Amicus Curiae Brief — Buckeye Check Cashing, Inc. v. Cardegna

Supreme Court of the Anited States

S

BUCKEYE CHECK CASHING, INC.,

Petitioner,

Vv.

JOHN A. CARDEGNA and DONNA REUTER,

Respondents.

e =

On Writ Of Certiorari To The

Supreme Court Of Florida

S

BRIEF OF UNIVERSITY OF WISCONSIN

LAW PROFESSORS AS AMICI CURIAE

IN SUPPORT OF RESPONDENTS

°

DavID S. SCHWARTZ

Associate Professor of Law

(Counsel of Record)

JOEL ROGERS

Professor of Law, Political

Science & Sociology

UNIVERSITY OF WISCONSIN

Law SCHOOL

975 Bascom Mall

Madison, WI 53706

(608) 262-8150

(Institutional affiliation listed

for identification purposes only.)

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

i

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ............cccccecccesesssesseseeeseevees iii

INTEREST OF AMICI CURIAE..........ccccccseseseseseeesseeees 1

SUMMARY OF ARGUMENT ...........:cccsecessessessesesesesvees 1

RRA SADT ai dl Re paris Ear ere 3

I. FAAPREEMPTION ISUNCONSTITUTIONAL.. 3

A. Despite Southland’s Assertion to the

Contrary, the FAA is Procedural Regula-

tion that Cannot Constitutionally Control

BIN MMIII sich cicsceesettnsptionnensehadelinthdpniamandans 3

1. The Enforcement of Arbitration Agree-

ments is Fundamentally Procedural ..... 4

2. This Court Has Held Arbitration to be

Procedural in the Context of Pre-

I I soihiinncitniisilnsiduasbiniahiiestinicaiie 5

3. This Court Has Held Arbitration to be

Procedural in the Conflict of Laws

4. Southland’s Statement that the FAA is

‘Substantive Law for Preemption Pur-

poses is Erroneous. ....................:cesseeeeeees 8

B. Congress Lacks the Power to Regulate

State Court Procedures ...............ccccsseeesenees 12

1. Constitutional Structure and Centuries

of Precedent Dispel the Idea of a Gen-

eral Congressional Power to Regulate

State Court Procedures.......................-- 12

2. The Supremacy Clause Imposes Only

Federal Substantive Law, and Not Pro-

cedural Law, on the State Courts ......... 14

ii

TABLE OF CONTENTS - Continued

Page

3. The Commerce Power Does Not Au-

thorize Procedural Regulation of State

ROSSI RATE ETT EE LARS. et LEAR 17

Il. THIS CASE PRESENTS THE PROPER

OCCASION TO OVERRULE SOUTHLAND ... 19

A. Southland Suffers from Constitutional In-

firmities Comparable to Swift v. Tyson....... 19

B. Southland’s Authority Has Been Eroded

by Subsequent Decisions of this Court....... 21

C. Southland’s Unworkable Test for Preemp-

tion Has an Unsettling Effect on the Law

That Outweighs Any Legitimate Reliance

Interests by Private Contracting Parties... 22

D. Southland’s Imposition of a “National Pol-

icy Favoring Arbitration” on the States In-

trudes on the State-Federal Balance by

Preempting Broad Swaths of State Con-

SR i icccestcatitieschniceninitpininsitinigsnnnctindinitinpianiden 24

E. This Court’s “Clear Statement” Rule and

the Doctrine of Constitutional Avoidance

Undermine Any Contention that South-

land Properly Construes the FAA............... 26

I vettrsnneninticincsnetziteaminciaissetimpensinntnnintngiataiinn 28

TABLE OF AUTHORITIES

Page

CASES

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265

UE ce:cohscipcacehioshisiohdinebeisiblangoeibasndaanitcodh the duihsdall 5, 19, 22, 27, 28

Bernhardt v. Polygraphic Co., 350 U.S. 198 (1956)............ 7

Ex parte Bollman, 8 U.S. (4 Cranch) 75 (1807)................ 13

Bradley v. Harris Research, 275 F.3d 884 (9th Cir.

SITU visinichbiesinispstaciinienaniculsaciin enbtaigindeiiishaianiae tedaliniaadctiedmanianmasbiiictani 23

Bronson v. Kinzie, 42 U.S. (1 How.) 311 (1842)................. 12

Brooklyn Savings Bank v. O’Ne.t, 324 U.S. 697

iD vinsiititinscninitsntatinstnhestbainngaieniiaiiictliibesiepsibiipaidinniubaiasicnebnanite 5

Circuit City Stores v. Adams, 532 U.S. 105 (2001)... 6, 20, 21

Cohens v. Virginia, 19 U.S. (6 Wheat) 264 (1821) ............ 15

Dice v. Akron, Canton & Youngstown R. Co., 342

ep ciie SaINE NOI vinnebbioshndnsttviceilticleindspaiainldintlateaiinapihdetpeandienntanisate’ 17

Doctors Associates v. Casarotto, 517 U.S. 681 (1996)....... 22

Doctors Associates v. Hamilton, 150 F.3d 157 (2d

ITED, TIIITTE iehisaouiiidicinciattinatteaibciidabiadineeaitindiitaeaidinadiigntiennminedinneees 23

EEOC v. Waffle House, 534 U.S. 279 (2002)................. 6, 21

Egelhoff v. Egelhoff, 532 S. Ct. 141 (2001)......................2. 26

English v. General Electric Co., 496 U.S. 72 (1990) ......... 27

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)........... 7, 20, 21

Felder v. Casey, 487 U.S. 131 (1988).................cccccceeeeeesees 17

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

I accusteinnbicacinintenienpiidtaintciiniesanslidinatnitnpiniteieatitinbizeti 7, 21

iv

TABLE OF AUTHORITIES -— Continued

Page

Green Tree Fin. Serv. v. Bazzle, 539 U.S. 444 (2003)........ 22

Gregory v. Ashcroft, 501 U.S. 452 (1991)........ 12, 24, 25, 26

Hardware Dealers Mut. Fire Ins. Co. v. Glidden Co.,

tir ef: | ee Cer ra 13

Howlett v. Rose, 496 U.S. 456 (1990) ................ 2, 12, 15, 16

Jinks v. Richland County, 538 U.S. 456 (2009).............. 3,9

Johnson v. Fankell, 520 U.S. 911 (1997)......2, 12, 15, 16, 17

KKW Enterprises v. Gloria Jean’s Gourmet Coffees

Franchising Corp., 184 F.3d 42 (1999)..........-sssses0 23

Landgraf v. USI Film Prods., 511 U.S. 244 (1994)......... 4,5

Mastrobuono v. Shearson Lehman Hutton, Inc., 514

RP CEEy ieee isceocenuniccnctessnninsdebisnpseiiabdabidininaieniiicmstuaies 4,8

Mesa v. California, 489 U.S. 121 (1989) .............. eee 19

Minneapolis & St. L. R. Co. v. Bombolis, 241 U.S.

