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

Supreme Court brief1995

Ask Donna

What actually matters in this document.

Text

Supreme Court, U.S.

F I LED

No. 94-1518 MAY 9 1999

OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

DOCTOR'S ASSOCIATES, INC.

and NICK LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Petition for a Writ of Certiorari to

the Supreme Court of Montana

BRIEF FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION, AS AMICUS CURIAE

SUPPORTING PETITIONERS

JOHN F.. VERHEY MATTHEW R. SHAY

Counsel of Record THE INTERNATIONAL

LEwis G. RUDNICK FRANCHISE ASSOCIATION

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

203 North LaSalle Street Suite 900

Suite 1800 Washington, D.C. 20005

Chicago, Illinois 60601 (202) 628-5000

(312) 368-4000

Counsel for Amicus Curiae

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES ................. ii

INTEREST OF THE AMICUS CURIAE .....

SUMMARY OF ARGUMENT ................

NE. bid ou iae eid yds cewaee eed enin

THIS COURT SHOULD DECIDE WHETHER A

STATE STATUTORY NOTICE PROVISION

FOR ARBITRATION IS PREEMPTED BY THE

FEDERAL ARBITRATION ACT ........... 7

A. The Montana Supreme Court’s Decision

Disregards Prior Decisions Of This Court

And Other Lower Federal Courts .... 8

B. The Montana Supreme Court’s Decision

Distorts This Court’s Reasoning In Volt . 1]

i II.

THE MONTANA SUPREME COURT’S DE-

CISION REPRESENTS UNSOUND PUBLIC

PRET 6640665 beenbandusisevdedsesevestve 13

SAE bd. cd nds awedeveerewskedaurbense 18

TABLE OF AUTHORITIES

CASES: PAGE

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

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

CA. GE CURED occcvcicesatecseaveesesseeee 10, 11

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

115 B. Ch. GG CIR cccccevasevctesunstseee 9, 14

American Physicians Service Group, Inc. v. Port

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

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

Ape. Ti, TED s0vendtvesexacateeaseseean 10

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

SORR CD) ck vcvdsidnnveoieeeeeee 17

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

st a. ape Se eee 10

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

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

missed, G01 US. 1907 (1901)... ccccceceses 10

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

S067 GRD) va cédckdies tuesedscansabascees 14

Mastrobuono v. Shearson Lehman Hutton, Inc.,

236. BS. CR. SEER CURED 0 nccccccacvesdsucnese §

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Foon., GB UR. Gib. GORE ter vavacsccososess 14

Perry v. Thomas, 482 U.S. 483 (1987) ... 4, 5, 8, 9, 11, 13

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

(1st Cir. 1989), cert. denied, 495 U.S. 956 (1990) . 10

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

Se Ge See o.de4as ans eke 14

iii

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

TMicueEle teach veegawededeveneeenes 4, 5, 8,9, 11, 13

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

tees of Leland Stanford Junior University, 489

i ees wees 5, 7, 9, 11, 12, 13

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

ead ie tee deine eaee wee hts 10

STATUTES:

a ng ee eekees 5, 8,9

No. 94-1518

IN THE

Supreme Court of the United States

OcTOBER TERM, 1994

DOCTOR’S ASSOCIATES, INC.

and NICK LOMBARDI,

Petitioners,

Vv.

PAUL CASAROTTO and PAMELA CASAROTTO,

Respondents.

On Petition for a Writ of Certiorari to

the Supreme Court of Montana

BRIEF FOR THE INTERNATIONAL

FRANCHISE ASSOCIATION, AS AMICUS CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE AMICUS CURIAE

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

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

world representing the interests of franchising. IFA has

more than 750 franchisor members and, since first inviting

franchisees to join in 1993, has already attracted more

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

center for current and prospective franchisors and fran-

chisees, state and federal government agencies, and the

- =

public. IFA also represents the interests of franchising

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

ation has been instrumental in promoting balanced legisla-

tion to regulate franchising practices in the United States.

