Petition for Writ of Certiorari — Doctor's Associates, Inc. v. Casarotto

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Supreme Court, U.S.

, FILED

No. 94- 941518 mar 141995

Uivtiwn vt seek vecnd

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

DoctTor’s ASSOCIATES, INC. and Nick LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

Petition for a Writ of Certiorari to the

Supreme Court of Montana

PETITION FOR A WRIT OF CERTIORARI

MARK R, KRAVITZ *

JEFFREY R. BABBIN

WIGGIN & DANA

One Century Tower

P.O. Box 1832

New Haven, CT 06508-1832

(208) 498-4400

H. BARTOW Fark, III

FARR & TARANTO

2445 M Street, N.W.

Washington, D.C. 20037

(202) 775-0184

* Counsel of Record

WILSON - Eres PRINTING Co., INC. - 789-0096 - WasHiIncTon, D.C. 20001

QUESTION PRESENTED

Whether Section 2 of the Federal Arbitration Act (9

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

“valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation

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

ments to arbitrate, but not other agreements, unenforce-

able unless a specific notice of the arbitration agreement

is placed on the first page of the contract.

(i)

STATEMENTS PURSUANT TO RULES 14.1(b) AND 29.1

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

Corporation are parties to the proceedings in the Montana

Eighth Judicial District Court. They were not parties

to the appeal in the Supreme Court of Montana and are

omitted from the caption in this Court.

Doctor’s Associates, Inc., the only corporate petitioner,

states that it has no parent company and that it has no

subsidiaries (other than wholly-owned subsidiaries).

TABLE OF CONTENTS

Page

QUESTION PRESENTED 2000000.......2....:cccc-e0ees pauanaienatene i

STATEMENTS PURSUANT TO RULES 14.1(b)

SE TN. ‘eeebiainleicanitigetiininnccatinititnaitieratinitiintnienecalinatiiniatnian ii

pF Bg hg iv

I aii 1

ci ce a 1

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

I 2

ES ee i ae 2

i I II scccticiccteicedceenindistnsinininewiantionicowe 3

Si nn 4

REASONS FOR GRANTING THE WRIT..................... 8

I. THE FEDERAL ARBITRATION ACT PRE-

EMPTS MONTANA’S STATUTORY RE-

STRICTIONS ON ENFORCEMENT OF

ARBITRATION AGREEMENTS . 0000... 10

Il. THE DECISION OF THE MONTANA SU-

PREME COURT IS IN DIRECT CONFLICT

WITH DECISIONS OF THE FIRST, SECOND

AND EIGHTH CIRCUITS AND THE HIGH-

EST COURT OF MISSOURI ...........................--- 15

III. THE MONTANA SUPREME COURT'S DE-

CISION RAISES ISSUES OF NATIONAL

TR ee eR 20

EERE SCTE ee 24

(iii)

TABLE OF AUTHORITIES

CASES Page

A.C. Beals Co. v. Rhode Island Hosp., 292 A.2d 865

Chak. GUID .ccunceserecnnencippiciaiaininenpuieiinitiadianiainmsiens 23

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

1329 (Ind. Ct. App. 1991), tranfer denied (Ind.

Feb. 27, 1992), cert. denied, 118 S. Ct. 61

I RRTRESEENSN Re eet Dae le 2 SALON AOC MMM re aE 19

Allied-Bruce Terminix Companies v. Dobson, 115

is Sas Ge Ce ei erisdcnRathcetiitettinetbeainttainneial passim

American Physicians Service Group Inc. v. Port

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

Ct. App. 1992). writ of error denied (Tex. Apr.

RR A as Fe Be SS EFS 19

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

685 S.W.2d 887 (Mo. 1985).................2.....----.---- 9, 18, 20

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

PS Ss WEITER ccs ctsctnsRdccsecdatieenieciaehnceniatitaniaeniniitect 9, 18, 20

David L. Threlkeld & Co. v. Metallgesellschaft Ltd.

(London), 923 F.2d 245 (2d Cir.), cert. dis-

missed, 501 U.S. 1267 (1991) _...... me ke, 9, 15, 16, 20

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

Bf IR Reeer TRIE SORE E Re iad Na ite 13

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

CE, Gk, PNR SID insvinsaticiatniniieinndaaiadiiid 23

Hefele v. Catanzaro, 727 S.W.2d 475 (Mo. Ct. App.

| | EERE Rea SOUL ee ice nant ee eel 23

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

TUUIIIIEY Sisiseishacitnncniinesitabinashcubinniednssatahiaenii ibis ok ani te tical taal 23

Mastrobuono v. Shearson Lehman Hutton, Inc., 68

U.S.L.W. 4195 (U.S. Mar. 6, 1995) ....... 9, 11, 12, 14, 22

McCarney v. Nearing, Staats, Prelogar & Jones,

866 S.W.2d 881 (Mo. Ct. App. 1993) _...........-.... 23 t

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

- Oe gt Be, een te me 9, 11, 20 :

Perry v. Thomas, 482 U.S. 483 (1987) _.......... 9, 11, 12,13 i

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

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

TABLE OF AUTHORITIES—Continued

Page

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

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

SISTENT cis ciceisistnherterscsoeiiesabepaigeciammaninctaiinigt tanita si 9, 16, 17, 19, 20

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

a as SUID viceiccinstiaiicidesinideielniaic lias cae nic, 17

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

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

ees of Leland Stanford Junior University, 489

See SI MINE etch cinsieioenshentisadcnadiaielaieigeetetiicaa 7,9,14

Webb v. R. Rowland & Co., 800 F.2d 803 (8th Cir.

SITE ceinsdaesicshstoccaiieitniehiescibibiipigamnl ndibansdieniiebasbiniiabe cada 9, 17, 18, 20

Woermann Constr. Co. v. Southwestern Bell Tel.

Co., 846 S.W.2d 790 (Mo. Ct. App. 1993) _.......... 23

STATUTES

eT TING TET nites hop ttvicinieniaiaspiesiciieteiiainthdeibanaioaidsiiaiaeabam cto passim

i iaeinieelinthaciiiiaielictbeiwigilinsisaddeniibblidibad eat. 16

REF EEC Harte AON . 1

Conn. Gen. Stat. § 52-408 (1995) ................0...2000000.... 22

Ga. Code Ann. § 9-9-2(c) (Michie Supp. 1994)...... 21, 22

Iowa Code § 679A.1(2) (c) (1995) 200.0000. 21

Mo. Rev. Stat. § 485.460 (1994) ..............0...000............3 17, 21

Mont. Code Ann. § 27-5-114(2) (b) (1993) 0.000000... 22

Mont. Code Ann. § 27-5-114(4) (1993) ............ 2, 3, 6, 10, 13

R.I. Gen. Laws § 10-3-2 (Supp. 1994) ........000000000000002.. 21

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

| MEELIS Saree RE AEN Ue AND oy a TT 21

Tenn. Code Ann. § 29-5-302(a) (Supp. 1994)........ 21

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

BN TED aiiniaiishiinntaicidiieniicshninisaltipdpaunpiiciitaaaitaiie 21

Vt. Stat. Ann. tit. 12, § 5652 (b) (Supp. 1994) ........ 15, 21

MISCELLANEOUS

Henry C. Strickland, The Federal Arbitration

Act’s Interstate Commerce Requirement: What's

Left for State Arbitration Law?, 21 Hofstra L.

Ss: Ce SE cncis iceinnciesteniiainiih tie can ee alee 20, 22

Uniform Arbitration Act (1955), 7 U.L.A. 1 (West

I Ge I SIO ncn o cocctsihacinnccusccckaunianibcbabenimtactauitiets 13

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

No. 94-

DoctTor’s ASSOCIATES, INC. and NicK LOMBARDI,

y Petitioners,

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

Petition for a Writ of Certiorari to the

Supreme Court of Montana

PETITION FOR A WRIT OF CERTIORARI

Doctor’s Associates, Inc. and Nick Lombardi respect-

fully request that a writ of certiorari issue to review the

judgment of the Supreme Court of Montana in this case.

OPINIONS BELOW

The opinion of the Supreme Court of Montana is re-

ported at 886 P.2d 931. It is reprinted in the appendix

to this petition at la-36a. The order of the Montana

Eighth Judicial District Court is not reported. It is re-

printed in the appendix to this petition at 39a-40a.

JURISDICTION

The Supreme Court of Montana entered judgment on

December 15, 1994. The jurisdiction of this Court is

invoked pursuant to 28 U.S.C. § 1257(a).

STATUTORY PROVISIONS INVOLVED

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

§ 2, provides:

Validity, irrevocability, and enforcement of agree-

ments to arbitrate

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusal to perform the whole or any part thereof, or

an agreement in writing to submit to arbitration an

existing controversy arising out of such a contract,

transaction, or refusal, shall be valid, irrevocable,

and enforceable, save upon such grounds as exist at

law or in equity for the revocation of any contract.

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

vides:

Notice that a contract is subject to arbitration pur-

suant to this chapter shall be typed in underlined

capital letters on the first page of the contract; and

unless such notice is displayed thereon, the contract

may not be subject to arbitration.

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

lidity of arbitration agreements under Montana law, is

set out in the appendix to this petition. Pet. App. 41a.

STATEMENT

A. Introduction

This case arises from the refusal of the Montana Su-

preme Court to enforce an agreement by the parties to

arbitrate their disputes. Although the agreement met all

of the requirements of Section 2 of the Federal Arbitra-

tion Act (“FAA”), 9 U.S.C. § 2—which makes arbitra-

tion agreements “valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the

revocation of any contract”—the Montana Supreme

Getic ianaaddieeeeiemn st cieal

Court held that the agreement was unenforceable because

it did not comply with a provision of Montana’s arbitra-

tion act requiring notice that a contract is subject to

arbitration to be typed in underlined capital letters on

the first page of the contract. See Mont. Code Ann.

§ 27-5-114(4) (1993). In so doing, the court rejected

Petitioners’ argument that the Montana statute, which

applies only to agreements to arbitrate and not other

agreements, is preempted by Section 2 of the FAA.

B. Factual Background

Petitioner Doctor’s Associates, Inc. (“DAI”) is the

national and international franchisor of Subway sandwich

shops.’ DAI has sold a total of over 8,500 Subway fran-

chises throughout the United States. Pet. App. 39a; sec

also id. 27a (Weber, J., dissenting). Petitioner Nick

Lombardi is DAI’s development agent in Montana.

On April 25, 1988, respondent Paul Casarotto entered

into a franchise agreement with DAI to open a Subway

shop in Montana. Pet. App. 3a. The franchise agree-

ment was a standard agreement used by DAI with its fran-

chisees. The agreement contained an express arbitration

clause providing that “[a]ny controversy or claim arising

out of or relating to this contract or the breach thereof

shall be settled by Arbitration.” ?

1 During the events in question, DAI was a Connecticut corpo-

ration with its principal place of business in Connecticut. As a

result of a merger in 1991, it is now a Florida corporation.

2 The full text of the arbitration clause (Pet. App. 3a-4a) is as

follows:

Any controversy or claim arising out of or relating to this

contract or the breach thereof shall be settled by Arbitration

in accordance with the Commercial Arbitration Rules of the

American Arbitration Association at a hearing to be held in

Bridgeport, Connecticut and judgment upon an award rendered

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

jurisdiction thereof. The commencement of arbitration pro-

ceedings by an aggrieved party to settle disputes arising out

Another section of the franchise agreement provided

that “[t]his Agreement shall be governed by and con-

strued in accordance with the laws of the State of Con-

necticut.” Pet. App. 5a. Just above the signature block,

the agreement provided as follows: “Each of the parties

hereto acknowledges that he has read and understands this

Agreement and consents to be bound by all of its terms

and conditions.” Appendix to Brief for the Appellants,

Exhibit 1 (attachment A), Casarotto v. Lombardi, 886

P.2d 931 (Mont. 1994).° The agreement was executed

by DAI and Paul Casarotto.

C. Proceedings Below

A dispute subsequently arose between the parties. De-

spite the agreement to arbitrate all disputes, however,

Casarotto brought suit against DAI, Lombardi and others

in the Montana Eighth Judicial District Court, Cascade

County.‘ In the suit, he alleged that he had entered into

of or relating to this contract is a condition precedent to the

commencement of legal action by either party. The cost of

such a proceeding will be borne equally by the parties.

3 Respondent Pau! Casarotto filed an affidavit in the Montana

state district court, averring that “I read the agreement over

before I signed it,” although he goes on to state that “no one ever

told or explained to me that the agreement contained an arbitra-

tion clause or that the agreement was to be interpreted according

to the laws of the State of Connecticut.” Appendix to Brief for

the Appellants, Exhibit 2, {{ 8, Casarotto v. Lombardi, 886 P.2d 931

(Mont. 1994). DAI also provided Casarotto a detailed franchise

offering circular that contained the following notice on the first

page as required by the Federal Trade Commission: “READ ALL

OF YOUR CONTRACT CAREFULLY. BUYING FRANCHISE

[sic] IS A COMPLICATED INVESTMENT. TAKE YOUR TIME

TO DECIDE. IF POSSIBLE, SHOW YOUR CONTRACT AND

THIS INFORMATION TO AN ADVISOR, SUCH AS A LAWYER

OR AN ACCOUNTANT.” Id., Exhibit 8, at 1. The offering cir-

cular also stated that the franchise agreement contained a binding

arbitration agreement. /d., Exhibit 3, at 18a.

* The suit named Paul Casarotto and his wife, Pamela Casarotto,

as plaintiffs. Paul and Pamela Casarotto asserted claims against

the franchise agreement and had opened a store on the

west side of Great Falls in reliance on false representa-

tions of DAI and Lombardi that he would have an exclu-

sive right to open a store in a different part of town when

that location became available. He also alleged that DAI

and Lombardi had interfered with efforts to sell his store.

