Opposition Brief — Connolly v. Securities Industry Ass'n

we aa woes '.; ——_—

Supreme Court, U.S,

() FILED

No. 89-894

DEC-27 398

In the JOSEPH F. SPANIOL, JR.

Supreme Court of the United States

—

- OCTOBER TERM, 1989.

MICHAEL J. CONNOLLY, SECRETARY

OF STATE, AND BARRY C. GUTHARY,

DIRECTOR, MASSACHUSETTS SECURITIES DIVISION,

PETITIONERS,

Vv.

SECURITIES INDUSTRY ASSOCIATION, DEAN WITTER

REYNOLDS INC., DONALDSON, LUFKIN & JENRETTE

SECURITIES CORPORATION, DREXEL BURNHAM

LAMBERT INCORPORATED, FIDELITY BROKERAGE

SERVICES, INC., KIDDER PEABODY & CO.

INCORPORATED, MERRILL LYNCH, PIERCE,

FENNER & SMITH INCORPORATED, PAINEWEBBER

INCORPORATED, PRUDENTIAL-BACHE SECURITIES

INC., SHEARSON LEHMAN HUTTON INC.,

AND SMITH BARNEY, HARRIS UPHAM & CO.

INCORPORATED,

RESPONDENTS.

’ RESPONDENTS’ BRIEF IN OPPOSITION TO PETITION

sage py CERTIORARI TO THE UNITED STATES

2 cai OF APPEALS FOR THE FIRST CIRCUIT

GERALD F. RATH*

E. SUSAN GARSH

STEVEN W. HANSEN

Don E. Gorton, III

BINGHAM, DANA & GOULD

150 Federal Street

Boston, Massachusetts 02110

Paks (617) 951-8000

Question Presented for Review

Whether state regulations which apply only to arbitration

agreements, and which impose different and more onerous

formation rules for arbitration contracts than pertain to con-

tracts generally, are preempted by the Federal Arbitration Act.

Table of Contents iii

Question presented for review i

Table of authorities iv

Statement of the case

Reasons why a writ of certiorari should not be granted 3

I. The First Circuit decision is consistent with appli-

cable decisions of the court 3

A. This Court has provided considerable guid-

ance on the proper construction of the Federal

Arbitration Act 3

B. The Court of Appeals followed the teachings

of this Court on FAA preemption 5

1. No conflict is created by the fact that the

Regulations apply only to securities brokers 5

2. The First Circuit decision is consistent with

applicable decisions of this Court because

the Regulations single out arbitration agree-

ments for special treatment 6

3. The Court of Appeals followed applicable

decisions of this Court in concluding that

the Regulations are preempted whether or

not they directly prohibit enforcement 10

4. The First Circuit correctly held that the

Regulations conflicted with the equal foot-

ing policy under the FAA 11

II. Petitioners have not established an important

question of Federal law that has not been, but

should be, settled by this Court 12

III. There is no conflict among the circuits or be-

tween the First Circuit and a State Court of last

resort 12

iv TABLE OF AUTHORITIES CITED

IV. There is no genuine dispute as to applicable State

law 14

Conclusion 15

Appendix A 17

Statement Required by Rule 28.1 17

Table of Authorities Cited

CASES

Adams v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

888 F.2d 696 (10th Cir. 1989) 9n, 10n

Bowen v. Massachusetts, 108 S. Ct. 2722 (1988) 14n

Brockett v. Spokane Arcades, Inc., 472 U.S. 491

(1985) 14n

Carpenter v. Suffolk Franklin Sav. Bank, 370 Mass.

314, 346 N.E.2d 892 (1976) On

Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282

(9th Cir. 1988) 10n

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

(8th Cir. 1972) 13

Dean Wittes Reynolds, Inc. v. Byrd, 470 U.S. 213

(1985) a a © 2

Laing v. United States, 423 U.S. 161 (1976) 12

Markell v. Sidney B. Pfeifer Foundation, Inc., 9 Mass.

App. Ct. 412, 402 N.E.2d 76 (1980) 9n

Michigan Canners & Freezers Ass’n v. Agricultural

Marketing & Bargaining Board, 467 U.S. 461 (1984) 9n

Mitsubishi Motors Corp. v. Soier Chrysler-Plymouth,

Inc., 473 U.S. 614 (1985) 3n, 4, 9n, 11

TABLE OF AUTHORITIES CITED V

Morton v. Ruiz, 415 U.S. 199 (1974) 12

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Corp., 460 U.S. 1 (1983) 3n, 4, 11

Nussebaum v. Chambers & Chambers, Inc. , 322 Mass.

