Petition for Writ of Certiorari — Williams v. Saturn Distribution Corp.

Supreme Court brief1990

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Text

Mary Sue TERRY

K. MARSHALL Cook

Eric K.G. Fiske

In The ——

F. SPANIOL, JR.

CLERK

Supreme Court of the United crates

October Term, 1990

DONALD E. WILLIAMS, COMMISSIONER OF

THE DEPARTMENT OF MOTOR VEHICLES,

COMMONWEALTH OF VIRGINIA,

and

VIRGINIA AUTOMOBILE DEALERS

ASSOCIATION, INC.,

Petitioners,

vV.

SATURN DISTRIBUTION CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE FOURTH CIRCUIT

R. Harvey CHAPPELL, Jr. *

E. Forp STEPHENS

CHRISTIAN, BARTON, Epps,

BRENT & CHAPPELL

1200 Mutual Building

909 East Main Street

Richmond, Virginia 23219

(804) 644-7851

WituiaM T. LEHNER

Attorney General

Deputy Attorney General

Guy W. Horst ey, Jr. *

Senior Assistant

Attorney General

Assistant Attorney

General

Office of the Attorney

General

101 North Eighth Street

Richmond, Virginia 23219

(804) 786-4624

Counsel for Petitioner —

Donald E. Williams,

Commissioner of the

Department of Motor

Vehicles, Commonwealth

of Virginia

1800 West Grace Street

Richmond, Virginia 23220

Counsel for Petitioner -

Virginia Automobile

Dealers Association, Inc.

* Counsel of Record

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

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED FOR REVIEW

1. Does the Federal Arbitration Act apply to a state

Statute concerning contract formation?

2. Is there an “actual conflict” between the Federal

Arbitration Act and a state statute of contract formation

warranting preemption of the latter under the Supremacy

Clause when the state statute ensures only that parties volun-

tarily enter into agreements containing forum selection

clauses and does not affect the enforceability of existing

arbitration agreements?

3. Can a state law of contract formation be construed as

“singling out” arbitration for special treatment and unreasona-

bly burdening parties’ ability to enter into arbitration agree-

ments where the statute applies to all forum selection clauses

and requires only that parties voluntarily enter into arbitration

agreements?

4. Does the Federal Arbitration Act allow automobile

manufacturers/distributors to force their dealers to accept

arbitration clauses as part of their franchise agreements when

the Deaier’s Day in Court Act specifically provides dealers

access to federal courts to seek redress against manufacturcrs/

distributors?

5. Did the panel majority in this case err in refusing to

reconcile the Federal Arbitration Act, which mandates

enforcement of arbitration agreements, and Virginia’s interest

in enforcing its automobile franchise laws, which require only

that parties voluntarily enter into agreements containing

forum selection clauses?

LIST OF ALL PARTIES

The petitioners, who were defendants in the action below,

are Donald E. Williams, in his official capacity as Commis-

sioner of the Department of Motor Vehicles of the Common-

wealth of Virginia, and Virginia Automobile Dealers

Association, Inc. The respondent, which was plainiiff in the

action below, is Saturn Distribution Corporation, a wholly-

owned subsidiary of Saturn Corporation. Saturn Corporation,

in tur, is a wholly-owned subsidiary of General Motors

Corporation.

iii

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW............ i

a ii

po re Vv

Ne ec hse cea bs eda ten seesepenences 1

El 2

CONSTITUTIONAL PROVISION AND STATUTES

CRU Secckieusenn cet hssasse0seneeceane 2

cay ls yk ow. _ 2

Ne Lae s kab 5546564640606 EN OO OS anes 3

cE kas ae eee kG SANA Ne eres eseeeces 5

3. Bee Gremetece Comite CUMIOR. ..... 2... ccc cee: 5

4. The Court of Appeals’ Opinions ............... 6

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

I. The Panel Majority Erroneously Held That The

Federal Arbitration Act Applies To State Laws Of

ae ie cnce hues eeteesacencens 9

II. The Panel Majority’s Preemption Analysis Was Erro-

neous In Holding That There Was An Actual Conflict

Between The Federal Arbitration Act And

§ 46.1-550.5:27 Warranting Preemption............. 14

III. The Panel Majority Erroneously Concluded That

The Virginia Statute Singled Out Arbitration Provi-

sions For Special Treatment And Placed An Unrea-

sonable Burden On Parties’ Ability To Enter Into

PUNUCRTOIO FAITOGUROURR, . ww. ween ccc enees 17

IV. The Panel Majority Failed To Find That The Federal

Arbitration Act Would Conflict With The “Dealer’s Day

In Court Act” If Virginia Dealers Were Forced To

Accept Mandatory Arbitration ..................... 21

TABLE OF CONTENTS -— Continued

Page

V. The Panel Majority Failed To Uphold Virginia’s

Judicially Recognized Interest In Enforcing Its

Automobile Franchise Laws To Promote Fair Deal-

ing Between Manufacturers/Distributors And Their

EE Chae CGA RaWiUe cas Cbs beeen chun esawnses 24

TS 56 650 wakGGAb0 UA ka ckeeseeneebkunece’’s 28

Appendix

A. Opinion of the Court of Appeals — June 6, 1990..... A-1

B. Opinion and Judgment of the District Court — August

Sek We b54 4144005 be Seeks eo ROKARS NOR Dea A-28

C. Order of the Court of Appeals Denying Rehearing

and Suggestion for Rehearing in banc — July 20,

SPT yr ee ye Tee tT Tree Pe eee Ere A-43

ee Us I Ws Oe Ms owe ce cantducnissveaees A-45

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

Pe ChSGASEREE SOR CEUGCAG ACCS CA SEM ORE OEE ENERO A-46

F. Section 2 of the Dealer’s Day in Court Act, 15

i Aer eee hice vaaseewesaNes A-47

G. Section 5 of the Dealer’s Day in Court Act, 15

Py EN eae et Okeke cha Geen ake A-48

ae, ee Ue ere rrr ST err re A-49

ee Se a U8 Orr rr rere A-50

TABLE OF AUTHORITIES

Page

CasEs:

American Motors Sales Corp. v. Division of Motor

Vehicles, 592 F.2d 219 (4th Cir. 1979), cert. denied,

PCT ETT TT ee yr 24, 27

American Tobacco Co. v. Patterson, 456 U.S. 63

CU 6b 5c es nen deiactcccdtwcunbauanesassssesneuwns 9

Barney Motor Sales v. Cal Sales, Inc., 178 F. Supp.

See GN Ms EE 0 nn:b 5 Vas nccnekageeencneeuneans 22

Bernhardt v. Polygraphic Co. of America, 350 U.S.

CU RUE 4 60.060040000b0s 6050 000saceuniabeeuescen 12

Bethlehem Steel Co. v. New York State Labor Rela-

lens Board, 350 U.S. TET CIDST). ...cccccccscccccss 15

California v. ARC America Corp., 109 S. Ct. 1661

CRS kaw aso uundénnkh00n05060646464050 00s ARO 15

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

(8th Cir, 1972)... cece eee ee eee eee ee eee cence 6

Consumer Product Safety Commission v. GTE Syl-

VENER, TUE.. GET WB. TES CHGS 6680 ce ct rcnuscesens 10

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

CHO bn oa dee saeensbneuada aba ueeuke we oe, fas 58

Dewey v. R. J. Reynolds Tobacco Co., 1990 N.J.

SD WE Gee COU wah bcccecnscdccesenacbeaseanes 15

Eassa Properties v. Shearson Lehman Bros., Inc., 851

uae. Tre CRUD GA BOO vas cus ccsvewsssenceussen 12

English v. General Electric Co., 110 S. Ct. 2270

CK a dua kneeaes See OT PTT eT Tee TT Te ee, 15

Hillsborough County v. Automated Medicai Laborato-

7008, Tt.. STE Dae Fee Ceeee ov keke ckasscesas 15, 17

TABLE OF AUTHORITIES — Continued

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

Hoffman Estates v. Flipside, Hoffman Estates, Inc.,

GSS UB, GED COG s ccc csccctcesedesesesesecsaces 16

Hull v. Norcom, Inc., 750 F.2d 1547 (11th Cir. 1985) .... 12

Huron Portland Cement Co. v. Detroit, 362 U.S. 440

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

GOS OB. TOF Ghee c cccncccecqsccesecanssneve 12, 17

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Bae.. STS U.B. GIS CUBES) a a cccccccccsscssces 12, 22, 27

Moses H. Cone Memorial Hospital v. Mercury Constr.

Corp., 460 U.S. 1 (1983)

New Motor Vehicle Bd. v. Orrin W. Fox Co., 439 U.S.

OE Sno insccAsae 2600 bs kee k eee kekseaesees 25

Perry v. Thomas, 482 U.S. 483 (1987) . 12, 13, 16, 18, 19

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

Ca See GP cccxncccecnchensssss 10, 11, 12, 17, 21

Rodriguez De Quijas v. Shearson/American Express,

wn cl Se Oe a eee 12, 17, 27

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) ..... 12, 17

Schmitt-Norton Ford, Inc. v. Ford Motor Co., 524 F.

