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

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No. 95-559

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

DOCTOR’S ASSOCIATES, INC.

and NICK LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Writ of Certiorari to

the Supreme Court of Montana

BRIEF FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION AND THE SECURITIES

INDUSTRY ASSOCIATION, AS AMICI CURIAE

SUPPORTING PETITIONERS

JOHN F. VERHEY MATTHEW R. SHAY

Counsel of Record THE INTERNATIONAL

Lewis G. RUDNICK FRANCHISE ASSOCIATION

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

203 North LaSalle Street Suite 900

Suite 1800 Washi n, D.C. 20005

Chicago, Illinois 60601 (202) 5000

(312) 368-4000 WILLIAM J. FITZPATRICK

Counsel for Amici Curiae SECURITIES INDUSTRY

ASSOCIATION

120 Broadwa

New York, 10271

(212) 608-1500

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

TABLE OF CONTENTS

MONTANA’S STATUTORY NOTICE PROVI-

SION FOR ARBITRATION IS PREEMPTED

BY THE FEDERAL ARBITRATION ACT ....

A. The Montana Supreme Court’s Decision

Prior Decisions Of This Court

And Other Lower Federal Courts ....

B. The Montana Supreme Court’s Decision

Distorts This Court’s Reasoning In Volt .

Il.

THE MONTANA SUPREME COURT’S DE-

CISION REPRESENTS UNSOUND PUBLIC

PUEME cccccccccccconcccsccccccccovecees

TABLE OF AUTHORITIES

CASES

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

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

Ce. GR CRORE .. cccccctcvecccossénenunnnee

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

115 S. Ct. 834 (1995) .............. 4, 10, 11,

American Physicians Service Group, Inc. v. Port

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

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

Ape. Bl, TGR) <ccccccccpccccocuveuseapmecs

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

MEER CBD E). x0 000 cankécnteanssh eee

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

th Cir. ITD) .. cocccccccccccvcnaseesepess

David L. Threlkeld & Co., Inc. v. M

schaft, Ltd. (London), 923 F.2d 245 (2d Cir,),

cert. dismissed, 501 U.S. 1267 (1991).......

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

IOGT CIBDE) 2.0 occccccecenseceseunaneenee

Mastrobuono v. Shearson Lehman Hutton, Inc.,

115 &. O%. BBRB GED occ ccccsssacesensuees

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., 473 U.S. 614 (1985) .........cceeeeees

Perry v. Thomas, 482 U.S. 483 (1987) ... 6, 9, 10,

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

(1st Cir. 1989), cert. denied, 495 U.S. 956 (19990) .

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

US. SD (ORF) oc ccccscevcsssscueunaneeueee

PAGE

15, 16

12, 14

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

SORSSCSOseeecerecoccccccocccoeccees 6, 9, 10, 12, 14

Volt Information Sciences, Inc. v. Board of Trustees

of Leland Stanford Junior University, 489 U.S.

tT Siete eecedeceeedocee 6, 7, 8, 9, 10, 12, 13

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

EE EEE LE LESS ll

STATUTES

LEE 6, 9, 10

No. 95-559

In THE

Supreme Court of the United States

OcToBerR Term, 1995

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 FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION AND THE SECURITIES

INDUSTRY ASSOCIATION, AS AMICI CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE AMICI CURIAE

The International Franchise Association (“IF A”), founded

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

world representing the interests of franchising. IFA has

more than 750 franchisor members and, since first inviting

franchisees to join in 1993, has already attracted more

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

center for current and prospective franchisors and fran-

—2—

chisees, state and federal government agencies, and the

public. IFA also represents the interests of franchising

before legislatures, the courts, and the public. The Asso-

ciation has been instrumental in promoting balanced leg-

islation to regulate franchising practices in the United

States.