A franchise is a contractual relationship in which the

franchisor, the owner of a business concept and associated

trademarks or service marks, authorizes a franchisee to

conduct a business that is identified by the franchisor’s

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

tem. The contractual relationship is defined by a franchise

or license agreement, which sets forth the respective obli-

gations of the franchisor and franchisee. To promote uni-

formity in their franchise networks, franchisors utilize

standardized agreements. However, such “form’’ agree-

ments are frequently subject to negotiation. An increas-

ing number of franchising companies, in an effort to resolve

disputes with their franchisees in the least costly, least

disruptive and most expeditious manner possible, include

in their franchise agreements an undertaking to resolve

disputes by arbitration, binding on both the franchisor and

the franchisee. Such agreements obligate the parties to arbi-

trate disputes, usually under the auspices of the American

Arbitration Association or similar organization, and often

in the home state of the franchisor. In the past year alone,

almost 400 arbitrations involving franchise relationships

were initiated with the American Arbitration Association.

Historically, many state courts and state legislatures

have looked dimly on arbitration, especially when it oc-

curred as the result of a pre-dispute agreement to arbi-

trate. Whether this reluctance to honor agreements to ar-

bitrate stemmed from the belief that arbitration did not

afford the same procedural or substantive safeguards as

litigation, or whether it grew out of the states’ effort to

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

a we

was that arbitration agreements were routinely disregarded.

With the passage of the Federal Arbitration Act (“FAA”)

and rigorous enforcement of arbitration agreements under

the FAA, especially by federal courts, most state courts

and legislatures grudgingly accepted arbitration as a legiti-

mate means of resolving disputes. In the past several

years, however, a backlash has occurred. A number of

states, including Montana, have enacted statutes, pur-

portedly under the guise of ensuring that arbitration

agreements are freely entered into, that seriously under-

mine the enforceability of agreements to arbitrate. One

of the most prevalent examples of such legislation is the

Montana statute that is the subject of the Montana Su-

preme Court’s decision below,' which requires that notice

of the existence of an agreement to resolve disputes by

arbitration be displayed on the first page of the contract

in underlined, capital letters, a requirement that is appli-

cable only to arbitration agreements, not to contracts

generally. While federal courts have consistently struck

down anti-arbitration statutes of this type on preemption

grounds, a growing number of state courts, of which the

Montana Supreme Court is but the latest example, have

held otherwise, permitting states to single out arbitration

agreements for unfavorable treatment.

IFA is vitally concerned about this case because per-

mitting the decision of the Montana Supreme Court to

stand will encourage other state courts and legislatures

to undertake similar steps to undercut the enforceability

' The Montana Supreme Court’s opinion in this case, together

with the special concurrence and dissents, is printed as Appendix

A to the Petition for a Writ of Certiorari filed with the Court

in this case. References to the lower court’s opinion are designated

“App. A” followed by a page reference.

aitlien

of agreements to arbitrate and further thwart the strong

federal policy favoring arbitration. As a result, franchisors

and other businesses that include arbitration provisions

in their form agreements will either be forced to tailor

their agreements to the laws of 50 different states or for-

go the many advantages inherent in the arbitration proc-

ess. Even now, the inconsistent treatment of arbitration

notice provisions by federal and state courts introduces

great uncertainty into the franchise relationship and

spawns satellite litigation over the enforceability of those

provisions that threatens to overwhelm the benefits of

economy and efficiency that arbitration was originally in-

tended to produce.

Pursuant to Rule 37.2 of the Rules of this Court, IFA

respectively submits this brief as amicus curiae in support

of petitioners. Because many IFA members, both fran-

chisors and franchisees, utilize arbitration as a means of

resolving disputes, IFA has a substantial interest in the

outcome of this case and is able to provide an additional

and broader prospective on the issues presented. IFA be-

lieves this brief will assist the Court in analyzing and

resolving these issues. The parties have consented to the

filing of this brief, and their written consents have been

filed with the Clerk of Court.