Supp. 1089 (D. Minn. *981), aff'd, 685 F.2d 438

CO GR TD vce cvcnncceccctaceucnececnteccces 23

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

(1st Cir. 1989), cert. denied, 110 S. Ct. 2559 (1990)

WTTTTTT TTT TT TTT eee ee 7, 8, 14, 19

Securities Industry Ass'n v. Connolly, 703 F. Supp.

eB rere re 6

vii

TABLE OF AUTHORITIES — Continued

Page

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

ee Gabon s ckaaseesccunwun 12, 17, 21, 22

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

SOubOESSONNNGAO SES ORdaSOeLHEOROA DS 6, 10, 12, 16, 18, 19

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

oe Be es re ere 6

United States v. James, 478 U.S. 597 (1986)............ 9

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

Bee We GR; Te CERO oo cc cccnccc 5S, 11, 12, 15, 16, 17

Webb v. R. Rowland & Co., Inc., 800 F.2d 802 (8th

SN TU 6.60505 60664560 6cknussacdeabaseshbsecancas 6

CONSTITUTION AND STATUTES:

The Supremacy Clause, U. S. Const. art. VI, cl. 2...... 2

Federal Arbitration Act, 9 U.S.C. §§ 1-13 .............. 2

Dealer’s Day in Court Act, 15 U.S.C. §§ 1221-1225

LEARNER DOSEARA EMERGES 605 46000556050 E500 CRORES a

Se Wea: Wh NG Xho eantibinunveecsanadselcaniaaks 22

RP EN TS 45 5050 454545 cuSwCkEua SKS AER EOE 24

See ee) IE 6. nc 5 nb ats akan eoneasbeeneencid 2

Me WE PSUR Ghd acai nGaak bean sbaenskcnvaenken 5

Oe Or II 0s bc nb kd Ghd de0ceb aeekeceh Maneee 14

We. Code § 46.2-SS0.S:26 . 2... ccc ccc cccess 2, 3, 4, 5, 13

a ey Oe i ca aclacvabodwennsas passim

Va. Code § 46.2-1566 2

see ee eeeeeeeeeeeeeeeeeeeseeseeee eee

Viii

TABLE OF AUTHORITIES — Continued

Page

Se Se Se San bce ccccncnesecetaccocccacnd 2,4

OR, Ge BH Gee ec oc ccc cceceeciccccsccsccnccusess 26

MISCELLANEOUS:

Cohen & Dayton, The New Federal Arbitration Law,

+s |e @ 8. | RPTITTTTTTT TTT 11

H. R. Rep. No. 2850, 84th Cong., 2d Sess., reprinted

in 3 U.S. Code Cong. & Ad. News 4596 (1956) ..... 23

H. R. Rep. No. 96, 68th Cong., Ist Sess. (1924)....... 10

Joint Hearings on S. 1005 and H. R. 646 before the

Subcommittees of the Committees of the Judiciary,

68th Cong., Ist Sess. (1924) ........ 2... ee eee eee ees 11

Lieberman & Henry, Lessons from the Alternative

Dispute Resolution Movement, 53 Chi. L. Rev. 424

nw kG sou eSO heehee GhSGASeconserevecesseseces 18

Patterson, Dispute Resolution in a World of Alterna-

tives, 37 Cath. U. L. Rev. 591 (1988)............... 18

S. Rep. No. 2073, 84th Cong., 2nd Sess. (1956) ....... 25

Starr, “The Law of Procmpeion” .... 2... cc cccccccscess 15

No. 90-_

In The

Supreme Court of ihe United States

October Term, 1990

. 7

DONALD E. WILLIAMS, COMMISSIONER OF

THE DEPARTMENT OF MOTOR VEHICLES,

COMMONWEALTH OF VIRGINIA,

and

VIRGINIA AUTOMOBILE DEALERS

ASSOCIATION, INC.,

Petitioners,

SATURN DISTRIBUTION CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE FOURTH CIRCUIT

Donald E. Williams, Commissioner of the Department of

Motor Vehicles of the Commonwealth of Virginia (the “Com-

missioner”), and the Virginia Automobile Dealers Associa-

tion, Inc. (“VADA”), respectfully petition for a writ of

certiorari to review the judgment of the United States Court

of Appeals for the Fourth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1) is

reported at 905 F.2d 719. The opinion of the district court

(Pet. App. 28) reversed by the court of appeals is reported at

717 F. Supp. 1147.

JURISDICTION

The court of appeals entered judgment on June 6, 1990.

Pet. App. 1. On July 20, 1990, a petition for panel rehearing

and a suggestion of rehearing in banc was denied. Pet. App.

43. This Court has jurisdiction under 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISION

AND STATUTES INVOLVED

The pertinent parts of the following are reprinted as

indicated: the Supremacy Clause, U.S. Const. art. VI, cl. 2 at

Pet. App. 45; the Federal Arbitration Act, as amended, 9

U.S.C. §§ 1-13, at Pet. App. 46; the Dealer’s Day in Court

Act, as amended, 15 U.S.C. §§ 1221-1225, at Pet. App. 47-48;

Va. Code § 46.1-550.5:24 at Pet. App. 49; and Va. Code

§ 46.1-550.5:27 at Pet. App. 50.

STATEMENT OF THE CASE

Respondent brought suit alleging that Va. Code

§§ 46.1-550.5:24 and 46.1-550.5:27 were preempted by the

Federal Arbitration Act (“FAA” or the “Act”), 9 U.S.C.

§§ 1-13, under the Supremacy Clause of the United States

Constitution.! The district court rejected this constitutional

challenge. A divided court of appeals reversed, finding that

§ 46.1-550.5:27, but not § 46.1-550.5:24, was preempted by

the FAA.

1 Title 46.1 of the Code of Virginia was repealed and

§§ 46.1-550.5:24 and 46.1-550.5:27 were recodified as Va. Code

§§ 46.2-1566 and 46.2-1569, effective October 1, 1989. To avoid confu-

sion, these sections will be referred to by their previous designations

which were applicable on the date of the district court’s final order. All

other provisions of Virginia’s Motor Vehicle Franchise !aws will be

referred to by their new designations.

1. Background. Respondent Saturn Distribution Cor-

poration (“Saturn”) was created in 1985 to design, manufac-

ture and market a new automobile. Pet. App. 3. The dealer

agreement which Saturn wishes to impose upon its dealers in

Virginia includes as a nonnegotiable item mandatory media-

tion and binding arbitration as the exclusive remedy for

resolving disputes between Saturn and the dealer, the express

provisions in the proposed agreement being:

Saturn and Dealer acknowledge that, at the state

and federal levels, various courts and agencies

would, in the absence of this Article 5, be available

to them to resolve claims or controversies which

might arise between them. Saturn and Dealer agree

that it is inconsistent with the Mission and Philoso-

phy for either to use courts or governmental agen-

cies to resolve such claims or controversies.

THEREFORE, CONSISTENT WITH THE PROVI-

SIONS OF THE UNITED STATES ARBITRATION

ACT (9 U.S.C. Section 1 et seq.), DEALER AND

SATURN AGREE THAT THE DISPUTE RESOLU-

TION PROCESS OUTLINED IN THIS ARTICLE,

WHICH INCLUDES BINDING ARBITRATION,

SHALL BE THE EXCLUSIVE MECHANISM FOR

RESOLVING ANY CONTROVERSY OR CLAIM

BETWEEN THEM ARISING OUT OF OR RELAT-

ING TO THIS AGREEMENT, ITS CREATION, OR

TERMINATION.

Pet. App. 29-30 n.2.

Section 46.1-550.5:24 requires that such a dealer agree-

ment be “approved by the Commissioner as not containing

terms inconsistent with the provisions of this chapter” before

it is offered to prospective dealers in Virginia—Pet. App. 49.

Section 46.1-550.5:27(10) provides that it is unlawful to fail

to include in such a dealer agreement the following language,

“or words to that effect”:

“If any provision herein contravenes the valid laws

or regulations of any state or other jurisdiction

wherein this agreement is to be performed, or

denies access to the procedures, forums, or

remedies provided for by such laws or regulations,

such provision shall be deemed to be modified to

conform to such laws or regulations, and all other

terms and provisions shall remain in full force and

efrect,”....? :

Pet. App. 50.

When Saturn submitted its proposed agreemeni to the

Commissioner for approval pursuant to § 46.1-550.5:24 (Joint

Appendix in the Circuit Court (“J.A.”) at 58-9), the Commis-

sioner replied that “DMV cannot approve the Saturn Distribu-

tion Corporation Dealer Agreement” because, in part, “THE

DISPUTE RESOLUTION PROCESS contravenes the Virginia

franchise laws inasmuch as it requires that potential fran-

chisees . . . give up access to the procedures, forums or

remedies provided by such laws.” J.A. at 83. However, the

Commissioner emphasized that:

I would have no problem approving [Saturn’s]

agreement if in the agreement, or in an addendum

thereto, an option for the dealer to choose binding

arbitration under Saturn’s Dispute Resolution Pro-

cess or to choose the forum provided under Vir-

ginia’s dealer franchise laws is offered.

It would then be clearly understood that those

dealers choosing Saturn’s Dispute Resolution Pro-

cess would not be subject to protection under the

Virginia franchise laws.

J.A. at 84.

Prior to Saturn’s submission of its proposed agreement,

Chrysler Motors Corp. and Freightliner (a truck manufactur-

ing company) sent similar form agreements containing man-

datory binding arbitration provisions to the Commissioner for

approval pursuant to § 46.1-550.5:24. J.A. at 114. In both of

these two previous cases, the Commissioner took the same

position that he has maintained with Saturn. While he allowed

the manufacturer/distributor to include a binding arbitration

2 Va. Code § 46.2-1569(9), the recodification of Va. Code

§ 46.1-550.5:27(10), contains identical language except that it omits “and

effect” from the last phrase of the language required to be included in all

franchises with motor vehicle dealers.

clause in the franchise agreement offered to Virginia dealers,

the Commissioner required that the dealer be offered a choice

between the use of binding arbitration or the “procedures,

forums, and remedies provided for by” the laws of Virginia

for dispute resolution. J.A. at 114-17.

2. This Lawsuit. On May 19, 1989, Saturn filed a

complaint for declaratory judgment and injunctive relief

against the Commissioner requesting the district court to

declare (1) that §§ 46.1-550.5:24 and 46.1-550.5:27 are pre-

empted by the FAA under the Supremacy Clause of the United

States Constitution and (2) that the provisions of the Saturn

dealer agreement mandating arbitration are valid and enforce-

able in Virginia. Pet. App. 32. Jurisdiction in the district court

was based on 42 U.S.C. § 1331. Id. Virginia Automobile

Dealers Association intervened as a co-defendant with the

Commissioner and in opposition to Saturn. VADA is a trade

association consisting of more than 600 franchised auto-

mobile dealers in Virginia. Jd. On August 17, 1989, the

district court entered a final order granting summary judg-

ment in favor of Commissioner and VADA. Pet. App. 41.

3. The District Court’s Opinion. Applying this

Court’s preemption analysis, the district court concluded that

the Virginia statute, as interpreted by the Commissioner, “in

no way ‘stands as an obstacle to the accomplishment and

execution of the full purposes and objectives’ of the Federal

Arbitration Act.” Pet. App. 36 (quoting Hines v. Davidowitz,

312 U.S. 52, 67 (1941)). Noting that various Virginia statutes

dictate the form of certain contracts with no opportunity for

negotiation, the court concluded that § 46.1-550.5:27, in con-

trast, does not single out arbitration clauses for special treat-

ment that burden parties’ ability to commit themselves to

arbitration. Pet. App. 34-35. Moreover, citing this Court’s

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

Trustees, 109 S. Ct. 1248, 1254 (1989) (“Arbitration under

the Act is a matter of consent, not coercion.”), the district

court found that the challenged statute furthered the accom-

plishment of the full objectives of the FAA because it ensured

consensual rather than forced arbitration. Pet. App. 36.

The district court distinguished several cases which Sat-

urn cited in support of its motion. The court noted that Collins

Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995 (8th Cir. 1972)

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

1986) both involved existing agreements to arbitrate and state

Statutes which explicitly singled out arbitration agreements.