ORs UR IIEED nirsisssiitcadisinnediicnicniehacnitetdiaiiiiiesindieiadaialibeacipeteeahieadabiaie 14

Mitchell v. Forsyth, 472 U.S. 511 (1985).......... eee eeeeees 16

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

FB, FEO Tc SOG Ca sc gntnticnccscttncincstiinasiativctniniini 5, 7, 21

Moses H. Cone Memorial Hospital v. Mercury

Constr. Corp., 460 U.S. 1 (1983) ............cccccccsceseeeeeseeeeesees 9

New State Ice Co. v. Liebmann, 285 U.S. 262 (1932)........ 25

New York v. United States, 505 U.S. 144 (1992)......... 18, 25

Patterson v. McLean Credit Union, 491 U.S. 164

2 RESETS CER be ra k Ses cate woes ee Pen Res one an Nw 24

v

TABLE OF AUTHORITIES — Continued

Page

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

SE ERP REE SS CS Sr ee 1, 3, 19

Printz v. United States, 521 U.S. 897 (1997).......... 2, 14, 18

Reno v. Condon, 528 U.S. 141 (2000) .............ccccccccececeeeeees 18

Rodriguez de Quijas v. Shearson American Express,

ERTS SP We apanren ante 6, 7, 21

San Diego Bldg. Trades Council v. Garmon, 359

ERA ER 10

Santa Fe Industries v. Green, 430 U.S. 462 (1977)........... 24

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) ............. 6

Solid Waste Agency of Northern Cook County v.

Army Corps of Engineers, 531 U.S. 159 (2001)............. 26

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

Stirlen v. Supercuts, 51 Cal. App. 4th 1519, 60 Cal.

a EEE ATE 24

Sun Oil Co. v. Wortman, 486 U.S. 717 (1988)........... 3, 7,14

Swift v. Tyson, 42 U.S. (16 Pet.) 1 ‘1542)............00..... 20, 21

Tarble’s Case, 80 U.S. (13 Wall.) 397 (1871) ..................... 13

Testa v. Katt, 330 U.S. 386 (1947) ............ccccccccccceceeees 14, 18

Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal. 2002),

aff'd in part, rev'd in part 319 F.3d 1126 (9th Cir.

EG EES SSE AS es 23

United States v. Lopez, 514 U.S. 549 (1996)............. 1, 17, 25

United States v. Morrison, 529 U.S. 598 (2000)... 2, 17, 20, 25

Washington v. W.C. Dawson & Co., 264 U.S. 219

I aslin indi dclanthantubpinatminicneestecaptueeonibeusesaseitinbesessieinsneseene 20

vi

TABLE OF AUTHORITIES — Continued

Page

Wilko v. Swan, 346 U.S. 427 (1953) ..........cccccceeeeeeceeeeeeees 5,6

Wolfe v. North Carolina, 364 U.S. 177 (1960)................... 13

CONSTITUTIONS, STATUTES AND LEGISLATIVE MATERIALS

United States Constitution

EE eS oe tee are Se ENT ON 13

SS ECS er ee aN” MEO AR AE A Ts 13

| PES ae Ree a SA a mere L Man 14

pS ee Oe 18

Employee Retirement Income Security Act, 29

RE LS AGING ate ct HES RSS ik SA: 19

Federal Arbitration Act, 9 U.S.C. § 1, et seq. ............ passim

Fe es Oe ceicatccarcectntincictciitentatininmetaaminis, 20

National Labor Relations Act, § 10, 29 U.S.C. § 160........ 10

Securities Act of 1933, §14, 15 U.S.C. § 77n..............ceeceeee 6

OTHER AUTHORITIES

6A Corbin on Contracts § 1515 (1962) .........cccececcsseseseeereeees 5

William N. Eskridge, Jr., Overruling Statutory

Precedents, 76 Geo. L. Rev. 1361 (1988)..................0000. 20

The Federalist No. 82 (Hamilton) (Rossiter ed.

SET Ca EE Se Se ere ee awe eee 13, 15

Stephen A. Gardbaum, The Nature of Preemption,

SE Se 25

Henry Hart, The Relations Between State and

Federal Law, 54 Colum. L. Rev. 489 (1954).................. 15

vii

TABLE OF AUTHORITIES — Continued

Page

2 J. Kent, Commentaries on American Law (2d ed.

REE ES ae La ee es ee 12

Restatement (Second) of Conflict of Laws § 122 ................- 7

Restatement (Second) of Contracts § 195 ...............ccc..ccc000+ 5

David S. Schwartz, Correcting Federalism Mistakes

in Statutory Interpretation: the Supreme Court

and the Federal Arbitration Act, 67 Law & Con-

eS I ecitciviidiinesiiiasititnatdatadiinintssiindidinmsaneis 28

David S. Schwartz, The Federal Arbitration Act and

the Power of Congress Over State Courts, 83 Ore-

gon L. Rev. 541 (2004) .0...........cccccecceeceeeedereeeees 2, 7, 17, 23

David S. Schwartz, State Judges as Guardians of

Federalism: Resisting the Federal Arbitration

Act’s Encroachment on State Law, 16 Wash. U. J.

SS SSI ee lo 24

1

INTEREST OF AMICI CURIAE

Amici curiae are law professors whose teaching and

scholarship focus on federalism, and in particular, the

preservation of the states’ role as “laboratories of experi-

mentation in social policy.” United States v. Lopez, 514

U.S. 549, 581 (1995) (Kennedy, J., concurring) (quoting

New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932)

(Brandeis, J., dissenting)).' Amici have studied the doc-

trine of Federal Arbitration Act preemption and note with

great concern that it is one of the most sweeping doctrines

of federal preemption in current American law, one that

has made great inroads into state autonomy and policy

experimentation in areas traditionally left to state law.

Moreover, amici are concerned that Southland Corp. v.

Keating, 465 U.S. 1 (1984), which establishes FAA preemp-

tion, was wrongly decided as a matter of statutory inter-

pretation and in fact applies the FAA unconstitutionally as

a Congressional assertion of control over state court

structure, procedure and jurisdiction.

+

SUMMARY OF ARGUMENT

The question before the Court, whether the rule of

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395 (1967), must be applied by a state court, presents at

bottom a question of Federal Arbitration Act preemption

* Letters of consent to the filing of amicus briefs, including this

- ome, have been lodged with the Clerk of the Court pursuant to Rule

37.3. Pursuant to Rule 37.6, counsel for amici state that no counsel for a

party authored this brief in whole or in part, and no person other than

amici or their counsel have made a monetary contribution to the

preparation or submission of this brief.

that depends on the validity of Southland Corp. v. Keating,

465 U.S. 1 (1984).

Although the Justices of this Court have divided

closely on certain issues relating to federalism and Con-

gressional power to control state policymaking, see, e.g.,

United States v. Morrison, 529 U.S. 598 (2000), Printz v.

United States, 521 U.S. 897 (1997), this Court has been

unanimous in reaffirming the centuries-old principle that

states retain sovereignty over the structure, procedure and

jurisdiction of their courts. See Johnson v. Fankell, 520

U.S. 911 (1997); Howlett v. Rose, 496 U.S. 356, 372 (1994).