419, 77 N.E.2d 780 (1948) 10n

Page v. Moseley, Hallgarten, Estabrook & Weeden,

Inc., 806 F.2d 291 (1st Cir. 1986) 9n

Patterson v. Lamb, 329 U.S. 539 (1947) 12

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

3, 4, 5, 6, 7, 8, 9, 13

Rodriguez de Quijas v. Shearson/American Express,

Inc., 109 S. Ct. 1917 (1989) 3n, 4, 6, 9, 11

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

1147 (E.D. Va. 1989) 13

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) 3n, 4

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

U.S. 220 (1987) 3n, 4, 6, 8

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

3n, 4n, 5, 6, 7, 9, 10

Volt Information Sciences, inc. v. Board of Trustees,

109 S. Ct. 1248 (1989) 3n, 4n, 7, 9n

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

1986) 13

Wilson Elec. Contractors, Inc. v. Minnotte Contracting

Corp., 878 F.2d 167 (10th Cir. 1989) 13

vi TABLE OF AUTHORITIES CITED

STATUTES, REGULATIONS, AND CONGRESSIONAL PROVISIONS

54 Fed. Reg. 21,144 (May 16, 1989) 6n

950'C.M.R. § 12.104(g)(1)(a)-(c) 2

Alaska Stat. § 0.955.535(b) (Michie 1988 ed.) 13n

Cal. Civ. Proc. Code §§ 1295 (a) and (b) (West 1982 ed.) 13n

Ill. Rev. Stat. ch. 10, § 209 (West 1987 ed.) 13n

Mass. Gen. Laws Ann.

ch. 110A, § 201 (1989 Supp.) 2, 10n

ch. 110A, § 204 (1989 Supp.) 2, 10n

Mich. Comp. Laws § 600.5041 (West 1987 ed.) 13n

Ohio Rev. Code Ann. § 2711.23 (Banks-Baldwin 1989

Supp.) 13n

S.D. Codified Laws Ann. § 21-25B-3 (Michie 1987

ed.) 13n, 14n

Federal Arbitration Act

9 U.S.C. § 2 2

Racketeer Influenced and Corrupt Organizations Act

(RICO)

18 U.S.C. §§ 1961 et seq. 4

Securities Exchange Act of 1934, § 10(b)

15 U.S.C. § 78j(b) 4,6

Securities Act of 1933, § 12(2)

15 U.S.C. § 771(2) 4,6

H.R. Rep. No. 96, 68th Cong., Ist Sess. 1 (1924) 7

Sup. Ct. R. 17.1(c) 5, 12, 13, 14

No. 89-894

In the

Supreme Court of the United States

OcTOBER TERM, 1989

MICHAEL J. CONNOLLY, SECRETARY

oF STATE, AND BARRY C. GUTHARY,

DIRECTOR, MASSACHUSETTS SECURITIES DIVISION,

PETITIONERS,

Vv

SECURITIES INDUSTRY ASSOCIATION, DEAN WITTER

REYNOLDS INC., DONALDSON, LUFKIN & JENRETTE

SECURITIES CORPORATION, DREXEL BURNHAM

LAMBERT INCORPORATED, FIDELITY BROKERAGE

SERVICES, INC., KIDDER PEABODY & CO.

INCORPORATED, MERRILL LYNCH, PIERCE,

FENNER & SMITH INCORPORATED, PAINEWEBBER

INCORPORATED, PRUDENTIAL-BACHE SECURITIES

INC., SHEARSON LEHMAN HUTTON INC.,

AND SMITH BARNEY, HARRIS UPHAM & CO.

INCORPORATED,

RESPONDENTS.

RESPONDENTS’ BRIEF IN OPPOSITION TO PETITION

FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIRST CIRCUIT

Respondents respectfully pray that the petition for a writ of

certiorari to review the decision of the United States Court of

Appeals for the First Circuit dated August 31, 1989 be denied.

2

Statement of the Case

The regulations at issue declare it to be a “dishonest or

unethical practice[]” for a brokerage firm to:

1. require a customer to execute an arbitration agreement

as a “non-negotiable precondition” to opening or transact-

ing business in a securities account; or

2. request that a customer enter into an arbitration agreement

without disclosing that the customer cannot be required

to execute the agreement and without “fully and fairly”

disclosing the “legal effects” of the arbitration agreement.