Pet. App. 37. The district court also had before it the lower

court’s opinion in Securities Industry Ass'n v. Connolly, 703

F. Supp. 146 (D. Mass. 1988), later affirmed by the First

Circuit. The district court observed that the defendants in

Connolly admitted that their regulations singled out arbitra-

tion agreements. Pet. App. 38.

4. The Court Of Appeals’ Opinions. a. The Panel

Majority. A divided panel of the court of appeals reversed

the district court and found that § 46.1-550.5:27, but not

§ 46.1-550.5:24, was preempted. Emphasizing the value of

arbitration as a means of dispute resolution and the “ ‘liberal

federal policy favoring arbitration agreements’ ” (Pet. App. 6

(quoting Moses H. Cone Memorial Hospital v. Mercury Con-

str. Corp., 460 U.S. 1, 24 (1983)), the panel majority con-

cluded that “if a state law singles out arbitration agreements

and limits their enforceability it is preempted.” Pet. App. 7.

They first found that the FAA applied to laws of contract

formation because, to hold otherwise, “would be to allow

states to ‘wholly eviscerate Congressional intent to place

arbitration agreements upon the same footing as other con-

tracts.’”” Pet. App. 8 (quoting Southland Corp. v. Keating,

465 U.S. 1, 16-17 n.11 (1984)). Adopting the Fourth Circuit’s

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

593 F.2d 135 (4th Cir. 1979), they held “that § 2 [of the Act]

does preempt state rules of contract formation which single

Out arbitration clauses and unreasonably burden the ability to

form arbitration agreements.” Pet. App. 9. Applying this

aialysis, the panel majority found that § 46.1-550.5:27 “con-

flicts with the FAA because Virginia law generally permits

contracting parties to make terms nonnegotiable, and singles

Out arbitration provisions as an exception to that rule.” Pet.

App. 11.

To conclude that § 46.1-550.5:27 singles out arbitration

agreements, the panel majority relied heavily on the First

Circuit’s decision in Securities Industry Ass’n v. Connolly,

883 F.2d 1114 (ist Cir. 1989), cert. denied, 110 S. Ct. 2559

(1990). They considered non-determinative the fact that Vir-

ginia’s statute neither expressly mentions arbitration nor is

confined in its scope to that one specific type of forum

selection clause. Pet. App. 12-13. Rather, to decide whether

§ 46.1-550.5:27 is a rule specifically tailored toward arbitra-

tion agreements or whether it is merely a part of Virginia’s

laws of contract formation, the panel majority compared it to

general common law and statutory law and concluded that the

challenged statute is preempted because, as a general rule,

Virginia does not bar parties from making certain provisions

of their contracts nonnegotiable. Pet. App. 13-16.

b. The dissent. Judge H. Emory Widener, Jr., dissen-

ted from the panel’s opinion. Explaining that the majority had

abandoned the proper preemption analysis, he pointed out that

the “appropriate starting point in examining the statute in

question is not a ‘liberal federal policy favoring arbitration

agreements’ ” (Pet. App. 21), but rather is a presumption

against preemption “absent a clear and manifest Congres-

sional intent to the contrary.” /d. Noting that by its terms, the

FAA does not apply until an arbitration agreement exists and

that “virtually every reported case” in which the FAA has

been held to preempt state law has dealt with the enforce-

ability of an otherwise valid arbitration agreement, Judge

Widener pointed out that the challenged statute deals with the

formation of arbitration agreements, not their enforceability.

Pet. App. 22. He found that § 46.1-550.5:27 “only precludes

Saturn from unilaterally imposing agreements to arbitrate

upon its dealers. If a dealer agrees to arbitrate, the Virginia

Statute is no impediment to the agreement’s enforceability.”

Id. He concluded that there is no direct conflict between

Virginia’s statute and the FAA and thus no preemption. /d.

Judge Widener also explained that the majority panel had

failed to recognize that the Dealer’s Day in Court Act (15

U.S.C. §§ 1221-1225), overrode the FAA’s congressional

mandate to enforce arbitration agreements by providing auto-

mobile dealers access to federal courts irrespective of con-

tractual provisions. Pet. App. 22-25. He observed that the

Dealer’s Day in Court Act is “relevant not only to whether an

exception to preemption exists, but, especially under a ‘frus-

trate the federal policy’ theory, to whether preemption should

apply in the first instance.” Pet. App. 25.

As did the district court, Judge Widener distinguished the

Connolly decision. He considered the First Circuit’s underly-

ing concern in Connolly, to alleviate crowded court dockets,

impermissible under Article III of the Constitution. Pet. App.

26. He also pointed out that Connolly was a securities case, an

area in which federal acts have granted concurrent power to

the states and in which this Court has addressed the effect of

the FAA. 7d. By contrast, Judge Widener observed, “the

Virginia statute arises not from a grant of concurrent power,

but from the State’s inherent police power, and Congress in

the DDCA did manifest an intent to preclude waiver of a

judicial forum for claims between automobile dealers and

manufacturers.” Pet. App. 27.

c. A petition for panel rehearing and a suggestion for

rehearing in banc was denied. The court of appeals granted a

Stay pending the timely filing of a petition for writ of cer-

tiorari.

REASONS FOR GRANTING THE WRIT

This case presents important issues concerning the FAA

and the preemption of state law. The state statute at issue in

this case ensures that a Virginia automobile dealer’s decision

to waive access to available “procedures, forums, or

remedies” by agreeing to Saturn’s mandatory and binding

arbitration is voluntary. The panel majority held that the

preemptive effect of the FAA under the Supremacy Clause

reached state laws concerning contract formation and that

Virginia’s statute was preempted because, they concluded, it

singles out arbitration clauses and unreasonably burdens the

ability to form arbitration agreements. The approach taken by

the panel majority in striking this statute down is a serious

departure from the language, legislative history and this

Court’s interpretation of the FAA and demonstrates an exces-

sive enthusiasm for arbitration rather than an objective appli-

cation of this Court’s preemption analysis. By reviewing this

case, this Court will have the opportunity to consider a

decision which, if left unchallenged, will not only severely

weaken the ability of Virginia and her sister states to exercise

traditional police powers in protecting automobile dealers

from the overwhelming economic power and bargaining

strength of manufacturers/distributors, but will also cripple

the states’ ability to ensure their citizens voluntary access to

all dispute resolution processes. The questions raised by the

Fourth Circuit’s decision are of widespread significance and

review by this Court is warranted.

I. The Panel Majority Erroneously Held That The Fed-

eral Arbitration Act Applies To State Laws Of Con-

tract Formation.

The Fourth Circuit erred in holding that the Federal

Arbitration Act applied to § 46.1-550.5:27, a state law of

contract formation. The panel majority conclusion is contrary

to the express language of the FAA and its legislative history,

both of which clearly demonstrate that the Act applies only to

the enforcement of existing, consensual arbitration agree-

ments.

Interpretation of a statute must start with its language and

the words chosen by Congress must be accorded their ordi-

nary meaning. United States v. James, 478 U.S. 597, 604

(1986); American Tobacco Co. v. Patterson, 456 U.S. 63, 68

(1982). The provisions of the FAA limit its application to the

enforcement of agreements to arbitrate. Section 2 of the FAA

reads:

A written provision in any... contract evidencing a

transaction involving commerce to settle by arbitra-

tion a controversy thereafter arising out of such

contract or transaction, or the refusal to perform the

whole or any part thereof, or an agreement in writ-

ing to submit to arbitration an existing controversy

arising out of such a contract, transaction, or

i entire

refusal, shall be valid, irrevocable, and enforceable,

Save upon such grounds as exist at law or in equity

for the revocation of any contract.

Pet. App. 46 (emphasis added). By its plain language, the Act

applies only to enforce an agreement to arbitrate. It does not

apply to state laws of contract formation.

The language of the FAA must be considered conclusive

in the absence of a “clearly expressed legislative intention to

the contrary.” Consumer Product Safety Commission v. GTE

Sylvania, Inc., 447 U.S. 102, 108 (1980). The FAA’s legisla-

tive history does not justify departure from the plain language

of the Act; rather, the legislative history supports the conclu-

sion that the FAA applies only to enforce arbitration con-

tracts. The intent of Congress in enacting the FAA was

modest. The FAA was designed simply to overcome tradi-

tional judicial resistance to the enforcement of voluntary

arbitration agreements between contracting parties. The offi-

cial reports of the two bills, which ultimately were codified as

the FAA (H.R. 646 and S. 1005), underscore 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 con-

tract, and the effect of the bill is simply to make the

contracting party live up to his agreement. He can

no longer refuse to perform his contract when it

becomes disadvantageous to him.

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

Southland Corp. v. Keating, 465 U.S. 1, 25 (1984) (O’Connor,

J., dissenting); Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U.S. 395, 419 (1967) (Black, J., dissenting).

Addressing the fears of Congress that the legislation would

supplant state law, Mr. Julius Cohen, one of the chief drafts-

men of the legislation, stated that the proposed act would not

supersede state law on contract formation:

[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. 1005 and H.R. 646 before the Subcom-

mittees of the Committees of the Judiciary, 68th Cong., Ist

Sess. 37 (1924). See also Cohen & Dayton, The New Federal

Arbitration Law, 12 Va. L. Rev. 265 (1926). There is nothing

in the record of the congressional hearings to even suggest

that the Act would affect the states’ power to regulate the

process of contract formation.

This Court consistently has emphasized the intent of the

FAA’s draftsmen and “honor[ed] the plain meaning of the

[Act].” Prima Paint, 388 U.S. at 404. Writing for a unani-

mous Court in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S.

213 (i985), Justice Marshall stated:

The legislative history of the Act establishes that

the purpose behind its passage was to ensure judi-

cial enforcement of privately made agreements to

arbitrate. We therefore reject the suggestion that the

overriding goal of the Arbitration Act was to pro-

mote the expeditious resolution of claims. The Act,

after all, does not mandate the arbitration of all

claims, but merely the enforcement — upon the

motion of one of the parties — of privately negoti-

ated arbitration agreements.

* ~ *

[Pjassage of the Act was motivated, first and fore-

most, by a congressional desire to enforce agree-

ments into which parties had entered, and we must

not overiook this principal objective when constru-

ing the statute, or allow the fortuitous impact of the

Act on efficient dispute resolution to overshadow

the underlying motivation. .

Id. at 219-21 (footnote omitted) (emphasis added). See also,

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

Ct. 1248, 1255 (1989); Prima Paint, 388 U.S. at 412-13

(Black, J., dissenting) (“Sections 2 and 3 of the Act assume

the existence of a valid contract. They merely provide for

enforcement where such valid contract exists.”’).