SUMMARY OF ARGUMENT

In the decision below, the Montana Supreme Court un-

duly restricted the preemptive reach of Section 2 of the

FAA by holding that Montana’s notice requirement for arbi-

tration agreements does not violate the Supremacy Clause.

In doing so, the Montana Supreme Court disregarded two

controlling decisions of this court, Southland Corp. v. Keat-

ing, 465 U.S. 1 (1984), and Perry v. Thomas, 482 U.S.

483 (1987), which held that states may not restrict the en-

forceability of agreements to arbitrate except on “grounds

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

tract.” 9 U.S.C. § 2. Since Montana’s notice requirement

is directed exclusively at arbitration provisions and not

at any other contractual terms, it is preempted by the

FAA. In addition to conflicting with Southland and Perry,

the Montana Supreme Court’s decision also runs directly

contrary to the decisions of the three federal courts of

appeals that have addressed the issue, all of which held

that state arbitration notice requirements are preempted

by the FAA. Instead of following these decisions, the

court below relied on two intermediate state courts in In-

diana and Texas that upheld similar notice provisions.

Review of the decision below is necessary to signal to

state courts and legislatures that, for purposes of pre-

emption under the FAA, burdening the enforceability of

arbitration agreements with a notice provision is no differ-

ent than declaring those agreements unenforceable per se.

In determining that Montana’s notice provision did not

undermine the goals and policies of the FAA, the Mon-

tana Supreme Court also distorted this Court’s holding

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

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

The decision in Volt was premised on the notion that the

primary purpose of the FAA is to enforce privately nego-

tiated agreements to arbitrate, even where those agree-

ments allow for arbitration to be stayed pending the reso-

lution of related litigation. Because the parties here chose

the AAA’s Commercial Arbitration Rules and Connecticut

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

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

as the Montana Supreme Court reasoned, that another

state’s law be substituted that would invalidate the par-

ties’ agreement to arbitrate. In addition, although in Volt

this Court observed that the FAA does not entirely preempt

state arbitration laws, in particular state laws governing

the procedures under which arbitration is conducted, the

Montana Supreme Court perverted this holding into a li-

cense to enforce a state arbitration law that went to the

very substance of the right to arbitrate, prohibiting arbi-

tration from occurring altogether. The Montana Supreme

Court’s conclusion that the FAA mandates the enforce-

ment only of those arbitration agreements that are en-

tered into “knowingly,” which Montana’s notice provision

is purportedly designed to promote, flies in the face of

the FAA’s insistence on rigorous enforcement of arbitra-

tion agreements. Because of the apparent solicitude for

arbitration of the majority of the Montana Supreme Court,

when in fact its decision and the statute it enforced are

based on hostility to arbitration agreements, it is crucial

that this Court grant review of the decision below to dis-

courage similar attempts by state courts and legislatures

to undermine the FAA on the pretext of furthering its

goals and policies.

The Montana Supreme Court’s decision is also premised

on judicial and legislative hostility to arbitration, which

has long been discredited by this Court in view of the

many advantages that arbitration affords over traditional

litigation, including speed, economy, adjudicative exper-

tise and the capacity to preserve long-term relationships

once the dispute is resolved. To enforce statutes like Mon-

tana’s either would deprive the parties to a franchise rela-

tionship of these advantages altogether, or would seriously

impede the use of arbitration in the franchise relation-

ship by burdening franchisors with tailoring their contract

documents to meet the requirements of 50 different states

relative to the enforceability of arbitration provisions.

Moreover, the Montana Supreme Court’s reasoning is based

on unsupported and unfounded assumptions regarding the

negotiability of arbitration agreements and the role of

forum-selection clauses in those agreements.