He asserted state-law claims against DAI and Lombardi

for tortious interference with business relations, breach

of covenant of good faith and fair dealing, fraud, con-

structive fraud, negligent misrepresentation, deceit, and

violations of the Montana Consumer Protection Act. Pet.

App. 3a.

Citing the arbitration provisions in the franchise agree-

ment, DAI and Lombardi moved in the state district court

to dismiss or stay the judicial proceedings against them

pending arbitration. DAI and Lombardi argued that

Section 2 of the FAA required arbitration of the claims,

that the FAA preempted any state law impeding enforce-

ment of a contractual agreement to arbitrate, and that,

in any event, Montana law was inapplicable to the par-

ties’ agreement because the agreement contained the par-

ties’ choice of Connecticut law. DAI also filed a De-

mand for Arbitration with the American Arbitration As-

sociation. Pet. App. 4a, 40a.

The Montana district court granted Petitioners’ motion

to siay the lawsuit as against them pending arbitration.

The court found that the parties’ franchise agreement

involved interstate commerce within the meaning of Sec-

tion 2, that the claims asserted against DAI and Lom-

defendants other than DAI and Lombardi with whom they did not

have an arbitration agreement. Those claims were not the subject

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

serted against DAI and against Lombardi as DAI’s agent, only

Paul Casarotto had entered into the franchise agreement with

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

wife, is asserting claims against DAI and Lombardi. However, the

opinions below referred to the plaintiffs in the plural and treated

both plaintiffs alike.

bardi were encompassed by the agreement’s arbitration

clause, and that DAI had properly demanded arbitration

of those claims. The court ordered that the claims against

DAI and Lombardi “are hereby stayed until the arbitra-

tion has been had in accordance with the terms of the

arbitration agreement.” Pet. App. 39a-40a.

The Montana Supreme Court, sitting en banc (Pet.

App. 37a), reversed the district court in a 4-3 decision.

Although the court did not dispute that the arbitration

agreement met the requirements of federal law,° it none-

theless refused to enforce the agreement on the ground

that it did not comply with particular state notice require-

ments applicable only to arbitration agreements. See

Mont. Code Ann. § 27-5-114(4) (1993). Pet. App. 17a.

That statute provides that a contract must contain a no-

tice that it is subject to arbitration in underlined capital

letters on the first page of the contract, otherwise “the

contract may not be subject to arbitration.” The statute,

by its terms and as interpreted by the Montana Supreme

Court (Pet. App. 9a-10a, 41a), affects the enforceability

of arbitration agreements but not other types of contracts.

The decision of the Montana Supreme Court not to

enforce the parties’ agreement to arbitrate proceeded in

several steps. First, before reaching the question of

whether the FAA preempts state arbitration laws, the

court determined that it would apply Montana, not Con-

necticut, law to the agreement in this case. Although the

parties had explicitly provided in their contract that Con-

necticut law would govern the agreement, the Montana

Supreme Court rejected that selection. Instead, it ruled

that Montana’s arbitration notice statute (which had no

counterpart in Connecticut law) constituted a fundamental

5 The Montana Supreme Ccurt’s opinion did not disturb the trial

court’s rulings that the parties’ agreement to arbitrate involved

interstate commerce, that the claims against DAI and Lombardi

were encompassed by the agreement, and that DAI had filed a de-

mand for arbitration.

public policy that could not be thwarted by the parties’

choice of a different state’s law. According to the court,

the public policy of requiring notice of a contractual

arbitration clause reflected state legislative concerns that

Montanans receive sufficient notice before agreeing to a

dispute resolution procedure—namely, arbitration—that

was potentially inconvenient, expensive and devoid of the

procedural safeguards of a judicial proceeding. Pet. App.

9a-10a.

Having decided to apply Montana law to the parties’

agreement to arbitrate, the Montana Supreme Court next

considered whether Montana’s arbitration notice statute

was preempted by the FAA. The court acknowledged

decisions of this Court holding that Section 2 of the FAA

created federal substantive law binding on the states on

the issue of the enforceability of arbitration agreements.

Pet. App. 10a-12a. The Montana Supreme Court never-

theless interpreted this Court’s decision in Volt Informa-

tion Sciences, Inc. v. Board of Trustees of Leland Stanford

Junior University, 489 U.S. 468 (1989), as retreating

from earlier decisions by allowing courts to apply state

arbitration laws so long as such laws do not “undermine

the goals and policies of the FAA.” Pet. App. 13a-15a.

The Montana court then concluded that a notice statute

ensuring that parties had “knowingly” entered into an

arbitration agreement was consistent with the policies un-

derlying the FAA as construed in Volt. Pet. App. 16a-

17a.°

In deciding that Montana’s arbitration notice statute

was not preempted by Section 2 of the FAA, the Montana

Supreme Court declined to follow contrary decisions from

*The court stated that it was of no significance that Volt had

upheld a court’s application of California law to an arbitration

agreement where the parties had expressly chosen to abide by

California law, whereas in this case the court was applying Mon-

tana law despite the parties’ choice to be bound by Connecticut

law. Pet. App. 15a.

a ea aii I,

three federal courts of appeals and from the Missouri

Supreme Court, al) of which held that state arbitration

notice requirements are preempted by the FAA. The

court found those decisions unpersuasive because they

either preceded Volt or contained little or no reference to

Volt. The court found more persuasive decisions by in-

termediate state courts in Indiana and Texas that cited

Voli in ruling that notice provisions in state arbitration

acts are not preempted by the FAA. Pet. App. 16a.’

REASONS FOR GRANTING THE WRIT

This case presents an important issue regarding the

scope of Section 2 of the Federal Arbitration Act, 9

U.S.C. § 2. Although that section provides that written

arbitration agreements are “valid, irrevocable, and enforce-

able, save upon such grounds as exist at law or in equity

for the revocation of any contract,” the Montana Supreme

Court refused to enforce the agreement here because it

did not comply with a state statute requiring that notice

of an agreement to arbitrate (but no other contractual

term) be typed in underlined capital letters on the first

page of a contract.

This decision merits review for several reasons. To be-

gin with, it rests upon a serious misreading of the language

of Section 2 and of the decisions of this Court constru-

ing that language. Section 2 plainly states that written

arbitration agreements involving interstate commerce are

to be enforced “save upon such grounds as exist . . . for

the revocation of any contract.” 9 U.S.C. §2 (emphasis

added). This Court has repeatedly read that language—

most recently in Allied-Bruce Terminix Companies v.

7 The author of the court’s opinion also wrote separately to ex-

press his “personal observation” that federal appellate judges had

misinterpreted the FAA and thus had unnecessarily and inappropri-

ately deprived individuals of access to a system of justice available

only in the courts. Pet. App. 18a-22a. Three of the seven Justices

on the Montana Supreme Court dissented from the court’s opinion.

Pet. App. 23a-36a.

Dobson, 115 S. Ct. 834 (1995)—to mean that state laws

that condition enforcement of arbitration agreements on

compliance with particular state requirements are pre-

empted unless they apply to enforcement of contract pro-

visions generally, and not just to arbitration provisions.

See id. at 838-39, 843; Perry v. Thomas, 482 U.S. 483,

489-91 & 492 n.9 (1987); Southland Corp. v. Keating,

465 U.S. 1, 10-16 (1984); Moses H. Cone Memorial

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

Contrary to the reasoning of the Montana Supreme Court,

nothing in this Court’s decision in Volt Information Sci-

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

University, 489 U.S. 468 (1989), lessens the preemptive

scope of Section 2. See, e.g., Mastrobuono v. Shearson

Lehman Hutton, Inc., 63 U.S.L.W. 4195, 4197 (USS.

Mar. 6, 1995); Terminix, 115 S. Ct. at 843.

The decision below is also in direct conflict with the

decisions of a number of federal courts of appeals, as

well as that of another state supreme court. Those courts

relied on the language of Section 2 and the decisions of

this Court construing that language to hold that Section

2 preempts state laws conditioning enforcement of arbi-

tration agreements on compliance with notice require-

ments that do not apply to contracts generally. David L.

Threikeld & Co. v. Metallgesellschaft Ltd. (London), 923

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

1267 (1991); Securities Indus. Ass’n v. Connolly, 883

F.2d 1114, 1120 (1st Cir. 1989), cert. denied, 495 US.

956 (1990); Webb v. R. Rowland & Co., 800 F.2d 803,

806-07 (8th Cir. 1986); Collins Radio Co. v. Ex-Cell-O

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

Corp. v. Perryville Feed & Produce, Inc., 685 S.W.2d

837, 839 (Mo. 1985) (en banc).

Finally, the issues presented here have importance be-

yond this case. Eight states in addition to Montana have

enacted arbitration laws with notice requirements com-

parable to Montana’s or other laws intended to direct par-

ticular attention to an arbitration provision in a contract.

See Part III, infra. More generally, numerous states have

placed conditions on agreements to arbitrate that do not

apply to other contracts. Jd. Taken collectively, these

state laws stand as a direct impediment to the national

uniformity contemplated by Section 2, leaving persons

transacting business in multiple states subject to the

vagaries of inconsistent state arbitration laws. Review

by this Court is thus necessary to implement Congress’s

“inten[t] to foreclose state legislative attempts to under-

cut the enforceability of arbitration agreements.” South-

land, 465 U.S. at 16.

I, THE FEDERAL ARBITRATION ACT PREEMPTS

MONTANA’S STATUTORY RESTRICTIONS ON EN-

FORCEMENT OF ARBITRATION AGREEMENTS.

The question presented by this petition is straightfor-

ward. May Montana refuse to enforce an otherwise valid

agreement to arbitrate on the ground that the agreement

does not comply with notice requirements applicable to

arbitration agreements but not to other types of agree-

ments? The language of Section 2, and this Court’s con-

sistent construction of that language, make clear that Mon-

tana may not. Section 2 expressly preempts the applica-

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

Ann. § 27-5-114(4) (1993), to agreements involving in-

terstate commerce.

The language of Section 2 is plain and unequivocal.

With respect to contracts within its ambit—as the contract

here, involving an interstate transaction, concededly is—

it declares written agreements to arbitrate to be “valid,

irrevocable, and enforceable” as a matter of federal law.

9 U.S.C. § 2. To that principle, Section 2 then provides

an explicit, and explicitly limited, exception: agreements

to arbitrate may be deemed unenforceable “upon such

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

any contract.” Jd. (emphasis added). As a matter of

plain language, therefore, Section 2 permits courts to apply

state laws applicable to contracts generally, but not state

laws singling out arbitration agreements for disfavored

treatment.

This reading of Section 2 is confirmed by numerous de-

cisions of this Court. As the Court has recognized, Sec-

tion 2 embodies a “liberal federal policy favoring arbitra-

tion agreements.” Moses H. Cone, 460 U.S. at 24. Its

“basic purpose . . . is to overcome courts’ refusals to

enforce agreements to arbitrate.” Terminix, 115 S. Ct.

at 838; accord Mastrobuono, 63 U S.L.W. at 4196. By

enacting the FAA, Congress “intended courts . .. to

‘place such agreements upon the same footing as other

contracts.’” Jd. (quoting Volt, 489 U.S. at 474) (in-

ternal quotation marks omitted). It thus “withdrew the

power of the states to require a judicial forum for the

resolution of claims which the contracting parties agreed

to resolve by arbitration.” Southland, 465 U.S. at 10;

accord Mastrobuono, 63 U.S.L.W. at 4196.

The Court has acknowledged only two limitations on

the enforceability of arbitration agreements governed by

the FAA: “they must be part of a written maritime con-

tract or a contract ‘evidencing a transaction involving

commerce’ and such clauses may be revoked upon

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

any contract.’” Southland, 465 U.S. at 10-11. The Court

has emphasized that it “see[s] nothing in the Act indicat-

ing that the broad principle of enforceability [in Section

2] is subject to any additional limitations under state law.”

Id. at 11 (emphasis added). As a result, it has said that

state law may be applied only if the law “arose to govern

issues concerning the validity, revocability, and enforce-

ability of contracts generally.” Perry, 482 U.S. at 493

n.9; accord Terminix, 115 S. Ct. at 843. By contrast,

“[{a] state-law principle that takes its meaning precisely

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

not comport with this requirement of § 2. A court may

not, then, in assessing the rights of litigants to enforce

an arbitration agreement, . . . rely on the uniqueness of

an agreement to arbitrate as a basis for a state-law hold-

ing” denying enforcement of the agreement. Perry, 482

U.S. at 493 n.9 (citations omitted); accord Southland,

465 U.S. at 16-17 n.11.

The Court reemphasized these principles this Term.

Reviewing an Alabama law singling out arbitration agree-

ments from other types of agreements for unfavorable

treatment, the Court stated that “States may regulate con-

tracts, including arbitration clauses, under general con-

tract law principles . . . . What 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 enforce its arbitration clause. The Act makes any such

state policy uniawful... .” Terminix, 115 S. Ct. at 843

(emphasis added); see also Mastrobuono, 63 U.S.L.W. at

4197.