The FAA’s unambiguous provisions and legislative his-

tory limit its application to the enforcement of arbitration

agreements. Thus, the Eighth Circuit has observed that

“{wjhile federal law may govern the interpretation and

enforcement of a valid arbitration agreement, state law gov-

erns the question of whether such an agreement exists in the

first instance.” Eassa Properties v. Shearson Lehman Bros.,

Inc., 851 F.2d 1301, 1304-5 n.7 (11th Cir. 1988). Because

§ 46.1-550.5:27 is a law of contract formation which does not

affect the enforceability of forum selection clauses in agree-

ments voluntarily executed, the FAA does not apply.

Without discussing the language of the Act or its legisla-

tive history, the Fourth Circuit panel majority cites this

Court’s opinion in Southland as supporting precedent for

expanding the scope of the FAA beyond its purpose and

provisions to reach Virginia’s statute.* However, “[t]he issue

of ‘the making of an arbitration agreement’ was not involved

in Southland.” Hull v. Norcom, Inc., 750 F.2d 1547, 1551

(11th Cir. 1985). The question presented in Southland was

whether California could render arbitration provisions in exis-

ting franchise agreements unenforceable by enacting a fran-

chise investment law which invalidated any portion of an

agreement waiving compliance with state law. This Court held

that:

Plainly the effect of the judgment of the California

court [in upholding the state statute] is to nullify a

3 However, as in all the FAA cases which this Court has decided,

there was an existing agreement to arbitrate in Southland. /d. at 4. See

also Rodriguez De Quijas v. Shearson/American Express, Inc., 109 S. Ct.

1917, 1918-19 (1989); Volt Information Sciences, 109 S. Ct. at 1251;

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 223 (1987);

Perry v. Thomas, 482 U.S. 483, 485 (1987); Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 617 (1985); Byrd, 470 U.S.

at 215; Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460

U.S. 1, 5 (1983); Scherk v. Alberto-Culver Co., 417 U.S. 506, 508 (1974);

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117,

121-22 (1973); Prima Paint, 388 U.S. at 398; Bernhardt v. Polygraphic

Co. of America, 350 U.S. 198, 199 (1956).

valid contract made by private parties under which

they agreed to submit all contract disputes to final,

binding arbitration.

Id. at 7. The statute in Seuthland not only voided otherwise

valid arbitration contracts, it mandated that franchise disputes

be submitted to judicial resolution rather than any other

dispute resolution forum. These facts formed the basis on

which this Court concluded that the state law was preempted:

The Califomia Supreme Court interpreted this statute to

require judicial consideration of claims brought under

the state statute and accordingly refused to enforce the

parties’ contract to arbitrate such claims. So interpreted

the California Franchise Investment Law directly con-

flicts with § 2 of the Federal Arbitration Act and

violates the Supremacy Clause.

In enacting § 2 of the federal Act, Congress

declared a national policy favoring arbitration and

withdrew the power of the states to require a judi-

cial forum for the resolution of claims which the

contracting parties agreed to resolve by arbitration.

Id. at 10 (emphasis added). Therefore, this Court’s concern

about a state’s ability to “undercut the enforceability of arbi-

tration agreements” (/d. at 16) (emphasis added) or “wholly

eviscerate Congressional intent” (/d. at 16 n.11) pertained to

state laws which would mandate judicial resolution of claims

and prohibit the enforcement of agreements to arbitrate even

though parties have previously agreed to submit their disputes

to arbitration. By contrast, § 46.1-550.5:27 is a law of

contract formation which does not impinge upon the enfor-

ceability of agreements to adopt any form of dispute resolu-

tion. It does not mandate judicial resolution of disputes.>

* Similarly, in Perry v. Thomas the siate statute which this Court

neld as being preempted by the FAA required that litigants be provided a

judicial forum for resolving wage disputes even though the employces

had executed agreements with their employers containing arbitration

provisions. /d. at 491.

5 Section 46.1-550.5:27 must be read in conjunction with

§ 46.1-550.5:24 (upheld by the Fourth Circuit), which requires that cach

(Continued on following page)

§ .

As pointed out in Judge Widener’s dissent, the panel

majority’s conclusion that the FAA applies to state laws of

contract formation such as § 46.1-550.5:27 rests on a single

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

(Ist Cir. 1989), cert. denied, 110 S. Ct. 2559 (1990). This

Court has consistently interpreted the Act’s provisions as

applying only to the enforcement of an arbitration agreement.

No case cited by Connolly holds to the contrary.®

Il. The Pane! Majority’s Preemption Analysis Was Erro-

neous In Holding That There Was An Actual Conflict

Between The Federal Arbitration Act And

§ 46.1-550.5:27 Warranting Preemption.

Even if the FAA applied to state laws of contract forma-

tion, the Act would still not preempt § 46.1-550.5:27 because

there is no actual conflict between the two statutes. This

Court has held that the proper starting point for preemption

analysis is “the presumption against finding pre-emption of

state law in areas traditionally regulated by the States” absent

a “clear and manifest purpose of Congress” to the contrary.

(Continued from previous page)

automobile manufacturer/distributor seek and receive the approval of the

Commissioner to offer a franchise agreement form to its dealers in

Virginia before it actually does so. Automobile dealer franchises are one

type of only a handful of contracts which must be reviewed and approved

by state agencies before they are executed within the Commonwealth.

See, e.g., Va. Code § 38.2-203. It would be virtually impossible for

Virginia to enforce legislation requiring all or even most contracts offered

in the Commonwealth to be reviewed and approved by a state agency

before they are executed. Therefore, Virginia uses this procedure spar-

ingly and only when critical state interests exist, such as the protection of

automobile dealers, as explained in Section V of this petition.

the disputes concerned the enforcement of existing agreements to arbi-

trate. See Pet. at 12 n.3. This Court has yet to consider specifically

whether the FAA preempts state statutes conceming contract formation in

the absence of an executed arbitration contract. This case would provide

this Court with an opportunity to resolve this question.

California v. ARC America Corp., 109 S. Ct. 1661, 1665

(1989). See also Bethlehem Steel Co. v. New York State Labor

Relations Board, 330 U.S. 767, 780 (1947) (Frankfurter, J.,

dissenting). Solicitor General Kenneth W. Starr, in his

unpublished monograph “The Law of Preemption,” observed

that “ ‘our federal system, with its high regard for the several

States’ powers of governance, requires that judges not pre-

empt state laws lightly.’ Dewey v. RJ. Reynolds Tobacco

Co., 1990 N.J. LEXIS 98, 48 (N.J. 1990) (quoting Starr, “The

Law of Preemption,” at 61).

This Court recently reiterated its preemption analysis in

English v. General Electric Co., 110 S. Ct. 2270 (1990):

Our cases have established that state law is pre-

empted under the Supremacy Clause in three cir-

cumstances. First, Congress can define explicitly

the extent to which its enactments pre-empt state

law . .. . Second, in the absence of explicit statu-

tory language, state law is pre-empted where it

regulates conduct in a field that Congress intended

the Federal Government to occupy exclusively .. . .

Finally, state law is pre-empted to the extent that it

actually conflicts with federal law.

id. at 2275 (citation omitted).? Justice Blackmun, writing for

a unanimous court, stressed the difficult burden a party bears

in arguing that a state law is preempted by a federal law:

“Undoubiedly, every subject that merits congressional

legislation is, by definition, a subject of national con-

cem. That cannot mean, however, that every federal

Statute ousts all related state law. . . . Instead, we must

look for special features warranting pre-emption.”

Id. at 2279 (quoting Hillsborough County v. Automated Medi-

cal Laboratories, Inc., 471 U.S. 707, 719 (1985)). Justice

Blackmun also stated that:

? In Volt Information Sciences, this Court limited the preemption

analysis of the FAA to the third circumstance, where a state law “actually

conflicts” with the Act: “The FAA contains no express pre-emption

provision, nor does it reflect a congressional intent to occupy the entire

field of arbitration.” /d. at 1254.

The Court has observed repeatedly that pre-emption

is ordinarily not to be implied absent an “actual

conflict.” The “teaching of this Court’s decisions

... enjoins seeking out conflicts between state and

federal regulation where none clearly exists.”

Id. at 2281 (citation omitted) (quoting Huron Portland

Cement Co. v. Detroit, 362 U.S. 440, 446 (1960)).

Under this Court’s preemption analysis, there is no actual

conflict between § 46.1-550.5:27 and the FAA. The Virginia

Statute, as interpreted by the Commissioner, disturbs neither

the parties’ ability to agree to arbitrate their disputes, nor the

right to enforce such an agreement.* Instead, it simply

requires that both parties consent to a dispute resolution

forum, such as arbitration — that arbitration be “a matter of

consent, not coercion.” Volt Information Sciences, 109 S. Ct.

at 1255. The FAA does not preempt § 46.1-550.5:27, which

furthers rather than frustrates the intent of the FAA by ensur-

ing that arbitration is truly consensual.

In reaching the opposite conclusion, the panel majority

unduly emphasized the “ ‘liberal federal policy favoring arbi-

tration agreements.’ ” Pet. App. 6 (quoting Moses H. Cone

Memorial Hospital, 460 U.S. at 24). They failed to recognize

that the federal policy favoring arbitration does not avoid the

necessity to apply this Court’s accepted preemption analysis

to test the validity of the challenged statutcs.? More

8 Because the Commissioner is responsible for administering and

enforcing the statutory provisions, his interpretation must be considered

in discerning their meaning. Hoffman Estates v. Flipside, Hoffman

Estates, Inc., 455 U.S. 489, 494 n.5 (1982).

9 This Court on occasion has been less than diligent in recognizing

and fully discussing the accepted preemption analysis where there is

tension between federal and state legislation in cases inve!ving arbitra-

tion. For example, in Southland amazingly there is no mention of

preemption in the majority opinion; it is only discussed by Justice Stevens

in his dissent. /d. at 18. In Perry, although preemption is alluded to in the

majority opinion, there is no analysis; in Justice Stevens’ and Justice

O’Connor’s dissents it is discussed. Jd. at 493-95. But in Ware, the

(Continued on following page)

importantly, the panel majority failed to consider this Court’s

teaching in Hillsborough County, 471 U.S 707 at 719, for, as

Judge Widener pointed out in his dissent, not only the FAA,

but “[e]very federal statute presumably was enacted to further

a strong or liberal federal policy in favor of or against

something, but that does not lead inexorably to preemption of

every state law that touches on the same subject matter.” Pet.

App. 21.

III. The Panel Majority Erroneously Concluded That

The Virginia Statute Singled Out Arbitration Provi-

sions For Special Treatment And Placed An Unrea-

sonable Burden On Parties’ Ability To Enter Into

Arbitration Agreements.