A franchise is a contractual relationship in which the

franchisor, the owner of a business concept and associated

trademarks or service marks, authorizes a franchisee to

conduct a business that is identified by the franchisor’s

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

tem. The contractual relationship is defined by a franchise

or license agreement, which sets forth the respective

obligations of the franchisor and franchisee. To promote

uniformity in their franchise networks, franchisors utilize

standardized agreements. However, such “form” agree-

ments are frequently subject to negotiation. An increas-

ing number of franchising companies, in an effort to

resolve disputes with their franchisees in the least costly,

least disruptive and most expeditious manner possible, in-

clude in their franchise agreements an undertaking to re-

solve disputes by arbitration, binding on both the fran-

chisor and the franchisee. Such agreements obligate the

parties to arbitrate disputes, usually under the auspices

of the American Arbitration Association or similar organ-

ization, and often in the home state of the franchisor. In

the past year alone, almost 400 arbitrations involving fran-

chise relationships were initiated with the American Ar-

bitration Association.

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

profit corporation formed under the laws of Delaware.

SIA is the securities industry trade association represent-

ing the interests of more than 700 securities firms in

North America, which collectively account for 90% of se-

curities firms’ revenue in the United States.

The relationship between SIA members and their cus-

tomers, particularly those who borrow money from mem-

ber , or who trade in options, is sometimes governed by

a written agreement which contains a clause requiring the

arbitration of disputes. Most of these agreements also con-

tain a choice-of-law provision. SIA has a deep concern that

these agreements be enforced in accordance with the terms

of the Federal Arbitration Act (“FAA”). SIA has been

a successful plaintiff against the Commonwealth of Massa-

chusetts and the State of Florida in cases to enforce arbi-

tration clauses despite restrictive state laws or regula-

tions. Consistent enforcement of arbitration agreements

is important to both SIA members and their customers

since inconsistent enforcement of the FAA will lead to

uncertainty and confusion for both parties to the contract.

Historically, many state courts and state legislatures

have looked with disfavor on arbitration, especially when

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

arbitrate. Whether this reluctance to honor agreements

to arbitrate stemmed from the belief that arbitration did

not afford the same procedural or substantive safeguards

as litigation, or whether it grew out of the states’ desire

to preserve in-state forums for their citizens, the end

result was that arbitration agreements were routinely dis-

regarded. With the passage of the FAA and rigorous en-

forcement of arbitration agreements under the FAA, espe-

cially by federal courts, most state courts and legislatures

grudgingly accepted arbitration as a legitimate means of

resolving disputes. In the past several years, however,

a backlash has occurred. A number of states, including

Montana and most recently California, have enacted stat-

utes that, under the guise of ensuring that arbitration

Supreme Court is but the latest example, have held other-

ments for unfavorable treatment.

Amici are vitally concerned about this case because per-

mitting the most recent decision of the Montana Supreme

Court to stand, particularly after this Court’s summary

vacatur and remand of the case for consideration in light

of Allied-Bruce Terminix Companies, Inc. v. Dobson, 115

S. Ct. 834 (1995), will encourage other state courts and

legislatures to undertake similar steps to undercut the en-

the strong federal policy favoring arbitration. Legislatures

will continue to enact statutes that impose burdensome

conditions on the formation or performance of arbitration

agreements. And courts will continue to invoke these stat-

utes to overturn arbitration agreements either by disre-

garding parties’ choice-of-law clauses or, what is worse,

by applying these clauses ostensibly to honor the parties’

“intention” to forgo arbitration in the face of an unam-

biguous agreement to arbitrate. As a result, franchisors

and securities firms that include arbitration provisions in

their form agreements will either be forced to tailor their

agreements to the laws of 50 different states or forgo the

many advantages inherent in the arbitration process. Even

now, the inconsistent treatment of arbitration agreements

caused by state notice provisions introduces great uncer-

tainty into the enforcement of those agreements and

spawns satellite litigation over the enforceability of the

notice provisions thai threatens to erase the benefits of

economy and efficiency that arbitration was originally in-

tended to produce.