Yet Montana has done exactly that which the FAA

prohibits. Montana’s arbitration law makes unenforceable

any agreement to arbitrate that is not accompanied by

the prescribed notice. The statute does not affect the

validity of contracts generally under Montana law; it

limits only the enforcement of arbitration agreements as

part of a state policy disfavoring arbitration. As con-

strued by the Montana Supreme Court, the notice statute

reflects legislative concern about Montana citizens “enter-

ing into an agreement . . . to a procedure as potentially

inconvenient, expensive, and devoid of procedural safe-

guards as the one provided for by the rules of the Ameri-

can Arbitration Association.” Pet. App. 10a.*

It is precisely this type of focused hostility toward arbi-

tration that Congress sought to overcome when it enacted

8 This same anti-arbitration policy caused the Montana Supreme

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

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

necticut law. Although a state may be permitted to apply its con-

flict of law principles to advance a neutral state policy (for ex-

ample, a general policy against enforcement of adhesion contracts),

it may not apply those principles in order to enforce a state law

discriminating against arbitration agreements. See Mastrobuono,

63 U.S.L.W. at 4197.

the FAA. Terminix, 115 S. Ct. at 838.° The Montana

legislature’s attempt to address what it perceived as the

inequities of arbitration conflicts directly with Congress’s

remedial intent in enacting the FAA to eradicate “the

old common-law hostility toward arbitration, and the fail-

ure of state arbitration statutes to mandate enforcement

of arbitration agreements.” Southland, 465 U.S. at 14.

Congress, however, did not disable the states from pro-

tecting against unconscionable agreements or unequal bar-

gaining power. The “savings” clause in Section 2 of the

FAA permits a state to fashion and enforce principles

of contract law that apply to all contracts generally, in-

cluding agreements to arbitrate. But a state may not

enact a law that singles out arbitration agreements for

special treatment out of a concern that those agreements

in particular may be the product of unequal bargaining

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

U.S. 20, 33 (1991); Perry, 482 U.S. at 493 n.9: Saturn

Distribution Corp. v. Williams, 905 F.2d 719, 726 (4th

Cir.), cert. denied, 498 U.S. 983 (1990).”

The Montana Supreme Court appeared to concede that

Southland and Perry, standing alone, would require en-

forcement of the arbitration agreement in this case. Pet.

App. 10a-13a. The court found its way around Southland

*The notice statute, Mont. Code Ann. § 27-5-114(4) (1993), is

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

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

(West 1985 & Supp. 1994), which contains no notice requirement.

Montana has enacted other provisions refusing to enforce arbitra-

tion in certain types of contracts (Pet. App. 41a), which also are

deviations from the uniform act. Montana enacted its arbitration

act in 1985 in the wake of the Court’s decision in Southland that

states cannot altogether ban arbitration agreements that are other-

wise enforceable under Section 2 of the FAA.

1 Montana is also free to enforce its special requirements for

arbitration agreements where an agreement does not involve inter-

state commerce or otherwise falls outside the scope of the FAA.

As discussed earlier in text, the applicability of the FAA to the

agreement in this case is not at issue.

and Perry, however, by interpreting Volt as limiting Sec-

tion 2’s preemption of state law only to those instances in

which the law would “undermine the goals and policies

of the FAA.” Pet. App. 15a. But Volt did no such

thing. The Court in Volt had no occasion even to con-

sider the preemptive force of Section 2, since the Califor-

nia law chosen by the parties in Volt did not render their

arbitration agreement unenforceable. As this Court re-

cently explained, Volt held only that the FAA requires

courts “to enforce privately negotiated agreements to arbi-

trate, like other contracts, in accordance with their terms.”

Volt, 489 U.S. at 478; see Mastrobuono, 63 U.S.L.W. at

4197. In other words, the “FAA’s pro-arbitration policy

does not operate without regard to the wishes of the con-

tracting parties.” Mastrobuono, 63 U.S.L.W. at 4197; see

Volt, 489 U.S. at 478."

Nothing in Volt detracts from the holdings in South-

land and Perry that Section 2, by its plain language,

expressly preempts state laws conditioning enforcement of

arbitration agreements on compliance with requirements

not applicable to any contract. See Mastrobuono, 63

U.S.L.W. at 4197. As the Court reaffirmed in Terminix,

Section 2 must still be read as preempting state laws that

place arbitration agreements on an unequal footing with

other contracts, as such laws are “directly contrary to the

Act’s language and Coneress’s intent.” Terminix, 115

S. Ct. at 843 (emphasis added) .”

11 The situation here, of course, is the opposite of that presented

in Volt; here, the parties expressly agreed to apply Connecticut

law, which contains no special limitations on enforcement of arbi-

tration agreements. Moreover, the Court noted in Volt that the

state law at issue fostered the federal policy favoring arbitra-

tion, by resolving a practical problem arising in multiparty disputes

that the FAA failed to address. Volt, 489 U.S. at 476 n.5. While

the FAA might be silent about the procedural situation presented

in Volt, it speaks in the clearest possible terms to the circum-

stances under which an agreement to arbitrate must be enforced.

Southland, 465 U.S. at 10-11.

127t is true, as the Montana Supreme Court observed, that the

FAA does not “occupy the entire field of arbitration.” Volt, 489

II. THE DECISION OF THE MONTANA SUPREME

COURT IS IN DIRECT CONFLICT WITH DECI-

SIONS OF THE FIRST, SECOND AND EIGHTH

CIRCUITS AND THE HIGHEST COURT OF MIS-

SOURL.

The decision below also directly conflicts with decisions

by three federal courts of appeals and the Supreme Court

of Missouri. Each of those courts has held that Section 2

preempts state laws imposing notice requirements on

agreements to arbitrate.

In David L. Threlkeld & Co. v. Metallgesellschaft Ltd.

(London), 923 F.2d 245, 249-50 (2d Cir.), cert. dis-

missed, 501 U.S. 1267 (1991), the Second Circuit held

that the FAA preempted a Vermont statute, Vt. Stat. Ann.

tit. 12, § 5652(b) (Supp. 1994), prohibiting enforcement

of an agreement to arbitrate unless it was accompanied by

a prominently displayed, signed acknowledgment of arbi-

tration in a form prescribed by the statute.” Although

the court agreed that the form contract in that case did

not comply with the “rigorous standard” for arbitration

agreements set forth in the Vermont statute, the court

held that the statute was preempted by federal law and

ordered the parties to arbitrate their dispute. Jd. at 249.

The court found that the FAA required only that an

agreement to arbitrate be in writing, a “standard obvi-

U.S. at 477. But under Section 2 of the FAA, the parties may be

assured that their agreement to arbitrate will be enforced so long

as the agreement is “[a] written provision in ... a contract

evidencing a transaction involving commerce” that is not revo-

cable “upon such grounds as exist at law or in equity for the

revocation of any contract.” 9 U.S.C. § 2; see Southland, 465 U.S.

at 10-11. Any state law that imposes additional obstacles to en-

forcement of arbitration agreements is preempted under the Su-

premacy Clause. Terminiz, 115 S. Ct. at 838-39, 843.

18 Tn that case, the parties had signed the defendant's standard-

form customer contract that incorporated by reference the rules of

a commodities exchange. Those rules, in turn, provided that any

dispute arising out of any contract shall be referred to arbitration

in accordance with the rules.

eee

ously . . . less rigid than that required by the Vermont

statute.” Jd. at 250.‘ Because the Vermont statute “di-

rectly clash[ed]” with the FAA, and because it “effectively

reincarnate|d] the former judicial hostility towards arbi-

tration,” the court held that it was preempted and that the

arbitration agreement was enforceable. Id.

In Threlkeld, 923 F.2d at 250, the Second Circuit ex-

pressed its agreement with a similar decision by the First

Circuit in Securities Industry Ass'n v. Connolly, 883 F.2d

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

(1990). In Connolly, the court invalidated Massachu-

setts regulations that required securities broker-dealers to

“fully disclos[e] to the customer in writing the legal ef-

fect” of an arbitration clause in a customer account

agreement. Jd. at 1125. The First Circuit ruled that

“(t]he FAA prohibits a state from taking more stringent

action addressed specifically, and limited, to arbitration

contracts. Jd. at 1120. Finding that the regulations “de-

rive their essential meaning from the fact that a contract

to arbitrate is at issue,” the court held that the regulations

were in conflict with the FAA and were therefore pre-

empted. Id. at 1123.”

14 The applicable substantive provision of the FAA in Threlkeld

was Section 202 of the FAA, 9 U.S.C. § 202, rather than Section 2,

because the arbitration agreement involved international commerce.

See Threlkeld, 923 F.2d at 248, 250. Section 202 and Section 2 are

similar in that both require a written agreement involving inter-

national or interstate commerce to create an enforceable agreement

to arbitrate. While Section 2 also requires that the agreement

not be revocable upon such grounds as exist for the revocation

of any contract, that “savings” clause is not at issue in this case,

as the Montana Supreme Court did not (and, obviously, could not),

rely on that clause of Section 2 in applying Montana’s arbitration-

specific notice requirements. See Pet. App. 14a-17a.

15 The author of the Montana Supreme Court’s opinion wrote a

separate concurring opinion that harshly criticized the First Cir-

cuit’s decision in Connolly, taking the First Circuit to task for

failing to consider “the total lack of procedural safeguards in the

arbitration process” and the use of arbitration provisions by na-

The First Circuit acknowledged that Massachusetts

might have an interest in providing for greater disclo-

sures between broker-dealers and their customers and

for better protection of consumers. The court observed

that states are free to act to preserve the integrity of

the securities business, but not in ways that treat arbi-

tration agreements more harshly than other standard-form

consumer contracts. /d. at 1124. Although a state may

prefer to hold arbitration agreements to stricter standards,

the First Circuit, relying on Section 2, concluded that

“[t}hat value judgement was within the congressional

domain-—and only Congress, not the states, may create

excentions to it.” Jd.: cf. Terminix, 115 S. Ct. at 843

(O’Connor J., concurring) (concluding that the Court’s

decision will displace state arbitration laws intended to

protect consumers, including South Carolina’s law (like

Montana’s) that requires notice of arbitration to be promi-

nently placed on first page of contract).

The First Circuit in Connolly noted the similarity of

the Massachusetts regulations to state statutes that the

Eighth Circuit had previously held preempted by the

FAA. See Connolly, 883 F.2d at 1120. In Webb v. R.

Rowland & Co., 800 F.2d 803 (8th Cir. 1986), the

Eighth Circuit enforced the arbitration provisions in a

securities broker’s customer contract even though the con-

tract-—which specified that Missouri law applied—did not

contain a notice of the arbitration provisions in ten-point

capital letters above the signature block, as required by

Missouri law, Mo. Rev. Stat. § 435.460 (1994). The

court cited Southland, 465 U.S. at 10-11, for the principle

that Section 2 of the FAA provides the only limitations

on the enforceability of an arbitration agreement covered

by the Act. Thus, the court held that the Missouri

notice statute could not be applied to bar enforcement

tional companies to “subvert our system of justice.” Pet, App. 20a-

22a.

of the arbitration agreement in the case before it. Webb,

800 F.2d at 806-07.”

Finally, the Missouri Supreme Court itself has refused

to apply the Missouri statute at issue in Webb to invali-

date an arbitration agreement involving interstate com-

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

685 S.W.2d 837 (Mo. 1985) (en banc). The court held

that it could not apply the statute to an arbitration agree-

ment within the coverage of the FAA without violating the

Supremacy Clause, because the statute “seeks to impose

a requirement for contracts to arbitrate which is in addi-

tion to the requirements cf the Federal Arbitration Act.

All that is apparently required under that act is contrac-

tual language and format sufficient for an ordinarily writ-

ten contract.” Jd. at 839 (citation omitted).

These cases, taken together, create a body of law that

is in irreconcilable conflict with the decision of the Mon-

tana Supreme Court.’ While the Montana Supreme Court

thought that Volt had altered the preemptive scope of the

federal act. both the Second Circuit and the First Cir-

cuit found preemption after the decision in Volt. The

court in Connolly, in fact, expressly (and correctly) dis-

16In Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995 (8th

Cir. 1972), the Eighth Circuit also construed Section 2 of the FAA

as “plainly void[ing] all [state] doctrines of invalidity, unenforce-

ability and revocability which apply only to arbitration agree-

ments.” Jd. at 998. The court therefore enforced an arbitration

agreement that specified Texas law as governing, even though the

agreement did not comply with a Texas arbitration law that re-

quired the signed acknowledgment of counsel to the contracting

parties that the agreement to arbitrate was made upon the advice

of counsel.

17The Montana arbitration notice statute is indistinguishable

from the Vermont, Missouri and Texas statutes and Massachusetts

regulations that the First, Second and Eighth Circuits and the

Missouri Supreme Court have ail found preempted by Section 2.

Indeed, a federal court in Montana has held that the Montana notice

statute is preempted by the FAA. Snap-On Tools Corp. v. Vetter,

838 F. Supp. 468, 472 (D. Mont. 1993).

tinguished Volt on the ground that, unlike the Massa-

chusetts regulations, the California regulations applied in

Volt “did not impinge on the validity or enferceability of

the arbitral contract.” Connolly, 883 F.2d at 1119 n.3.

The Montana Supreme Court has thus embraced an in-

terpretation of the FAA based on Volt that is squarely

rejected by the First Circuit."* The clear and direct con-

flict between the decision of the Montana Supreme Court

and the decisions of federal courts of appeals and the

Missouri Supreme Court therefore warrants this Court’s

review.”®

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

27 (4th Cir.), cert. denied, 498 U.S. 983 (1990), the Fourth Cir-

cuit considered and rejected the same argument accepted by the

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

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

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

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

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

not to the contrary.” Jd. While the Virginia statute preempted

in Saturn imposed restrictions on arbitration different from the

notice requirements at issue in this case, the Fourth Circuit’s re-

liance on Webb and Connolly, see Saturn, 905 F.2d at 723-24,

strongly indicates that the Fourth Circuit would differ with the

Montana Supreme Court on the preemption question presented here.

19The Montana Supreme Court recognized that ifs decision was

in conflict with the decisions cited above, but chose instead to

follow the lead of two state intermediate appellate courts that

had read Volt as authority to invalidate arbitration agreements

that did not comply with state arbitration notice statutes. Pet. App.

