Amicus Curiae Brief — Connolly v. Securities Industry Ass'n

> Supreme Court, U.S,

No. 89-894. ~ a7” Fifteen

i} G8C 29 1989

In The alll te

JOSEPH F SPANIOL, UR.

CLERK

Supreme Court of the United

October Term, 1989

4

4

MICHAEL J. CONNOLLY,

MASSACHUSETTS SECRETARY OF STATE, et al.,

Petitioners,

SECURITIES INDUSTRY ASSOCIATION, et al.,

Respondents.

y%

vw

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the First Circuit

y’

4

BRIEF OF ALASKA, ARIZONA, COLORADO, CON-

NECTICUT, HAWAII, IDAHO, IOWA, KANSAS, KEN-

TUCKY, LOUISIANA, MAINE, MARYLAND,

MICHIGAN, MINNESOTA, MONTANA, NEBRASKA,

NEW HAMPSHIRE, NEW MEXICO, NORTH CARO-

LINA, NORTH DAKOTA, OHIO, OKLAHOMA, ORE-

GON, PENNSYLVANIA, SOUTH DAKOTA, TEXAS,

UTAH, VERMONT, VIRGINIA AND WEST VIRGINIA*

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

7%

4

Mary SuE TERRY Watter A. McFAarLAN!

Attorney General Deputy Attorney General

of Virginia **Guy W. Horsey, Jr.

H. LANE KNEEDLER Senior Assistant

Chief Deputy Attorney Attorney General

General 101 North Eighth Street

Richmond, Virginia 23219

(804) 786-6563

*Each sponsored according to Rule 36.4 by its Attorney

General pursuant to list of counsel continued inside front

cover.

**Counsel of Record for Amici

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

List of Counsel, Continued

HONORABLE DOUGLAS B.

BAILY

Attorney General of

Alaska

HONORABLE ROBERT K.

CORBIN

Attorney General of

Arizona

HONORABLE DUANE

WOODARD

Attorney General of

Colorado

HONORABLE CLARINE

NARDI RIDDLE

Attorney General of

Connecticut

HONORABLE WARREN

PRICE, III

Attorney General of

Hawaii

HONORABLE JIM JONES

Attorney General of Idaho

HONORABLE THOMAS J.

MILLER

Attorney General of Iowa

HONORABLE ROBERT T.

STEPHAN

Attorney General of

Kansas

HONORABLE FREDERICK

J. COWAN

Attorney General of

Kentucky

HONORABLE WILLIAM J.

GUSTE, JR.

Attorney General of

Louisiana

HONORABLE JAMES E.

TIERNEY

Attorney General of Maine

HONORABLE J. JOSEPH

CURRAN, JR.

Attorney General of

Maryland

HONORABLE FRANK J.

KELLEY

Attorney General of

Michigan

HONORABLE HUBERT H.

HUMPHREY, III

Attorney General of

Minnesota

HONORABLE MARC

RACICOT

Attorney General of

Montana

HONORABLE ROBERT M.

SPIRE

Attorney General of

Nebraska

HONORABLE JOHN P.

ARNOLD

Attorney General of New

Hampshire

HONORABLE HAL

STRATTON

Attorney General of New

Mexico

HONORABLE LACY H.

THORNBURG

Attorney General of North

Carolina

HONORABLE NICHOLAS J.

SPAETH

Attorney General of North

Dakota

HONORABLE ANTHONY J.

CELEBREZZE, JR.

Attorney General of Ohio

HONORABLE ROBERT H.

HENRY

Attorney General of

Oklahoma

HONORABLE DAVE

FROHNMAYER

Attorney General of

Oregon

HONORABLE ERNEST D.

PREATE, JR.

Attorney General of

Pennsylvania

HONORABLE ROGER A.

TELLINGHUISEN

Attorney General of South

Dakota

HONORABLE JIM MATTOX

Attorney General of Texas

HONORABLE R. PAUL

VAN DAM

Attorney General of Utah

HONORABLE JEFFREY L.

AMESTOY

Attorney General of

Vermont

HONORABLE ROGER W.