950 C.M.R. § 12.104(g)(1)(a)-(c).'

The Secretary of State may deny, suspend, or revoke the

registration of a broker-dealer which engages in a “dishonest

or unethical” practice. Mass. Gen. Laws Ann. ch. 110A, § 204

(1989 Supp.). It is unlawful to transact business in Massachu-

setts as a broker-dealer firm without registration. Jd. at § 201.

The Regulations effectively impose special rules on the forma-

tion of arbitration agreements between brokers and customers

—rules that do not burden the making of contracts generally.

it is undisputed that broker-customer agreements “evidenc[e]

. transactions involving commerce” and are typically in

writing, and thus subject to the Federal Arbitration Act, 9

U.S.C. § 2 (the “FAA”). See generally Dean Witter Reynolds,

Inc. v. Byrd, 470 U.S. 213 (1985).?

'The Regulations are appended to the Opinion of the Court of Appeals in

the Petition for Certiorari at 49a-52a (hereinafter, the “Regulations”). The

Opinion is found in the Petition at la-48a.

?The FAA, at 9 U.S.C. § 2, provides:

A written provision in any maritime transaction or a contract

evidencing a transaction involving commerce to settle by arbitra-

tion a controversy thereafter arising out of such contract or trans-

3

The Court of Appeals for the First Circuit held that the

Regulations were preempted “as a matter of law [because they]

actually conflict with the FAA and the federai policy therein.”

Opinion at 41a. Certiorari is sought from this judgment, ren-

dered August 31, 1989.

Reasons Why a Writ of Certiorari

Should Not Be Granted

I. THE First CircuUIT DECISION IS CONSISTENT WITH APPLI-

CABLE DECISIONS OF THE COURT.

A. This Court Has Provided Considerable Guidance on the

Proper Construction of the Federal Arbitration Act.

In a long line of cases, this Court has made it clear that

Congress intended, in the FAA, “to provide for the enforcement

of arbitration agreements within the full reach of the Commerce

Clause.” Perry v. Thomas, 482 U.S. 483, 490 (1987). What

that means has been fleshed out in some nine decisions constru-

ing the FAA rendered by the Court over the past fifteen years.’

action, or the refusal to perform the whole or any part thereof, or

an agreement in writing to submit to arbitration an existing con-

troversy 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.

’ Rodriguez de Quijas v. Shearson/American Express, Inc., 109 S. Ct. 1917

(1989); Volt Information Sciences, Inc. v. Board of Trustees, 109 S. Ct. 1248

(1989); Perry v. Thomas, 482 U.S. 483 (1987); Shearson/American Express,

Inc. v. McMahon, 482 U.S. 220 (1987); Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Dean Witter Reynolds, Inc.

v. Byrd, 470 U.S. 213 (1985); Southland Corp. v. Keating, 465 U.S. | (1984);

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S.

1 (1983); Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).

—

4

Four of these decisions came down within the past three years ,*

and three specifically addressed preemption of state law under

the FAA,° including one, Perry, that speaks directly to the

issue in this case.

This body of Supreme Court case law applied by the Court

of Appeals establishes the Court’s “current strong endorsement

of the federal statutes favoring [arbitration].” Rodriguez de

Quijas v. Shearson/American Express, Inc., 109 S. Ct. 1917,

1920 (1989). Recognizing an emphatic “federal policy favoring

arbitration,” Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. at 24 (1983), the Court has

found the arbitral process competent to handle claims of virtu-

ally every kind: Scherk v. Alberto-Culver Co., 417 U.S. 506

(1974) (international contract disputes); Byrd, 470 U.S. at 213

(state law claims); Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) (antitrust disputes);

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220

(1987) (claims under § 10(b) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78j(b), and the Racketeer Influenced

and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et

seq.); and Rodriguez de Quijas, 109 S. Ct. at 1917 (claim

under § 12(2) of the Securities Act of 1933, 15 U.S.C.

§ 771(2)). Reading the Act to require that “we rigorously en-

force agreements to arbitrate,” the Court has resolved “any

doubts concerning the scope of arbitrable issues . . . in favor

of arbitration,” whatever “the problem at hand.” Moses H.

Cone Memorial Hospital, 460 U.S. at 24-25.