16a; see American Physicians Service Group Inc. v. Port Lavaca

Clinie Associates, 843 S.W.2d 675, 678 (Tex. Ct. App. 1992) (en

banc) (“Texas Act prevails over the FAA”), wrif of error denied

(Tex. Apr. 21, 1993); .ilbright v. Edward D. Jones & Co., 571

N.E.2d 1329, 1332-33 (Ind. Ct. App. 1991); transfer denied (Ind.

Feb. 27, 1992), cert. denied, 113 S. Ct. 61 (1992). The decision

by the Indiana Court of Appeals, although erroneous in its failure

to find preemption, was inappropriate for review by this Court

because the state court’s judgment was ultimately based on the

independent state ground that the arbitration agreement did not

encompass the plaintiff's claims. See Albright, 571 N.E.2d at

1333-34.

Ill. THE MONTANA SUPREME COURT’S DECISION

RAISES ISSUES OF NATIONAL IMPORTANCE.

The decision below, if left standing, would seriously

disrupt the national uniformity that Congress sought to

achieve by putting arbitration agreements on the same

footing as other contracts. Arbitration agreements like

the one in this case have become a common feature in

business and consumer relationships. Financial institu-

tions, franchisors, manufacturers, and a multitude of other

companies conducting interstate businesses now include

arbitration agreements in their contracts. See generally

Henry C. Strickland, The Federal Arbitration Act's Inter-

state Commerce Requirement: What's Left for State Arbi-

tration Law?, 21 Hofstra L. Rev. 385, 429-54 (1992).

As the case law indicates, national and international econ-

omies have come to rely on arbitration in a variety of

circumstances. See, e.g., Threlkeld, 923 F.2d at 246-47

(contract between member of foreign commodities ex-

change and American trader); Connolly, 883 F.2d at

1116 (customer agreement with securities broker); Webb,

800 F.2d at 804-05 (same); Collins, 467 F.2d at 996

(purchase agreement between manufacturer and its sup-

plier of computer parts); Bunge, 685 S.W.2d at 838

(commercial contract for bulk purchase of soybeans).

It is thus of particular importance that parties to arbi-

tration agreements be assured that their arbitration agree-

ments are enforceable regardless of whether a particular

state is receptive to, or hostile to, arbitration. The deci-

sions of the First, Second and Eighth Circuits and the

Missouri Supreme Court, by preempting state arbitration

notice requirements, affirmed the validity of standardized

arbitration provisions that have flourished as a chosen

means of resolving disputes. As this Court has found,

Congress sought to confer the advantages of arbitration

on consumers and businesses alike, Terminix, 115 S. Ct.

at 842-43, by providing for “rapid and unobstructed en-

forcement of arbitration agreements.” Moses H. Cone,

460 U.S. at 23. But the Montana Supreme Court’s deci-

sion, along with those of the Texas and Indiana intermedi-

ate appellate courts (see note 19 supra), creates new

uncertainty in the law that undermines Congress’s support

of arbitration as an alternative device for dispute resolution.

The rule of law announced by the Montana Supreme

Court does not take into account the varying, even con-

flicting, arbitration laws that exist from state to state and

their impact on interstate commerce. State arbitration

notice provisions are far from uniform. Montana and

three other states impose varying notice requirements for

contracts subject to an agreement to arbitrate.* An addi-

tional five states have enacted differing laws regulating

the placement and acknowledgment of arbitration agree-

ments within certain kinds of contracts.” Furthermore,

20 Mo. Rev. Stat. § 435.460 (1994) (notice that contract contains

arbitration agreement must be placed adjacent to signature block

in ten-point capital letters); S.C. Code Ann. § 15-48-10(a) (Law.

Co-op. Supp. 1993) (notice that contract is subject to arbitration

shall be typed in underlined capital letters or rubber-stamped

prominently on first page of contract); Vt. Stat. Ann. tit. 12.

§ 5652(b) (Supp. 1994) (parties must sign written acknowledg-

ment of arbitration that contains language provided in statute

and that is prominently displayed in contract).

21 Ga. Code Ann. § 9-9-2(c) (8), (9) (Michie Supp. 1994) (arbi-

tration provisions in residential real estate contracts and employ-

ment contracts must be separately initialed at the time of contract’s

execution) ; Iowa Code § 679A.1(2)(c) (1995) (agreement to arbi-

trate tort claims must be in separate writing executed by parties) ;

R.I. Gen. Laws § 10-3-2 (Supp. 1994) (arbitration provisions in

insurance contracts must be placed immediately above parties’

signatures); Tenn. Code Ann. § 29-5-302(a) (Supp. 1994) (arbi-

tration clause in contracts relating to farm or residential property

must be separately signed or initialed by parties); Tex. Rev. Civ.

Stat. Ann. art. 224(b) (West Supp. 1994) (excluding from arbitra-

tion act any contract by an individ..al person for acquisition of prop-

erty or services where consideration is $50,000 or less unless parties

agree in writing to submit to arbitration and such agreement is

signed by parties and their attorneys); Tex. Rev. Civ. Stat. Ann.

art. 224(c) (West Supp. 1994) (personal injury claims excluded

numerous states have placed other conditions on agree-

ments to arbitrate that do not apply to contracts gen-

erally. Montana, for example, refuses to enforce arbitra-

tion agreements in certain types of contracts where the

consideration is $5,000 or less. Mont. Code Ann. § 27-

5-114(2)(b) (1993), cited in Terminix, 115 S. Ct. at

843 (O'Connor, J., concurring). Pet. App. 41a.”

The results of Montana’s interpretation of the FAA are

evident in this case. The Montana Supreme Court, apply-

ing its conflict of law principles, rejected the parties’

choice of Connecticut law and instead applied the Mon-

tana arbitration act.“ The parties therefore lost the bene-

fit of their agreement to arbitrate because they failed to

comply with a state notice statute that they did not antici-

pate would ever be applied to their agreement. A com-

pany doing business nationally cannot know in what state

it might be sued and—after the decision below—which

state’s arbitration notice statute might apply. Although

from scope of arbitration act except upon advice of counsel to both

parties as evidenced by written agreement signed by counsel to

both parties).

22 A state-law exclusion from arbitration for small transactions

would exclude a significant percentage of disputes that are now

subject to arbitration. “[A]ccording to the American Arbitration

Association ..., more than one-third of its claims involve amounts

below $10,000 ....” Terminiz, 115 S. Ct. at 843. Georgia similarly

excludes from enforcement under its arbitration act any agreement

to arbitrate relating to insurance contracts, loan agreements and

consumer financing agreements involving $25,000 or less, as well

as all contracts involving consumer transactions. Ga. Code Ann.

§ 9-9-2(c) (Michie Supp. 1994). Similar limitations on the en-

forceability of arbitration agreements can be found in many states’

laws. See Strickland, supra, at 402 n.98 (citing statutes from 13

different states); see also Mastrobuono, 63 U.S.L.W. at 4196 (dis-

cussing New York law barring awards of punitive damages in

arbitration).

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

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

Gen. Stat. § 52-408 (1995).

Section 2 of the FAA does subject parties to state laws

relating to contracts generally, Congress sought by enact-

ing the FAA to remove special state-imposed obstacles to

the parties’ attempts to arbitrate their disputes because

such differential state law treatment of arbitration provi-

sions would undermine the “declared . . . national policy

favoring arbitration.” Southland, 465 U.S. at 10.

The problems encountered by Petitioners in this case in

enforcing their agreement to arbitrate will be exacerbated

if other states now adopt Montana’s interpretation of the

preemptive scope of the FAA.* A state such as Alabama

that has expressed its hostility toward arbitration by ban-

ning enforcement of arbitration agreements, see Terminix,

115 S. Ct. at 837, could now express that hostility by

enacting new laws imposing specific conditions on en-

forcing arbitration agreements. In the past, this Court

has rejected interpretations of the FAA that “would permit

states to override the declared policy requiring enforce-

ment of arbitration agreements.” Southland, 465 U.S. at

17 n.11. The decision of the Montana Supreme Court

resurrects the obstacles that this Court has held were

eradicated when Congress enacted legislation making arbi-

tration agreements “valid, irrevocable, and enforceable”

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

*4 Other state courts have applied their state’s arbitration notice

statute to the case before them, but those decisions made no men-

tion of the FAA or preemption, presumably because no party con-

tended that the arbitration agreement involved interstate com-

merce. E.g., Hefele v. Catanzaro, 727 S.W.2d 475 (Mo. Ct. App.

1987); A.C. Beals Co. v. Rhode Island Hosp., 292 A.2d 865 (R.I.

1972) ; Joder Bldg. Corp. v. Lewis, 569 A.2d 471 (Vt. 1989). At

the same time, some state courts have found their own state’s notice

statutes preempted by the FAA. E.g., McCarney v. Nearing, Staats,

Prelogar & Jones, 866 S.W.2d 881, 887-88 (Mo. Ct. App. 1993),

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

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

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

Ct. App. 1989).

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

MARK R. KRAVITZ *

JEFFREY R. BABBIN

WIGGIN & DANA

One Century Tower

P.O. Box 1832

New Haven, CT 06508-1832

(208) 498-4400

H. BARTOW FARR, ITI

FARR & TARANTO

2445 M Street, N.W.

Washington, D.C. 20037

(202) 775-0184

Dated: March 14, 1995 * Counsel of Record

BEST AVAILABLE COPY

APPENDIX A

[Filed Dec. 15, 1994]

IN THE SUPREME COURT

OF THE STATE OF MONTANA

1994

No. 93-488

PAUL CASAROTTO and PAMELA CASAROTTO,

Plaintiffs and Appellants,

Vv.

Nick LomMBARD! and DocTor’s ASSOCIATES, INC.,

Defendants and Respondents,

and

DANIEL L. and Des Hupson, and

D&D SUBWAY CORPORATION,

Defendants.

Appeal from District Court of the Eighth Judicial District,

In and for the County of Cascade,

The Honorable John M. McCarvel, Judge presiding

Submitted: April 19, 1994

Decided: December 15, 1994

Justice Terry N. Trieweiler delivered the opinion of the

Court.

Plaintiffs Paul and Pamela Casarotto filed this suit in

the District Court for the Eighth Judicial District in

Cascade County to recover damages which they claim

were caused by the defendants’ breach of contract and

tortious conduct. Defendants Nick Lombardi and Doc-

tor’s Associates, Inc. (DAI), moved the District Court

for an order dismissing plaintiffs’ complaint, or in the

alternative, staying further judicial proceedings pending

arbitration of plaintiffs’ claims pursuant to a provision in

DAI’s franchise sement with plaintiffs which required

that disputes “arising out of or relating to” that contract

be settled by arbitration. The District Court granted de-

fendants’ motion, and ordered that further judicial pro-

ceedings be stayed until arbitration proceedings were com-

pleted in accordance with the terms of the parties’

agreement. Plaintiffs appeal from that order. We reverse

the order of the District Court.

The issues raised on appeal are:

1. Based on conflict of law principles, is the franchise

agreement entered into between the Casarottos and DAT

governed by Connecticut law or Montana law?

2. If the contract is governed by Montana law, is the

notice requirement in § 27-5-114(4), MCA, of Montana’s

Uniform Arbitration Act, preempted by the Federal Arbi-

tration Act found at 9 U.S.C. §$ 1-15 (1988)?

FACTUAL BACKGROUND

On October 29, 1992, Paul and Pamela Casarotto filed

an amended complaint naming Doctor’s Associates, Inc.,

and Nick Lombardi as defendants. For purposes of our

review of the District Court’s order, we presume the facts

alleged in the complaint to be true.

DAI is a Connecticut corporation which owns Subway

Sandwich Shop franchises, and Lombardi is their develop-

ment agent in Montana. The Casarottos entered into a

franchise agreement with DAI which allowed them to

open a Subway Sandwich Shop in Great Falls, Montana.

However, they were told by Lombardi that their first

choice for a location in Great Falls was unavailable.

According to their complaint, the Casarottos agreed to

open a shop at a less desirable location, based on a verbal

agreement with Lombardi that when their preferred loca-

tion became available, they would have the exclusive right

to open a store at that location. Contrary to that agree-

ment, the preferred location was subsequently awarded

by Lombardi and DAI to another franchise. As a result,

the Casarottos’ business suffered irreparably, and they lost

their business, along with the collateral which secured

their SBA loan.

This action is based on the Casarottos’ allegation that

Lombardi and DAI breached their agreement with the

Casarottos, defrauded them, breached the covenant of

good faith and fair dealing, and engaged in other tortious

conduct, all of which directly caused the Casarottos loss

of business and the resulting damage.

DAI’s franchise agreement with the Casarottos was

executed on April 25, 1988. There was no indication

on the first page of the contract that it was subject to

arbitration. However, paragraph 10(c) of the contract,

found on page 9, included the following provision:

Any controversy or claim arising out of or relat-

ing to this contract or the breach thereof shall be

settled by Arbitration in accordance with the Com-

mercial Arbitration Rules of the American Arbitra-

tion Association at a hearing to be held in Bridge-

port, Connecticut and judgment upon an award ren-

dered by the Arbitrator(s) may be entered in any

court having jurisdiction thereof. The commence-

ment of arbitration proceedings by an aggrieved

party to settle disputes arising out of or relating to

this contract is a condition precedent to the com-

mencement of legal action by either party. The cost

of such a proceeding will be born equally by the

parties.