FAA preemption flies in the face of this principle of

respect for state court procedural autonomy. Notwith-

standing Southland’s conclusory assertion that the FAA is

substantive, the FAA and its rule of enforcement of arbi-

tration agreements is fundamentally procedural: it im-

poses a choice of the forum that will hear the case and an

accompanying procedural regime. Thus, as applied to

cases such as this one — a state law matter heard in state

court — the FAA heedlessly restructures state court proce-

dures and runs roughshod over the state's choices on the

allocation of authority to various tribunals within its own

dispute resolution system.

Although this Court has never had occasion to address

the question head on, the structure of the Constitution and

this Court’s longstanding precedents weigh heavily

against the idea that Congress has the authority to impose

procedural rules on state courts. See David S. Schwartz,

The Federal Arbitration Act and the Power of Congress

Over State Courts, 83 Oregon L. Rev. 541 (2004). But even

if this Court chooses not to reach that question in this

case, it is still clear that Southland erred. Given the FAA’s

3

fundamentally procedural character, Southland violated

_ well-established doctrines of statutory interpretation — the

doctrine of constitutional avoidance and the presumption

against preemption — in holding that the FAA binds state

courts. Because the argument of Petitioner Buckeye Check

Cashing depends on an application of Southland to apply

the Prima Paint rule to state courts, the court below can

be reversed only if Southland is reaffirmed. Amici urge

this Court to take this opportunity to overrule Southland.

¢

ARGUMENT

I. FAAPREEMPTION IS UNCONSTITUTIONAL

A. Despite Southland’s Assertion to the Con-

trary, the FAA is Procedural Regulation

that Cannot Constitutionally Control State

Courts

While the Supremacy Clause obligates state courts to

apply federal substantive law applicable in cases before

them, it is well established that state courts at all times

retain control over their own procedures. (See infra section

B.) This Court has recently observed that “the meaning of

‘substance’ and ‘procedure’ in a particular context is

‘largely determined by the purposes for which the dichot-

omy is drawn.’” Jinks v. Richland County, 538 U.S. 456,

465 (2003) (quoting Sun Oil Co. v. Wortman, 486 U.S. 717,

726 (1988)). Southland decided this question without

reference to such purposes, and its conclusion that the

FAA is substantive law does not withstand scrutiny. From

any angle, the FAA is fundamentally procedural.

4

1. The Enforcement of Arbitration Agree-

ments is Fundamentally Procedural

Substantive law controls “the primary activity of

citizens.” Hanna v. Plumer, 380 U.S. 460, 474 (1965)

(Harlan, J., concurring), and is equated with “rights of

recovery.” Felder v. Casey, 487 U.S. 131, 141, 150 (1988).

Procedural rules, in contrast, do not affect primary activ-

ity, but simply define how and by whom a dispute will be

heard. Thus, this Court has held that changes in proce-

dural rules “instituted after the conduct giving rise to the

suit” will be applied without concerns regarding retroac-

tivity “[blecause rules of procedure regulate secondary

rather than primary conduct(|.)” Landgraf v. USI Film

Prods., 511 U.S. 244, 275 (1994). Likewise, new jurisdic-

tional rules will normally be applied to pending cases

because they “speak to the power of the court rather than

to the rights or obligations of the parties” and “take away

no substantive right but simply change[] the tribunal that

is to hear the case.” Jd. at 274 (internal citations and

quotations omitted).

Although the FAA provides for an apparent “right of

action” to enforce a contract, an arbitration agreement is

simply a contract about procedure. It does not establish

any primary rights or duties, or create a right of recovery,

but rather establishes the rules to be followed in the event

of a dispute. An arbitration agreement affects only “the

allocation of power between alternative tribunals.” See

Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.

52, 60 (1995). Once the court enforces the arbitration

agreement, the consequences are entirely procedural.

Enforcement of an arbitration agreement is the imposition

of “alternative dispute resolution,” which simply “trades

the procedures and opportunity for review of the court-

room for the simplicity, informality, and expedition of

5

arbitration.” Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 630 (1985). An arbitration

agreement is no more “substantive” than a pre-dispute

contract agreeing on the number of depositions to be taken

in a future lawsuit. In retroactivity terms, whether or not

an arbitration agreement is enforced is not substantive

because it “simply changes the tribunal that is to hear the

case.” Landgraf, 511 U.S. at 274; see Mastrobuono, 514

U.S. at 60. Overruling Southland and dispensing with

FAA preemption would not disturb the kind of reliance

interests considered in retroactivity cases: “Primary behavior

is not affected: No rule of conduct is retroactively changed,

but only (perhaps) the forum in which violation is to be

determined and remedied.” Allied-Bruce Terminix Cos. v.

Dobson, 513 U.S. 265, 285 (1995) (Scalia, J., dissenting).

2. This Court Has Held Arbitration to be

Procedural in the Context of Pre-

Dispute Waivers

It is well established that substantive rights and

remedies are not waivable in pre-dispute adhesion con-

tracts. See Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985) (“[iJn the

event the choice-of-forum and choice-of-law clauses oper-

ated in tandem as a prospective waiver of a party’s right to

pursue statutory remedies for antitrust violations, we

would have little hesitation in condemning the agreement

as against public policy”); Brooklyn Savings Bank v.

O’Neil, 324 U.S. 697, 727 (1945) (advance waiver of reme-

dies for wage and hour violations void because it would

“nullify the purposes of the statute); see generally Re-

statement (Second) of Contracts § 195(1) (1981); 6A Corbin

on Contracts § 1515 (1962).

6

At one time this Court applied the same principle to

arbitration agreements, on the theory that compelling

arbitration as a substitute for judicial enforcement ad-

versely affected substantive rights. In Wilko v. Swan, 346

U.S. 427 (1953), the Court rejected a claim by a defendant

brokerage firm to enforce a predispute arbitration agree-

ment against a customer asserting a claim under the

Securities Act of 1933. The Court held that the right to

enforce the Securities Act provisions in court was a non-

waivable “substantial” right pursuant to § 14 of the Act,

which prohibited any contract term “purporting to ...

waive compliance with any provision of this law,” 15

U.S.C. § 77n.

But in Rodriguez de Quijas v. Shearson/American

Express, 490 U.S. 477 (1989), this Court overruled Wilko,

holding that the right to a judicial forum for Securities Act

claims, as against a predispute arbitration agreement, is

not substantive. The antiwaiver language in the Securities

Act should have been “read to relate to substantive provi-

sions of the Act” rather than arbitration. 490 U.S. at 480

(internal quotations omitted) (emphasis added). This

Court specifically rejected Wilko’s determination that

arbitration affected substantive rights, calling the selec-

tion of an arbitral versus a judicial forum merely “proce-

dural.” Jd. at 482. The Court’s recent FAA cases repeatedly

affirm that arbitration agreements are “in effect, a special-

ized kind of forum selection clause,” id. at 482-83 (quoting

Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 (1974);

accord EEOC v. Waffle House, 534 U.S. 279, 295 (2002),

and that a party compelled to arbitrate “does not forgo .. .

substantive rights,” but “only submits to their resolution in

an arbitral, rather than a judicial, forum.” E.g., Circuit City

Stores v. Adams, 532 U.S. 105, 123 (2001) (“by agreeing to

7

arbitrate ... a party does not forego ... substantive

rights”); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

20, 26 (1991) (same); Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 630 (1985) (same).’