The decision below introduces rationales that substan-

tially curtail the enforceability of agreements to arbitrate

and raise issues of great importance under the FAA and

the Supremacy Clause. These issues have enormous sig-

nificance for a large and growing segment of American

business. These are compelling reasons for this Court’s

review.

ARGUMENT

THIS COURT SHOULD DECIDE WHETHER A STATE

STATUTORY NOTICE PROVISION FOR ARBITRATION

IS PREEMPTED BY THE FEDERAL ARBITRATION ACT

In holding that the FAA does not preempt Montana’s

statute requiring that a contract containing an arbitration

agreement include a conspicuous notice to that effect on

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

regarded two of this Court’s controlling precedents and

a substantial number of lower federal court decisions that

flatly refute the Montana Supreme Court’s holding. In so

doing, the Montana Supreme Court has severely restricted

the preemptive reach of the FAA. Moreover, the Montana

Supreme Court reached its decision by seriously distort-

ing this Court’s holding in Volt Information Sciences, inc.

v. Board of Trustees of Leland Stanford Junior Uni-

versity, 489 U.S. 468 (1989), to the point of emasculating

the enforceability of agreements to arbitrate under the

FAA.

A. The Montana Supreme Court’s Decision Disregards Prior

Decisions Of This Court And Other Lower Federal

Courts

The Montana Supreme Court held that the Montana

notice provision is not preempted by Section 2 of the FAA

because the notice requirement does not ‘‘undermine the

goals and policies of the FAA.” App. A at 16a. In so hold-

ing, however, the Montana Supreme Court disregarded

this Court’s controlling decisions in Southland Corp. v.

Keating, 465 U.S. 1 (1984), and Perry v. Thomas, 482 U.S.

483 (1987). In holding that a provision of the California

Franchise Investment Law requiring judicial consideration

of claims brought under the statute was preempted by

the FAA, this Court in Southland declared that the only

permissible limitation under state law on the enforceability

of agreements to arbitrate (other than the “involving com-

merce” requirement) was whether those agreements were

revocable upon “ ‘grounds as exist at law or in equity for

the revocation of any contract.’ ” 465 U.S. at 11 (quoting

9 U.S.C. § 2). Likewise, in Perry, this Court struck down

a provision of the California Labor Code, which precluded

arbitration of wage collection claims, on the ground that

the California law did not ‘{arise] to govern issues con-

cerning the validity, revocability, and enforceability of con-

tracts generally,” but rather “(took] its meaning precise-

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

482 U.S. at 492 n. 9.

The Montana statute at issue here is preempted by the

FAA because it clearly “takes its meaning preciseiy from

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

does not require that any other contractual provision be

flagged with a conspicuous notice provision on the first

page of the contract. Arbitration agreements alone are

burdened with this requirement in Montana—burdened,

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

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

sions in Southland and Perry, therefore, the Montana

statute is preempted by the FAA.

Indeed, in a recent pronouncement on the FAA, this

Court reaffirmed that, under its holdings in Southland and

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

date arbitration agreements. See Allied-Bruce Terminix

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

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

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

rejected a request to overrule Southland and permit state

courts to apply their own anti-arbitration laws regardless

of whether interstate commerce was involved, holding that

Southland was well-established law and that, consequent-

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

arbitration agreements to invalidate an arbitration pro-

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

the “basic purpose of the Federal Arbitration Act is to

overcome courts’ refusal to enforce agreements to arbi-

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

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

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

cluded that while “States may regulate contracts, includ-

ing arbitration clauses, under general contract law prin-

ciples and they may invalidate an arbitration clause ‘upon

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

tion of any contract’[,] . . . [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 en-

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

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

done in the statute at issue here precisely what this Court

and numerous other federal and state courts over the past

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

contracts are fair enough to enforce all their basic terms,

even absent a special notice designed to bring the exist-

ence of those terms to the parties’ attention, but that ar-

bitration agreements are not fair enough to enforce with-

out such a notice.