On January 29, 1993, DAI moved the District Court

to dismiss the Casarottos’ complaint, or at least stay fur-

ther judicial proceedings, pending arbitration pursuant

to paragraph 10(c) of the franchise agreement. DAI

alleged that the franchise agreement affected interstate

commerce, and therefore, was subject to the Federal Ar-

bitration Act found at 9 U.S.C. §§ 1-15 (1988). They

sought a stay of proceedings pursuant to § 3 of that Act,

which provides in relevant part that:

If any suit or proceeding be brought in any of the

courts of the United States upon any issue referable

to arbitration under an agreement in writing for

such arbitration, the court in which such suit is pend-

ing, upon being satisfied that the issue involved in

such suit or proceeding is referable to arbitration un-

der such an agreement shall on application of one

of the parties stay the trial of the action until such

arbitration has been had in accordance with the

terms of the agreement... .

DAI claimed that Montana law could not be raised

as a bar to enforcement of the arbitration provision for

two reasons: First, the contract specifically called for

the application of Connecticut law; and second, Mon-

tana law was preempted by the Federal Arbitration Act.

The Casarottos opposed DAI’s motion on the grounds

that Montana law applied, in spite of the choice of law

provision in the contract, and that based on § 27-5-114

(4), MCA, the contract’s arbitration provision was unen-

forceable because DAI had not provided notice on the

first page of the agreement that the contract was subject

to arbitration.

On June 2, 1993, the District Court issued its order

granting DAI’s motion to stay further judicial proceed-

ings pursuant to 9 U.S.C. §3. The order was made

applicable to both DAI and Lombardi, but not to other

named defendants who were not parties to the franchise

agreement and whose alleged conduct raises other issues.

On July 8, 1993, the District Court issued an order pur-

suant to Rule 54(b), M.R.Civ.P., certifying its June 2

order as final for purposes of appeal. The Casarottos

appeal from that order.

ISSUE 1

Based on conflict of law principles, is the franchise

agreement entered into between the Casarottos and DAI

governed by Connecticut law or Montana law?

Paragraph 12 of the franchise agreement entered into

between the parties provides as follows: “This agreement

shall be governed by and construed in accordance with

the laws of the State of Connecticut and contains the en-

tire understanding of the parties.” DAI contends that,

therefore, Connecticut law governs our interpretation of

the contract and that since Connecticut law is identical to

the Federal Arbitration Act see Conn. Gen. Stat. § 52-

409 (1993), conspicuous notice that the contract was sub-

ject to arbitration was not required and we need not

concern ourselves with the issue of whether Montana law

is preempted.

The Casarottos respond that the issue of whether to

apply Connecticut or Montana law involves a conflict of

law issue and that the answer can be found in our prior

decisions. We agree.

In Emerson v. Boyd (1991), 247 Mont. 241, 805 P.2d

587. we cited with approval the Ninth Circuit’s decision

in R.J. Williams Co. v. Fort Belknap Housing Authority

(9th Cir. 1983), 719 F.2d 979, which adopted the cri-

teria established in Restatement (Second) of Conflict of

Laws § 188 (1971) to determine which jurisdiction’s

laws apply to a contract where no choice of law is pro-

vided for in the contract. Section 188 provides as follows:

(1) The rights and duties of the parties with respect

to an issue in contract are determined by the local

law of the state which, with respect to that issue, has

the most significant relationship to the transaction

and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by

the parties (see § 197), the context to be taken into

account in applying the principles of § 6 to deter-

mine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(d) the location of the subject matter of the

contract, and

(ce) the domicil, residence, nationality, place

of incorporation and place of business of

the parties.

These contracts are to be evaluated according to their

relative importance with respect to the particular

issue.

(3) If the place of negotiating the contract and the

place of performance are in the same state, the local

law of this state will usually be applied, except as

otherwise provided in §§ 189-199 and 203.

In this case, there is a choice of law provision in the

parties’ contract. The question is whether it was an “effec-

tive” choice. We recently held in Youngblood v. Ameri-

can States Ins. Co. (1993), 262 Mont. 391, 394, 866

P.2d 203, 205, that this State’s public policy will ulti-

mately determine whether choice of law provisions in

contracts are “effective.” In that case, we stated:

Here, the general policy language in the insurance

contract requires American States to pay whatever

damages are required in Montana; that is, the con-

tract is to be performed in Montana. Therefore,

unless a contract term provides otherwise, Kemp [v.

Allstate Ins. Co. (1979), 183 Mont. 526, 601 P.2d

20) and § 28-3-102, MCA, require the application

of Montana law because the contract was to be ‘per-

formed’ in Montana. In this case, however, the in-

surance contract contains a choice of law provision

which requires the application of Oregon subroga-

tion law... .

. .. [T]he choice of law provision will be enforced

unless enforcement of the contract provision re-

quiring application of Oregon law as regards subro-

gation of medical payments violates Montana’s pub-

lic policy or is against good morals.

Youngblood, 866 P.2d at 205.

Based on our conclusion in that case that subrogation

of medical payment benefits was contrary to our public

policy, we held that:

[T]he choice of law provision in the insurance con-

tract would result in medical payment subrogation

under Oregon law. Because such subrogation vio-

lates Montana’s public policy, that term of the in-

surance contract at issue here is not enforceable.

Youngblood, 866 P.2d at 208.

Restatement (Second) of Conflict of Laws § 187(2)

(1971) is consistent with our decision in Youngblood,

and expands upon the factors to be considered under

the circumstances in this case. It provides that:

(2) The law of the state chosen by the parties to

govern their contractual rights and duties will be

applied, even if the particular issue is one which the

parties could not have resolved by an explicit pro-

vision in their agreement directed to that issue, unless

either

(a) the chosen state has no substantial rela-

tionship to the parties or the transaction

and there is no other reasonable basis for

the parties’ choice, or

(b) application of the law of the chosen state

would be contrary to a fundamental policy

of a state which has a materially greater

interest than the chosen state in the deter-

mination of the particular issue and which,

under the rule of § 188, would be the

state of the applicable law in the absence

of an effective choice of law by the parties.

Adopting § 187, then, as our guide, we first look to

§ 188 to determine whether Montana law would be ap-

plicable absent an “effective” choice of law by the parties.

According to the affidavit of Paul Casarotto filed in

opposition to DAI’s motion to dismiss, he executed the

contract in neither Connecticut nor Montana. It was

executed while he was traveling in New York. How-

ever, it appears from that same affidavit, and from the

allegations in the complaint, that original negotiations

were conducted by him in Great Falls, the contract was

to be performed in Great Falls, the subject matter of the

contract (the Subway Sandwich Shop) was located in

Great Falls, and that he and Pamela Casarotto resided

in Great Falls at the time that the contract was executed.

The only connection to Connecticut was that DAI was

incorporated in that state and apparently had its home

office in that state at the time of the parties’ agreement.

We conclude that based upon the application of the cri-

teria set forth in § 188, and our prior decision in Emer-

son, Montana has a materially greater interest than Con-

necticut in the contract issue that is presented, and that

absent an “effective” choice of law by the parties, Mon-

tana law would apply.

Our remaining inquiry, then, is whether application of

Connecticut law would be contrary to a fundamental

Nt ee ee Oe Ona

policy of this State by eliminating the requirement that

notice be provided when a contract is subject to arbi-

tration.

In Trammel v. Brotherhood of Locomotive Firemen

and Enginemen (1953), 126 Mont. 400, 409, 253 P.2d

329, 334, we held that the public policy of a state is

established by its express legislative enactments. Here,

the legislative history for § 27-5-114(4), MCA, makes

clear that the legislative committee members considering

adoption of the Uniform Arbitration Act had two primary

concerns. First, they did not want Montanans to waive

their constitutional right of access to Montana’s courts

unknowingly, and second, they were concerned about

Montanans being compelled to arbitrate disputes at dis-

tant locations beyond the borders of our State.

The facts in this case, and our recent decision in

another case, justify those concerns.

Regardless of the amount in controversy between these

parties, the arbitration clause in the Subway Sandwich

Shop Franchise Agreement requires that the Casarottos

travel thousands of miles to Connecticut to have their

dispute arbitrated. Furthermore, it requires that they

share equally in the expense of arbitration, regardless

of the merits of their claim. Presumably, that expense

could be substantial, since under the Commercial Arbi-

tration Rules of the American Arbitration Association

(1992), those expenses would, at a minimum, include:

the arbitrator’s fees and travel expenses, the cost of wit-

nesses chosen by the arbitrator, the American Arbitra-

tion Association’s administrative charges, and a filing fee

of up to $4000, depending on the amount in controversy.

For a proceeding involving multiple arbitrators, the ad-

ministrative fee alone, for which the Casarottos would be

responsible, is $150 a day. In addition, since the con-

tract called for the application of Connecticut law, the

Casarottos would be required to retain the services of a

Connecticut attorney.

10a

In spite of the expense set forth above, the procedural

safeguards which have been established in Montana to

assure the reliability of the outcome in dispute resolutions

are absent in an arbitration proceeding. The extent of

pretrial discovery is within the sole discretion of the

arbitrator and the rules of evidence are not applicable.

The arbitrator does not have to follow any law, and

there does not have to be a factual basis for the arbi-

trator’s decision. See May v. First National Pawn Brokers,

Ltd. (Mont. Dec. 15, 1994), Slip Op. 94-189.

Based upon the determination by the Legislature of

this State that the citizens of this State are at least en-

titled to notice before entering into an agreement which

will limit their future resolution of disputes to a pro-

cedure as potentially inconvenient, expensive, and devoid

of procedural safeguards as the one provided for by the

rules of the American Arbitration Association, and the

terms of this contract, we conclude that the notice require-

ment of § 27-5-114, MCA, does establish a fundamental

public policy in Montana, and that the application of

Connecticut law would be contrary to that policy. There-

fore, we conclude that the law of Montana governs the

franchise agreement entered into between the Casarottos

and Doctor’s Associates, Inc.

ISSUE 2

If the contract is governed by Montana law, is the

notice requirement in § 27-5-114(4), MCA, of Montana’s

Uniform Arbitration Act, preempted by the Federal Arbi-

tration Act found at 9 U.S.C. §§ 1-15 (1988)?

DAI contends that even if Montana law is applicable,

§ 27-5-114(4), MCA, is preempted by the Federal Arbi-

tration Act because it would void an otherwise enforce-

able arbitration agreement. In support of its argument,

DAI relies on U.S. Supreme Court decisions in Perry v.

Thomas (1987), 482 U.S. 483, 107 S. Ct. 2520, 96

L. Ed. 2d 426, Southland Corp. v. Keating (1984), 465

lla

U.S. 1, 104 §. Ct. 852, 79 L. Ed. 2d 1, and Moses H.

Cone Memorial Hospital v. Mercury Construction Corp.

(1983), 460 U.S. 1, 103 S. Ct. 927, 74 L. Ed. 2d 765.

These cases have been referred to as “[a] trilogy of United

States Supreme Court cases” which “developed the fed-

eral policy favoring arbitration and the principle that the

FAA is substantive law enacted pursuant to Congress’s

commerce powers that preempts contrary state provisions.”

David P. Pierce, The Federal Arbitration Act: Conflict-

ing Interpretations of its Scope 61 Cinn. L. Rev. 623,

630 (1992). From this trilogy, Southland and Perry

appear to be closest on point and warrant some discussion.

Southland Corporation was the owner and franchisor

of 7-Eleven Convenience Stores. Its standard franchise

agreements, like DAI’s included an arbitration provision.

Southland was sued in California by several of its fran-

chisees, based on claims which included violations of the

disclosure requirements of the California Franchise In-

vestment Law, Cal. Corp. Code § 31000, et seq. (West

1977). The California Supreme Court held that the

Franchise Investment Law required judicial consideration

of claims brought under that statute, and therefore, held

that arbitration could not be compelled. The U.S. Su-

preme Court disagreed, and held that:

In creating a substantive rule applicable in state

as well federal courts, Congress intended to foreclose

state legislative attempts to undercut the enforce-

ability of arbitration agreements. We hold that

§ 31512 of the California Franchise Investment Law

violates the Supremacy Clause.

Southland, 465 U.S. at 16 (footnotes omitted).

In Perry, the Supreme Court was called upon to recon-

cile 9 U.S.C. § 2 which mandates enforcement of arbitra-

tion agreements, with § 229 of the California Labor Code,

“which provides that actions for the collection of wages

may be maintained ‘without regard to the existence of

12a

any private agreement to arbitrate.’” Perry, 465 U.S.

at 484 (quoting Cal. Lab. Code § 229 (West 1971)).

In that case, Kenneth Thomas sued his former employer

for commissions he claimed were due for the sale of se-

curities. His employer sought to stay the proceedings

pursuant to §§ 2 and 4 of the Federal Arbitration Act,

based on the arbitration provision found in Thomas’s ap-

plication for employment. Perry, 465 U.S. at 484-85. In

an opinion affirmed by the California Court of Appeals

and the California Supreme Court, the California Superior

Court denied the motion to compel arbitration. On ap

peal, the U.S. Supreme Court held that § 2 of the FAA

reflected a strong national policy favoring arbitration

agreements, notwithstanding “state substantive or proce-

dural policies to the contrary.” Perry, 482 U.S. at 489.

Citing its decision in Southland, the Court held that:

“Congress intended to foreclose state legislative

attempts to undercut the enforceability of arbitra-

tion agreements.” Id. at 16 (footnote omitted). Sec-

tion 2, therefore, embodies a clear federal policy of

requiring arbitration unless the agreement to arbi-

trate is not part of a contract evidencing interstate

commerce or is revocable “upon such grovnds as

exist at law or in equity for the revocation of any

contract.” 9 U.S.C. §2. “We see nothing in the

Act indicating that the broad principle of enforce-

ability is subject to any additional limitations under

state law.” Keating, supra, at 11.

Perry, 482 U.S. at 489-90,

As additional authority, DAI cites to our own previous

decisions which have enforced arbitration agreements in

Montana based on Southland and Perry. See Downey

v. Christensen (1992), 251 Mont. 386, 825 P.2d 557;

Vukasin v. D.A. Davidson & Co. (1990), 241 Mont.