‘Rodriguez de Quijas, 109 S. Ct. at 1917; Volt Information Sciences, 109

S. Ct. at 1248; McMahon, 482 U.S. at 220; Perry, 482 U.S. at 483.

*Volt Information Sciences, 109 S. Ct. at 1248; Perry, 482 U.S. at 483;

Southland Corp., 465 U.S. at 1.

eo

5

B. The Court of Appeals Followed the Teachings of this

Court on the Preemptive Effect of the FAA.

Petitioners cannot demonstrate that the First Circuit decision,

striking down Regulations which imposed far more demanding

standards on the formation of arbitration contracts than are

imposed by the general law of contracts in the Commonwealth

of Massachusetts, is in conflict with applicable decisions of

this Court. Sup. Ct. R. 17.1(c). In Southland Corp. v. Keating,

465 U.S. 1, 11 (1984), the Court declared that “the broad

principle of enforceability is [not] subject to any additional

limitations under state law.” The Court underscored that Con-

gress “contemplated a broad reach of the Act, unencumbered

by state-law constraints.” /d. at 13.

1. No conflict is created by the fact that the Regulations

apply only to securities brokers.

A California law requiring a judicial forum only for franchise

disputes was held preempted given Congressional intent “to

foreclose state legislative attempts to undercut the enforceabil-

ity of arbitration agreements.” Southland Corp., 465 U.S. at

16. Another California statute, purporting to require “that liti-

gants be provided a judicial forum for resolving wage dis-

putes,” was held to be preempted in Perry, 482 U.S. at 491.

These cases lead directly to the First Circuit holding that

Massachusetts cannot encumber the formation of securities

arbitration agreements for asserted reasons of investor protec-

tion. See Opinion at 22a-23a (“At the very least, . . . enmity

[toward arbitration], however manifested in state law, is

preempted.”). Petitioners nevertheless purport to find a “con-

flict” on the grounds that a state is free to single out certain

industries for “protection” against arbitration if it is in an

“established area of State concern.” Petition at 22. Why “the

conduct of securities brokers” but not employers is an area of

Ee

6

concern justifying an extraordinary deviation from the preemp-

tion guidelines articulated in Southland is never explained. As

this Court has held, nothing in the Securities Exchange Act

of 1934 or the Securities Act of 1933 justifies antagonism

toward arbitration agreements affecting securities.° See McMa-

hon, 482 U.S. at 220 and Rodriguez de Quijas, 109 S. Ct. at

1917.

2. The First Circuit decision is consistent with applicable

decisions of this Court hecause the Regulations single

out arbitration agreements for special treatment.

The Court of Appeals’ holding that the FAA preempts state

contract formation rules which single out arbitration agree-

ments adheres to this Court’s explanation in Perry of the role

of state law under the FAA: “[s]tate law, whether of legislative

or judicial origin, is applicable if that law arose to govern

issues concerning the validity, revocability, and enforceability

of contracts generally. A state law principle that takes its

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

does not comport with this requirement of § 2.” 482 U.S. at

492-93 n.9 [citation omitted]. As if this language did not exist,

petitioners seek certiorari to determine the extent of state au-

thority to subject arbitration to differential regulation. See Peti-

tion at 32 (issue is whether states have authority to adopt rules

for arbitration “in lieu of . . . traditional contract law doc-

*For a state to claim some special power to regulate arbitration agreements

entered into with securities brokers is particularly ironic since the Securities

and Exchange Commission (SEC), as this Court has observed, has “broad

authority to oversee and regulate . . .” arbitrations relating to customer disputes,

McMahon, 482 U.S. at 233-34. After respondents submitted their brief in the

Court of Appeals, the SEC explicitly chose not to adopt rules similar to those

at issue here. See 54 Fed. Reg. 21,144; 21,154 (May 16, 1989) cited at Petition

at 20. The SEC expressly looked to “competitive forces” in the marketplace.

Rather, the SEC has approved rules proposed by industry Self-

Organizations, providing for appropriate disclosures regarding the inclusion of

arbitration clauses in customer agreements. /d.

7

trines”). Because the Regulations apply only to arbitration

agreements, they decidedly take their “meaning from the fact

that a contract to arbitrate is at issue.” The Court of Appeals’

holding that Massachusetts may require bargaining in the form-

ation of arbitration agreements only if bargaining is required

in the formation of contracts generally flows inexorably from

Perry.’