TOMPKINS, II

Attorney General of

West Virginia

TABLE OF CONTENTS

Page(s)

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

SUMMARY OF ARGUMENT...........-..00ccceess 2

pos A er eer ee ee eee eee ee Te Te 3

I. CONNOLLY CREATES A CONFLICT

AMONG THE CIRCUITS CONCERNING

THE EFFECT OF THE FAA UPON STATE

LAWS GOVERNING THE PROCESS OF

ey oe ey 8 ee KS

II. THE FAA NEITHER EXPRESSLY NOR

IMPLICITLY PREEMPTS ALL STATE REGU-

LATO OF ARBITRATION .... 0... cececes 3

Il. THE LEGISLATIVE HISTORY OF THE FAA

BELIES THE CONTENTION THAT THE

STATES’ REGULATION OF ARBITRABILITY

IS INCONSISTENT WITH THE FAA........ 6

IV. CONNOLLY MISCONSTRUES PRECEDENT

OF THIS COURT IN RULING THAT THE

FAA PROHIBITS REASONABLE STATE REG-

ULATION OF ARBITRATION .............. 10

V. THE STATES HAVE A LEGITIMATE INTER-

EST IN REQUIRING THAT ARBITRABILITY

4. EE ere y eee ry ee 12

ii

TABLE OF AUTHORITIES

Page(s)

CASES

Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974) .... 13

Barrentine v. Arkansas-Best Freight System, Inc., 450

US. 728 CGE) «... . hcixnessneuecpneee eee 13

Chicago & North Western Transportation Corp. v.

Kalo Brick & Tile Co., 450 U.S. 311 (1981)........... 5

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

(TOG) aes s ce cebnebs ean ap eee ee 10

Florida Lime & Avocado Growers, Inc. v. Paul, 373

U.S. 152 COQGSP wos osc ck 08 eerde ae eaee caer ees 5

Hines v. Davidowitz, 312 U.S. 52 (1941) .............. 12

McDonald v. West Branch, 466 U.S. 284 (1984)........ 13

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

414 US. T97 GSTS). ..0050deuebessunnens Cobwen wees 11

Mitsubishi Motors Corp. v. Soler Chrylser-Plymouth,

Inc., 473 US. GI4 CSSD) . csaivevinsaagentyereeds 10

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Corp., 460-U.S. 1 (1983)... .ccccceacecees 10

Perry v. Thomas, 482 U.S. 483 (1987). ......-cceesees: 10

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

U.S. 995 (1967) .... 2. .s0ccnavesscenenedeneenetienee 11

Rodriguez De Quijas v. Shearson/American Express,

Inc., 109 S.Ct. 1917 C9GD). ... cs sacecedeneunseeeens 10

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

1147 (B.D. Va. 1909) .....ssccnussesneneneeeeae 4, 15

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)...... 10

ili

|

TABLE OF AUTHORITIES - Continued

Page(s)

Securities Industry Ass'n v. Connolly, 883 F.2d 1114

ars bid os et ea La Cheba we Rees passim

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

Ree nee ee an mn 10

Southland Corp. v. Keating, 465 U.S. 1 (1984).......... 6

Supak & Sons Mfg. Co., Inc. v. Pervel Industries, Inc.,

oe wae toe Ce Cie. 1979)... ... «50s ccccccess 3, 4, 14

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

De ee. SU MOOD ec nn vnceres eh eres eva euxe ves 6, 11

OTHER

Federal Arbitration Act (9 U.S.C. §§ 2-9)........ passim

eink ens Sins saesicbie pte xs ee es 7

Hearings on S.B. 4213 and S.B. 4214 before the Sub-

committee of the Senate Committee on the Judiciary,

ES 8

Joint Hearings on S.B. 1005 and H.R. 646 Before the

Subcommittees of the Committees on the Judici-

ave, Geum Come. tet Sess. (1924).................. 8, 9

Report No. 536 on S. 1005, 68th Cong., 1st Sess.

ee ee 7

Report No. 96 on H.R. 646, 68th Cong., 1st Sess.

eer a sii nha t ded Ser edws wened es qaene 7

INTEREST OF AMICI CURIAE

The decision of the First Circuit Court of Appeals in

Securities Industry Ass‘n v. Connolly, 883 F.2d 1114 (1st Cir.