126, 785 P.2d 713; William Gibson, Jr., Inc. v. James

Graff Communications (1989), 239 Mont. 335, 780 P.2d

1131; Larsen v. Opie (1989), 237 Mont. 108, 771 P.2d

—— ae oe

13a

977; Passage v. Prudential-Bache Securities, Inc. (1986),

223 Mont. 60, 727 P.2d 1298.

The Casarottos, however, contend that Southland and

Perry must be considered in light of the Supreme Court’s

more recent decision in Volt Information Sciences, Inc.

v. Board of Trustees of Leland Stanford Junior University

(1989), 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed. 2d

488, and that our prior arbitration decisions did not deal

with the enforceability of arbitration agreements which

violated Montana’s statutory law. We agree.

In Volt, the parties entered into a construction contract

which contained an agreement to arbitrate all disputes

between the parties relating to the contract. The contract

also provided that it would be governed by the law in the

state where the project was located. Volt, 489 U.S. at

470.

As a result of a contract dispute between the parties,

Stanford filed an action in California Superior Court

naming Volt and two other companies involved in the

construction project. Volt petitioned the Superior Court

to compel arbitration of the dispute. However, the Cali-

fornia Arbitration Act found at Cal. Civ. Proc. Code

§ 1280, et seq. (West 1982), contained a provision allow-

ing the court to stay arbitration pending resolution of

related litigation. On that basis, the Superior Court de-

nied Volt’s motion to compel arbitration, and instead,

stayed arbitration proceedings pending outcome of the

litigation. The California Court of Appeals affirmed that

decision, and the California Supreme Court denied Volt’s

petition for discretionary review. The U.S. Supreme

Court granted review and affirmed the decision of the

California courts. Volt, 489 U.S. at 471-73.

On appeal, the Supreme Court considered Volt’s argu-

ment that California’s arbitration laws were preempted by

the Federal Arbitration Act. In its analysis of the pre-

emption issue, the Supreme Court stated that:

l4a

The FAA contains no express pre-emptive provi-

sion, nor does it reflect a congressional intent to

occupy the entire field of arbitration. But even when

Congress has not completely displaced state regula-

tion in an area, state law may nonetheless be pre-

empted to the extent that it actually conflicts with

federal iaw—that is, to the extent that it “stands as

an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress.” Hines

v. Davidowitz, 312 U.S. 52, 67 (1941). The ques-

tion before us, therefore, is whether application of

Cal.Civ.Proc. Code Ann. § 1281.2(c) to stay arbitra-

tion under this contract in interstate commerce, in

accordance with the terms of the arbitration agree-

ment itself, would undermine the goals and policies

of the FAA. We conclude that it would not.

Volt, 489 U.S. at 477-78 (citation omitted; emphasis

added).

The Supreme Court explained that the purpose of the

Federal Arbitration Act was to enforce lawful agreements

entered into by the parties, and not to impose arbitra-

tion on the parties involuntarily. It noted that in this

case the parties’ agreement was to be bound by the ar-

bitration rules from California. Therefore, it held that:

Where, as here, the parties have agreed to abide

by state rules of arbitration, enforcing those rules

according to the terms of the agreement is fully

consistent with the goals of the FAA, even if the

result is that arbitration is stayed where the Act

would otherwise permit it to go forward. By per-

mitting the courts to “rigorously enforce” such agree-

ments according to their terms, see [Dean Witter

Reynolds, Inc. v. \Byrd, [470 U.S.] at 221, we give

effect to the contractual rights and expectations of

the parties, without doing violence to the policies be-

hind the FAA.

Volt, 489 US. at 479.

15a

While the Court in Volt applied state laws that had

been chosen by the parties in their contract, and this case

involves state law which is applied pursuant to conflict

of law principles, it has been cbserved that:

The real significance of the Volt decision is not

in the Court’s holding, but rather in what the Court

failed to hold. For example, the Court found no

preemption of the California arbitration law by the

FAA. Instead, the Court merely stated that Con-

gress did not intend that the FAA occupy the entire

field of arbitration law. Thus, enforcing the Califor-

nia law was merely a procedural issue and did not

frustrate the policy behind the FAA of enforcing

the agreement.

David P. Pierce, The Federal Arbitration Act: Conflict-

ing Interpretations of its Scope 61 Cinn. L. Rev. 623,

635 (1992) (footnotes omitted).

Section 2 of 9 U.S.C. provides that:

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereaf-

ter arising out of such contract or transaction, or the

refusal to perform the whole or any part thereof,

or an agreement in writing to submit to arbitration

an existing controversy arising out of such a con-

tract, transaction, or refusal, shall be valid, irrevo-

cable, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of any

contract.

(Emphasis added. )

Based upon the Supreme Court’s decision in Volt, we

conclude that the nature of our inquiry is whether Mon-

tana’s notice requirement found at § 27-5-114(4), MCA,

would “undermine the goals and policies of the FAA.”

We conclude that it does not.

16a

DAI relies on decisions in Threlkeld & Co., Inc. v.

Metallgesellschaft Ltd. (2d Cir. 1991), 923 F.2d 245,

Securities Industry Ass'n v. Connolly (Ast Cir. 1989),

883 F.2d 1114, Webb v. R. Rowland & Co., Inc. (8th

Cir. 1986), 800 F.2d 803, and Bunge Corp. v. Perryville

Feed & Produce, Inc. (Mo. 1985), 685 S.W.2d 837, in

support of its argument that notice provisions are pre-

empted by federal law.

The Casarottos, on the other hand, rely on decisions in

American Physicians v. Port Lavaca Clinic (Tex. Ct.

App. 1992), 843 S.W.2d 675, and Albright v. Edward

D. Jones & Co. (Ind. Ct. App. 1991), 571 N.E.2d 1329,

for the principle that since Volt, other courts have held

that notice provisions in state arbitration laws are not

preempted by the Federal Arbitration Act.

However, the cases cited by the parties either precede

the Supreme Court’s decision in Volt, or contain little or

no reference to the Volt decision. We conclude that none

are persuasive, and we must rely on our own analysis of

whether Montana’s notice requirement undermines the

goals and policies of the FAA.

Our conclusion that Montana’s notice requirement does

not undermine the policies of the FAA is based on the

Supreme Court’s conclusion that it was never Congress’s

intent when it enacted the FAA to preempt the entire

field of arbitration, and its further conclusion that the

FAA does not require parties to arbitrate when they have

not agreed to do so. That Court held that the purpose

of the FAA is simply to enforce arbitration agreements

into which parties had entered, and acknowledged that

the interpretation of contracts is ordinarily a question of

state law. Volt, 489 U.S. at 474.

Presumably, therefore, the Supreme Court would not

find it a threat to the policies of the Federal Arbitration

Act for a state to require that before arbitration agree-

ments are enforceable, they be entered knowingly. To

17a

hold otherwise would be to infer that arbitration is so

onerous as a means of dispute resolution that it can only

be foisted upon the uninformed. That would be incon-

sistent with the conclusion that the parties to the contract

are free to decide how their disputes should be resolved.

Montana’s notice requirement does not preclude parties

from knowingly entering into arbitration agreements, nor

do our courts decline to enforce arbitration agreements

which are entered into knowingly.

Therefore, we conclude that Montana’s notice statute

found at § 27-5-114(4), MCA, would not undermine the

goals and policies of the FAA, and is not preempted by

9 U.S.C. § 2 (1988).

Because the agreement of the parties in this case did

not comply with Montana’s statutory notice requirement,

it is not subject to arbitration, according to the law of

Montana. The District Court’s order dated June 2, 1993,

is, therefore, reversed, and this case is remanded to the

District Court for further proceedings consistent with this

opinion.

/s/ Terry Trieweiler

Justice

We concur:

/s/ John Conway Harrison

/s/ William E. Hunt, Sr.

/s/ James C. Nelson

Justices

18a

Justice Terry N. Trieweiler specially concurring.

The majority opinion sets forth principles of law agree-

able to the majority of this Court in language appropriate

for judicial precedent. I offer this special concurring

opinion as my personal observation regarding many of the

federal decisions which have been cited to us as authority.

To those federal judges who consider forced arbitration

as the panacea for their “heavy case loads” and who con-

sider the reluctance of state courts to buy into the ar-

bitration program as a sign of intellectual inadequacy,

I would like to explain a few things.

In Montana, we are reasonably civilized and have a

sophisticated system of justice which has evolved over

time and which we continue to develop for the primary

purpose of assuring fairness to those people who are

subject to its authority.

Over the previous 100 years of our history as a state,

our courts have developed rules of evidence for the pur-

pose of assuring that disputes are resolved on the most

reliable bases possible.

Based on the presumption that all men and women are

fallible and make mistakes, we have developed standards

for appellate review which protect litigants from human

error or the potential arbitrariness of any one individual.

We believe in the rule of law so that people can plan

their commercial and personal affairs. If our trial courts

decline to follow those laws, our citizens are assured that

this Court will enforce them.

We have rules for venue, and jurisdictional require-

ments based on the assumption that it is unfair to force

people to travel long distances from their homes at great

expense and inconvenience to prosecute or defend against

lawsuits.

We believe that our courts should be accessible to all,

regardless of their economic status, or their social im-

19a

portance, and therefore, provide courts at public expense

and guarantee access to everyone.

We have developed liberal rules of discovery (patterned

after the federal courts) based on the assumption that

the open and candid exchange of information is the surest

way to resolve claims on their merits and avoid unneces-

sary trials.

We have contract laws and tort laws. We have laws

to protect our citizens from bad faith, fraud, unfair busi-

ness practices, and oppression by the many large national

corporations who control many aspects of their lives but

with whom they have no bargaining power.

While our system of justice and our rules are imper-

fect, they have as their ultimate purpose one overriding

principle. They are intended, and continue to evolve,

for the purpose of providing fairness to people, regardless

of their wealth or political influence.

What I would like the people in the federal judiciary,

especially at the appellate level, to understand is that due

to their misinterpretation of congressional intent when it

enacted the Federal Arbitration Act, and due to their

naive assumption that arbitration provisions and choice

of law provisions are knowingly bargained for, all of

these procedural safeguards and substantive laws are

easily avoided by any party with enough leverage to stick

a choice of law and an arbitration provision in its pre-

printed contract and require the party with inferior bar-

gaining power to sign it.

The procedures we have established, and the laws we

have enacted, are either inapplicable or unenforceable in

the process we refer to as arbitration.

I am particularly offended by the attitude of federal

judges, typified by the remarks of Judge Selya in the

First Circuit, which were articulated in Securities In-

dustry Ass'n v. Connolly (1st Cir. 1989), 883 F.2d 1114,

————————————————————EEEEEeeee

20a

cert. denied (1990), 495 U.S. 956, 110 S. Ct. 2559, 109

L. Ed. 2d 742.

Judge Selya considered “[i]ncreased resort to the courts”

as the cause for “tumefaction of already-swollen court

calendars.” He refers to arbitration as “a contractual

device that relieves some of the organic pressure by op-

erating as a shunt, allowing parties to resolve disputes

outside of the legal system.” Connolly, 883 F.2d at 1116.

He states that “[t]he hope has long been that the Act

could serve as a therapy for the ailment of the crowded

docket.” Connolly, 883 F.2d at 1116. He then bemoans

that fact that, “[a]s might be expected, there is a rub:

the patient, and others in interest, often resist the treat-

ment.” Connolly, 883 F.2d at 1116.

Judge Selya refers to the preference in the various state

jurisdictions to resolve disputes according to traditional

notions of fairness, and then suggests that “[t]he FAA

was enacted to overcome this ‘anachronism’.” Connolly,

883 F.2d at 1119 (citation omitted). He considers it

the role of federal courts to be “on guard for artifices

in which the ancient suspicion of arbitration might re-

appear.” Connolly, 883 F.2d at 1119.

This type of arrogance not only reflects an intellectual

detachment from reality, but a self-serving disregard for

the purposes for which courts exist.

With all due respect, Judge Selya’s opinion illustrates

an all too frequent preoccupation on the part of federal

judges with their own case load and a total lack of con-

sideration for the rights of individuals. Nowhere in Judge

Selya’s lengthy opinion is there any consideration for the

total lack of procedural safeguards inherent in the arbi-

tration process. Nowhere in his opinion does he consider

the financial hardship that contracts, like the one in this

case, impose on people who simply cannot afford to en-

force their rights by the process that has been forced upon

them. Nowhere does Judge Selya acknowledge that the

21a

“patient” (presumably courts like this one) who resists

the “treatment” (presumably the imposition of arbitration

in lieu of justice) has a case load typically three times as

great as Justice Selya’s case load.

The notion by federal judges, like Judge Selya, that

people like the Casarottos have knowingly and volun-

tarily bargained and agreed to resolve their contractual

disputes or tort claims by arbitration, is naive at best, and

self-serving and cynical at worst. To me, the idea of a

contract or agreement suggests mutuality. There is no

mutuality in a franchise agreement, a securities brokerage

agreement, or in any other of the agreements which typi-

cally impose arbitration as the means for resolving dis-

putes. National franchisors, like the defendant in this

case, and brokerage firms, who have been the defendants

in many other arbitration cases, present form contracts

to franchisees and consumers in which choice of law pro-

visions and arbitration provisions are not negotiable, and

the consequences of which are not explained. The pro-

vision is either accepted, or the business or investment

opportunity is denied. Yet these provisions, which are

not only approved of, but encouraged by people like

Judge Selya, do, in effect, subvert our system of justice

as we have come to know it. If any foreign government

tried to do the same, we would surely consider it a serious

act of aggression.