As discussed above, it is evident that there is no “actual

conflict” between the FAA and the challenged statute and thus

no preemption. That should end the inquiry. However, the

panel majority held that “§ 2 [of the Act] preempt[s] state

rules of contract formation which single out arbitration

clauses and unreasonably burden the ability to form arbitra

tion agreements.” Pet. App. 9. The panel majority erred

because § 46.1-550.5:27 neither singles out arbitration

clauses nor unreasonably burdens the parties’ ability to enter

into arbitration agreements.

This Court has recognized that “the purpose of Congress

in 1925 [in enacting the FAA] was to make arbitration agree-

ments as enforceable as other contracts, but not more so.”

Prima Paint, 388 U.S. at 404 n.i2 (emphasis added). Vir-

ginia’s statute does exactly that. As part of the protective

(Continued from previous page)

preemption analysis is set out clearly, recognizing the difference between

conflicting federal regulatory schemes (as in Scherk, Byrd, McMahon and

Rodriguez) and the interrelationship between federal and state statutes

such as presented in the present case. Ware, 414 U.S. at 126-27. Most

recently, this Court in unmistakable terms rejected FAA preemption of the

California choice of law statute in Volt Information Sciences applying the

traditional analysis. /d. at 1254-55.

scheme for automobile dealers, § 46.1-550.5:27 does not

address arbitration specifically. Indeed, arbitration is not

mentioned because it is not the only type of forum selection

clause nor the only method of dispute resolution.!° The chal-

lenged statute applies to any forum selection clause having

the effect of denying dealers access to “procedures, forums,

or remedies” provided by law where the contract is to be

performed. For example, if Saturn proposed a form agreement

which required that all grievances by its Virginia dealers be

resolved in Michigan courts (not by arbitration), the Commis-

sioner would not permit that provision to be forced upon

dealers, because it would deny the dealers access to the

procedures, forums or remedies provided under Virginia’s

automobile dealer laws. Likewise, any mandatory and binding

mediation provision in a manufacturer/distributor franchise

form offered on a nonnegotiable basis would be contrary to

Virginia laws. Thus the challenged statute does not “take its

meaning precisely from the fact that a contract to arbitrate is

at issue.” Perry, 482 U.S. at 492 n.9. Section 46.1-550.5:27

does not single out arbitration agreements for special treat-

ment, but instead treats them the same as other forum selec-

tion provisions which are otherwise valid in Virginia.

The panel majority cites Southland and Perry as support-

ing their finding that even if a statute affects all forum

selection and does not expressly refer to arbitration, it still

may impermissably single out arbitration provisions. Pet.

App. 12-13. However, Southland and Perry are not apposite;

this Court did not hold that the California statutes violated the

FAA because they singled out arbitration. Rather, this Court

10 Dispute resolution forums include, at least: judicial, early neutral

evaluation and case management, mediation, court supervised criticism,

neighborhood justice centers, counseling, mini-trials, fact finding, mal-

practice screening panels, statutory administrative procedures, court

annexed arbitration and arbitration. See, generally, Lieberman and Henry,

Lessons from the Alternative Dispute Resolution Movement, 53 U. Chi. L.

Rev. 424 (1986); Patterson, Dispute Resolution in a World of Alternatives,

37 Cath. U. L. Rev. 591, 592 (1988) (“The number of possible processes

for resolving disputes is virtually infinite.”).

found that the state statutes in both cases ran afoul of the Act

because they voided existing arbitration contracts by requir-

ing judicial resolution of claims. Southland, 465 U.S. at 10;

Perry, 482 U.S. at 490-91.

The panel majority maintained that the challenged statute

“must be compared to general contract law rather than to laws

which apply only to contracts subject to the Motor Vehicle

Licensing Act.” Pet. App. 13-14 (original emphasis). In

reaching that conclusion, the panel majority relied heavily on

one decision, Connolly. However, Connolly is readily distin-

guishable on its facts. In Connolly, the Commonwealth of

Massachusetts admitted that its regulations applied only to

arbitration agreements. /d. at 1120. In the present case, by

contrast, § 46.1-550.5:27 does not single out arbitration but

treats it on an equal footing with other contract provisions

that are otherwise valid.

In addition, the legal analysis in Connolly is flawed. The

First Circuit concluded, and the panel majority in the present

case agreed, that a state law of contract formation which

treats arbitration agreements in a specific industry “more

severely than . . . contracts are generally treated under” state

law is invalid. /d. at 1124. Thus, adopting the analysis in

Connolly, the panel majority held that the correct comparison

group for the challenged statute was “general contract law”

or, in other words, the entire spectrum of contracts.

When Connolly wazs on appeal before this Court, how-

ever, the Solicitor General advocated a smaller comparison

group. In his Brief for the United States as Amicus Curiae

(the “Solicitor General’s Brief’), the Solicitor General repeat-

edly emphasized that Massachusetts had conceded that its

regulations singled out arbitration. Solicitor General’s Brief

at 7, 8, 11 and 15. Based on this concession, he concluded

that further review of Connolly was unwarranted. /d. at 11.

However, drawing a distinction between statutes which single

Out arbitration and “permissible state regulations of general

application that necessarily encompass arbitration provisions

in contracts” (/d. at 11), the Solicitor General counseled that

Massachusetts was not powerless in its ability to regulate

arbitration:

Absent controlling federal law, the state legislature

presumably could accomplish the goal of the securi-

ties arbitration regulations by enacting a state law

providing, for example, that forum selection clauses

in all consumer contracts must be the subject of

negotiation and full disclosure. In other words,

application of the anti-discrimination principle of

Section 2 of the Federal Arbitration Act is by no

means tantamount to outlawing state regulation of

arbitration provisions. Federal law simply guaran-

tees that arbitration agreements not be singled out

for special treatment. That is precisely what Massa-

chusetts attempted to do here.

Id. at 19-20 (emphasis added) (citation omitted).!! It is

obvious from his brief that the Solicitor General does not take

the position that a state law exercising its legitimate police

power must apply to all contracts in order to avoid falling

prey to an accusation that it singles out arbitration agree-

ments. Crucial to his example of a permissible statute is the

legislation’s application to other provisions — i.c. “forum

selection clauses” — rather than exclusively to arbitration

provisions as Massachusetts had done. Thus, the Solicitor

General concluded that a statute need not apply to the total

sphere of contracts, but rather to only “consumer contracts.”

A requirement that state statutes do otherwise — that they

apply to all contracts — would cripple the states’ ability to

address evenhandedly arbitration clauses in concert with other

forum selection clauses in a more limited group of con-

tracts. }2

1! In his brief, the Solicitor General did not specifically address the

question of whether the FAA applies to laws of contract formation.

12 The panel majority’s opinion, if left standing, would transform

arbitration into a “sacred cow.” As discussed in Section I of this petition,

the language and the legislative history of the Act confine its scope to the

enforcement of existing arbitration agreements. See Pet. at 9-14. In this

context, the “savings clause” of the FAA - that an arbitration agreement

is enforceable “save upon such grounds as exist at law or in equity for the

(Continued on following page)

Because the challenged Virginia statute applies to all

provisions by which a dealer could waive access to any

available “procedures, forums, or remedies,” it does not “sin-

gle out arbitration.” As Judge Widener said in his dissent, “As

interpreted by the Commissioner, the statute only precludes

Saturn from unilaterally imposing agreements to arbitrate

upon its dealers. If a dealer agrees to arbitrate, the Virginia

statute is no impediment to the agreement’s enforceability.”

Pet. App. 22.

IV. The Panel Majority Failed To Find That The Federal

Arbitration Act Would Conflict With The “Dealer’s

Day In Court Act” If Virginia Dealers Were Forced

To Accept Mandatory Arbitration.

An interpretation that the FAA authorizes manufacturers/

distributors to force an arbitration agreement on motor vehi-

cle dealers would conflict with the Dealer’s Day in Court Act

(“DDCA”), 15 U.S.C. §§ 1221-1225. The Dealer’s Day in

Court Act demonstrates that Congress intended dealers to

have access to courts to seek redress against distributors.

(Continued from previous page)

revocation of any contract” — is consistent with Congress’ purpose in

passing the legislation, which was to make existing arbitration agreements

as enforceable as other contracts, but not more so. See Prima Paint, 388

U.S. at 404 n.12; Pet. at 17. The panel majority, however, aftcr re-tooling

the Act to make it apply to state laws of contract formation, then plugs in

the “savings clause,” resulting in the sweeping preemption of any state

Statute which “imposes burdens on arbitration agreements that do not

apply to contracts generally.” Pet. App. 13. Therefore, if this decision

goes unchallenged, any state law applying to the formation of specific

agreements by regulating the use of certain types of cont:aci provisions

which are otherwise valid, but which necessarily encompass arbitration,

would be preempted by the FAA because the law does not apply to

contracts generally. As a result, the panel majority’s interpretation of the

FAA does more than place arbitration agreements on equal footing with

other contract provisions; it elevates arbitration to the status of an

untouchable. The ramifications of this interpretation on the exercise of the

States’ traditional police powers are far-reaching.

The FAA’s “mandate may be overrridden by a contrary

congressional command.” McMahon, 482 U.S. at 226. See

also Mitsubishi, 473 U.S. at 627-28. Congressional intent to

prohibit waiver of a judicial remedy for a statutory right can

be deduced from a statute’s text or legislative history, “or

from an inherent conflict between arbitration and the statute’s

underlying purposes.” McMahon, 482 U.S. at 227. Enacted

over three decades after the original Federal Arbitration Act,

the DDCA provides that:

An automobile dealer may bring suit against any

automobile manufacturer . . . in any district court of

the United States . . . [to] recover damages by him

sustained . . . by reason of the failure of . . . [the]

manufacturer .. . to act in good faith in performing

or complying with any of the terms or provisions of

the franchise, or in terminating, canceling, or not

renewing the franchise with said dealer... .

15 U.S.C. § 1222. The text of the DDCA is consistent with

the underlying purpose behind it, as indicated in the legisla-

tive history:

The bill creates a cause of action where none previ-

ously existed in that, irrespective of contractual

provisions, it grants a right of review in the Federal

courts of disputes between automobile manufac-

turers and their dealers involving the good faith of

the manufacturer in complying with, in terminating,

or in not renewing the franchises.

H.R. Rep. No. 2850, 84th Cong., 2d Sess., reprinted in 3 U.S.

Code Cong. & Ad. News 4596, 4596 (1956) (emphasis

added). Therefore, the provisions of the DDCA and its legis-

lative history manifest a Congressional intent to prohibit a

mandatory waiver of a judicial forum by automobile dealers.