Southland Corp. also makes it clear that only “general con-

tract defenses such as fraud . . .” can be raised against the

formation or enforcement of an arbitration agreement. 465

U.S. at 16 n.11 (emphasis added). The Court reiterated in Volt

Information Sciences, Inc. v. Board of Trustees, 109 S. Ct.

1248, 1254 (1989), that only “general state-law principles of

contract interpretation” can be applied to arbitration agreements

falling within the purview of the FAA.

This rule of generality, which controlled the Court of Ap-

peals’ preemption analysis, proceeds from the recognized pur-

pose of the Act “to place an arbitration agreement ‘upon the

same footing as other contracis, where it belongs’ . . .” Byrd,

470 U.S. at 219, citing H.R. Rep. No. 96, 68th Cong., Ist

Sess. 1 (1924). See also Volt Information Sciences, 109 S.

Ct. at 1255. The “equal footing” policy, in turn, reflects a

Congressional intent to root out longstanding judicial hostility

to arbitration. Byrd, 470 U.S. at 219-20. The insistence that

only general state law govern arbitration ensures that states

cannot, in the guise of promoting particular policies, “wholly

eviscerate congressional intent to place arbitration agreements

‘upon the same footing as other contracts.’ ” Southland Corp..,

460 U.S. at 16 n.11, citing H.R. Rep. No. 96, 68th Cong.

Ist Sess. 1 (1924).

’ Petitioners appear to argue that this case poses the question as to whether

a state may adopt different rules for consumer contracts. Petition at 24. The

ability of a state to distinguish between consumer and non-consumer contracts

is not at issue because the Regulations apply only to arbitration clauses, not

to all clauses in consumer contracts.

8

The fact that the Regulations are argued to be a “prophylac-

tic” against “ ‘fraud or overwhelming economic power,’ ” Peti-

tion at 36, does not, as the Court of Appeals held, override

the requirement that the grounds for disfavoring an arbitration

agreement must be the same as those for any contract. What

should be beyond dispute at this time is that no state may

single out arbitration for special regulation.* If “bargaining”

is deemed by a state to be vital to “voluntariness,” particularly

in a consumer setting, then presumably a state, consistent with

the FAA, could prohibit all clauses in standard form consumer

contracts, including, but not limited to, arbitration clauses.

Massachusetts did not do that. Nor did it declare all contracts

of adhesion presumptively unenforceable. In Perry, this Court

noted that “unconscionability,” a formation issue, is governed

by the principle that a state may not create special rules appli-

cable only to arbitration contracts. 482 U.S. at 493 n.9.

Petitioners note, but fail to deal with, language in McMahon

that “[a]bsent a well-founded claim that an arbitration resulted

from the sort of fraud or excessive economic power that ‘would

provide grounds ‘for the revocation of any contract,’ ’ [citation

omitted] the Arbitration Act ‘provides no basis for disfavoring

agreements to arbitrate statutory claims by skewing the other-

wise hospitable inquiry into arbitrability.”” 482 U.S. at 226.

Petition at 44. Of course, parties need not arbitrate, just as

they need not carry out other contract terms, when they have

not agreed to do so. No case suggests that, in the name of

“enhancing voluntariness,” ° a state may create onerous require-

*This case does not present an issue of a state’s authority to regulate on

subjects collateral to the formation, construction, or validity of arbitration

agreements.

* Petitioners argue that the Regulations harmonize with the purposes of the

FAA because federal law “was plainly intended to facilitate consensual arbi-

tration” and “the Massachusetts regulations are faithful to the federal policy

...” Petition at 42, 44-45. Burdening arbitration agreements with special

9

ments applicable only to arbitration agreements. Indeed, the

case law is to the contrary. Whether arbitration agreements

are “adhesive in nature” or “unconscionable” is to be governed

by the rules generally applicable to contracts. Only a “factual

showing” which establishes grounds “for the revocation of any

contract” justifies concluding that an arbitration agreement was

the product of unequal bargaining power. Rodriguez de Quijas,

109 S. Ct. at 1921; Perry, 482 U.S. at 492-93 n.9."°

A regulatory approach treating a certain class of arbitration

agreements as inherently coercive too closely resembles “state

legislative attempts to undercut the enforceability of arbitration

agreements.” Southland Corp., 465 U.S. at 16. Had the First

Circuit shown latitude for a legal “prophylactic” which singles

out arbitration agreements, it would have acted contrary to

applicable decisions of this Court."'

procedures, grafted on top of existing law ensuring voluntariness and protecting

contracting parties against fraud and duress, can hardly be described as a goal

of the FAA. Cf. Volt Information Sciences, 109 S. Ct. at 1254. In any event,

because the Regulations clash with the “equal footing” policy of the FAA, id.

at 1255, they are preempted. See Michigan Canners & Freezers Ass'n v. Agri-

cultural Marketing & Bargaining Board, 467 U.S. 461, 477 (1984).