The Montana Supreme Court’s holding also disregards

the contrary decisions from the three federal courts of

appeals that have addressed the issue, all of which have

invalidated arbitration notice provisions similar to the

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

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

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

a Vermont statute that required agreements to arbitrate

to be “prominently displayed” in contracts and signed by

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

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

(invalidating a state regulation requiring full written dis-

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

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

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

contracts highlight the existence of arbitration clauses in

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

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

a requirement that arbitration agreements bear an attor-

ney’s acknowledgement that all parties have been advised

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

Court has joined a growing number of state courts that

have reinvigorated the former hostility to arbitration by

concluding that arbitration notice provisions do not run

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

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

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

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

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

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

similar laws that single out arbitration agreements for un-

favorable treatment by regulating the placement and ac-

knowledgment of arbitration agreements in certain types

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

couraged by the Montana Supreme Court’s decision below

to uphold similar anti-arbitration statutes against preemp-

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

Court to review—and reverse—the decision of the Montana

Supreme Court in order to signal to state courts and

legislatures that, for purposes of preemption under the

FAA, statutory notice provisions for arbitration are no

less hostile to arbitration than were the statutes at issue

in Southland and Perry.

B. The Montana Supreme Court’s Decision Distorts This

Court’s Reasoning In Volt

In sustaining the Montana statute against a preemption

attack, the Montana Supreme Court also seriously dis-

torted this Court’s reasoning in Volt in several respects.

First, the decision below completely disregards the par-

ties’ arbitration agreement. As this Court observed in

Volt, the primary purpose of the FAA is to enforce

“privately negotiated arbitration agreements,” and par-

ties to an arbitration agreement should be “at liberty to

choose the terms under which they will arbitrate.” 489

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

cial Arbitration Rules and Connecticut law, not Montana

law, to govern their arbitration agreement. Since neither

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

statutes).

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

tions the enforceability of an agreement to arbitrate on

the existence of a notice provision, Volt cannot support

the result reached by the Montana Supreme Court. On

the contrary, the very notion of enforcing a notice provi-

sion not chosen by the parties to invalidate an arbitra-

tion provision chosen by the parties is completely an-

tithetical to the teaching of Volt and strikes at the heart

of the FAA’s purpose—to ensure that private agreements

to arbitrate are rigorously enforced according to their

terms.

Second, the Montana Supreme Court’s unduly narrow

interpretation of the scope of federal preemption of state

arbitration laws is impossible to square with Volt. Pur-

portedly relying on Volt, the Montana Supreme Court

declared that Montana’s notice requirement does not “un-

dermine the goals and policies of the FAA,” because Con-

gress never intended to preempt the entire field of arbi-

tration and because the FAA does not require parties to

arbitrate when they have not agreed to do so. App. A

at 16a. However, this Court’s statement in Volt that the

FAA does not entirely preempt state arbitration law was

made in reference to a California procedural statute that

merely had the effect of delaying an arbitration until after

litigation of related claims had occurred—and under cir-

cumstances where the parties had chosen that law to govern

their arbitration. Thus, the California law affected only

the timing of arbitration, and did not purport to prohibit

arbitration altogether. Here, however, the Montana Su-

preme Court has interpreted Volt to permit a state to

ban arbitration in its entirety, notwithstanding the exist-

ence of an arbitration agreement enforceable under the

laws of the parties’ own choosing. Nor does the justifica-

tion offered by the Montana Supreme Court for its hold-

ing—that the FAA mandates the enforcement only of those

~i-

arbitration agreements that are “knowingly” entered in-

to—survive scrutiny. Since the “knowing” requirement ap-

plies only to arbitration agreements and not to contracts

generally in Montana, it is preempted under Southland

and Perry. Behind Montana’s preoccupation with ensuring

that arbitration agreements are “knowingly” entered into

lies considerable legislative and judicial hostility toward

arbitration. Because of this apparent solicitude for arbitra-

tion of the majority of the Montana Supreme Court, when

its decision and the statute it enforced are, in fact, based

on hostility to arbitration agreements, and in order to

forestall similar attempts by state courts or legislatures

to use this Court’s reasoning in Volt to turn the FAA

on its head, it is critical that this Court grant review of

that decision.