1989), invalidates regulations of the Commonwealth of

Massachusetts designed to insure that purchasers of secu-

rities who sign form brokerage agreements containing

arbitration clauses do so knowingly and voluntarily. The

challenged regulations accomplish this objective by (1)

requiring securities brokers to disclose to customers the

legal effects of a mandatory arbitration clause in a broker-

age agreement, and (2) prohibiting brokerage firms from

imposing arbitration agreements upon customers as a

non-negotiable condition precedent to opening brokerage

accounts. The First Circuit ruled that these regulations

were preempted by the Federal Arbitration Act, 9 U.S.C.

§§ 2-9 (“FAA” or “the Act”), because they single out

arbitration agreements for more stringent treatment than

other contractual provisions.

Connolly extends the sweep of federal preemption of

the FAA beyond the intent of Congress and, thereby,

frustrates the purposes of the Act. The effect of the ruling

is to leave the states powerless to protect consumers from

being coerced to enter arbitration agreements. Amici cur-

iae have a legitimate regulatory interest in protecting

their citizens from an uninformed waiver of other avail-

able options for dispute resolution, particularly in indus-

tries where market forces do not insure that consumers

have adequate information to make a voluntary waiver.

The effect of Connolly extends to other industries

where economic realities may, in effect, deny consumers

and small businessmen the option of any means of dis-

pute resolution other than an arbitration process dictated

by the offeror on a “take it or leave it” basis. Accordingly,

amici submit their brief amici curiae supporting the peti-

tion for certiorari.

SUMMARY OF ARGUMENT

Amici urge the Court to grant Massachusetts’ peti-

tion for a writ of certiorari because the decision in Con-

nolly misconstrues both Congressional intent in enacting

the FAA and the precedent of this Court. While the Court

has consistently ruled that the FAA requires the states to

honor arbitration agreements between the parties to a

contract, it has never ruled that the FAA renders the

states powerless to regulate the process by which such

agreements are reached in order to avoid coerced

arbitration.

The wording of the FAA does not suggest an intent to

preempt state regulation of all aspects of the arbitration

process. A review of the legislative history of the FAA

clearly indicates that Congress intended that the states

retain the power to regulate the process of contract for-

mation to ensure that privately negotiated arbitration is

consensual rather than coerced.

If the FAA is construed to prohibit states from requir-

ing that arbitrability be negotiable, citizens could be

forced to forego state and federal remedies by being

coerced into an arbitration process favoring and solely

tailored by the offering party. The purpose of the FAA is

to enforce arbitration of contractual disputes between the

parties according to the terms to which thew have bound

themselves. State regulation designed solely to require

that the parties freely and knowingly accept those terms

furthers rather than frustrates that purpose.

ARGUMENT

I. CONNOLLY CREATES A CONFLICT AMONG THE

CIRCUITS CONCERNING THE EFFECT OF THE

FAA UPON STATE LAWS GOVERNING THE PRO-

CESS OF CONTRACT FORMATION

The Connolly court apparently was not impressed

with the distinction between state regulation of the pro-

cess of contract formation and the enforcement of contracts

made by consenting parties for purposes of FAA preemp-

tion. Instead, the court found the FAA prohibited the

states from adopting any regulation which singles out

arbitration agreements for special treatment not applica-

ble to other contracts generally, observing that such regu-

lation demonstrates hostility towards arbitration contrary

to the FAA. That broad interpretation of the FAA conflicts

with the decision of the Fourth Circuit Court of Appeals

in Supak & Sons Mfg. Co., Inc. v. Pervel Industries, Inc., 593

F.2d 135 (4th Cir. 1979), wherein the court premised its

analysis of an FAA challenge to a state law of contract

formation with the observation that the FAA “does not

displace state law on the general principles governing

formation of the contract itself,” and “[b]y its terms, § 2

[of the FAA] does not apply until the arbitration in ques-

tion is determined to be part of the contract.” 593 F.2d

137.

Plaintiff in Supak sought unsuccessfully to invoke

arbitration procedures to resolve a contractual dispute

under a sales contract governed by the Uniform Commer-

cial Code. Plaintiff relied upon an oral agreement with

defendant to arbitrate disputes; defendant argued that

arbitration was not available because state law deemed

the addition of arbitrability a “material alteration” of a

contract requiring written confirmation by the parties.

