2 (1994), provides:

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce

to settle by arbitration a controversy thereafter aris-

ing out of such contract or transaction, or the refusal

to perform the whole or any part thereof, or an agree-

ment in writing to submit to arbitration an existing

controversy arising out of such a contract, trans-

action, 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.

Mont. Code Ann. § 27-5-114(4) (1995) provides:

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.

1 Counsel for both the Petitioners and the Respondents have

consented to the filing of this brief. Their consents are on file

with the Clerk.

3

STATEMENT

1. Because Petitioners set the facts forth fully in their

brief, ACLI only summarizes the facts here. On April

25, 1988, respondent Paul Casarotto (“Casarotto”) en-

tered into a franchise agreement with petitioner Doctor’s

Associates, Inc. (“DAI”) to open a Subway Sandwich

Shop in Montana. Appendix to Petition for Certiorari

(“Pet. App.”), at 12a-13a.* The franchise agreement in-

cluded an arbitration provision that provided that “[a]ny

controversy or claim arising out of or relating to this

contract or the breach thereof shall be settled by Arbitra-

tion....” Pet. App. 13a.

2. Casarotto subsequently filed suit against both DAI

and Lombardi, as well as other defendants, in the Mon-

tana Eighth Judicial District Court, Cascade County

(“the trial court”). In his amended complaint, he alleged

that he had entered into the franchise agreement and

opened his shop at a less desirable location in reliance

upon false representations by DAI and Lombardi that he

would have the exclusive right to open a shop at a more

desirable location when that location became available.

Pet. App. 13a; Petition for Certiorari (“Pet.”), at 5. He

also alleged that DAI and Lombardi had interfered with

efforts to sell his store. Pet. 5. On the basis of these

allegations, he asserted claims for breach of contract,

various torts, and violation of the Montana Consumer

Protection Act. Pet. App. 13a; Pet. 6.

DAI and Lombardi moved to dismiss or stay the law-

suit pending arbitration, pursuant to the arbitration pro-

vision in the franchise agreement. The trial court granted

the motion to stay, holding that the franchise agreement

* Petitioner Nick Lombardi is DAI’s development agent in Mon-

tana. Pet. App. 12a. Respondent Pamela Casarotto is Casarotto’s

wife. The opinions of the courts below treated both Casarottos

alike, although in fact only Paul Casarotto is asserting claims

against DAI and Lombardi. Petition for Certiorari (“Pet.”), at

5 n.4.

4

concerned interstate commerce, that Casarotto’s claims

against DAI and Lombardi “ar[o]se out of and relate[d]

to the franchise agreement,” and that DAI had properly

demanded arbitration. Pet. App. 49a-50a.°

3. The Montana Supreme Court reversed the trial

court’s order. Its sole reason for doing so was that the

franchise agreement did not comply with Mont. Code

Ann. § 27-5-114(4), which provides that arbitration pro-

visions are unenforceable unless the contracts containing

them contain “[nJotice that [the] contract is subject to

arbitration . . . typed in underlined capital letters on the

first page of the contract... .” Pet. App. 27a.

4. DAI and Lombardi appealed the Montana Supreme

Court’s decision to this Court, which vacated the judg-

ment and remanded for further consideration in light of

Allied-Bruce Terminix Cos. v. Dobson, 115 S. Ct. 834

(1995). See Doctor's Associates, Inc. v. Casarotto, 115

S. Ct. 2552 (1995).

5. Notwithstanding the order to reconsider its earlier

decision in light of Terminix, the Montana Supreme

Court summarily reaffirmed and reinstated its original

decision in the case, stating that “we can find nothing in

the [Terminix] decision which relates to the issues pre-

sented to the Court in this case.” Pet. App. 6a-7a.

SUMMARY OF ARGUMENT

I. Section 2 of the Federal Arbitration Act, 9 U.S.C.

$2 (“Section 2”), provides that written agreements to

arbitrate, when contained in contracts evidencing inter-

state commerce, must be enforced unless they are invalid

on the basis of state law principles (such as duress) that

are generally applicable to all contracts. Therefore, if a

State conditions the enforcement of arbitration agreements

* These findings were not disturbed on appeal. See Pet. App. 6a

(Montana Supreme Court assumed that there was a sufficient nexus

with interstate commerce and that the Federal Arbitration Act

was applicable) .