"Nor does the general contract law of Massachusetts afford a basis for

concern that standard form contracts are systematically the product of coercion

or overreaching. See, e.g., Carpenter v. Suffolk Franklin Sav. Bank, 370

Mass. 314, 327, 346 N.E.2d 892, 900 (1976). On the contrary, assent to a

contract is presumed to be a “conscious choice” in the absence of fraud or

undue influence. See Markell v. Sidney B. Pfeifer Foundation, Inc., 9 Mass.

App. Ct. 412, 440, 402 N.E.2d 76, 93 (1980).

'' Mitsubishi Motors and Rodriguez de Quijas likewise dispose of petitioners’

issue as to “whether the States have any authority to ensure that arbitration

agreements are entered into knowingly and voluntarily, in lieu of case by case

adjudications under traditional contract law doctrines.” Petition at 32. Mit-

subishi Motors “forbids indulgent presumptions as to systematic overreaching

in the investor-broker context.” Page v. Moseley, Hallgarten, Estabrook &

Weeden, Inc., 806 F.2d 291, 295 and n.6 (Ist Cir. 1986). Lower courts have

consistently rejected claims that standard form contracts entered between securi-

ties brokers and customers are unconscionable or contracts of adhesion. See

Adams v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 888 F.2d 696 (10th

10

3. The Court of Appeals followed applicable decisions of

this Court in concluding that the Regulations are

preempted whether or not they directly prohibit en-

forcement.

The Court of Appeals followed settled law when it concluded

that the Regulations are preempted regardless of whether they

trench directly on enforceability. See Opinion at 36a-37a. The

federal policy favoring arbitration can be “undercut” by dis-

criminatory state rules all the more effectively if the chosen

sanction is license suspension. See generally Southland Corp..,

465 U.S. at 16. “The power to suspend a license is much more

than a shift in costs; it is the economic equivalent of the death

penalty.” Opinion at 42a."

Cir. 1989); Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282 (9th Cir.

1988).

Petitioners argue that the Regulations did not conflict with the purposes

of FAA because they did not limit enforcement of arbitration agreements.

Petition at 36. The Court of Appeals characterized that claim as “open to

considerable doubt” and stated that, as the District Court had held, the Blue

Sky Act, Mass. Gen. Laws Ann. ch. 110A, would likely render non-conforming

agreements unenforceable. See Opinion at 36a-37a, n.7, citing 703 F. Supp.

at 149. The Court of Appeals also cited “hornbook law that one who violates

a licensing statute — which, as here, is not a revenue measure, but a public-pro-

tection statute — is generally not allowed to enforce the contract.” /d. at 37a,

n.7 This accords with settled Massachusetts law that “it is against public policy

that the court should be called upon to enforce contracts the parties have been

expressly or impliedly forbidden by law to make. . . .” Nussenbaum v. Cham-

bers & Chambers, Inc., 322 Mass. 419, 422, 77 N.E.2d 780 (1948). In any

event, certiorari is inappropriate to review whether the Regulations limit the

enforceability of arbitration agreements as a matter of state law. See note 14,

infra. Moreover, the Court of Appeals correctly interpreted this Court’s opinions

as supporting the proposition that the draconian sanction of license suspension

is just as impermissible a means of effectuating hostility to arbitration as direct

limitations on enforceability.

—— ns See ee

1]

4. The First Circuit correctly held that the Regulations

conflict with the equal footing policy of the FAA.

Petitioners’ contention that the First Circuit impermissibly

encouraged resort to arbitration, Petition at 40, ignores the

holding of the Court of Appeals, as well as applicable decisions

of this Court and the nature of the Regulations. Although the

Court of Appeals acknowledges the “liberal federal policy

favoring arbitration,” Opinion at 3a, using words, by the way,

identical to those used in Moses H. Cone Memorial Hospital,

460 U.S. at 24, its holding is squarely predicated upon the

impermissibility of a direct conflict with the “equal footing”

policy of the FAA. See Byrd, 470 U.S. at 219.