The court held that the FAA does not preempt the states

from limiting arbitrability in this manner, suggesting that

state laws governing contract formation would be pre-

empted under the FAA only if they were solely applicable

to arbitration and placed an “unreasonable burden on the

parties’ ability to commit themselves to arbitration.” Id.

The question presented by this petition is whether

the Connolly analysis (any specific state regulation of arbi-

trability is presumptively preempted by the FAA) or that

of Supak (FAA preempts only state law which either

impedes enforcement of arbitration agreements or which

unreasonably burdens the parties’ ability to consent to

1 Consistent with Supak, a federal district court rejected an

FAA preemption challenge to Virginia law requiring that arbi-

tration clauses in motor vehicle franchise contracts be negotia-

ble. Saturn Distribution Corp. v. Williams, 717 F.Supp. 1147 (E.D.

Va. 1989). That case is currently on appeal to the Fourth Circuit

Court of Appeals.

arbitration) is the correct interpretation of the FAA. It is a

question which this Court has not yet considered. More

importantly, it is vitally significant to the power of states

to regulate contractual relationships in order to protect

unwary consumers against coerced waivers of judicial or

administrative means of dispute resolution.

Il. THE FAA NEITHER EXPRESSLY NOR IMPLIC-

ITLY PREEMPTS ALL STATE REGULATION OF

ARBITRATION

Whether the FAA preempts the states from regulating

arbitration clauses in contracts of adhesion is the disposi-

tive legal issue raised by this petition. Any analysis of a

claim of federal preemption must begin with the premise

that there is a presumption against preemption. “Preemp-

tion of state law by federal statute or regulation is not

favored ‘in the absence of persuasive reasons... .’”

Chicago & North Western Transportation Corp. v. Kalo Brick

& Tile Co., 450 U.S. 311, 317 (1981) [quoting Florida Lime &

Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142 (1963)].

Whether federal law preempts state regulation is

determined by Congressional intent, which may be found

by (a) explicit statutory language, (b) implication arising

from the fact that the federal law is so pervasive as to

occupy the entire field of regulation to the exclusion of

supplementary state regulation, or (c) evidence that the

challenged state law conflicts with, or stands as an obsta-

cle to, federal law. As the Connolly court concedes, there

is neither explicit preemption language in the FAA nor

any indication that Congress intended to exclude the

states from the field of regulation of arbitration. Ac-

cordingly, Connolly is based solely upon a determination

that a state regulation requiring that an agreement to

arbitrate be voluntary conflicts with the intent of FAA.

Connolly is wrong because it ignores the legislative his-

tory of the FAA that clearly indicates that the challenged

regulations are consistent with the intent of the drafters

of the FAA.

III. THE LEGISLATIVE HISTORY OF THE FAA

BELIES THE CONTENTION THAT THE STATES’

REGULATION OF ARBITRABILITY IS INCON-

SISTENT WITH THE FAA

A divided Court in Southland Corp. v. Keating, 465

U.S. 1 (1984), ruled that the FAA withdrew the power of

the states to require a judicial forum for resolution of

contract disputes. Justice Stevens, in dissent, concluded

that Congress did not intend to require states to honor

arbitration agreements in franchise relationships where

the relative disparity in bargaining position between the

parties warranted regulatory protection for the weaker

party. While Justice Stevens’ argument did not persuade

the majority, his view, supported by. the legislative his-

tory of the FAA, that Congress assumed there is a role for

state regulation of arbitrability is echoed in this Court’s

recent decision in Volt Information Sciences, Inc. v. Board of

Trustees, 109 S.Ct. 1248 (1989).

That legislative history is extensive and consistently

supports the validity of the Massachusetts regulations. It

suggests that the intent of Congress in enacting the FAA

was modest. Rather than having as its purpose the pre-

emption of state regulation of arbitration, the FAA was

designed simply to overcome traditional judicial resis-

tance to the enforcement of voluntary arbitration agree-

ments between contracting parties.

The official reports of the two bills, which ultimately

were codified as the FAA (H.R. 646 and S. 1005), under-

score the limited scope of the legislation. Congressman

Graham, who authored the House Report of H.R. 646,

summarized the effect of the bill for his colleagues as

follows:

Arbitration agreements are purely matters of

contract and the effect of the bill is simply to

make the contracting party live up to his agree-

ment. He can no longer refuse to perform his

contract when it becomes disadvantageous to

him.