THE MONTANA SUPREME COURT’S DECISION

REPRESENTS UNSOUND PUBLIC POLICY

Arbitration notice provisions like Montana’s not only run

afoul of the Supremacy Clause and Section 2 of the FAA,

but also represent unsound public policy based on a dis-

credited judicial and legislative hostility to arbitration. Op-

ponents of arbitration have long maintained that arbitra-

tion represents an inferior, and inadequate, form of justice

compared with traditional litigation because, they say, it

deprives parties of, among other things, substantive rights

under state statutory and common law, the right to a jury

trial, wide-ranging discovery procedures, a broad right of

appeal, competent adjudicators and, in many cases, an in-

state forum. Detractors of arbitration also attack the con-

sensual nature of pre-dispute arbitration agreements, point-

ing out that those agreements are often contained in non-

negotiated form contracts between parties of unequal bar-

gaining power. These anti-arbitration sentiments, barely

concealed in the majority opinion of the Montana Supreme

Court, come to the surface in the special concurring opin-

ion of Justice Trieweiler. App. A at 18a-22a. This Court,

however, has repeatedly dismissed those objections as un-

founded® and, in doing so, has acknowledged the many

benefits of arbitration, including speed, see, e.g., Terminix,

115 S. Ct. at 843; economy, see, e.g., id.; informality and

adaptability of procedures; see, e.g., Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 633

(1985); availability of expert adjudicators, see, e.g., Mit-

subishi, 473 U.S. at 633; and ability to preserve the dis-

putants’ relationship, see Terminix, 115 S. Ct. at 843.

Moreover, as this Court has observed, arbitration offers

advantages to large and small businesses as well as to in-

dividuals, notwithstanding that it is often invoked under a

form contract between parties having unequal bargaining

power. See Terminix, 115 S. Ct. at 843; Gilmer v. Inter-

state/Johnson Lane Corp., 111 S. Ct. 1647, 1655 (1991).

Permitting the decision below, with its inherent bias

against arbitration, to stand will encourage other state

courts and legislatures to likewise impair the enforceabil-

ity of arbitration agreements, with serious repercussions

for franchising and other business relationships that utilize

% The various objections to arbitration which this Court has dis-

missed include: 1) its inability to further important social policies,

see Gilmer v. Interstate/Johnson Lane Corp., 111 S. Ct. 1647, 1653

(1991); 2) inherent bias of arbitrators, see id. at 1654; Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 US. 614, 634

(1985); 3) lack of discovery procedures, see Gilmer, 111 S. Ct. at 1654-

55; 4) lack of meani ] judicial review, see Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 232 (1987); incompetence

of arbitrators, see McMahon, 482 U.S. at 232; 6) limitations on

substantive rights or relief, see Gilmer, 111 S. Ct. at 1655; and

7) that it is the product of unequal bargaining power, Gilmer, 111

S. Ct. at 1655.

ee nn

arbitration to resolve disputes. Arbitration enjoys wide-

spread use in the franchise community, in large part be-

cause it offers many advantages to franchisors and fran-

chisees over traditional litigation. It is typically much less

expensive than litigation because of the absence of, or

limitations on, pleading requirements, motion practice,

discovery and pretrial procedures. Since many disputes

between franchisors and franchisees, such as claims for

nonpayment of royalty fees, involve relatively small amounts

of money, arbitration enables the parties to resolve these

disputes economically without having to spend the entire

value of the claim pursuing a remedy. Moreover, the great

majority of franchisors are relatively small companies and,

like many franchisees, cannot afford the high cost associ-

ated with pursuing or defending claims in a judicial forum.