Moreover, petitioners are wrong in suggesting that the Court

of Appeals misconstrued the FAA, as interpreted by this Court.

Contrary to petitioners’ suggestion, Congress intended to en-

courage use of arbitration and recognized the “benefit of the

legislation for expedited resolution of disputes.” Byrd, 470

U.S. at 220, 221. Indeed, this Court frequently has reiterated

the “emphatic federal policy in favor of arbitral dispute resolu-

tion.” Mitsubishi Motors, 473 U.S. at 631. The result below

is fully consistent with this Court’s “current strong endorsement

of the federal statutes favoring” arbitration. Rodriguez de

Quijas, 109 S. Ct. at 1920.

Finally, any contention that the Regulations accord with

federal policy regarding arbitration overlooks their clear im-

port. The Regulations are not neutral. They regulate “in a

manner patently inhospitable to arbitration.” Opinion at 5a.

In sum, the Petition fails to demonstrate that the First Circuit

decided a federal question in conflict with the applicable deci-

sions of this Court. Further review is not warranted.

12

II. PETITIONERS HAVE NoT SHOWN AN IMPORTANT QUESTION

OF FEDERAL LAW THAT Has Not BEEN, BUT SHOULD

BE, SETTLED BY THIS COURT.

This case does not present an issue of unsettled federal law.

See discussion at Section I. B, supra. Even if it did, review

by this Court would not be warranted because there is no

“important question” which “should be settled by the Court”

as those phrases are used in Sup. Ct. R. 17.1(c).

Petitioners point to “[t}he intense interest of state regulators”

and “the actions of federal agencies which have addressed

mandatory arbitration clauses” to argue that “a question of

national significance” is presented. Petition at 13, 14 and 17.

The importance of a given subject matter to policy-makers is

not the standard under Sup. Ct. R. 17.1(c) for defining what

is an “important question of federal law” or determining when

such an issue should be decided. Petitioners have not shown,

for example, that the Court of Appeals departed from long-

established precedent or policy under the FAA. Cf. Morton v.

Ruiz, 415 U.S. 199, 201-02 (1974); Patterson v. Lamb, 329

U.S. 539, 541 (1947). Nor can it be said that a large number

of other pending cases hinge on the resolution of this case.

Cf. Laing v. United States, 423 U.S. 161, 167 (1976). Given

the extensive attention this Court already has accorded in recent

vears to the construction of the FAA, there is no reason, at

this time, for yet another foray into the field.

III. THERE Is No CONFLICT AMONG THE CIRCUITS OR BE-

TWEEN THE First CIRCUIT AND A STATE COURT OF LAST

RESORT.

The decision of the First Circuit does not conflict with de-

cisions of other circuit courts or state courts of last resort.

13

Indeed, it is in harmony with opinions from other circuits. For

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

995, 997 (8th Cir. 1972), the Eighth Circuit held that state

law contract formation rules specific to arbitration agreements,

such as those at issue here, are preempted. Collins Radio struck

down a rule requiring that an attorney’s acknowledgement

accompany an arbitration agreement. More recently, the Eighth

Circuit in Webb v. R. Rowland & Co., 800 F.2d 803, 806

(8th Cir. 1986), rejected a state law which purported to render

non-enforceable arbitration agreements in “contracts of adhe-

sion,” and to require that arbitration agreements be set off in

10-point type. The Tenth Circuit has stressed that, under Perry,

“arbitration agreements should not be construed by the courts

in a manner different from nonarbitration agreements.” Wilson

Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878

F.2d 167, 169 n.2 (10th Cir. 1989).

The only arguably inconsistent case cited is a decision of

the United States District Court for the Eastern District of

Virginia. See Petition at 30-31, citing Saturn Distribution

Corp. v. Williams, 717 F. Supp. 1147 (E.D. Va. 1989). But

even a direct and intolerable conflict between a Circuit Court

decision and a District Court ruling from another circuit does

not warrant certiorari. See Sup. Ct. R. 17.1(a).

Rather than relying on the actuality of inconsistent cases,

petitioners advocate that this Court radically alter its standard

and accept cases because there is the possibility of “inconsistent

cases in the lower courts.” Petition at 24. Petitioners point to

the existence of other, allegedly similar statutes governing

“mandatory arbitration clauses” in the banking and health care

context. Petition at 28-30.'? Of course, these state laws ulti-

' Alaska Stat. § 0.955.535(b) (Michie 1988 ed.); Cal. Civ. Proc. Code §§

1295(a) and (b) (West 1982 ed.); Ill. Rev. Stat. c.10, § 209 (West 1987 ed.); Mich.