Pursuant to Rule 37.3 of the Rules of this Court, IFA

and SIA, respectfully submit this brief as amici curiae

in support of petitioners. Because many IFA members,

both franchisors and franchisees, and many securities

firms, utilize arbitration as a means of resolving disputes,

IFA and SIA have a substantial interest in the outcome

of this case and are able to provide an additional and

broader prospective on the issues presented. IFA and SIA

believe this brief will assist the Court in analyzing and

resolving these issues. The parties have consented to the

filing of this brief, and their written consents have been

filed with the Clerk of Court.

SUMMARY OF ARGUMENT

In the decision below, the Montana Supreme Court per-

sists in underestimating the preemptive reach of Section

2 of the FAA by holding that Montana’s notice require-

ment for arbitration agreements does not violate the Su-

premacy Clause. In doing so, the Montana Supreme Court

continues to disregard two controlling decisions of this

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

Perry v. Thomas, 482 U.S. 483 (1987), both of which held

that states may not restrict the enforceability of agree-

ments to arbitrate except on “grounds as exist at law or

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

Since Montana’s notice requirement is directed exclusively

at arbitration provisions and not at any other contractual

terms, it is preempted by the FAA. In addition to conflict-

ing with Southland and Perry, the Montana Supreme

Court’s decision also runs directly contrary to the deci-

sions of the three federal courts of appeals that have ad-

dressed the issue, all of which held that state arbitration

notice requirements are preempted by the FAA. Instead

of following these decisions, the court below in its initial

opinion relied on two intermediate state courts in Indiana

and Texas that upheld similar notice provisions. Reversal

of the decision below is necessary to signal to state courts

and legislatures that, for purposes of preemption under

the FAA, burdening the enforceability of arbitration agree-

ments with a notice provision is no different than declaring

those agreements unenforceable per se.

By maintaining that Montana’s notice provision does not

undermine the goals and policies of the FAA because it

ensures consensual arbitration, the Montana Supreme

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

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

Stanford Junior University, 489 U.S. 468 (1989). The deci-

= ™

sion in Volt was premised on the notion that the primary

purpose of the FAA is to enforce privately negotiated

agreements to arbitrate, even where those agreements

allow for arbitration to be stayed pending the resolution

of related litigation. Because the parties here chose the

AAA’s Commercial Arbitration Rules and Connecticut

law, not Montana law, to govern their arbitration agree-

ment, Volt requires that their choice be upheld and not,

as the Montana Supreme Court reasoned, that another

state’s law be substituted that would invalidate the parties’

agreement to arbitrate. In addition, although in Volt this

Court observed that the FAA does not entirely preempt

state arbitration laws, and in particular state laws govern-

ing the procedures under which arbitration is conducted,

the Montana Supreme Court perverted this holding into

a license to enforce a state arbitration law that went to

the very substance of the right to arbitrate, prohibiting

arbitration from occurring altogether. The Montana Su-

preme Court’s conclusion that the FAA mandates the en-

forcement only of those arbitration agreements that are

entered into “knowingly,” which Montana’s notice provi-

sion is purportedly designed to promote, flies in the face

of the FAA’s insistence that arbitration agreements be

placed on the same footing as other agreements. Because

of the purported solicitude for arbitration of the major-

ity of the Montana Supreme Court, when in fact its deci-

sion and the statute it enforced are based on hostility to

arbitration agreements, it is crucial that this Court re-

verse the Montana Supreme Court’s most recent decision

in this case to discourage similar attempts by state courts

and legislatures to undermine the FAA on the pretext

of furthering its goals and policies.

The Montana Supreme Court’s decisions below are also

premised on judicial and legislative hostility to arbitra-

tion, which has long been discredited by this Court in

view of the many advantages that arbitration affords over

traditional litigation. These advantages include speed,

economy, adjudicative expertise and the capacity to pre-

serve long-term relationships once the dispute is resolved.

To enforce statutes like Montana’s either would deprive

the parties to a franchise relationship of these advantages

altogether, or would seriously impede the use of arbitra-

tion in the franchise relationship by forcing franchisors

to tailor their contract documents to meet the arbitration

requirements of 50 different states. Moreover, the Montana

Supreme Court’s reasoning is based on unsupported and

unfounded assumptions regarding the negotiability of arbi-

tration agreements and the role of forum-selection clauses

in those agreements.