The elimination or reduction in scope of motion prac-

tice, discovery and pretrial procedures in arbitration also

makes it generally much quicker than litigation. The rela-

tive speed with which arbitrations proceed from the ini-

tial filing of the arbitration demand to the issuance of an

award and, if necessary, confirmation of the award by a

court, not only will in most cases cost the parties less

in attorneys’ fees but also will enable them to resume

their relationship more quickly without the continuing

disruptive influence of a pending lawsuit. Similarly, the

informality and often less adversarial nature of arbitra-

tion enhance the prospect that the franchisor and fran-

chisee will be able to honor their respective obligations

while the arbitration is pending, put aside their differences

once the arbitration has concluded and keep the franchise

relationship intact. Franchise relationships are unique in

today’s business world because they typically run for a

period of ten to twenty years. Since disputes are bound

to arise in a relationship of that length, arbitration offers

—16—

a method for resolving those disputes while preserving

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

cause arbitration is more flexible with regard to sched-

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

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

franchisees alike, an important consideration in light of

the fact that many franchisors and franchisees are small

businesses with limited personnel. Finally, arbitration also

offers the parties to a franchise relationship the option

of having an individual experienced in franchising adjudi-

cate their dispute. Because franchising is a unique form

of business organization and is subject to a wide array

of registration, disclosure and relationship laws, franchise

expertise is often a sought-after qualification of arbitrators

chosen to decide franchise disputes. To ensure that the

many advantages of arbitration remain available to them,

national franchisors should not be compelled to tailor their

contract documents to meet the requirements of 50 differ-

ent states.

Furthermore, there is nothing inherent in the arbitra-

tion process itself that favors franchisors over franchisees.

Contrary to the anti-arbitration sentiments expressed in

the special concurring opinion of Justice Trieweiler, fran-

chisees are often sophisticated, multi-unit operators who,

on their own behalf or through counsel, negotiate the

terms of their franchise agreements, including whether

and under what circumstances arbitration of disputes will

occur. Although arbitration agreements often provide for

arbitration in the franchisor’s home state, there are sound

business reasons for a franchisor to consolidate disputes

with its franchisees in a forum where it can resolve them

as cost-effectively as possible. It is certainly no more

burdensome for an individual franchisee to arbitrate in

the franchisor’s home state than it is for a national fran-

chisor to arbitrate against multiple franchisees in their

—17—

respective home states. Indeed, in light of this Court’s de-

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

1522 (1991), upholding the enforceability of a non-negoti-

ated choice-of-forum clause printed on the reverse side

of a cruise line passenger ticket, there is no serious

argument that forum selection clauses in the franchise

relationship—a business relationship—are not fully en-

forceable.

Enforcement of arbitration agreements in the franchise

relationship will also produce systemic benefits, economiz-

ing on the scarce judicial resources available for resolving

other disputes where parties may not be able to structure

a dispute resolution procedure in advance. Those scarce

judicial resources are utilized not only when a dispute sub-

ject to arbitration is instead resolved in a judicial forum,

but also when parties, encouraged by anti-arbitration deci-

sions like that of the Montana Supreme Court in this case,

participate in satellite litigation such as this to challenge

the enforceability of agreements to arbitrate. The benefits

that Congress sought to realize by mandating the rigorous

enforcement of agreements to arbitrate will be realized

only if state courts and state legislatures are reminded

that attempts to undermine the enforceability of agree-

ments to arbitrate will not go unnoticed by this Court.

Otherwise, state legislatures will be unleashed to formu-

late all manner of requirements for, and obstacles to, ar-

bitration agreements, and the sound public policy that

underlies the FAA will be subverted. Moreover, there is

no assurance that states will not seek to burden arbitra-

tion agreements retroactively, contending that the right

to arbitrate is a purely procedural right, the deprivation

of which would not impair obligations or substantive rights’

under franchise agreements. For those reasons, it is critical

to the franchising community that this Court review the

decision of the Montana Supreme Court.

—18—

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

JOHN F. VERHEY MATTHEW R. SHAY