Comp. Laws § 600.5041 (West 1987 ed.); Ohio Rev. Code Ann. § 2711.23

(Banks-Baidwin 1989 Supp.); and S.D. Codified Laws Ann. § 21-25B-3 (Michie

14

mately may be construed not to reach contracts implicating

interstate commerce. Moreover, courts faced with deciding

the constitutionality of these laws may reach results consistent

with the First Circuit Court of Appeals. Petitioners fail to

demonstrate any special reasons why this Court should alter

the guidelines for certiorari established in Rule 17.1(a).

IV. THERE Is No GENUINE DISPUTE AS TO APPLICABLE STATE

LAW.

Petitioners complain that the Court of Appeals incorrectly

decided a matter of state law, namely, whether “the regulations

apply conditions to the formation of arbitration agreements

that are common to, if not the rule of, Massachusetts consumer

contracts generally. . . .” Petition at 46. Petitioners claim that

the Court of Appeals’ “application of [the] Act’s ‘equal footing’

objective [to Massachusetts law] is irrational . . .” Petition at

47. Cf. Opinion at 36a-38a (“unconscionability is the standard

for voluntariness in Massachusetts.’’)

Petitioners’ argument is specious. It is beyond dispute that

Massachusetts does not require “bargaining” over all contract

terms. Petition at 48. Nor does Massachusetts require “bargain-

ing” over all terms in consumer contracts. Indeed, petitioners

do not identify — and did not identify below — any term,

other than arbitration, that Massachusetts requires to be “nego-

tiated” in any type of contract."

1987 ed.). Petitioners point to no decisions from state courts of last resort

construing the laws cited, much less “inconsistent decisions in the lower courts.”

‘Even if state law were unclear — which it is not — certiorari would be

inappropriate to resolve an issue of Massachusetts law. See Bowen v. Massa-

chusetts, 108 S. Ct. 2722, 2739 (1988); Brockett v. Spokane Arcades, Inc.,

472 U.S. 491, 500 (1985).

15

V. CONCLUSION

For each of the foregoing reasons, respondents respectfully

| request that the petition for a writ of certiorari be denied.

Respectfully submitted,

GERALD F. RATH*

E. SUSAN GARSH

STEVEN W. HANSEN

DON E. GORTON, III

BINGHAM, DANA & GOULD

150 Federal Street

Boston, Massachusetts 02110

(617) 951-8000

Attorneys for Respondents

* Counsel of ‘Record

Dated: December 26, 1989

ro ee

17

Appendix A

STATEMENT REQUIRED BY RULE 28.1

1. Securities Industry Association

The Securities Industry Association has no parent com-

panies, subsidiaries, or affiliates.

2. Dean Witter Reynolds Inc.

Sears Roebuck and Co.

Dean Witter Financial Services Group Inc.

Dean Witter Financial Services Inc.

Allstate Insurance Co.

Coldwell Banker Inc.

3. Donaldson, Lufkin & Jenrette Securities Corporation

The Equitable Life Assurance Society of the United States

Equitable Investment Corporation

Donaldson, Lufkin & Jenrette, Inc.

Alliance Capital Management L.P.

4. Drexel Burnham Lambert Incorporated

The Drexel Burnham Lambert Group Inc.

5. Fidelity Brokerage Services, Inc.

FMR Corp.

6. Kidder Peabody & Co. Incorporated

General Electric Co.

General Electric Financial Services

7. Merrill Lynch, Pierce, Fenner & Smith Incorporated

Merrill Lynch & Co., Inc.

8. PaineWebber Incorporated

Paine Webber Group Inc.

18

9. Prudential-Bache Securities Inc.

The Prudential Insurance Company of America

PRUCO, Inc.

Prudential Capital and Investment Services, Inc.

Prudential Securities Group Inc.

10. Shearson Lehman Hutton Inc.

American Express Company

Shearson Lehman Hutton Holdings Inc.

First Capital Holdings Corp.

11. Smith Barney, Harris Upham & Co. Incorporated

Primerica Corporation

Primerica Holdings, Inc.

Smith Barney Holdings, Inc.

Smith Barney Inc.