3. This Court Has Held Arbitration to be

Procedural in the Conflict of Laws Con-

text

Conflict of laws principles may sometimes require a

state court to apply the substantive law of another state,

but a state court may always apply its own procedural law.

Restatement (Second) of Conflict of Laws § 122. Thus, in

Sun Oil Co. v. Wortman, 486 U.S. 717 (1987), this Court

held that a state could apply its own statute of limitations

to a cause of action governed by the substantive law of a

sister state; the statute of limitations was procedural for

* These holdings vitiate one of Southland’s primary rationales for

imposing FAA § 2 on the states: the purported need to impose a uniform

federal rule to prevent forum shopping. Southland, 465 U.S. at 15.

Forum shopping is a concern only where the parties are able to shop for

favorable substantive rules that are likely to affect the outcome. But

because the enforcement vel non of the arbitration agreement should

not affect the outcome of a case, there is no forum shopping problem —

any more than with any forum selection clause, where the same

substantive law would be applied by the alternate fora.

On similar grounds, it is also clear that arbitration would be

deemed procedural for Erie purposes. Although this Court has had no

occasion to revisit its determination in Bernhardt v. Polygraphic Co.,

350 U.S. 198, 203 (1956), that arbitration is “outcome determinative,”

the holding and rationale of Rodriguez effectively overrule Bernhardt

on this point. Erie analysis is supposed to be guided by the “twin aims”

of discouraging forum shopping and avoiding unfairness in the admini-

stration of justice, neither of which are an issue if arbitration provides a

fair forum that creates no predictable advantage to one side. See

Schwartz, Power of Congress, supra, 83 Ore. L. Rev. at 607-09.

8

choice-of-law purposes, and therefore a matter of state

sovereignty. Id. at 726, 727.

In Mastrobuono v. Sheason Lehman Hutton, 514 U:S.

52 (1995), this Court was asked to determine whether a

choice-of-law clause adopting “the laws of the state of New

York” was intended to incorporate a state law rule barring

arbitrators from awarding punitive damages. The Court

held the agreement to be ambiguous on this point, in large

part because choice of law provisions are naturally read to

include only substantive law: “In other words, the provi-

sion might include only New York’s substantive rights and

obligations, and not the State’s allocation of power be-

tween alternative tribunals.” Jd. at 60. By placing the

question of the state’s “allocation of power between” courts

and arbitrators on the other side of the line from “substan-

tive rights and obligations,” Mastrobuono plainly holds

that arbitration is not substantive law for conflict-of-laws

purposes.

4. Southland’s Statement that the FAA is

Substantive Law for Preemption Pur-

poses is Erroneous

Southland’s assertion that the FAA is substantive law

is contradicted by the basic understanding of the distinc-

tion between substantive and procedural law, as well as by

this Court’s more recent decisions holding arbitration to be

procedural for pre-dispute waiver and conflict-of-laws

purposes. Can it be said that preemption and the Suprem-

acy Clause are a different “context” for purposes of a

substance/procedure line? Even if the answer to that

question is “yes,” Southland errs by holding arbitration

and the FAA to be substantive for preemption purposes.

9

In the Supremacy context, “the purposes for which the

[substance-procedure] dichotomy is drawn,” Jinks, 538

U.S. at 465, must be to balance the federalism interest

between Congress’s power to govern the people of the

several states under its enumerated powers and the states’

interest in maintaining sovereignty over their courts.

Analysis of the substance-procedure distinction for Su-

premacy purposes should consider whether the federal

statute restructures or modifies neutral rules of state

judicial administration without the presence of a substan- ~

tive impact on primary rights. Looking at the state sover-

eignty stakes, the effect of the FAA as a procedural

restructuring of state courts is readily apparent. With FAA

preemption, state law cases between non-diverse parties —

cases that would be decided entirely within the state court

system, such as the instant case — must be reallocated to

the alternative dispute resolution forum, notwithstanding

any contrary state policy. One set of procedures — arbitra-

tion procedures - is thereby substituted for state-

mandated procedures. Although most states have arbitra-

tion enforcement statutes, many of these create exceptions

allowing certain categories of cases to remain in court.

Thus, the FAA should be viewed as procedural for Suprem-

acy Clause purposes because its primary effect, applied to

the states, is to restructure state judicial systems by overrid-

ing state decisions about how to allocate disputes among

alternative fora within the state dispute resolution system.

Two objections could be raised to the argument that

arbitration of a would-be state court case is part of the

state’s dispute resolution system. First, it can be argued

that the FAA federalizes all arbitration law. Moses H. Cone

Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 20

(1983) (dicta). Where the FAA applies, this argument

10

suggests, arbitration is an adjunct federal forum with

exclusive jurisdiction, rather than an alternative state

forum. In this light, the FAA’s intrusion on state sovereignty

is essentially the same as that of the National Labor Rela-

tions Board, a non-judicial federal instrumentality which has

exclusive original jurisdiction over certain labor law mat-

ters, displacing state courts. See San Diego Bldg. Trades

Council v. Garmon, 359 U.S. 236, 241-42 (1959) (holding

that National Labor Relations Board has preemptive pri-

mary jurisdiction over federal labor matters); National Labor

Relations Act § 10, 29 U.S.C. § 160 (2000) (same).

But this argument fails. While arbitration may be a

federal adjunct in those cases where arbitration is com-

pelled by a federal court, FAA preemption means that

state courts must compel arbitration, even where no

federal jurisdiction is present. Moreover, exclusive federal

jurisdiction results from an assertion of federal subject

matter jurisdiction, which the FAA does not create. See

Southland, 465 U.S. at 15 n.9. A law cannot deprive state

courts of jurisdiction while at the same time expecting

state courts to apply it.’ A

The second objection is that arbitration is “private”:

the FAA does not restructure state courts, it could be

argued, but rather bars a class of cases from state court

and sends them into a third world of adjudication, one that

* Where federal courts have exclusive jurisdiction, a state court

must simply dismiss the case — the state court’s involvement ends. With

arbitration, under the FAA and state analogues, a court normally stays

the litigation but retains jurisdiction as the parties arbitrate. Often the

winner in arbitration wil] return to court to ask for the award to be

confirmed as a judgment; sometimes the loser will seek to have the

award set aside on one of the limited grounds for judicial review.

11

is independent of both the state and federal systems. But

this objection likewise fails. To begin with, the creation of

a right of action — whether enforced in arbitration or court

— means opening the door of the state’s dispute resolution

system. Moreover, most of the “law” of arbitration — and

certainly the doctrine of FAA preemption — arises only in

the context of disputed arbitration agreements. Where

parties engage in truly private ordering to resolve their

disputes, they can reach a private agreement to arbitrate

(pre-dispute or not), adhere to that agreement without

contesting it in court, and submit voluntarily to the

arbitrator’s decision. But the FAA and state arbitration -

statutes make that process part of the public dispute

resolution system for any dispute where one of the parties

deviates from that purely private model — typically, by

resisting arbitration or asking a court to compel it; by

seeking judicial review of a disputed procedural matter or

of the arbitrator’s award; or by seeking to confirm the

arbitration award as a judgment of the court. Invoking

any aspect of an arbitration statute crosses a significant

line from pure private ordering into a zone of public

dispute resolution. Even where the parties submit to a

pre-dispute arbitration agreement without litigating any

enforcement issues, the background law of enforcement —

and the prospect of state coercion or enforcement — make

that agreement part of the state system. Only if an arbi-

tration were purely voluntary at every stage — regardless

of background state arbitration law — could it be seriously

contended that arbitration was not part of the state

dispute resolution system.