5

upon compliance with requirements that the state does

not obligate other kinds of agreements to meet, the addi-

tional requirements conflict with Section 2. The Montana

notice statute at issue in this case makes arbitration pro-

visions unenforceable unless they satisfy requirements

that Montana law does not require other kinds of con-

tractual provisions to meet. Consequently, the Montana

notice statute conflicts with Section 2 and is preempted

by it.

If. If states like Montana were permitted to impose

special restrictions upon the enforceability of arbitration

agreements, then, because the nature of such restrictions

varies from state to state, life insurance companies could

not enforce arbitration provisions in their policies unless

they tailored those policies to conform to the requirements

of individual states. Doing so would raise the cost of

insurance. Moreover, because of the rather amorphous

standards used in choice-of-law analysis, it is often diffi-

cult to predict which state’s law might be applied to a

particular policy. Consequently, in order to ensure that

arbitration provisions in their policies will be enforced,

life insurance companies would have to create policies

that complied with the differing requirements of multiple

states. To do so would be cumbersome at best and, in

some cases, impossible.

6

ARGUMENT

I. MONTANA CODE ANN. § 27-5-114(4), WHICH CON-

DITIONS THE ENFORCEABILITY OF ARBITRA-

TION PROVISIONS UPON STANDARDS THAT

OTHER KINDS OF CONTRACTUAL PROVISIONS

NEED NOT MEET, IS CONSEQUENTLY PRE-

EMPTED BY SECTION 2 OF THE FEDERAL ARBI-

TRATION ACT

A. Section 2 Of The Federal Arbitration Act Prevents

_ $tates From Conditioning The Enforceability Of

Arbitration Provisions Upon Standards That Other

Kinds Of Contractual Provisions Need Not Meet

Section 2 provides that written agreements to arbitrate,

when contained in a contract “evidencing a transaction

involving [interstate] commerce,” 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).‘ The Court has repeatedly held

that Congress’ intent in enacting this last phrase was to

place arbitration agreements “upon the same footing as

other contracts.” Allied-Bruce Terminix Cos. v. Dobson,

115 S. Ct. 834, 838 (1995); Gilmer v. Interstate/Johnson

Lane Corp., 500 U.S. 20, 24, 33 (1991); Volt Informa-

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

ford Junior Univ., 489 U.S. 468, 474, 478 (1989);

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

220, 225-226 (1987); Dean Witter Reynolds v. Byrd,

470 U.S. 213, 219 (1985); Southland Corp. v. Keating,

465 US. 1, 16 (1984); Scherk v. Alberto-Culver Co..,

417 U.S. 506, 511 (1974); Prima Paint Corp. v. Flood

& Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967)

(“As the ‘saving clause’ in § 2 indicates, the purpose of

Congress in 1925 was to make arbitration agreements as

enforceable as other contracts... .”). Thus, state law

may be applied to invalidate an arbitration provision only

*The same is true of separate agreements to arbitrate. See 9

U.S.C. § 2.

7

if the law “arose to govern issues concerning the validity,

revocability, and enforceability of contracts generally.”

Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).

It follows that if a state attempts to place arbitration

provisions upon an unequal “footing” by requiring them

to meet criteria that other kinds of contractual provisions

need not meet, the additional requirements conflict with

Section 2. See Southland Corp., 465 U.S. at 16 nll

(holding that a California statute that made arbitration

agreements, but not other kinds of agreements, unenforce-

able was preempted by Section 2); Perry, 482 U.S. at 492

n.9 (finding that Section 2 preempted another California

statute because “a state-law principle [of enforceability]

that takes its meaning precisely from the fact that a con-

tract to arbitrate is at issue does not comport with... .

§ 2”). As this Court recently held in Terminix:

What States may not do is decide that a contract is

fair enough to enforce all its basic terms (price, serv-

ice, credit), but not fair enough to enforce its arbi-

tration clause. The [Federal Arbitration] Act makes

any such state policy unlawful, for that kind of policy

would place arbitration clauses on an unequal “foot-

ing,” directly contrary to the Act’s language and

Congress’ intent.