See Barney Motor Sales v. Cal Sales, Inc., 178 F. Supp. 172,

174 (S.D. Cal. 1959).

There would be an inherent conflict between the FAA

and the more recently enacted DDCA if automobile dealers in

Virginia (and throughout the country) could be forced to

accept arbitration because Congress’ attempt to balance the

disparity in the bargaining position between manufacturers/

distributors and dealers would be frustrated. Congress would

not have enacted the DDCA if the right of access it granted to

dealers could be taken away by the unilateral action of manu-

facturers/distributors, the very ones from whom Congress

sought to protect the dealers. However, it would be entirely

consistent with the FAA, the DDCA and the challenged Vir-

ginia statute if a dealer could voluntarily waive his rights

under these dealer protective statutes and agree to arbitrate all

disputes which may arise out of a franchise agreement. See

Schmitt-Norton Ford, Inc. v. Ford Motor Co., 524 F. Supp.

1099, 1105 (D. Minn. 198i), aff'd, 685 F.2d 438 (8th Cir.

1982). This accommodation among the various statutes may

be achieved under the Commissioner’s interpretation of the

challenged statute.

Declining to decide “whether all DDCA claims may be

arbitrated,” the panel majority stated that “[e]ven if the

DDCA does preclude waiver of a judicial forum for the

enforcement of its rights, the Virginia statutes do not mirror

that restriction but also preclude some waivers of a judicial

forum for the enforcement of non-DDCA claims.” Pet. App. 7

n.2. As Judge Widener states in his dissent, the panel majority

“both mischaracterizes the Virginia statute and understates

the significance of the DDCA’s legislative history.” Pet. App.

23. Section 46.1-550.5:27 merely ensures that a dealer volun-

tarily waives his right to access to certain dispute resolution

forums. It does not preclude the waiver of judicial forum for

either DDCA or non-DDCA claims. In addition, the legisla-

tive history of the DDCA underscores the importance of

granting dealers access to a judicial forum:

Concentration of economic power in the automobile

manufacturing industry of the United States has

developed to the point where legislation is required

to remedy the manifest disparity in the ability of

franchised dealers of automobile vehicles to bargain

with their manufacturers. .. . The bill as amended

proceeds from the conclusion that in the automobile

industry concentration of economic power has

increased to the degree that traditional contractual

concepts are no longer adequate to protect the

automobile dealers under their franchises.

H.R. Rep. No. 2850, 84th Cong., 2d Sess., reprinted in 3 U.S.

Code Cong. & Ad. News 4596, 4596-97 (1956) (emphasis added).

By enacting the Dealer’s Day in Cour Act, Congress

acknowledged that an automobile dealer is in a uniquely vulnerable

position in relation to his manufacturer/distributor and, as a result,

it afforded the dealer a protection not shared by other franchisees.

However, by ensuring a dealer’s day in court against his manufac-

turer/distributor, Congress did not preempt the entire field of

automobile franchise law.!3 Virginia’s automobile franchise laws,

of which the challenged statutes play an integral part, were enacted

to advance the same interests which Congress recognized in pass-

ing the DDCA. As Judge Widener stated, “[I]f the most that can be

said, as here, is that a presumptively valid state statute is in general

tension with a federal statute of general application, and yet

furthers precisely the same goals as another federal statute dealing

with the specific subject in issue, the state enactment should stand

until Congress says otherwise.” Pet. App. 25. As a result, “the fact

that the DDCA may not encompass every conceivable claim

between manufacturer and dealer is of no consequence.” Pet. App.

24-25 (Widener, J., dissenting).

V. The Panel Majority Failed To Uphold Virginia’s Judi-

cially Recognized Interest In Enforcing Its Auto-

mobile Franchise Laws To Promote Fair Dealing

Between Manufacturers/Distributors And Their

Dealers.

Virginia has enacted its motor vehicle franchise laws to

prevent unfair acts or practices between a manufacturer/

13-15 U.S.C. § 1225 expressly provides that the Act does “not

invalidate any provision of the laws of any State except insofar as there is

a direct conflict between an express provision of this (Act] and an express

provision of State law which can not be reconciled.” See, e.g., American

Motors Sales Corp. v. Division of Motor Vehicles, 592 F.2d 219, 224 (4th

Cir. 1979), cert. denied, 444 U.S. 836 (1979) (in upholding a portion of

one of the statutes here under review, Va. Code § 46.1-550.5:27, the

Fourth Circuit held that the Dealer’s Day in Court Act did not preempt

Virginia’s ability to enact such laws).

distributor and its dealer. These laws recognize the vast dis-

parity in bargaining power between the manufacturer/

distributor and its dealer. By initiating this lawsuit, Saturn, a

manufacturer/distributor, has attempted unilaterally to substi-

tute its own arbitration process for the administrative and

judicial procedures provided by Virginia law.

Motor vehicle franchise laws uniformly have been recog-

nized as promoting legitimate state purposes. In New Motor

Vehicle Bd. v. Orrin W. Fox Co., 439 U.S. 96 (1978), this

Court, interpreting California’s automobile franchise laws,

discussed the disparity in bargaining power between auto-

mobile manufacturers and their dealers:

“{The] vast disparity in economic power and bar-

gaining strength [between manufacturers and the

dealers] has enabled the factory to determine arbi-

trarily the rules by which the two parties conduct

their business affairs. These rules are incorporated

in the sales agreement or franchise which the manu-

facturer has prepared for the dealer’s signature.

“Dealers are with few exceptions completely depen-

dent on the manufacturer for their supply of cars.

When the dealer has invested to the extent required

to secure a franchise, he becomes in a real sense the

economic captive of his manufacturer. The substan-

tial investment of his own personal funds by the

dealer in the business, the inability to convert easily

the facilities to other uses, the dependence upon a

single manufacturer for supply of automobiles, and

the difficulty of obtaining a franchise from another

manufacturer all contribute toward making the

dealer an easy prey for domination by the factory.

On the other hand, from the standpoint of the auto-

mobile manufacturer, any single dealer is expend-

able. The faults of the factory-dealer system are

directly attributable to the superior market position

of the manufacturer.”

Id. at 100 n.4 (quoting S. Rep. No. 2073, 84th Cong., 2d Sess.

2 (1956)). This Court also noted that some states, including

Virginia, had enacted legislation to protect car dealers. /d. at

101 n.5. After recognizing the authority of a state to enact a

“general scheme of business regulation that impose[s] reason-

able restrictions upon the exercise of the right [to franchise)”

(/d. at 106), this Court upheld California’s Automobile Fran-

chise Act. /d. at 108.14

At the heart of Virginia’s motor vehicle dealer franchise

laws is § 46.1-550.5:27 which provides, in connection with

Va. Code § 46.2-1573, that the Commissioner may conduct

hearings to determine, among other issues, whether: (1) the

refusal of a manufacturer to permit a dealer to sell a franchise

is reasonable under the circumstances; (2) there is reasonable

evidence that after the grant of a new franchise in an existing

dealer’s market area, the market will support all of the dealers

in the market area; (3) there is good cause to determine,

cancel or refuse to renew the franchise of a dealer; or (4) the

refusal to offer a dealer’s designation of a successor is unrea-

sonable under the circumstances. The Commissioner's deci-

sions concerning disputes under Virginia’s dealer franchise

laws are binding on all interested parties, subject to appeal

and judicial review. Va. Code § 46.2-1573.A. In sum, Vir-

ginia’s dealer franchise laws provide substantive rules in a

regulatory scheme to be administered by the Commissioner.

Mandatory application of Saturn’s franchise agreement

form with its binding arbitration would allow General

Motors’ subsidiary to unilaterally void Virginia’s dealer pro-

tections. Saturn would reap the benefits of a Virginia market

while being exempt from oversight by a neutral official, the

Commissioner. The need for such oversight is clearly recog-

nized by Congress and this Court. Virginia’s General Assem-

bly has created, by statute, specific procedural and

14 To suggest, as did the panel majority, “that no automobile dealer

is required to contract with [Saturn]” and that “[dJealers are not required

to execute the new agreement in order to continue as dealers” (Pet. App.

16 n.6) is to ignore the economic captivity described by this Court. The

reality is that the panel majority not only has put at risk all potential new

dealers but all existing dealers upon renewal of their contracts. Chrysler

Motor Corporation and Freightliner (and all other manufacturers/distribu-

tors) understandably will expect the Commissioner to approve their

mandatory binding arbitration provisions as well. J.A. at 114-17.

. eal

substantive rights for dealer protection. This Court should not

allow Saturn to demand those dealers to waive access to such

procedures as a condition of being accepted as a franchisee.»

Reduced to its essence, Saturn’s challenge is but another

attempt by a national manufacturer/distributor to undermine

Virginia’s dealer protection statutes. In American Motors, the

attack came under the guise of a Commerce Clause challenge.

Saturn, a subsidiary of General Motors, now seeks to invali-

date the dealer laws by means of the FAA and the Supremacy

Clause. However, unlike the earlier attempt by American

Motors, Saturn’s challenge, if successful, would render Vir-

ginia’s dealer protection statutes a nullity by permitting man-

ufacturers to force dealers to waive all rights under the

Virginia law.'© As a result, Virginia’s legitimate interest in

enforcing its franchise laws would be frustrated.

'S Citing this Court’s opinion in Rodriguez De Quijas, the panel

majority noted that “[e]xisting Virginia law can and should be applied to

revoke any contract which results from . . . the sort of overwhelming

economic power which can render an agreement unconscionable.” Pet.

App. 19 (original emphasis). Having made that holding, the panel major-

ity failed to take the next logical step in this analysis and acknowledge

the overwhelming economic power wielded by automobile manufacturers/

distributors which Congress and this Court have found to exist. As a

result of the panel majority’s opinion, there is no doubt that Saturn, or any

other manufacturer/distributor, could impose its own arbitration scheme

On its potential dealer or existing dealer (upon renewal) as a result of this

overwhelming economic power, which would render such franchises

unconscionable in the absence of statutes such as § 46.1-550.5:27. Only

where a dealer has the option to choose is this avoided.

16 This is not idle speculation. If the Virginia statute is preempted

there would be nothing to protect dealers from being coerced into an

arbitration agreement which provides that all disputes will be settled by

arbitration in Michigan or Japan and under the laws of another state or

country. This is precisely the kind of arbitration agreement that was at

issue in Mitsubishi. The lower courts held that Puerto Rico could not

forbid enforcement of such an arbitration agreement (although this Court

did not address that issue) but they did not hold that a state could not act

to protect the dealer (and the viability of its own statute) by requiring

such an agreement to be voluntary.