Report No. 96 on H.R. 646, 68th Cong., 1st Sess.

(Jan. 24, 1924).

The Senate report on its counterpart to H.R. 646, S.

1005, similarly stresses the enforcement of voluntary

agreements as the impetus behind the new law:

The record made under the supervision of this

society [referring to the Arbitration Society of

America] shows not only the great value of vol-

untary arbitrations but the practical justice in

the enforced arbitration of disputes where writ-

ten agreements for that purpose have been vol-

untarily and solemnly entered into.

Report 536 on S. 1005, 68th Cong., Ist Sess. (May 14, 1924).

While the Act was carefully considered over two

sessions of Congress, it passed without substantial oppo-

sition. This lack of opposition may be explained by the

modest purpose of the Act — to require that parties who

have agreed to arbitrate their disputes honor that

agreement.

Fears by members of Congress that the legislation

would supplant state law was addressed by its sup-

porters. During the Congressional hearings on the FAA in

1924, one of the chief draftsmen of the legislation, Mr.

Julius Cohen, submitted a brief to two Congressional

subcommittees stating that the proposed legislation

would not supersede state law on contract formation:

It [the FAA] is no infringement upon the right of

each State to decide for itself what contracts

shall or shall not exist under its laws. To be sure

whether or not a contract exists is a question of

the substantive law of the jurisdiction wherein

the contract was made.

Joint Hearings on S.B. 1005 and H.R. 646 Before the Subcom-

mittees of the Committees on the Judiciary, 68th Cong., 1st

Sess. (1924) at 37 (the “1924 Hearings”). There is nothing

in the record of those hearings to suggest that the Act

would affect the states’ power to regulate the process of

contract formation.

Moreover, the transcripts of the Congressional hear-

ings reflect that the FAA was not intended to require the

states to tolerate coerced arbitration through adhesive

contracts. During hearings on the proposed FAA in 1923,

Senator Walsh expressed his concern that arbitration

clauses often appeared in “take it or leave it” contracts. A

proponent and drafter of the FAA, W.H.H. Piatt, assured

Senator Walsh that it was not the intention of the bill to

force arbitration on unwilling parties and he “would not

favor any kind of legislation that would permit the forc-

ing a man to sign that kind of a contract.” Hearings on S.B.

4213 and S.B. 4214 before the Subcommittee of the Senate

Committee on the Judiciary, 67th Cong., 4th Sess. (1923) at

10.

Similarly, during the Congressional hearings in 1924,

Julius Cohen was asked to respond to the contention that

arbitration clauses are used by railroads in “take it or

leave it” contracts with shippers. He responded that there

are statutory safeguards to protect individuals against the

harsh effects of contracts of adhesion, stating, by way of

illustration, “you can not get a provision into an insur-

ance contract to-day (sic) unless it is approved by the

insurance department.” 1924 Hearings at 15. Mr. Cohen’s

comment is consistent with the simple proposition

advanced by Massachusetts in Connolly: by enacting the

FAA, Congress did not intend to deny the states their

regulatory prerogative to prevent coerced arbitration

through regulation of the process of contract formation.

Moreover, Mr. Cohen’s written comments provided to

Congress reinforce the notion that the states could protect

their citizens from unwanted arbitration in adhesive con-

tracts without offending the FAA:

There is no disruption therefore by means of the

Federal bludgeon to force an individual State

into an unwilling submission to arbitration

enforcement. The statute cannot have that effect.

1924 Hearings at 40. Connolly, however, interprets the

FAA in such a way as to have precisely “that effect” by

restricting the states’ authority to require that arbitration

be consensual.

10

IV. CONNOLLY MISCONSTRUES PRECEDENT OF

THIS COURT IN RULING THAT THE FAA PRO-

HIBITS REASONABLE STATE REGULATION OF

ARBITRATION

The result in Connolly was influenced by rulings of

this Court reflecting an expansive reading of the FAA. In

none of those cases, however, was there any doubt that

the parties had fairly contracted to arbitrate their dis-

putes. Instead, the Court was merely asked to, and con-

sistently did, rule that agreements to arbitrate are

enforceable and that states are preempted by the FAA

from denying enforcement of valid agreements to

arbitrate.?