ARGUMENT

MONTANA’S STATUTORY NOTICE PROVISION FOR

ARBITRATION IS PREEMPTED BY THE FEDERAL

ARBITRATION ACT

In maintaining that the FAA does not preempt Montana’s

statute requiring that a contract containing an arbitration

agreement include a conspicuous notice to that effect on

the face of the contract, the Montana Supreme Court con-

tinues to disregard two of this Court’s controlling prece-

dents and a substantial number of lower federal court de-

cisions that flatly refute the Montana Supreme Court’s

holding. In so doing, the Montana Supreme Court has

severely restricted the preemptive reach of the FAA.

Moreover, to justify its hostility to arbitration, the Montana

Supreme Court persists in distorting this Court’s holding

in Volt Information Sciences, Inc. v. Board of Trustees

of Leland Stanford Junior University, 489 U.S. 468 (1989),

into a license to disregard arbitration agreements on the

pretext of honoring the parties’ intentions.

A. The Montana Supreme Court’s Decision Disregards Prior

Decisions Of This Court And Other Lower Federal Courts

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

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

Montana notice provision is not preempted by Section 2

of the FAA because the notice requirement does not un-

dermine the goals and policies of the FAA. App. A at

7a. In so doing, however, the Montana Supreme Court

continues to disregard this Court’s controlling decisions

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

Perry v. Thomas, 482 U.S. 483 (1987). In holding that a

provision of the California Franchise Investment Law re-

quiring judicial consideration of claims brought under the

statute was preempted by the FAA, this Court in South-

land declared that state law may limit the enforceability

of agreements to arbitrate only upon “ ‘grounds as exist

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

465 U.S. at 11 (quoting 9 U.S.C. § 2) (emphasis added).

Likewise, in Perry, this Court struck down a provision

of the California Labor Code, which precluded arbitration

of wage collection claims, on the ground that the Califor-

nia law did not “{arise] to govern issues concerning the

validity, revocability, and enforceability of contracts gen-

erally,” but rather “(took] its meaning precisely from the

fact that a contract to arbitrate is at issue.” 482 U.S. at

492 n. 9.

The Montana statute at issue here is preempted by the

FAA because it clearly “takes its meaning precisely from

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

does not require that any other contractual provision be

—10—

flagged with a conspicuous notice provision on the first

page of the contract. Arbitration agreements alone are

burdened with this requirement in Montana—burdened,

in that the absence of such a notice renders the agree-

ment to arbitrate unenforceable. Under this Court’s deci-

sions in Southland and Perry, therefore, the Montana

statute is preempted by the FAA. -—

Indeed, in a recent pronouncement on the FAA, this

Court reaffirmed that, under its holdings in Southland and

Perry, the FAA preempts state laws that seek to invali-

date arbitration agreements. See Allied-Bruce Terminix

Companies, Inc. v. Dobson, 115 S. Ct. 834 (1995); accord

Mastrobuono v. Shearson Lehman Hutton, Inc., 115 S.