Furthermore, if the Federal Arbitration Act is to be

interpreted as broadly as some of the decisions from our

federal courts would suggest, then it presents a serious

issue regarding separation of powers. What these interpre-

tations do, in effect, is permit a few major corporations

to draft contracts regarding their relationships with others

that immunizes them from accountability under the laws

of the states where they do business, and by the courts

in those states. With a legislative act, the Congress, ac-

cording to some federal decisions, has written state and

federal courts out of business as far as these corporations

22a

are concerned. They are not subject to California’s labor

laws or franchise laws, they are not subject to our con-

tract laws or tort laws. They are, in effect, above the law.

These insidious erosions of state authority and the ju-

dicial process threaten to undermine the rule of law as we

know it.

Nothing in our jurisprudence appears more intellec-

tually detached from reality and arrogant than the lament

of federal judges who see this system of imposed arbitra-

tion as “therapy for their crowded dockets.” These de-

cisions have perverted the purpose of the FAA from one

to accomplish judicial neutrality, to one of open hostility

to any legislative effort to assure that unsophisticated

parties to contracts of adhesion at least understand the

rights they are giving up.

It seems to me that judges who have let their concern

for their own crowded docket overcome their concern for

the rights they are entrusted with should step aside and let

someone else assume their burdens. The last I checked,

there were plenty of capable people willing to do so.

/s/ Terry Trieweiler

Justice

23a

Justice Fred J. Weber dissents as follows:

I respect the majority opinion in its expression of the

deeply held conviction that arbitration of the type ex-

pressed in the contract in this case should not be enforced

in Montana and thereby deprive the parties of access to the

court system. The answer to such a judicial approach

was stated by the United States Supreme Court in Volt

Info. Sciences v. Bd. of Trustees (1989), 489 U.S. 468,

478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488, 497, in

which the United States Supreme Court stated:

The Act [Federal Arbitration Act] was designed “to

overrule the judiciary’s longstanding refusal to en-

force agreements to arbitrate,” . . . and place such

agreements “upon the same footing as other con-

tracts,” . . . Section 2 of the Act therefore declares

that a written agreement to arbitrate in any contract

involving interstate commerce or a maritime trans-

action “shall be valid, irrevocable, and enforceable,

save upon such grounds as exist at law or in equity

for the revocation of any contract.” (Citations

omitted. )

I specifically disagree with the majority opinion’s refusal

to enforce the agreement to arbitrate in the present case.

Issue I

As stated in the majority opinion: Based on conflict

of law principles, is the franchise agreement entered into

between the Casarottos and DAI governed by Connecti-

cut law or Montana law?

I point out that the issue as stated by the parties es-

sentially was whether an out-of-state corporation can avoid

Montana Arbitration Act’s conspicuous notice requirement

by claiming preemption under the FAA?

The majority opinion refers to this Court’s 1991 case

of Emerson v. Boyd. \n determining whether a contract

24a

dispute arose on an Indian reservation, that case adopted

language from R.J. Williams Co., a Ninth Circuit case

with regard to the factors to be used to determine whether

an action did arise on the reservation. In contrast to the

present case, Emerson v. Boyd did not contain an agreed

choice of law as is present in this case. I do not find

this to be appropriate authority.

The majority opinion on this issue concludes that the

Montana Legislature had determined that its citizens are

entitled to notice before entering into an agreement which

will limit their future resolution of disputes to a proce-

dure inconvenient, expensive and devoid of procedural

safeguards—and further concludes that the notice require-

ments of § 27-5-114, MCA, established a fundamental

public poiicy in this State which is contrary to the policy

of the Connecticut law. On the basis of those conclusions,

the majority opinion further concludes that the law of

Montana governs. I do not agree with that conclusion.

The key parts of § 27-5-114, MCA, which apply to this

issue are the following:

Validity of arbitration agreement—exceptions. (1)

A written agreement to submit an existing contro-

versy to arbitration is valid and enforceable except

upon such grounds as exist at law or in equity for

the revocation of a contract.

(4) Notice that a contract is subject to arbitration

pursuant to this chapter shall be typed in underlined

capital letters on the first page of the contract; and

unless such notice is displayed thereon, the contract

may not be subject to arbitration. (Emphasis sup-

plied. )

Our question then becomes whether the contract here is

subject to “arbitration pursuant to this chapter” so that

the notice must be typed in underlined capital letters on

the first page of the contract. Two specific paragraphs

25a

of the contract are controlling here. Section 10(c) of

the contract stated in pertinent part:

Any controversy or claim arising out of or relating

to this contract or the breach thereof shall be settled

by Arbitration in accordance with the Commercial

Arbitration Rules of the American Arbitration As-

sociation at a hearing to be held in Bridgeport, Con-

necticut, ...

Section 12 of the agreement further stated:

12. This Agreement shall be governed by and

construed in accordance with the laws of the State

of Connecticut and contains the entire understand-

ing of the parties. Other than the representations

contained in the Agreement, the Offering Circular

and advertising materials of the Franchisor, no other

representations have been made to or relied upon

by the Franchisee except as set forth below: (None

are set forth)

When the foregoing contract provisions are compared

to subsection (4) of § 27-2-114, MCA, it is apparent

that these contract provisions do not fit within the statute.

There is no statement in the Franchise Agreement which

specifies that the contract is subject to arbitration pur-

suant to Montana law or to the Uniform Arbitration Act

as enacted in Montana under §§ 27-5-111 to 115, MCA.

I conclude that the contract provisions are controlling

in this instance and that the contract between the parties

is not by its terms subject to Montana law or arbitration

under Montana law. In fact the reverse is true. As above

specified, the agreement requires that the commercial

rules of the American Arbitration Association shall be

applied in any arbitration, and also provides that the

agreement is governed by and construed under the laws

of the State of Connecticut. This clearly rebuts any sug-

gestion that this particular contract is subject to arbitra-

tion pursuant to the laws of the State of Montana and in

26a

particular § 27-5-114, MCA. I therefore conclude that

the notice requirement of § 27-5-114, MCA, does not in

any way establish a fundamental public policy which is

applicable to the present contract.

I further point out that the reference to Restatement

(Second) of Conflict of Laws, § 188 (1971), is applicable

only in the absence of an “effective” choice of law and

I conclude there was such an effective choice of law

in the present case.

Issue II

If the contract is governed by Montana law, is the

notice requirement of § 27-5-114(4), MCA, of Montana’s

Uniform Arbitration Act, preempted by the Federal Ar-

bitration Act found at 9 U.S.C. § 1-15 (1988)?

The majority opinion quotes the following from the

1987 United States Supreme Court opinion of Perry v.

Thomas:

. . . Congress intended to foreclose state legislative

attempts to undercut the enforceability of arbitra-

tion agreements. .. . Section 2, therefore, embodies

a clear federal policy of requiring arbitration unless

the agreement to arbitrate is not part of a contract

evidencing interstate commerce .. . We see nothing

in the Act indicating that the broad principle of en-

forceability is subject to any additional limitations

under state law. ... (Emphasis supplied. )

The affidavit of the vice president of DAI establishes

without contradiction that the present agreement to ar-

bitrate is part of a contract in interstate commerce:

5. Before July 1991, DAI was a corporation

organized under the laws of the State of Connecticut,

with a principal place of business at 325 Bic Drive,

Milford, CT 06460. On July 1, 1991, DAI of Flor-

ida merged with DAI of Connecticut, leaving DAI

of Florida as a surviving corporation.

27a

6. DAI has sold a total of 8500 Subway fran-

chises in the United States and estimates that there

are approximately 7400 stores in operation world

wide.

Clearly the present agreement to arbitrate is part of a

contract evidencing interstate commerce so the Federal

Arbitration Act is applicable.

The majority opinion analyzes the United States Su-

preme Court’s decision in Volt and from that concludes

that the nature of the inquiry is whether Montana’s no-

tice requirement under § 27-5-114(4), MCA, would un-

dermine the goals and policy of the FAA and further

concludes it does not. I disagree with that analysis of

Volt.

In Volt, Volt petitioned the California court to compel

arbitration of a dispute and the defendant moved to stay

arbitration pursuant to California law. The California

Statute permitted the court to stay arbitration pending

resolution of related litigation between a party to the

arbitration agreement and third parties not bound by it.

The California court stayed the arbitration proceedings

pending the outcome of the litigation. In considering

whether the California code section in question was pre-

empted by the FAA, the United States Supreme Court

Stated:

The FAA contains no express preemptive provi-

sion, nor does it reflect a congressional intent to oc-

cupy the entire field of arbitration. ... But even

when congress has not completely displaced state

regulation in an area, state law may nonetheless be

preempted to the extent that it actually conflicts

with federal law—that is, to the extent that it “stands

as an obstacle to the accomplishment and execution

of the full purposes and objectives of Congress.” . . .

The question before us, therefore, is whether applica-

tion of Cal. Civ. Proc. Cod. Ann. § 1281.2(c) to

stay arbitration under this contract in interstate com-

28a

merce, in accordance with the terms of the arbitra-

tion agreement itself, would undermine the goals and

policies of the FAA. We conclude it would not.

. . . Accordingly, we have recognized that the FAA

does not require parties to arbitrate when they have

not agreed to do so. See id., at 219, 84 L.Ed.2d

158, 105 S.Ct. 1238. (The Act “does not mandate

the arbitration of all claims”), nor does it prevent

parties who do agree to arbitrate from excluding cer-

tain claims from the scope of their arbitration agree-

ment. Jt simply requires courts to enforce privately

negotiated agreements to arbitrate, like other con-

tracts, in accordance with their terms. . . (Citations

omitted.) (Emphasis supplied. )

Volt, 489 U.S. at 477-78, 109 S.Ct. at 1255, 103 L.Ed.

2d at 499-500. The court further stated and concluded:

Arbitration under the Act is a matter of consent,

not coercion, and parties are generally free to struc-

ture their arbitration agreements as they see fit. . .

Where, as here, the parties have agreed to abide by

state rules of arbitration, enforcing those rules ac-

cording to the terms of the agreement is fully con-

sistent with the goals of FAA, even if the result is

that arbitration is stayed where the Act would other-

wise permit it to go forward.

Volt, 489 U.S. at 479, 109 S.Ct. at 1256, 103 L.Ed. at

500. It is essential to keep in mind that the key holding

of Volt as expressed by the United State Supreme Court

was that the agreement to arbitrate should be enforced

according to its terms—and that allowed application of

the California law which provided for the stay in proceed-

ings where other parties besides the arbitration parties

were involved in the case. That conclusion does not as-

sist the majority opinion. The rationale of the Volt de-

cision in the present case would require enforcement of

the contract as agreed upon by the parties—which would

29a

require application of the American Arbitration Associa-

tion rules as well as the laws of the State of Connecticut.

I conclude that the contract here should be enforced to

require application of the American Arbitration Associa-

tion Rules and the laws of the State of Connecticut un-

der Volt.

In addition to the conclusion reached under Volt, I

will discuss several cases which have concluded that a

statutory provision similar to Montana’s statutory require-

ment of a statement in capital letters on page one of a

contract is in conflict with the Federal Arbitration Act

and therefore not enforceable. In David L. Threlkeld and

Co. v. Metallgesellschaft Ltd. (2nd Cir. 1991), 923 F.2d

245, Threlkeld asserted that Vermont law voided any

arbitration agreement which does not have a specific ac-

knowledgement of arbitration signed by both parties and

where the agreement to arbitrate has not been displayed

prominently in the contract. The circuit court acknowl-

edged that Threlkeld was correct in asserting that the con-

tracts did not comply with the rigorous Vermont standard.

The circuit court then concluded that the Vermont stat-

ute is preempted by federal law and stated:

Because federal arbitration law governs this dis-

pute, we must determine whether the Vermont stat-

ute is sufficiently consistent with federal law that

the two may peacefully coexist... . The First Cir-

cuit has recently held that restrictive provisions simi-

lar to those found in the Vermont statute are pre-

empted by federal law... .

We agree with the First Circuit that state statutes

such as the Vermont statute directly clash with the

Convention and with the Arbitration Act because

they effectively reincarnate the former judicial hos-

tility towards arbitration. Accordingly we hold that

the Convention and the Arbitration Act preempt the

Vermont statute, and that the . . . arbitration pro-

30a

visions, as drafted, are not enforceable. (Emphasis

supplied. )

Threlkeld, 923 F.2d at 250. Threlkeld is clear author-

ity for concluding that the Montana statute directly clashes

with the Federal Arbitration Act and therefore is not

enforceable.

In a similar manner, Bunge Corp. v. Perryville Feed

and Produce (Mo.1985), 685 S.W.2d 837, addresses a

similar issue. As pointed out by the Missouri court in

Bunge, the Missouri statute is based on the Uniform Ar-

bitration Act (as is the Montana statute) and contains a

provision that each contract shall include a statement in

10 point capital letters which reads substantially as fol-

lows: THIS CONTRACT CONTAINS A BINDING

ARBITRATION PROVISION WHICH MAY BE EN-

FORCED BY THE PARTIES. The Missouri Supreme

Court then stated:

It is clear that § 435.460, if applied to this case,

seeks to impose a requirement for contracts to ar-

bitrate which is in addition to the requirements of

the Federal Arbitration Act. All that is apparently

required under that act is contractual language and

format sufficient for an ordinary written contract. . . .

If the Missouri statute applies, then a commercial

contract sufficient under federal law would be in vio-

lation.

There is a manifest violation of the supremacy

clause if our statute is so applied. The Federal

Arbitration Act was passed by Congress pursuant

to its power to regulate interstate commerce... Any

requirement of state law which adds a burden not

imposed by Congress is in derogation of the Con-

gressional power, and pro tanto invalid. A very re-

cent case so holding is Southland Corp. v. Keeting. . .