2 See Rodriguez De Quijas v. Shearson/American Express, Inc.,

109 S.Ct. 1917 (1989) (customer agreement with brokerage

house contained a clause to arbitrate controversies relating to

investment accounts); Perry v. Thomas, 482 U.S. 483 (1987) (state

law cannot invalidate an employment contract requiring arbi-

tration of dispute with employer); Shearson/American Express,

Inc. v. McMahon, 482 U.S. 220 (1987) (customer agreement with

brokerage house contained a clause to arbitrate controversies

relating to investment accounts); Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (distributor

contract for the sale of automobiles had a provision that all

disputes would be settled by arbitration); Dean Witter Reynolds,

Inc. v. Byrd, 470 U.S. 213 (1985) (customer agreement with

brokerage house contained a clause to arbitrate any contro-

versy between the parties relating to the agreement); Southland

Corp. v. Keating, supra (states may not require judicial forum for

resolution of contract disputes where parties have contracted

for arbitration); Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983) (construction contract con-

tained a clause to arbitrate all claims and disputes relating to

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

(Continued on following page)

11

That there are limitations upon FAA preemption of

state laws affecting arbitration was recognized by this

Court in Volt. In Volt, the Court upheld a California

procedural rule permitting a stay of arbitration pending

resolution of related litigation involving third parties

who were not bound by the arbitration agreement.

Volt’s expression of the purpose of the FAA demon-

strates the error of the court in Connolly. The majority

noted that there is no federal policy favoring mandated

arbitration:

The FAA contains no express pre-emption provi-

sion, nor does it reflect a congressional intent to

occupy the entire field on arbitration.

* * *

It simply requires courts to enforce privately

negotiated agreements to arbitrate, like other

contracts, in accordance with their terms.

* * *

Arbitration under the Act is a matter of consent,

not coercion, and parties are generally free to

(Continued from previous page)

(contract for the sale of an international business had a clause

providing that any controversy arising out of the agreement

would be referred to arbitration); Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Ware, 414 U.S. 117 (1973) (New York Stock

Exchange form agreement between employer and employee

contained a provision whereby the parties agreed to arbitrate

controversies arising out of termination of employment); Prima

Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)

(consulting agreement had a clause by which the parties

agreed that any controversy arising out of the contract would

be settled by arbitration).

———ae awe

12

structure their arbitration agreements as they

see fit.

109 S.Ct. 1254-5. The Massachusetts regulations do not

undermine these principles; indeed, by insuring that an

arbitration agreement is truly “privately negotiated,”

those regulations promote the policies underlying the

FAA.

The effect of Connolly is to make arbitration a sacred

cow which cannot be subject to reasonable regulation by

the states for consumer protection. This position is simply

not justified by the FAA or Supreme Court precedent.

Volt removes any doubt that there is room for state regu-

lation of arbitration. The appropriate inquiry for pur-

poses of preemption analysis is whether state regulation

of arbitration “stands as an obstacle to the accomplish-

ment and execution of the full purposes and objectives of

Congress.” Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

The effectiveness of contractual arbitration as a

means of dispute resolution is premised upon the

assumption that the parties knowingly and voluntarily

have chosen to be bound by the arbitral process. The

Connolly decision is fatally flawed because it ignores this

principle in adopting a per se rule invalidating any state

regulation affecting arbitration, regardless of the nature

of the state’s interest in regulating a particular industry.

V. THE STATES HAVE A LEGITIMATE INTEREST IN

REQUIRING THAT ARBITRABILITY BE

NEGOTIABLE

The rule of Connolly establishes precedent which

threatens to invalidate a large spectrum of state

13

regulation. While Connolly involves only the securities

industry in Massachusetts, under the law of the case any

state regulation which singles out arbitration for special

treatment is vulnerable to an FAA preemption challenge.