12

B. Congress Lacks the Power to Regulate

State Court Procedures

1. Constitutional Structure and Centuries

of Precedent Dispel the Idea of a Gen-

eral Congressional Power to Regulate

State Court Procedures

Questions of procedure “belong[] to the discretion of

every government, consulting its own interest and conven-

ience.” 2 J. Kent, Commentaries on American Law 462-63

(2d ed. 1832). A state’s authority over the structure and

procedure of its own court system is a fundamental attrib-

ute of state sovereignty. “Through the structure of its

government, and the character of those who exercise

government authority, a State defines itself as a sover-

eign.” Gregory v. Ashcroft, 501 U.S. 452, 460 (1990).

Procedural questions fundamentally concern the allocation

of the state’s decisionmaking power to courts. This alloca-

tion question — “deciding who decides” — is the most basic

question of Constitution-making, and therefore goes to the

very heart of government sovereignty. How procedural

systems are structured also determines the nature of

justice that is delivered. For these reasons, this Court has

repeatedly treated as axiomatic the notion that states are

sovereign over the structure, jurisdiction and procedure of

their court systems. As this Court unanimously declared

in Johnson v. Fankell, 520 U.S. 911 (1997), “We have made

it quite clear that it is a matter for each state to decide

how to structure its judicial system.” Jd. at 923 n.13. Over

a century earlier, the Court likewise stated, “Undoubtedly,

a state may regulate at pleasure the modes of proceeding

in its courts.” Bronson v. Kinzie, 42 U.S. (1 How.) 311, 315

(1842); accord Howlett v. Rose, 496 U.S. 356, 372 (1990)

(“the states have great latitude to establish the structure

13

and jurisdiction of their own courts”); Wolfe v. North

Carolina, 364 U.S. 177, 195 (1960) (“Without any doubt it

rests with each State to prescribe the jurisdiction of its

appellate courts, the mode and time of invoking that

jurisdiction, and the rules of practice to be applied in its

exercise”); Hardware Dealers Mut. Fire Ins. Co. v. Glidden

Co., 284 U.S. 151 (1931) (“the procedure by which rights

may be enforced and wrongs remedied is particularly a

subject of state regulation and control”); Turble’s Case, 80

U.S. (13 Wall.) 397, 407 (1871) (“How [state and federal

governments] respective laws shall be enacted; how they

shall be carried into execution; and in what tribunals, or

by what officers ... are matters subject to their own

control, and in the regulation of which neither can inter-

fere with the other”) (emphasis added).

The Constitution nowhere grants Congress any general

power to regulate the judiciaries of the several states. This

absence is striking, in light of the framers’ twin assump-

tions that state courts would play a central role in han-

dling not only interstate judicial business arising under

state law, but also (pending creation of lower federal

courts) a significant quantity of federal judicial business.

See The Federalist No. 82, at 492-95 (Hamilton) (Rossiter

ed. 1961). Where the Constitution grants Congress general

authority to regulate a court system, the Constitution

speaks of a power to “constitute” or “ordain and establish”

“Tribunals” or “Courts” that are “inferior” to the Supreme

Court. U.S. Const. Art. I, § 8, cl. 9; U.S. Const. Art. ITI, § 1.

These are plainly federal courts. According to Chief Justice

Marshall, “state courts are not, in any sense of the word,

inferior courts ... because they emanate from a different

authority, and are the creatures of a distinct government.”

Ex parte Bollman, 8 U.S. (4 Cranch) 75, 97 (1807); see,

14

e.g., Minneapolis & St. L. R. Co. v. Bombolis, 241 U.S. 211,

222 (1916) (Supremacy Clause requirement that state

courts hear federal cases “in no sense implied . . . that for

the purpose of enforcing the right the state court was to be

treated as a Federal Court deriving its authority not from

the State creating it, but from the United States”).

2. The Supremacy Clause Imposes Only

Federal Substantive Law, and Not Pro-

cedural Law, on the State Courts

The Supremacy Clause’ obligates state judges to apply

federal substantive law applicable to disputes in state

court, see Testa v. Katt, 330 U.S. 386 (1947), but nothing in

* The Full Faith and Credit Clause, U.S. Const. Art. IV, § 1, allows

Congress limited authority to regulate procedural questions respecting

the effect of the judgments of one state’s court in another, as well as

rules governing the choice of law in state courts. See, e.g., Sun Oil Co. v.

Wortman, 486 U.S. 717, 729 (1987). However, this specific constitutional

mandate involves coordination of states’ authority vis a vis each other,

rather than between the federal and state sovereignties, and is a far cry

from a general power over state court procedures.

* The Supremacy Clause provides:

This Constitution, and the Laws of the United States which

shall be made in Pursuance thereof; and all treaties made,

or which shal] be made, under the Authority of the United

States, shall be the supreme Law of the Land; and the

Judges in every state shall be bound thereby, any Thing in

the constitution or Laws of any State to the Contrary not-

withstanding.

U.S. Const. Art. VI, cl. 2 (emphasis added). It has never seriously been

argued that the Supremacy Clause is itself an affirmative grant of

legislative authority to Congress to control state courts; rather, any

federal statute binding on state courts must be duly enacted according

to one of Congress's enumerated powers. See, e.g., Printz v. United

States, 521 U.S. 897, 925 (1997).

15

this obligation implies any diminution of state sovereignty

over how those courts are constituted or what procedures

they will follow. On the contrary, the framers recognized

that the power of state courts to apply federal law follows

from their pre-existing jurisdiction. Thus, Hamilton

argued that state courts will necessarily have “a concur-

rent jurisdiction in all cases arising under the laws of the

Union where it is not expressly prohibited,” precisely

because “(t)he judiciary power of every government”

includes the power to apply the substantive law of any

sovereign that may be applicable to a dispute before it.

The Federalist No. 82, at 492 (Hamilton); see Cohens v.

Virginia, 19 U.S. (6 Wheat) 264, 415 (1821) (per Marshall,

C.J.) (Supreme Court review of federal law decisions in

state court was needed precisely because federal questions

were otherwise “confided ... to the state courts, however

they may be constituted”) (emphasis added).

The modern Supreme Court has repeatedly reaffirmed

“the general rule, ‘bottomed deeply in belief in the impor-

tance of state control of state judicial procedure, ... that

federal law takes the state courts as it finds them.”

Howlett v. Rose, 496 U.S. 356, 372 (1990) (quoting Henry

Hart, The Relations Between State and Federal Law, 54

Colum. L. Rev. 489, 508 (1954)); accord Johnson v. Fankell,

520 U.S. 911, 919 (1997). This Court has recognized that

Testa’s “requirement that a state court of competent

jurisdiction treat federal law as the law of the land does

not necessarily include within it a requirement that the

State create a court competent to hear the case in which

the federal claim is presented.” Howlett, 496 U.S. at 372.