CONCLUSION

The present case presents to this Court important issues,

the resolution of which will impact on the traditional police

powers of states and the doctrine of federalism. Squarely

before this Court is the question of whether the preemptive

effect of the FAA under the Supremacy Clause reaches state

statutes concerning contract formation. If left undisturbed, the

panel majority’s conclusion that the Act does have such an

expansive scope would infringe upon the states’ ability to

treat arbitration the same as all other contract provisions in

the exercise of their traditional regulatory powers. Moreover,

this Court now has its first opportunity to consider the

Dealer’s Day in Court Act, the states’ dealer protection stat-

utes and congressional and judicial findings concerning the

overwhelming economic power wielded by automobile manu-

facturers/distributors, in the context of the FAA. Weighing in

the balance is Virginia’s and her sister states’ ability not only

to protect their automobile dealers, but also to ensure all their

citizens voluntary access to all dispute resolution processes.

The petition for writ of certiorari should be granted.

Respectfully submitted,

Donacp E. WIL.iaMs,

Commissioner of the

Department of Motor Vehicles,

Commonwealth of Virginia

and

Virginia Automobile

Dealers Association, Inc.

Mary Sue Terry

Attorney General

K. MarRsHALL Cook

Deputy Attorney General

Guy W. Horstey, Jr. *

Senior Assistant

Attorney General

Eric K.G. Fiske

Assistant Attorney

General

Office of the Attorney

General

101 North Eighth Street

Richmond, Virginia 23219

(804) 786-4624

Counsel for the

Commissioner

*Counsel of Record

R. Harvey Cuapper, Jr. *

E. Forp STEPHENS

CHRISTIAN, Barton, Epps,

Brent & CHAPPELL

1200 Mutual Building

909 East Main Street

Richmond, Virginia 23219

(804) 644-7851

Wituiam T. LEHNER

1800 West Grace Street

Richmond, Virginia 23220

(804) 644-7851

Counsel for VADA

A-1

Appendix A

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 89-2773

SATURN DISTRIBUTION CORPORATION, a Delaware

Corporation,

Plaintiff-Appellant,

versus

DONALD E. WILLIAMS, Commissioner of the

Department of Motor Vehicles, Commonwealth of

Virginia; VIRGINIA AUTOMOBILE DEALERS

ASSOCIATION,

Defendants-Appellees,

CENTER FOR PUBLIC RESOURCES, INC.,

Amicus Curiae.

Appeal from the United States District Court for the

Eastern District of Virginia, at Richmond. Richard L. Wil-

liams, District Judge. (CA-89-319-R)

Argued: December 6, 1989 Decided: June 6, 1990

Before WIDENER, CHAPMAN, and WILKINSON, Circuit

Judges.

A-2

Reversed by published opinion. Judge Chapman wrote

the opinion, in which Judge Wilkinson joined. Judge Wid-

ener wrote a dissenting opinion.

ARGUED: Kenneth Steven Geller, MAYER, BROWN, &

PLATT, Washington, D.C., for Appellant. Guy Winston

Horsley, Jr., Senior Assistant Attorney General, Rich-

mond, Virginia; Robert Harvey Chappell, Jr., CHRIS-

TIAN, BARTON, EPPS, BRENT & CHAPPELL,

Richmond, Virginia, for Appellees. ON BRIEF: Richard J.

Favretto, Evan M. Tager, MAYER, BROWN & PLATT,

Washington, D.C.; Stephen M. Shapiro, MAYER, BROWN

& PLATT, Chicago, Illinois; E. Milton Farley, III, David F.

Peters, HUNTON & WILLIAMS, Richmond, Virginia;

Roderick D. Gillum, Vice President and General Counsel,

SATURN CORPORATION, Troy, Michigan, for Appellant.

Mary Sue Terry, Attorney General, Walter A. McFarlane,

Deputy Attorney General, Jeffrey A. Spencer, Assistant

Attorney General, Eric K. G. Fiske, Assistant Attorney

General, Richmond, Virginia; E. Ford Stephens, CHRIS-

TIAN, BARTON, EPPS, BRENT & CHAPPELL, Rich-

mond, Virginia; William T. Lehner, Malvin W. Brubaker,

Richmond, Virginia, for Appellees. John A.C. Keith,

BLANKENSHIP & KEITH, Fairfax, Virginia, for Amicus

Curiae.

CHAPMAN, Circuit Judge:

Plaintiff/appellant Saturn Distribution Corporation

appeals the denial of its motion for summary judgment

and the grant of summary judgment against it by the

district court. Saturn brought this action for declaratory

A-3

and injunctive relief against the Commissioner of the

Virginia Department of Motor Vehicles to challenge two

provisions of the Virginia Motor Vehicle Dealer Licensing

Act. The central question raised below and on appeal is

whether Virginia may prohibit the formation of a non-

negotiable agreement between an automobile dealership

and an automobile manufacturer compelling arbitration

of claims arising out of the dealership agreement. The

district court held that Virginia may enforce its statutory

provisions designed to prevent the formation of manda-

tory arbitration agreements between automobile manu-

facturers and dealers. We hold that one of the challenged

provisions is preempted by the Federal Arbitration Act,

and therefore reverse.

Saturn Distribution Corporation (Saturn) is a wholly-

owned subsidiary of Saturn Corporation, which is in turn

a wholly-owned subsidiary of General Motors Corpora-

tion. Saturn was created in 1985 to design, manufacture,

and market motor vehicles under the “Saturn” name-

plate. Saturn adopted a “Mission and Philosophy” of

manufacturing and marketing cars, which is reflected in

the Saturn Distribution Corporation Dealer Agreement (here-

inafter “Dealer Agreement”). As part of that philosophy,

Saturn concluded that an alternative dispute resolution

system should be a core element of its Dealer Agreement.

That system includes binding arbitration which is manda-

tory under the Agreement.!

1 If a dispute arises, either Saturn or a dealer may file a

request for mediation. The dispute is forwarded to a panel,

(Continued on following page)

A-4

The Commonwealth of Virginia has enacted legisla-

tion that prohibits automobile manufacturers and dealers

from entering into agreements that contain mandatory

alternative dispute resolution provisions, such as Sat-

urn’s. Va. Code Ann. § 46.1-550.5:27 (1989 Supp.). In

addition, a second statute requires a manufacturer to

submit its standard franchise agreement to the Commis-

sioner of the Department of Motor Vehicles for his

approval prior to offering it to a dealer. Va. Code Ann.

§ 46.1-550.5:24 (1988 Supp.). When Saturn submitted its

Dealer Agreement to the Commissioner, Donald E. Wil-

liams, he refused to approve it. The Commissioner subse-

quently made clear that he would not approve the

Agreement unless it contained an opt out provision to the

binding arbitration provisions. Saturn brought this action

against the Commissioner alleging that the statutes, as

applied by the Commissioner to its Dealership Agree-

ment, are preempted by the Federal Arbitration Act. The

Virginia Automobile Dealers Association (VADA) inter-

vened as a defendant.

(Continued from previous page)

which recommends a consensus solution. If either party rejects

that solution, or if both waive mediation, they proceed to

binding arbitration, which provides for document discovery

and a hearing. The Arbitration Panel, composed of two dealers

and two Saturn representatives, is required to reach a con-

sensus decision, which is final and unappealable, except as

provided by the Federal Arbitration Act.

Since arbitration is central to the structure of its Dealership

Agreement, Saturn refuses to contract with any dealer who will

not agree to this mandatory arbitration clause. For this reason,

this opinion refers to the arbitration clause as “nonnegotiable.”

A-5

The district court ruled that the provisions are not

preempted by the Federal Arbitration Act (FAA), 9 U.S.C.

§§ 1 et seq., and granted summary judgment to defen-

dants. Saturn Distrib. Corp. v. Williams, 717 F. Supp. 1147

(E.D. Va. 1989). On appeal, the Center for Public

Resources, Inc. submitted an amicus curiae brief support-

ing Saturn.

We hold that § 46.1-550.5:27 of the Motor Vehicle

Dealer Licensing Act, as interpreted by the Commis-

sioner, does conflict with the Federal Arbitration Act, and

is preempted by the Supremacy Clause, U.S. Const., Art.

VI. Therefore, the proposed arbitration provisions in Sat-

urn’s Agreement are enforceable in Virginia, and the

Commissioner may not prohibit or discourage use of the

nonnegotiable arbitration provision in contracts between

Saturn and its Virginia dealers.

II.

“The Supremacy Clause of Art. VI of the Constitution

provides Congress with the power to pre-empt state law.”

Louisiana Pub. Serv. Comm'n v. FCC, 476 U.5. 355, 368, 106

S. Ct. 1890, 1898, 90 L. Ed. 2d 369 (1986). The Federal

Arbitration Act was enacted to promote the enforceability

of arbitration agreements and to make arbitration a more

viable option to parties weary of the ever-increasing

“costliness and delays of litigation.” Dean Witter Reynolds

Inc. v. Byrd, 470 U.S. 213, 220, 105 S. Ct. 1238, 1242, 84 L.

Ed. 2d 158 (1985) (quoting H.R. Rep. No. 96, 68th Cong.,

Ist Sess. 2 (1924)). The Supreme Court has repeatedly

recognized the value of arbitration as a means of dispute

A-6

resolution, most recently in Rodriguez de Quijas v. Shear-

son/American Express, Inc., 109 S. Ct. 1917, 104 L. Ed. 2d

526 (1989); Shearson/American Express, Inc. v. McMahon,

482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987); and

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985).

The FAA (9 US.C. § 2) preempts “conflicting state

laws which restrict the validity or enforceability of arbi-

tration agreements.” Supak & Sons Mfg. Co. v. Pervel Indus.

Inc., 593 F.2d 135, 137 (4th Cir. 1979) (footnote omitted).

State laws are subject to preemption not only if they

directly contradict federal law, but also if they stand “as

an obstacle to the accomplishment and execution of the

full purposes and objectives of Congress.” Hines v.

Davidowitz, 312 U.S. 52, 67, 61 S. Ct. 399, 404, 85 L. Ed. 581

(1941); Schneidewind v. ANR Pipeline Co., 485 U. S. 293,

298, 108 S. Ct. 1145, 1150, 99 L. Ed. 2d 316 (1988). The

FAA constitutes “a congressional declaration of a liberal

federal policy favoring arbitration agreements, notwith-

standing any state substantive or procedural policies to

the contrary.” Moses H. Cone Memorial Hosp. v. Mercury

Constr. Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941, 74 L. Ed.