Although this Court has determined that the states

may not eliminate arbitration as an option for dispute

resolution, it has recognized that Congress has deter-

mined that arbitration may not be appropriate for the

resolution of some disputes arising under federal law.°

This recognition of the differences between judicial and

3 This Court on several occasions has determined that the

“proper relationship between federal courts” and alternative

dispute resolution favors granting litigants access to the for-

mer. Alexander v. Gardner-Denver Co., 415 U.S. 36, 38 (1974)

(emphasis added). In Alexander, the Court found that “the fact-

finding process in arbitration usually is not equivalent to judi-

cial fact-finding. .. .[A]nd the rights and procedures common

to civil trials .. . are often severely limited or unavailable.” 1d.

at 57-58. The Court concluded that “the federal policy favoring

arbitration of labor disputes and the federal policy against

discriminatory employment practices can best be accommo

dated” by allowing a Title VII plaintiff access to federal courts

regardless of whether the dispute was first litigated in arbitra-

tion. Id. at 59 (emphasis added). See also McDonald v. West

Branch, 466 U.S. 284 (1984) (wherein the Court ruled that

federal courts should not give any effect to arbitration resolu-

tions of 42 U.S.C. § 1983 actions); Barrentine v. Arkansas-Best

Freight System, Inc., 450 U.S. 728, 744 (1981) (wherein the Court,

over the dissent of Chief Justice Burger in which he extolled

the virtues of arbitration, noted again that “arbitral procedures

[are] less protective of individual statutory rights than are

judicial procedures” and held that employees have a right to

bring minimum wage claims under the Fair Labor Standards

Act in court).

14

non-judicial procedures cannot be ignored by the states

any more than it can be ignored by the federal govern-

ment. Subject only to the limitation that state regulation

cannot frustrate the objectives of the FAA, the states must

be free to consider the differences between arbitration

and judicial procedures in regulating the process of con-

tract formation.

That it may be appropriate for the states to subject

arbitration to special conditions through laws governing

contract formation was recognized by the Fourth Circuit

Court of Appeals in Supak. The court ruled that it is

permissible under the FAA for a state to define the addi-

tion of arbitrability to a commercial contract as a material

alteration requiring written consent by both parties.

Under Connolly, the state rule would not have survived,

because it “singles out” arbitration for special treatment

not applicable to other contractual provisions.

The implications of the First Circuit ruling are stag-

gering. While arbitration has gained recognition as an

acceptable alternative to judicial procedures, the states

have an interest in reducing the risk that their citizens

would unknowingly or unwillingly forfeit an option of

judicial relief or administrative remedies provided by

state law. This interest is particularly important in indus-

tries where market forces do not provide opportunities

for informed waivers by consumers.

The states’ general acceptance of arbitration as an

efficient and inexpensive means of resolving contractual

disputes has been accompanied in many instances by

regulations designed to protect the consumer from an

uninformed or coerced waiver of rights to access to a

15

judicial fornm. For example, arbitration of medical

claims, while gaining widespread acceptance, is subject to

certain disclosure requirements in many states.4 Similar

concerns have prompted some states to regulate arbitra-

tion imposed through adhesive contracts in motor vehicle

franchise agreements.° Privately negotiated arbitration is

desirable only if it is mutually acceptable to all parties

who would be bound by it. Otherwise, it has the potential

of becoming a tool by which those who dominate an

industry may exert their economic strength to avoid

rather than embrace a fair and impartial resolution of

contractual disputes.

4.

»

CONCLUSION

The Connolly decision presents a legal issue which

has not yet been addressed by this Court and which is the

subject of disagreement among the circuits. If left undis-

turbed, the ruling threatens to undermine seriously the

legitimate interests of the states in assuring that contrac-

tual arbitration is truly a matter of consent, not coercion.

4 See examples given in Massachusetts’ petition for cer-

tiorari at 28-30.

5 See Saturn Distribution Corp. v. Williams (n. 1).

16

Accordingly, amici urge that the Court grant a writ of

certiorari to decide this significant question.

Respectfully submitted by the

Commonwealth of Virginia

on behalf of Amici Curiae,

by her Counsel:

Mary Sue TERRY

Attorney General of Virginia

H. LANE KNEEDLER

Chief Deputy Attorney General

Wa.TER A. McFarRLANE

Deputy Attorney General

*Guy W. Hors ey, Jr.

Senior Assistant Attorney General

101 North Eighth Street

Richmond, Virginia 23219

Telephone: (804) 786-6563

*Counsel of Record for Amici