115 S. Ct. at 843.

B. Ment. Code Ann. § 27-5-114(4) Conditions The En-

forceability Of Arbitration Provisions Upon Stand-

ards That Other Kinds Of Contractual Provisions

Need Not Meet, And Is Therefore Preempted By

Section 2 Of The Federal Arbitration Act

Mont. Code Ann. § 27-5-114(4) (“the Montana notice

statute”) makes arbitration clauses unenforceable unless

the contracts in which they appear contain a notice,

“typed in underlined capital letters on the first page of

the contract,” that the contract is subject to arbitration.*

5 Although the statute states that failure to comply with this

requirement means that the contract “may” not be subject to arbi-

8

However, Montana law does not make the enforcement

of other contractual provisions contingent upon the exist-

ence of such a notice. Consequently, the Montana notice

statute does exactly what Section 2 forbids and is accord-

ingly preempted as to all arbitration provisions that Con-

gress has the power to regulate under Section 2.

In Louisiana Public Service Commission v. FCC, 476

U.S. 355, 369 (1986), the Court held that “[t]he critical

question in any pre-emption analysis is always whether

Congress intended that federal regulation supersede state

law.” ° As discussed above in Part I.A. of the Argument,

Congress clearly did intend Section 2 to supersede all state

laws that create special obstacles to the enforcement of

arbitration provisions. See Perry, 482 U.S. at 489 (“Sec-

tion 2 . . . embodies a clear federal policy of requiring

arbitration unless the agreement to arbitrate is not part

of a contract evidencing interstate commerce or is revoc-

able ‘upon such grounds as exist at law or in equity for

the revocation of any contract’).

The Montana Supreme Court held that Section 2 does

not preempt the Montana notice statute because the Mon-

tana statute “would not undermine the goals and policies

of the FAA... .” Pet. App. 4a, 27a. But obviously the

Montana notice statute does undermine what this Court

has identified as the “basic purpose” of the Federal Arbi-

tration Act: “to put arbitration provisions on ‘the same

footing’ as a contract’s other terms.” Terminix, 115 S. Ct.

at 840 (quoting Scherk, 417 U.S. at 511). The Montana

Supreme Court’s analysis, and its resulting conclusion that

the Montana notice statute is not preempted, simply ig-

nores (or at best misreads) both the plain language of

Section 2 and the prior decisions of this Court.

tration, the Montana Supreme Court has construed the statute to

mean that the contract shall not be subject to arbitration. See

Pet. App. 27a (“Because the agreement of the parties in this case

did not comply with Montana’s statutory notice requirement, it

is not subject to arbitration, according to the law of Montana”).

6 Citing Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).

9

II. PERMITTING STATES TO IMPOSE SPECIAL OB-

STACLES TO THE ENFORCEMENT OF ARBITRA-

TION AGREEMENTS WOULD INCREASE THE

COST OF INSURANCE AND FORCE INSURERS

TO COMPLY WITH REQUIREMENTS THAT NO

SINGLE STATE WOULD HAVE IMPOSED

If states like Montana were allowed to flout Section 2

by placing special restrictions on the enforceability of

arbit tion agreements, life insurance companies could not

enforce arbitration provisions in their policies unless they

customized those policies to conform with the require-

ments of individual states, thus raising the cost of insur-

ance. Moreover, because it is often difficult to predict

which state’s law might be applied to a particular policy,

the only way for life insurance companies to guarantee

that arbitration provisions in their policies will be en-

forced would be to create policies that complied with the

special arbitration requirements of multiple states. How-

ever, it frequently would be difficult, if not impossible, to

create such policies.

One way in which ACLI’s members keep down the

costs of their policies is to use nationally standardized

forms. If it were necessary, in order to enforce a policy’s

arbitration provisions, that the policy be customized to

comply with the special arbitration requirements of each

state, such customizing would raise the costs of providing

insurance and ultimately result in increased costs for

policyholders. “[I]n insurance, as in other areas, custom-

ization invariably costs more than standardization.” R.

Keeton & A. Widiss, Insurance Law § 2.8, at 119 (1988).