Ct. 1212, 1215-16 (1995). In Terminix, this Court decisively

rejected a request to overrule Southland and permit state

courts to apply their own anti-arbitration laws regardless

of whether interstate commerce was involved, holding that

Southland was well-established law and that, consequent-

ly, Alabama could not apply its statute barring pre-dispute

arbitration agreements to invalidate an arbitration pro-

vision. Terminix, 115 S. Ct. at 838-39. After observing

that the “basic purpose of the Federal Arbitration Act

is to overcome courts’ refusal to enforce agreements to

arbitrate” and to place those agreements “ ‘upon the same

footing as other contracts,’ ” id. at 838 (quoting Volt, 489

U.S. at 474), Justice Breyer, writing for this Court, con-

cluded that while “States may regulate contracts, includ-

ing arbitration clauses, under general contract law prin-

ciples and they may invalidate an arbitration clause ‘upon

such grounds as exist at law or in equity for the revoca-

tion of any contract’[,] . . . [wJhat States may not do is

decide that a contract is fair enough to enforce all its basic

terms (price, service, credit), but not fair enough to en-

force its arbitration clause,” Terminix, 115 S. Ct. at 843

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

= =

Montana has done precisely what this Court and numer-

ous other federal and state courts over the past decade

have held that it cannot do: It has decided that contracts

are fair enough to enforce all their basic terms, even ab-

sent a special notice designed to bring the existence of

those terms to the parties’ attention, but that arbitration

agreements are not fair enough to enforce without such

a notice. Since this Court in Terminix made clear that

state laws that place arbitration agreements “on an un-

equal footing” by definition undermine the goals and poli-

cies of the FAA, Terminiz, 115 S. Ct. at 843, the Montana

Supreme Court’s refusal on remand to the principles

reaffirmed in Terminix requires out r

The Montana Supreme Court’s holding also disregards

the contrary decisions from the three federal courts of

appeals that have addressed the issue, all of which have

invalidated arbitration notice provisions similar to the

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

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

(2d Cir.), cert. dismissed, 501 U.S. 1267 (1991) (invalidating

a Vermont statute that required agreements to arbitrate

to be “prominently displayed” in contracts and signed by

the parties); Securities Indus. Ass’n v. Connolly, 883 F.2d

1114, 1120 (1st Cir. 1989), cert. denied, 495 U.S. 956 (1990)

(invalidating a state regulation requiring full written dis-

closure of “the legal effect of the pre-dispute arbitration

contract or clause’’); Webb v. R. Rowland & Co., 800 F.2d

803, 806-07 (8th Cir. 1986) (invalidating a requirement that

contracts highlight the existence of arbitration clauses in

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

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

a requirement that arbitration agreements bear an attor-

ney’s acknowledgement that all parties have been advised

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

atin

Court has joined a growing number of state courts that

have reinvigorated the former hostility to arbitration by

concluding that arbitration notice provisions do not run

afoul of the FAA. See, e.g., American Physicians Service

Group, Inc. v. Port Lavaca Clinic Assoc., 843 S.W.2d 675,

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

(Tex. Apr. 21, 1998); Albright v. Edward D. Jones & Co.,

571 N.E.2d 1329, 1332-38 (Ind. Ct. App. 1991), cert. denied,

113 S. Ct. 61 (1992). In addition, a number of states have

similar laws that single out arbitration agreements for un-

favorable treatment by regulating the placement and ac-

knowledgment of arbitration agreements in certain types

of contracts.2 Courts in those states could well be en-

couraged by the Montana Supreme Court’s decision below

to uphold similar anti-arbitration statutes against pre-

emption attacks. Thus, there is a compelling need for this

Court to reverse the decision of the Montana Supreme

Court in order to signal to state courts and legislatures

that, for purposes of preemption under the FAA, statu-

tory notice provisions for arbitration are no less hostile

to arbitration than were the statutes at issue in Southland

and Perry.

B. The Montana Supreme Court’s Decision Distorts This

Court’s Reasoning In Volt

In sustaining the Montana statute against a preemption

attack, the Montana Supreme Court persists in its dis-

tortion of this Court’s reasoning in Volt in several re-

spects. First, the decision below completely disregards

the parties’ arbitration agreement. As this Court observed

in Volt, the primary purpose of the FAA is to enforce

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

statutes).