Indeed, Testa is a continuation of a long-standing line of

cases which take pains to point out that in imposing

federal substantive law on state courts via the Supremacy

16

Clause, Congress “had not attempted ‘to enlarge or regu-

late the jurisdiction of state courts or to control or affect

their modes of procedure|.]” Howlett, 496 U.S. at 373

(quoting Mondou v. New York, N.H. & Hart. R. Co., 223

US. 1, 56 (1912)).

Even where a significant federal right may be lost due

to neutral state procedural rules, this Court has reaf-

firmed the procedural autonomy of state courts. In John-

son v. Fankell, the Idaho courts had applied state

appellate procedure to deny the defendant state officials

an interlocutory appeal from the trial court’s denial of

summary judgment on their qualified immunity defense.

Under federal law, in contrast, a district court order

denying a qualified immunity defense prior to final judg-

ment — whether on a 12(b)(6) motion to dismiss or motion

for summary judgment - is immediately appealable on an

interlocutory basis. Mitchell v. Forsyth, 472 U.S. 511

(1985). Thus, under Mitchell, a valid qualified immunity

defense carries in tow the important procedural right not

to have to submit to the burden of pretrial litigation,

particularly discovery processes. The Johnson defendants

argued that the right to interlocutory appeal was bound up

with their substantive federal defense of qualified immu-

nity, and that the Idaho rule barring interlocutory appeal

was therefore preempted because it interfered with their

federal right to be free from burdensome pretrial litigation

— an interest very similar to that asserted by a party

seeking to compel arbitration.

This Court unanimously rejected that argument. The

Court reasoned that the “normal presumption against pre-

emption” was “buttressed” by the compelling federalism

interest in allowing states to control their own judicial

procedures; the Idaho courts’ dismissal of the interlocutory

17

appeal “rested squarely on a neutral state Rule regarding

the administration of the state courts.” 520 U.S. at 918.

“Principles [that] are fundamental to a system of federal-

ism” outweighed the defendant’s argument that their

federal rights would justify “requirling] a State to under-

take something as fundamental as restructuring the

operation of its courts.” Jd. at 922. Thus, as Johnson v.

Fankell makes clear, federal supremacy of substantive law

stops short of permitting Congress to override neutral

rules of state procedure or judicial ad.ninistration.°

3. The Commerce Power Does Not Author-

ize Procedural Regulation of State Courts

Assuming arguendo that state court litigation comes

within one of the definitions of “interstate commerce” —

which is open to debate, see United States v. Morrison, 529

U.S. 598 (2000); United States v. Lopez, 514 U.S. 549

(1995) — that does nothing to undermine this Court's

longstanding recognition of the states’ sovereignty over

their own court procedures. In Johnson v. Fankell, there

was no question that section 1983 claims were within

Congress’s enumerated powers; nevertheless, the Court

held that Congress’s power over substance did not extend

to a power over state court procedure.

* In a handful of cases, this Court has recognized a limited

exception — the so-called “reverse-Erie” doctrine — in which Congress

may influence some procedural incidents of federal rights heard in state

courts by preempting non-neutral state procedures that unduly

discriminate against substantive federal rights. See Felder v. Casey, 487

U.S. 131, 138 (1988) (striking down Wisconsin statute imposing special

notice requirement on federal civil rights plaintiffs); Dice v. Akron,

Canton & Youngstown R. Co., 342 U.S. 359 (1952); see Schwartz, Power

of Congress, supra, 83 Ore. L. Rev. at 581-88.

18

Moreover, this Court’s holdings in New York v. United

States, 505 U.S. 144 (1992) and Printz v. United States,

521 U.S. 897 (1997), should foreclose the notion that

Congress can directly regulate state court structure,

procedure and jurisdiction. The Testa line of cases is quite

consistent with the principle underlying Printz and New

York, that federal supremacy means the power of Congress

to regulate the people directly, but not the power to regu-

late the people indirectly by regulating state governments.

See New York, 505 U.S. at 164-65; Printz, 521 U.S. at 920.

A Congressional directive to change a state court proce-

dure is not simply a command to apply existing state

judicial resources to enforce a federal right, but a directive

to state courts to regulate litigants in a particular way.

Codes of procedure either come directly from state legisla-

tures, or else from courts in a quasi-legislative, rulemak-

ing capacity, or from state constitutions. Likewise, the

creation of a court and the definition of its jurisdiction are

in the first instance legislative or constitutional acts,

rather judicial acts. To assert control over procedure or

jurisdiction, Congress would have to “commandeer” the

state legislature or its constitutional process. Congres-

sional control over state procedure thus seems to be the

very sort of commandeering condemned in Printz and New

York. Federalism principles, whether located in the Tenth

Amendment or elsewhere, see New York, 505 U.S. at 156,

160; Printz, 521 U.S. at 518; Reno v. Condon, 528 U.S. 141,

147 (2000), protect the states’ sovereignty over their

governmental processes from such commandeering.’

" Congress does have the power to displace state court jurisdiction

entirely: by creating substantive federal rights, preempting state law

and giving federal courts exclusive jurisdiction, as it has done under

(Continued on following page)

19

Il. THIS CASE PRESENTS THE PROPER OCCA-

SION TO OVERRULE SOUTHLAND

Although, strangely, Petitioner’s brief cites Southland

only once and never even mentions preemption, Peti-

tioner’s argument squarely depends on Southland and the

doctrine of FAA preemption. Without Southland, there

could be no conceivable basis for arguing that the Prima

Paint rule — a federal rule allocating decisionmaking

authority between federal courts and arbitrators when

fraud is asserted as a defense to an arbitration agreement

— applies in state court. Therefore, Southland’s constitu-

tionally doubtful interpretation of the FAA is directly

implicated in this case.

A. Southland Suffers from Constitutional In-

firmities Comparable to Swift v. Tyson

Special circumstances warrant overruling Southland.

See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265,

284 (1995) (Scalia, J., dissenting) (“proper application of

ERISA, 29 U.S.C. § 1144(a). But any suggestion that Congress’s power

to enact a completely preemptive regulatory scheme carries the “lesser

included” power of dictating state court procedures suffers from a

fundamental flaw. While the purported power to regulate state proce-

dures may represent a lesser intrusion on state autonomy than

complete preemption of a field, it is not a “lesser included” power,

because it is not “included.” The fact that Congress possesses the

nuclear bomb of preemption-plus-exclusive-jurisdiction does not imply

that it also possesses a small commando team with “surgical strike”

capability. This “lesser included” argument is also a close cousin to the

constitutionally dubious theory of “protective jurisdiction,” which holds

that Congress can give jurisdiction to federal courts over state law

claims where Congress could, but has not, preempted state law with

substantive federal regulation. This Court has declined to embrace that

theory. See Mesa v. California, 489 U.S. 121, 137 (1989).