Moreover, it is not always possible to predict which

state’s law will be applied when determining the enforce-

ability of a particular policy’s arbitration provisions. For

example, even when a contract expressly specifies which

state’s law is to govern its enforcement, Montana will not

apply that law if to do so would “violate{] Montana’s

public policy or [would be] against good morals.” Pet.

App. 17a (quoting Youngblood v. American States Ins.

10

Co., 866 P.2d 203, 205 (Mont. 1993)). Other states

will also disregard the parties’ choice of law on the basis

of such considerations.’ Obviously, it is difficult to predict

when amorphous concepts like “public policy” or “good

morals” might be used to invalidate the parties’ choice of

law.

Thus, if states were allowed to impose special restric-

tions on the enforcement of arbitration provisions, the

only way to guarantee the enforcement of those provisions

would be to issue policies that met the special arbitration

requirements of all the states whose law might be applied.

That could involve meeting the requirements of many

states, because policyholders often move to another state

after purchasing life insurance policies, it is obviously diffi-

cult to predict where they might move, and a court might

apply the law of the new state in determining whether a

policy’s arbitration provision was enforceable. See Re-

statement (Second) of Conflict of Laws § 192 cmt. d

(1988) (if the policyholder changes the state of his domi-

cile after applying for a life insurance policy, a court

might, in some cases, apply the law of the new state to is-

sues arising under the policy). As a result, insurers would

be required to contend with a cumbersome set of require-

7 The Restatement (Second) of Conflict of Laws, which is fol-

lowed by many states, provides that courts may refuse to enforce

the parties’ choice of law if, among other things, applying the law

of the chosen state “would be contrary to a fundamental policy of

a state which has a materially greater interest than the chosen

state in the determination of the particular issue and which...

would be the state of the applicable law in the absence of an

effective choice of law by the parties.” Restatement (Second) of

Conflicts of Law § 187(2)(b) (1988). See, eg., Cherry, Bekaert

& Holland v. Brown, 582 So.2d 502, 507-508 (Ala. 1991) (refusing

to enforce parties’ choice of law); National Glass, Ine. v. J.C.

Penney Properties, Inc., 650 A.2d 246, 248-251 (Md. 1994) (same) ;

DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-681 (Tex.

1990) (refusing to enforce parties’ choice of law, but noting that

the Restatement “offers little guidance” in determining what con-

stitutes the “fundamental” policy of a state), cert. denied, 498

U.S. 1048 (1991).

11

ments, in the aggregate, that no individual state would

have imposed. Furthermore, because those requirements

often differ, and may even be inconsistent with each other,

it would frequently be difficult, if not impossible, to com-

ply with all of the potentially applicable requirements.*

CONCLUSION

For all of the foregoing reasons, the judgment below

should be reversed.

Respectfully submitted,

Of Counsel: Patricia A. DUNN

PHILLIP E. STANO STEPHEN J. GOODMAN

AMERICAN COUNCIL OF Counsel of Record

LIFE INSURANCE JONES, Day, REAVIs & PoGuE

1001 Pennsylvania Ave.,N.W. 1450G Street, N.W.

Washington, D.C. 20004 Washington, D.C. 20005

(202) 624-2183 (202) 879-3939

Counsel for the Amicus

February 1996

* An example of how states’ requirements may differ is the vari-

ation in notice requirements for arbitration provisions. Montana

and South Carolina require special notice of such provisions to

be placed on the first page of contracts containing such provisions,

while Missouri requires such notice to be placed adjacent to the

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

1995) ; Mo. Ann. Rev. Stat. § 435.460 (Vernon 1992). In addition,

Rhode Island requires that arbitration provisions in insurance

contracts must be placed immediately above the parties’ signatures,

whereas Iowa requires (in the case of tort claims) that the agree-

ment to arbitrate must be in a separate writing executed by the

parties. R.I. Gen. Laws § 10-3-2 (Supp. 1995); Iowa Code Ann.

§ 679A.1(2)(c) (West 1987). In order to comply with all of

these statutes, a contract would have to contain special notices of

arbitration both at the beginning and the end of the contract, and

would have to contain arbitration agreements both in the body

of the contract and in a separate writing. Compliance with these

varying requirements would be cumbersome and inefficient, to say

the least, and would involve surmounting a set of obstacles that

none of these states would individually have imposed.