=}—

“privately negotiated arbitration agreements”; thus, par-

ties to an arbitration agreement should be “‘at liberty to

choose the terms under which they will arbitrate.” 489

U.S. at 472. Here, the parties chose the AAA’s Commer-

ee ant camedian tow, ast Montene

, to govern arbitration agreement. Since neither

Connecticut law nor the AAA’s rules nor the FAA condi-

the existence of a notice provision, Volt cannot support

ae ree nee ty Oe Caren Syyseme- Cont. On

Second, the Montana Supreme Court’s unduly narrow

interpretation of the scope of federal preemption of state

FAA” because Congress never intended to preempt the

entire field of aryitration and because the FAA does not

require parties to arbitrate when they have not agreed

to do so. App. B at 26a. The Montana Supreme Court re-

affirmed that holding in its most recent opinion, finding

in its earlier opinion. However, this Court’s statement in

Volt that the FAA does not entirely preempt state arbi-

tration law was made in reference to a California pro-

cedural statute that merely had the effect of delaying an

arbitration until after litigation of related claims had

——

occurred—and under circumstances where the parties had

chosen that law to govern their arbitration. Thus, the

California law affected only the timing of arbitration, and

did not purport to prohibit arbitratx n altogether. Here,

however, the Montana Supreme Court has

Volt to permit a state to ban arbitration in its entirety,

the existence of an arbitration agreement

enforceable under the laws of the parties’ own choosing.

Even if the parties had chosen Montana law to govern

their franchise agreement, the Montana Supreme Court’s

holding would still be indefensible, because choice-of-law

clauses, like arbitration agreements generally, must be

construed in light of the federal presumption that resolves

all doubts in favor of arbitrability. See Mastrobuono, 115

S. Ct. at 1218 & n. 8.

Nor does the justification offered by the Montana Su-

preme Court for its holding—that the FAA mandates the

enforcement only of those arbitration agreements that are

“knowingly” entered into—survive scrutiny. Since the

“knowing” requirement applies only to arbitration agree-

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

empted under Southland and Perry. Although Montana

could ban all standard form contracts in an effort to en-

sure that parties with inferior bargaining power “know”

what they are agreeing to, it cannot impose this require-

ment only on arbitration agreements. Behind Montana’s

preoccupation with ensuring that arbitration agreements

are “knowingly” entered into lies considerable legislative

and judicial hostility toward arbitration. Because the Mon-

tana Supreme Court’s purported solicitude for arbitration —

may encourage other state courts or legislatures to em-

ploy similar artifices to turn the FAA on its head, it is

critical that this Court reverse decision below.

in non-negotiated form contracts between parties of un-

equal bargaining power. These anti-arbitration sentiments,

barely concealed in the initial majority opinion of the Mon-

tana Supreme Court, came to the surface in the special

concurring opinion of Justice Trieweiler filed with the in-

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

Montana Supreme Court has since attempted to distance

itself from those sentiments as the basis for its holding,

especially in light of the language in Terminiz “extolling

the virtues of arbitration,” App. A at 7a (citing Terminiz,

115 3. Ct. at 843), its continuing animosity to arbitration

is apparent when it attributes this Court’s recognition of

the benefits of arbitration to partisan “input” from the

AAA. App. A at 7a. There is little question that the Mon-

tana Supreme Court’s holding continues to be motivated

by a distrust of arbitration and the benefits it affords.

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For largely similar reasons, the informality and often

less adversarial nature of arbitration are important be-

cause they enhance the prospect that a franchisor and its

franchisee will be able to honor their contractual obliga-

tions while the arbitration is pending and put aside their

differences once the arbitration has concluded, keeping

their relationship intact. Franchise relationships are unique

in today’s business world because they typically run for

a period of ten to twenty years. Since disputes are more

likely to arise in a relationship of that length, arbitration

offers a method for resolving those disputes while preserv-

ing the long-term nature of the relationship. Moreover,

because arbitration is more flexible with regard to sched-

uling times and places of hearings, it tends to be less

disruptive of the day-to-day operations of franchisors and

franchisees alike, an important consideration in light of

the fact that many franchisors and franchisees are small

businesses with limited personnel. Finally, arbitration also

offers the parties to a franchise relationship the option

of having an individual experienced in franchising adjudi-

cate their dispute. Because franchising is a unique form

of business organization and is subject to a wide array

of registration, disclosure and relationship laws, franchis-

ing expertise is often a sought-after qualification of ar-

bitrators chosen to decide franchise disputes.