20

stare decisis does not prevent correction of the mistake” of

Southland). Justice Brandeis wrote that stare decisis “is

not an inexorable command. The instances in which the

court has disregarded its admonition are many.” Washing-

ton v. W.C. Dawson & Co., 264 U.S. 219, 238 (1924)

(Brandeis, J., dissenting). Fourteen years later, a majority

of the Court joined Justice Brandeis, in Erie R. Co. v.

Tompkins, 304 U.S. 64 (1938), to overrule a 96-year-old

statutory interpretation precedent, Swift v. Tyson, 42 U.S.

(16 Pet.) 1 (1842). Erie held that the judicial interpretation

given to section 34 of the 1789 Judiciary Act by Swift — not

the statute itself —- was unconstitutional because it allowed

the federal courts to make law on subjects outside the

legislative power of Congress.

Southland is not a garden variety error in statutory

interpretation, where the Court can rely on Congress to

clear up a disagreement over statutory intent.” Like Swift,

Southland is a major federalism error that attributes

to Congress an intention to intrude on state autonomy

to a degree that pushes the FAA beyond the limits of

* “Notwithstanding the rule fof statutory stare decisis], the

Supreme Court has overruled or materially modified statutory prece-

dents more than eighty times” between 1961 and 1988. William N.

Eskridge, Jr., Overruling Statutory Precedents, 76 Geo. L. Rev. 1361,

1427-39 (1988).

* It seems problematic to rely on Congress to correct the Court’s

erroneous statutory interpretation, when the Court errs by attributing

too much power to Congress. But see Circuit City Stores v. Adams, 532

U.S. at 122 (suggesting it is incumbent upon Congress, not the Court, to

revisit Southland). Such a suggestion runs counter to this Court's

reaffirmation of its role as watchman on the boundaries of Congres-

sional power. See Morrison, 529 U.S. at 617 n.7. Moreover, even if

Congress overrules Southland’s statutory interpretation, it cannot undo

Southland’s implied constitutional interpretation that Congress has the

power to regulate state court procedures.

21

Congressional power. Although Southland’s FAA is nar-

rower in scope than the general federal law considered in

Erie, its effect on the states goes deeper: federal common

law under Swift was not applicable in state court, and

state statutes could in effect overrule federal common law

decisions. See Erie, 304 U.S. at 71 (quoting Swift, 42 US.

(16 Pet.) at 10) (“positive statutes of the state” are rules of

decision under § 34). But Southland holds that the federal

common law of the FAA binds state courts and nullifies

state statutes. Thus, Southland’s reliance on the FAA - a

fundamentally procedural law — as a basis to create a body

of federal judge-made law that preempts state lawmaking

is arguably even more constitutionally problematic than

Swift.

B. Southland’s Authority Has Been Eroded by

Subsequent Decisions of this Court

Southland’s authority has been eroded by several

subsequent decisions of this Court treating the FAA as

procedural. Rodriguez, 490 U.S. at 482-83; accord EEOC v.

Waffle House, 534 U.S. 279, 295 (2002) (arbitration agree-

ment is “effectively a forum selection clause”); Circuit City

Stores v. Adams, 532 U.S. 105, 123 (2001); Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991);

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 628 (1985).

It may also be quite true that no Justice who has sat

on this Court since 1994 even believes Southland was

correctly decided, whereas five Justices who sat on this

Court after 1994 have, at one time or another specifically

stated that Southland was wrongly decided. See South-

land, 465 U.S. at 18-21 (Stevens, J., concurring in part

22

and dissenting in part) (dissenting from proposition that

§ 2 of the FAA preempts state statutes, as opposed to

common-law rules, limiting enforceabilility of arbitration

agreements for certain types of cases); 465 U.S. at 24

(O’Connor, J., joined by Rehnquist, J., dissenting) (South-

land majority wrongly concluded that FAA §2 created

federal substantive rights that must be enforced in state

courts); Allied-Bruce, (O’Connor, J., concurring) (same); id.

at 284-85 (Scalia, J., dissenting) (“Adhering to Southland

entails a permanent, unauthorized eviction of state-court

power to adjudicate a potentially large class of disputes”);

id, at 285 (Thomas, J., joined by Scalia, J., dissenting) (“In

my view, the Federal Arbitration Act does not apply in

state courts”). While this Court declined to overrule

Southland ten years ago in Allied-Bruce, and while the

plurality opinion in Green Tree Fin. Serv. v. Bazzle, 539

U.S. 444 (2003), took FAA preemption as a given, in

neither case did the Court consider Southland’s constitu-

tional infirmities.

C. Southland’s Unworkable Test for Preemp-

tion Has an Unsettling Effect on the Law

That Outweighs Any Legitimate Reliance

Interests by Private Contracting Parties

Southland has been construed by this Court as creat-

ing a rule that state laws that target arbitration agree-

ments for special barriers tc enforcement are preempted,

whereas “generally applicable contract defenses” and rules

that “arose to govern ... contracts generally” may be

applied to arbitration agreements “without contravening

[FAA] § 2.” Doctors Associates v. Casarotto, 517 U.S. 681,

687 (1996) (quoting Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987)). This distinction between “general contract law”

23

and “arbitration-specific” rules, which reflects internal

contradictions in Southland, is incoherent and has defied

consistent application in all but the clearest cases. See

Schwartz, Power of Congress, supra at 554-70.

For instance, some courts have held that laws regulat-

ing non-arbitration matters in certain kinds of contracts —

such as venue provisions in consumer contracts — are not

“genérally applicable” because they do not apply to all

contracts, and are therefore preempted in arbitration

cases. See, e.g., Bradley v. Harris Research, 275 F.3d 884

(9th Cir. 2001) (holding FAA preempts venue provision in

state franchise law); KKW Enterprises v. Gloria Jean’s

Gourmet Coffees Franchising Corp., 184 F.3d 42, 50 (1999)

(same); Doctors Associates v. Hamilton, 150 F.3d 157, 163

(2d Cir. 1998) (same). These holdings threaten to under-

mine broad swaths of state contract regulation. An arbi-

tration agreement could be written to mandate a waiver of

injunctive relief, compensatory damages or attorneys’ fees

‘guaranteed by a state consumer or antidiscrimination

statute: because those statutes are not “general contract

law” they would be preempted and the arbitration agree-

ment “enforced as written” under this spin on Southland’s

“general law” analysis.

Few legitimate expectations are settled by Southland.

On the contrary, it is clear that, in the past several years,

corporate drafters of arbitration agreements have not been

resting on settled expectations, but have been aggressively

experimenting with arbitration agreements to find new

ways to use them to limit their customers’ or employees’

remedies against them. See, eg., Ting v. AT&T, 182

F. Supp. 2d 902, 924-28 (N.D. Cal. 2002), aff’d in part,

rev'd in part 319 F.3d 1126 (9th Cir. 2003) (arbitra-

tion agreement purported to limit liability for wilful

24

misconduct, limit or bar compensatory and punitive

damages, preclude class actions, and impose secrecy

requirements); Stirlen v. Supercuts, 51 Cal. App. 4th 1519,

60 Cal. Rptr. 2d 138, 142-43 (1997) (arbitration agreement

purported to require adhering party to waive tort damages

and attorneys fees, while leaving drafting party free to

pursue claims in court).