We do not hold that the Missouri statute is un-

constitutional. We simply hold that it may not be

3ila

applied to defeat the arbitration provision of a con-

tract which is within the coverage of the federal stat-

ute. . . . (Citations omitted.) (Emphasis supplied.)

Bunge, 685 S.W.2d at 839. The Bunge conclusion is

directly applicable to our present case. If our Montana

Statute applies to the present case, then a commercial

contract sufficient under federal law would be in violation

of the Montana statute even though it meets the require-

ment of the Federal Arbitration Act. As a result, even

if we accept the majority opinion conclusion that the

Montana code section applies, I would hold that Montana

law may not be applied to defeat the arbitration prin-

ciples of a contract which is clearly within the coverage

of the Federal Arbitration Act.

The District Court held that the Federal Arbitration

Act required that the present suit should be stayed until

the arbitration has been held in accordance with the terms

of the agreement. I would affirm that holding.

/s/ Fred J. Weber

Justice

Chief Justice J. A. Turnage concurs in the foregoing

dissent.

/s/ J. A. Turnage

Chief Justice

32a

Justice Karla M. Gray, dissenting.

I respectfully dissent from the Court’s opinion on both

issues presented therein. I write separately because the

reasons for my dissent are not altogether identical to

those which form the basis for Justice Weber’s dissent.

With regard to issue one, I conclude that the franchise

agreement entered into between the Casarottos and DAI

was governed by Connecticut law. It is my view that

the Court’s analysis of this issue is incomplete and

erroneous.

I agree with the Court’s synopsis of our decision in

Emerson v. Boyd, and, on the basis that the agreement

before us does include a choice of law provision, on the

inapplicability of that decision to the case before us. In

my view, Youngblood also is not on point here, since

that case did not relate to whether a statute represents

a statement of public policy by the Montana legislature

and, if so, the extent of that statement of public policy.

I agree with the Court that Montana has a materially

greater interest than Connecticut in the contract issue

presented and that, absent an “effective” choice of law

by the parties, Montana law would apply. I disagree with

the remainder of the Court’s discussion and analysis on

this issue.

My primary concern is that the Court neither presents

nor discusses the specific language contained in the stat-

utory notice requirement. That statute provides that

“[njotice that a contract is subject to arbitration pur-

suant to this chapter shall be typed in underlined capital

letters on the first page of the contract; ... .” Section

27-5-114(4), MCA. By its terms, the franchise agree-

ment before us is subject to Connecticut law, not “this

chapter”’—the MUAA. The legislature’s specific limita-

tion on the applicability of the notice requirement is

clear and unambiguous; under such a circumstance, we

are obligated to so interpret it (Curtis v. Dist. Court of

PORT

33a

21st Jud. Dist. (Mont. 1994), 879 P.2d 1164, 1166,

51 St.Rep. 776, 778) and conclude that the notice re-

quirement is not applicable to the contract before us.

Since the statute is inapplicable by its terms to the con-

tract, it cannot form the basis of a public policy broad

enough to negate the parties’ choice of Connecticut law.

The Court does not even address the specific statutory

language, preferring to resort inappropriately to gener-

alized legislative history for its overly broad interpretation

of the extent to which the notice requirement applies and

the extent to which the legislature adopted the notice

requirement as a public policy. Had the legislature in-

tended the notice requirement to apply to every arbitra-

tion agreement entered into by a citizen or resident of

Montana, notwithstanding that some other jurisdiction’s

law would otherwise apply, it would have done so; it

did not. It is inappropriate for the Court to judicially

broaden the legislature’s clear statute in the gwise of a

conflict of law analysis.

With regard to issue two, I conclude that even if the

Court were correct regarding the applicability of Mon-

tana’s notice requirement under conflict of law principles,

that requirement is preempted by the Federal Arbitration

Act (FAA). Therefore, I also dissent from the Court’s

opinion on this issue.

The Court suggests that the United States Supreme

Court’s Volt decision was a departure from its earlier

Southland/Perry line of cases. It then presents an inade-

quate analysis of Volt. Finally, the Court concludes, pur-

portedly under a Volt analysis, that Montana’s notice

requirement does not undermine the goals and policies of

the FAA. Nothing could be further from the truth.

In Southland, the United States Supreme Court was

faced with a California statute which required judicial

consideration of certain claims brought under it; the Cali-

fornia courts held that the statute precluded arbitration

34a

under an agreement containing an arbitration provision.

Determining that the FAA was a substantive rule appli-

cable in state courts by which Congress intended “to fore-

close state legislative attempts to undercut the enforce-

ability of arbitration agreements,” the Supreme Court

held that the California statute violated the supremacy

clause. Southland was decided in 1984.

In 1987, the Supreme Court decided Perry, another

California case involving a different California statute

which—by its terms—provided that legal actions for

the collection of wages could be maintained notwith-

standing an agreement to arbitrate such claims. Again

the California courts denied a motion to compel arbi-

tration under the parties’ agreement, favoring their legis- |

lature’s effort to render arbitration agreements unenforce- |

able. And again the United States Supreme Court re-

versed, quoting its Southland language that Congress in-

tended to foreclose state legislatures from undercutting

the enforceability of arbitration agreements. For addi-

tional clarity, the Supreme Court added “ “We see noth-

ing in the [FAA] indicating that the broad principle of

enforceability is subject to any additional limitations un-

der state law.’” Perry, 482 U.S. at 489-90 (citations

omitted). Southland and Perry are, as the Court notes,

consistent with each other.

In 1989, the Supreme Court decided Volt. There, faced

with yet another California statute and another decision

from the California courts denying a motion to compel

arbitration on the basis of the state statute, the Supreme

Court affirmed. Contrary to this Court’s suggestion, Volt

is entirely consistent with—and not a retrenchment from

— Southland and Perry. All three cases require this Court

to conclude that Montana’s notice requirement is pre

empted by the FAA.

In Volt, the parties had specifically agreed to submit

disputes under their contract to arbitration under the

California arbitration statutes. The California arbitration

35a

statute at issue in Volt differed markedly from those in

Southland and Perry. As noted above, the earlier cases

involved statutes which clearly undercut the enforce-

ability of arbitration agreements. In Volt, however, the

statute—part of the California Arbitration Act—merely

allowed a court to stay arbitration pending resolution of

related litigation; the right to arbitrate remained. The

issue before the Supreme Court was the same as in the

earlier cases: whether the stay provision would under-

mine the goals and policies of the FAA.

The Supreme Court reiterated that the purpose of the

FAA was to enforce arbitration agreements entered into

by parties, and specifically noted the parties’ agreement

to apply California’s arbitration rules, one of which per-

mitted the stay of arbitration pending related litigation.

On these facts, including the parties’ choice of California

arbitration law and that that law permitted a stay—but

not a voiding—of arbitration, the Supreme Court held that

enforcing the California stay provision did not frustrate

the policy behind the FAA of enforcing arbitration agree-

ments.

The Court’s opinion fails—or refuses-—-to recognize

two important differences between Volt and the case pres-

ently before us. First, the Supreme Court in Volt relied

heavily on the fact that the parties had affirmatively

chosen California arbitration law, including the stay stat-

ute, to govern their agreement. Second, the stay statute

did not undercut, undermine or render unenforceable the

parties’ agreement to arbitrate.

Here, the parties did not affirmatively choose Montana

arbitration law, which includes the notice requirement,

to govern their agreement. They chose Connecticut law.

Moreover, it is clear under Southland, Perry and Volt

that Montana’s notice requirement is preempted by the

Federal Arbitration Act. The reason for this constitutes

the second important difference between this case and

36a

Volt: here, the application of the notice requirement

is not merely a procedural matter; indeed, it totally under-

mines the purposes of the FAA by rendering the parties’

arbitration agreement unenforceable. This is precisely the

result prohibited by the United States Supreme Court

in all three of the cases discussed herein and in the Court’s

opinion on this issue.

I would affirm the District Court’s grant of defendants’

motion to stay judicial proceedings pending arbitration

of plaintiffs’ claims.

/s/ Karla M. Gray

Justice

Chief Justice J.A. Turnage joins in the foregoing dis-

sent of Justice Karla M. Gray.

/s/ J.A. Turnage

Chief Justice

37a

APPENDIX B

[Filed Feb. 17, 1994]

IN THE SUPREME COURT

OF THE STATE OF MONTANA

No. 93-488

PAUL CASAROTTO and PAMELA CASAROTTO,

Plaintiffs and Appellants,

Vv.

Nick LOMBARDI and Doctor’s ASSOCIATES, INC.,

Defendants and Respondents,

and

DANIEL L. and Des Hupson, and

D&D SUBWAY CORPORATION,

Defendants.

ORDER

Pursuant to the Internal Operating Rules of this Court,

this cause is classified for oral argument before the Court

sitting en banc and will be set on a future calendar of

this Court.

IT IS ORDERED that counsel for all parties in this

appeal are hereby directed to specifically address in oral

argument the issue of preemption in the following United

States Supreme Court case: Volt Information Sciences,

Inc. vs. Board of Trustees of the Leland Stanford Junior

University (1989), 489 U.S. 468, 103 L.Ed.2d 488,

109 S.Ct. 1248.

38a

This Court will consider receiving amicus curiae briefs

relative to this cause.

The Clerk is directed to mail a true copy of this order

to counsel of record for all parties and to the Executive

Directors of the State Bar of Montana, the Montana Trial

Lawyers’ Association and the Montana Defense Trial

Lawyers’ Association.

DATED this 17th day of February, 1994.

For the Court,

By /s/ J.A. Turnage

Chief Justice

—

Can Rts eS tty. ccna is mended Mimi at BO tis 86s PONS IDE

39a

APPENDIX C

[Filed Jun. 2, 1993]

MONTANA EIGHTH JUDICIAL DISTRICT COURT

CASCADE COUNTY

No. BDV-92-860

PAUL CASAROTTO and PAMELA CASAROTTO,

- Plaintiffs,

DANIEL L. and Des Hupson,

D&D SUBWAY CORPORATION, NicK LOMBARDI,

and DocTor’s ASSOCIATES, INC.,

Defendants.

ORDER

This cause is before the Court on the defendants Doc-

tor’s Associates, Inc. (“DAT”) and Nick Lombardi’s mo-

tion to dismiss, or in the alternative, to stay pending ar-

birtation. The Court having considered the briefs, the

argument of counsel and the evidence submitted, rules

as follows:

1. The plaintiff Paul Casarotto (the “franchisee”) and

DAI entered into a franchise agreement dated April 25,

1988 that concerned interstate commerce. DAI is the

national franchisor of “Subway” sandwich shops and the

franchise agreement permits, inter alia, the franchisee a

license to use the nationally-known and federally-registered

“Subway” trademark.

2. The franchise agreement contained a clause requir-

ing that:

Any controversy or claim arising out of or relating

to this contract or the breach thereof shall be settled

by Arbitration in accordance with the Commercial

Arbitration Rules of the American Arbitration As-

sociation at a hearing to be held in Bridgeport, Con-

40a

necticut and judgment upon an award rendered by

the Arbitrator(s) may be entered in any court hav-

ing jurisdiction thereof. The commencement of ar-

bitration proceedings by an aggrieved party to settle

disputes arising out of or relating to this contract

is a condition precedent to the commencement of

legal action by either party. The cost of such a

proceeding will be borne equally by the parties.

3. The claims asserted by the plaintiffs against defend-

ants DAT and its alleged agent Lombardi arise out of

and relate to the franchise agreement and are therefore

encompassed by the arbitration clause and referable to

arbitration.

4. The Federal Arbitration Act requires that if an

action is brought upon any issue referable to arbitration

under the terms of an arbitration agreement, the suit shall

be stayed “until such arbitration has been had in accord-

ance with the term of the agreement... .” 9 U.S.C.

§ 3. See also, e.g., Moses H. Cone Memorial Hospital

v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983);

Downey v. Christensen, 825 P.2d 557, 559 (Mont.

1992).

5. DAI has demanded arbitration of the plaintiffs’

claims under the rules of the American Arbitration As-

sociation.

Accordingly, it is ordered and adjudged that plaintiffs’

claims against the defendants Doctor’s Associates, Inc.,

and Nick Lombardi are hereby stayed until the arbitration

has been had in accordance with the terms of the ar-

bitration agreement.

DONE and ORDERED this 2nd day of June, 1993.

/s/ John M. McCarvel

District Judge

Se Va ee ee ee ee ya oa 5. supa 4 ay.

4la

APPENDIX D

STATUTE INVOLVED

Section 27-5-114, Montana Code Annotated

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

tions. (1) A written agreement to submit an existing

controversy to arbitration is valid and enforceable except

upon such grounds as exist at law or in equity for the

revocation of a contract.

(2) A written agreement to submit to arbitration any

controversy arising between the parties after the agree-

ment is made is valid and enforceable except upon such

grounds as exist at law or in equity for the revocation

of a contract. Except as permitted under subsection (3),

this subsection does not apply to:

(a) claims arising out of personal injury, whether

based on contract or tort;

(b) any contract by an individual for the acquisition

of real or personal property, services, or money or credit

where the total consideration to be paid or furnished by

the individual is $5,000 or less:

policies or annuity contracts except for those contracts

between insurance companies; or

(d) claims for workers’ compensation.

(3) A written agreement between members of a trade

or professional organization to submit to arbitration any

controversies arising between members of the trade or

professional organization after the agreement is made

is valid and enforceable except upon such grounds as

exist at law or in equity for the revocation of a contract.

(4) Notice that a contract is subject to arbitration

pursuant to this chapter shall be typed in underlined capi-

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

such notice is displayed thereon, the contract may not be

subject to arbitration.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.