Moreover, there is nothing inherent in the arbitration

process itself that favors franchisors over franchisees. Con-

trary to the anti-arbitration sentiments expressed in the

initial special concurring opinion of Justice Trieweiler,

App. B at 28a-32a, franchisees are often sophisticated,

multi-unit operators who, on their own behalf or through

counsel, negotiate the terms of their franchise agreements,

including whether and under what circumstances arbitra-

tion of disputes will occur. Although arbitration agree-

forum where it can resolve them as cost-effectively as pos-

sible. It is certainly no more burdensome for an individual

franchisee to arbitrate once in the franchisor’s home state

dispute subject to arbitration is instead resolved in a

judicial forum but also when parties, encouraged by anti-

arbitration decisions like those of the Montana Supreme

Court in this case, initiate satellite litigation such as this

to challenge the enforceability of agreements to arbitrate.

Even if the franchisor ultimately succeeds on appeal in

enforcing the agreement to arbitrate, significant judicial

resources will often have been spent on both the trial and

appellate level in reaching that result.

However, these benefits of arbitration will be realized

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

system as a whole, only if state courts and state legisla-

tures are reminded that attempts to undermine the en-

—20—

forceability of agreements to arbitrate, like Montana’s, will

not go unnoticed by this Court. Otherwise, state legisla-

tures will be unleashed to formulate all manner of require-

ments for, and obstacles to, arbitration agreements, and

the sound public policy that underlies the FAA will be

subverted. Although it may seem theoretically possible

for a national franchisor to track such rules and adjust

the arbitration provisions of its contracts to meet their

requirements, in practice this would prove extremely bur-

densome and probably impossible.

Even if national franchisors undertook the burdensome

task of tailoring their contract documents to meet the

varying and often conflicting arbitration laws of 50 differ-

ent states, they would not be assured of having their ar-

bitration agreements enforced, as this case itself demon-

strates. A court—like the Montana Supreme Court in this

case—may simpiy choose to disregard the parties’ choice-

of-law clause out of hostility toward arbitration and apply

a state notice requirement or other state anti-arbitration

law that the parties never expected, much less intended,

would be applied to their relationship. Since a nationwide

franchisor cannot anticipate in what state it might be sued

or what state’s arbitration statute might apply, it has no

effective means of assuring that it can partake of the

benefits of arbitration that Congress sought to promote

by enacting the FAA.

What has been written above concerning franchisors is

equally true for securities firms. Most of SIA’s members

do business in multiple states, some in all states. Firms

use a universal agreement for all customers and expect

them to be enforced equally in all jurisdictions. Montana,

by singling out arbitration clauses for special notices not re-

quired for any other type of contract or clause, has created

wali

costly obstacles to the ability to use universal agreements

in the securities industry while also violating the purpose

and intent of Section 2 of the FAA.

Furthermore, once a franchise agreement or securities

customer agreement containing an arbitration clause is

signed, it cannot be amended to comply with a subse-

quently enacted precondition to the validity and enforce-

ability of the arbitration clause. It is far from clear under

current law that such a legislative enactment would not

be applied to a preexisting contract on the basis that it

changed substantive rights, since a court could construe

a dispute resolution provision as purely procedural in

nature. Thus, the validity of tens of thousands of arbitra-

tion agreements may be made uncertain retroactively by

the enactment of such legislation, resulting in extensive

litigation to determine whether particular state-imposed

requirements for arbitration agreements are preempted

by the FAA. It is far sounder public policy to reiterate

the long-standing and well understood rule that the FAA

preempts any state requirement that segregates arbitra-

tion agreements from other contracts and imposes precon-

ditions to their validity and enforceability that are not

applicable to contracts generally. This Court should defini-

tively and finally close the door to such state efforts to

undermine arbitration agreements governed by the FAA.

—22—

CONCLUSION

IFA and SIA respectfully request that this Court

reverse the decision of the Montana Supreme Court and

remand the case to that court with instructions to enforce

the arbitration clause at issue.

Respectfully submitted,