D. Southland’s Imposition of a “National Pol-

icy Favoring Arbitration” on the States In-

trudes on the State-Federal Balance by

Preempting Broad Swaths of State Con-

tract Law

To the extent that cases about arbitration agreements

are about something other than procedure, that something

is contracts, an area of traditional state regulation which

federal courts should be “reluctant to federalize.” Patterson

v. McLean Credit Union, 491 U.S. 164, 183 (1989) (quoting

Santa Fe Industries v. Green, 430 U.S. 462, 479 (1977)).

Since Southland was decided in 1984, scores of state laws

have been held preempted or become subject to FAA

preemption; just since 2002, at least fifty different state

laws have been held preempted under Southland. David S.

Schwartz, State Judges as Guardians of Federalism:

Resisting the Federal Arbitration Act’s Encroachment on

State Law, 16 Wash. U. J. L. & Pol. 129, 234 (2004).

The values of federalism, articulated in Gregory v.

Ashcroft, 501 U.S. 452 (1991), provide a basis for evaluat-

ing Southland’s federalism error:

This federalist structure of joint sovereigns pre-

serves to the people numerous advantages. It as-

sures a decentralized government that will be

25

more sensitive to the diverse needs of a hetero-

genous society; it increases opportunity for citi-

zen involvement in democratic processes; it

allows for more innovation and experimentation

in government; and it makes government more

responsive by putting the States in competition

for a mobile citizenry.

Gregory, 501 U.S. at 458; accord United States v. Lopez,

514 U.S. 549, 552 (1995) (citing Gregory as setting forth

the “first principles” of federalism); id. at 581 (Kennedy, J.,

concurring) (quoting New State Ice Co. v. Liebmann, 285

U.S. 262, 311 (1932) (Brandeis, J., dissenting) (arguing

that states can serve as “laboratories for experimentation”

in social policy). Each of these values of federalism as-

sumes a substantial degree of state lawmaking autonomy;

none would have much meaning if the states were merely

“regional offices [Jor administrative agencies of the federal

government.” New York v. United States, 505 U.S. 144, 188

(1992).

Preemption doctrine represents the most significant

and frequently applied limitation on substantive state

autonomy in our constitutional scheme. See Stephen A.

Gardbaum, The Nature of Preemption, 79 Corn. L. Rev.

767, 768 (1994). While federal commerce power still

potentially reaches most subjects of legislation even after

Lopez and United States v. Morrison, 529 U.S. 598 (2000),

preemption doctrine holds that Congress may nullify state

law on any subject within federal legislative jurisdiction.

Therefore,

the true test of federalist principle may lie, not in

the occasional effort to trim Congress’s commerce

power at its edges ... or to protect a state treas-

ury from a private damage action ... but rather

26

in those many statutory cases where courts in-

terpret the mass of technical detail that is the

ordinary diet of the law

— namely, preemption cases. Egelhoff v. Egelhoff, 532 S. Ct.

141, 161 (2001) (Breyer, J., dissenting).

E. This Court’s “Clear Statement” Rule and

the Doctrine of Constitutional Avoidance

Undermine Any Contention that Southland

Properly Construes the FAA

Southland plainly violated two well-established

principles of statutory construction that should operate to

protect federalism and state autonomy in the application

of the FAA. A well-established principle of judicial re-

straint, the doctrine of constitutional avoidance, holds that

“where an otherwise acceptable construction of a statute

would raise serious constitutional problems, the Court will

construe the statute to avoid such problems unless such

construction is plainly contrary to the intent of Congress.”

Solid Waste Agency of Northern Cook County v. Army

Corps of Engineers, 531 U.S. 159, 173 (2001) (internal

quotations omitted) (narrowly construing the federal

Clean Water Act to avoid federalism-based constitutional

question). As shown above, Southiand’s imposition of a

fundamentally procedural federal law on the states raises

serious constitutional objections that are sufficient to

reject the Southland interpretation of the FAA as preemp-

tive substantive law.

Likewise, this Court held in Gregory that “li]f Con-

gress intends to alter the usual constitutional balance

between the States and the Federal Government, it must

make its intention unmistakably clear in the language of

27

the statute.” 501 U.S. at 460 (internal quotations omitted).

This “clear statement” rule has long been applied in

preemption cases: “‘where .. . the field which Congress is

said to have preempted includes areas that have been

traditionally occupied by the States,’ congressional intent

to supersede state laws must be ‘clear and manifest.’”

Allied-Bruce, 513 U.S. at 283 (O’Connor, J., conc:ur: 1g)

(quoting English v. General Electric Co., 496 U.S. 72, «8-79

(1990)). “To the extent that federal statutes are ambigu-

ous, we do not read them to displace state law.” Allied-

Bruce, 513 U.S. at 292 (Thomas, J., dissenting); accord

Southland, 465 U.S. at 18 (Stevens, J., concurring in part

and dissenting in part) (“The exercise of state authority in

a field traditionally occupied by state law will not be

deemed pre-empted by a federal statute unless that was

the clear and manifest purpose of Congress”).

Does the FAA include a “clear statement” of Congres-

sional intent to preempt state law, as would be required

under Gregory? No. It is widely recognized that the “na-

tional policy favoring arbitration” was not the creation of

the FAA as written by Congress, but was instead a judicial

creation — federal common law — that took the FAA as a

point of departure. See Allied-Bruce, 513 U.S. at 283

(O’Connor, J., concurring) (“the Court has abandoned all

pretense of ascertaining congressional intent with respect

to the Federal Arbitration Act, building instead, case by

case, an edifice of its own creation”). As has been clearly

demonstrated in two scholarly dissenting opinions from

this Court, the Southland opinion flouted the FAA's

historical record, which showed that Congress intended

the FAA to be a procedural statute that neither applied in

state court nor preempted state law. See Allied-Bruce, 513

U.S. at 285-95 (Thomas, J., dissenting); Southland, 465

28

U.S. at 23-31 (O’Connor, J., dissenting). But even the

Southland majority opinion conceded the absence of

anything that would meet the “clear statement” test, when

it went outside the FAA's text to rely on a legislative

history that was “not without ambiguities.” 465 U.S. at 12.

There is no question that were Southland being

decided for the first time today, this Court would apply

Solid Waste Agency and Gregory to reject the argument

that the FAA is substantive law binding on the states.

¢

CONCLUSION

Southland’s rule of Federal Arbitration Act preemp-

tion “entails a permanent, unauthorized eviction of state-

court power to adjudicate a potentially large class of

disputes.” Allied Bruce Terminix Cos. v. Dobson, 513 U.S.

265, 284-85 (1995) (Scalia, J., dissenting). It is time that

Southland be overruled. Amici respectfully submit that, on

this basis, this Court affirm the decision below.

Dated: September 23,2005 Respectfully submitted,

DaviD S. SCHWARTZ

(Counsel of Record)

JOEL ROGERS

Amici Curiae University of

Wisconsin Law Professors

” For additional historical evidence supporting the arguments in

the O’Connor and Thomas dissents, see David S. Schwartz, Correcting

Federalism Mistakes in Statutory Interpretation: the Supreme Court

and the Federal Arbitration Act, 67 Law & Contemp. Prob. 5 (2004).

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