2d 765 (1983). The language of the FAA requires that

states place no greater restrictions upon arbitration provi-

sions than they place upon other contractual terms. In

relevant part, the FAA declares that:

A written provision in... a contract evidencing

a transaction involving commerce to settle by

arbitration a controversy thereafter arising out

of such contract or transaction, . . . shall be

valid, irrevocable, and enforceable, save upon

such grounds as exist at law or in equity for the

revocation of any contract.

A-7

9 U.S.C. § 2. Therefore, with few limitations, if a state law

singles out arbitration agreements and limits their

enforceability it is preempted.?

2 An exception to federal pre-emption exists if Congress

has overridden the FAA by indicating its intent to preclude

waiver of the judicial forum for a particular statutory right.

State law in agreement with that Congressional mandate

would not contravene the FAA. See Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. at 627-28, 105 S. Ct. at

3355; Shearson/American Express, Inc. v. McMahon, 482 U.S. at

226-27, 107 S. Ct. at 2337-38. Likewise, a state law will not be

preempted if it addresses that which the FAA does not. See Volt

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

Junior Univ., 109 S. Ct. 1248, 1254-55, 103 L. Ed. 2d 488 (1989).

The Commissioner has argued that Congress has

expressed an intent to override the FAA’s application to arbi-

tration agreements between automobile manufacturers and

dealers in the Dealer’s Day in Court Act (DDCA), 15 U.S.C.

§§ 1221-1225. We have recently stated that:

Courts cannot determine whether arbitration

agreements are to be enforced by making subjective

judgments as to the relative importance of various

federal statutes. Rather, Congress must provide clear

guidance if it wishes federal courts to refrain from

enforcing arbitration agreements when violations of

a particular statutory right are alleged.

Gilmer v. Interstate/Johnson Lane Corp., 895 F.2d 195, 203 (4th Cir.

1990). Although we note that the text of the DDCA does not

evince clear Congressional intent to override the FAA, we do

not decide today whether all DDCA claims may be arbitrated.

Even if the DDCA does preclude waiver of a judicial forum for

the enforcement of its rights, the Virginia statutes do not

mirror that restriction but also preclude some waivers of a

_ judicial forum for the enforcement of non-DDCA claims. The

question of whether Congress intended all DDCA claims to be

arbitrable may be resolved if and when a dispute under the

DDCA arises.

A-8

The Commissioner argues that the scope of FAA pre-

emption is limited to laws covering existing arbitration

agreements, and does not extend to laws that prohibit or

regulate the formation of arbitration agreements. We dis-

agree. Although most cases have arisen in the context of

existing arbitration agreements, that circumstance does

not limit the scope of FAA preemption. Indeed, many

courts have at least implicitly recognized a broader scope

of FAA preemption. See, e.g., Medical Development Corp. v.

Industrial Molding Corp., 479 F.2d 345, 348 (10th Cir. 1973);

Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995, 997-98

(8th Cir. 1972).

It is clear that a state may not refuse to enforce and

may not revoke an existing arbitration agreement on the

ground that the contract did not comply with rules of

contract formation applicable only to arbitration provi-

sions. See Webb v. R. Rowland & Co., Inc., 800 F.2d 803,

806-07 (8th Cir. 1986) (violation of statute requiring arbi-

tration provisions to be accompanied by a notice in 10-

point type that the contract contains a binding arbitration

provision does not render an otherwise valid arbitration

agreement unenforceable). It is likewise clear that in pass-

ing the FAA, “Congress intended to foreclose state legisla-

tive attempts to undercut the enforceability of arbitration

agreements.” Southland Corp. v. Keating, 465 U.S. 1, 16, 104

S. Ct. 852, 861, 79 L. Ed. 2d 1 (1984) (emphasis added). To

restrict the FAA to existing agreements would be to allow

states to “wholly eviscerate Congressional intent to place

arbitration agreements ‘upon the same footing as other

contracts.’ ” Southland, 465 U.S. at 16-17 n.11, 104 S. Ct. at

861 (quoting H. R. Rep. No. 96, 68th Cong., Ist Sess., 1

(1924)). The FAA does not allow a state legislature to

A-9

circumvent Congressional intent by enacting special rules

to discourage or prohibit the formation of agreements to

arbitrate. As noted by the district court, “common sense

dictates that a state should not be able to escape its

enforcement duties under § 2 by banning the formation of

arbitration agreements.” 717 F. Supp. at 1150.

We have not discovered a single authority which

squarely addresses the issue and adopts the Commis-

sioner’s narrow interpretation of the scope of FAA pre-

emption. The First Circuit recently rejected the

Commissioner’s interpretation in Securities Indus. Ass’n v.

Connolly, 883 F.2d 1114, 1123-24 (1st Cir. 1989). Our court

previously alluded to this issue in Supak & Sons Mfg. Co.

v. Pervel Indus. Inc., 593 F.2d 135 (4th Cir. 1979), a case

which involved a motion to stay proceedings pending

arbitration pursuant to § 3 of the FAA. In deciding

whether the parties had agreed to arbitrate, we held that

Uniform Commercial Code § 2-207 applied to a written

confirmation form containing an arbitration provision not

agreed upon by the parties in a prior oral agreement.

Thus Supak held only that the general rule of contract

formation applied to contracts involving arbitration, and

that the parties had not agreed to arbitrate the issue

involved in that litigation. However, we recognized the

possibility that: “§ 2 would preempt a state rule of con-

tract formation which applied only to arbitration clauses

and which placed an unreasonable burden on the parties’

ability to commit themselves to arbitration.” Id. at 137.

We hold today that § 2 does preempt state rules of con-

tract formation which single out arbitration clauses and

unreasonably burden the ability to form arbitration

agreements. The district court was correct to hold that

A-10

“arbitration agreements may not be burdened with ‘con-

ditions on (their) formation and execution . . . which are

not part of the generally applicable contract law.’ ” 717 F.

Supp. at 1152 (quoting Securities Indus. Ass’n v. Connolly,

703 F. Supp. 146, 153 (D. Mass. 1989)).

IIl.

Having determined that the scope of the FAA encom-

passes laws affecting the formation of arbitration agree-

ments, we turn now to the question of whether the FAA

preempts the statutes at hanc. The Virginia statute pri-

marily at issue provides:

It is unlawful for any manufacturer, factory

branch, distributor or distributor branch, or any

field representative, officer, agent or any repre-

sentative whatsoever of any of them:

* * *

10. To fail to include in any franchise with a

motor vehicle dealer the following language: “If

any provision herein contravenes the valid laws or

regulations of any state or other jurisdiction

wherein this agreement is to be performed, or

denies access to the procedures, forums, or

remedies provided for by such laws or regulations,

such provision shall be deemed to be modified to

conform to such laws or regulations, and all other

terms and provisions shall remain in full force and

effect,” or words to that effect.

Va. Code Ann. § 46.1-550.5:27.5

3 Although the complaint also contests the validity

of § 46.1-550.5:24, that provision merely requires the

(Continued on following page)

A-11

Although the statute appears to void all binding arbi-

tration agreements in automobile franchise agreements,

we accept as authoritative the Commissioner’s interpreta-

tion of the statute as forbidding only nonnegotiable arbi-

tration provisions and not negotiable arbitration

agreements. Nevertheless, we hold that § 46.1-550.5:27 is

preempted to the extent that it places greater restrictions

upon arbitration provisions than Virginia places upon

other contractual terms. We find that the Commissioner’s

interpretation conflicts with the FAA because Virginia

law generally permits contracting parties to make terms

nonnegotiable, and singles out arbitration provisions as

an exception to that rule.

The district court held that the statute “does not

subject arbitration clauses to burdens not felt by other

types of contracts” and indeed “affords privileged status

to arbitration agreements,” 717 F. Supp. at 1150, but we

disagree. We find persuasive the reasoning of Securities

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

which held that Massachusetts regulations barring securi-

ties brokerage firms from including nonnegotiable arbi-

tration provisions in their customer agreements were

preempted by the FAA. The Massachusetts regulations (1)

made it unlawful for securities brokerage firms to insist

(Continweé from previous page)

Commission's [sic] appreéval of franchise or sales agreements

to prevent the formation of agreements containing terms incon-

sistent with the Motor Vehicle Dealer Licensing Act. Since

§ 46.1-550.5:24 is essentially an enforcement provision which

does not independently pertain to arbitration agreements, it

does not conflict with the FAA and is not preempted.

A-12

that prospective customers agree to arbitrate future dis-

putes; (2) required brokerage firms to bring this prohibi-

tion to the attention of prospective customers who were

offered arbitration as an option; and (3) required broker-

age firms to explain the legal effect of any arbitration

provision offered as an option. Thus, as the statute in this

case, the Massachusetts regulations essentially prohibited

nonnegotiable arbitration agreements.

The district court did not have before it the First

Circuit’s opinion, but distinguished the district court's

opinion in Connolly, supra, 703 F. Supp. 146, in part

because the defendants in that case admitted that the

regulations in question singled out arbitration agree-

ments. In the present case the state does not concede that

the statute singles out arbitration agreements for espe-

cially burdensome treatment, but we find that the import

of the statute renders it indistinguishable from the Con-

nolly regulations.

The Commissioner contends that because the Virginia

statute does not mention arbitration, and applies to any

contractual provision that denies dealers access to the

“procedures, forums or remedies” in Virginia, it does not

single out arbitration agreements. He points out that the

statute conceivably would void forum-selection provi-

sions. However, the mere fact that a statute or regulation

dees not expressly refer to arbitration is not determina-

tive on the question of whether it impermissibly singles

out arbitration provisions. In Southland Corp. v. Keating,

supra, the Supreme Court held that a California franchise

statute which did not expressly refer to arbitration, but

which voided any term that waived its protections, was

is se

A-13

preempted to the extent that it had the effect of prohibit-

ing arbitration provisions. Nor is the fact that the Virginia

statute voids other contractual provisions determinative,

because the Supreme Court has emphasized that the

focus should be on whether the statute, either on its face

or as applied, imposes burdens on arbitration agreements

that do not apply to contracts generally. See Southland, 465

U.S. at 16-17 n.11, 104 S. Ct. at 861; Perry v. Thomas, 482

U.S. 483, 492-93 n.9, 107 S. Ct. 2520, 2527, 96 L. Ed. 2d 426

(1987).

The district court erred in comparing the instant

statute favorably to other provisions of the Motor Vehicle

Dealer Licensing Act which absolutely bar the formation

of certain terms between automobile manufacturers and

dealers; e.g., a manufacturer may not sign a contract with

a new dealership within a certain geographic proximity

of an existing dealer without notice and a hearing, and it

is unlawful for parties to contract in violation of that

section. § 46.1-550.5:27(4). From similar sections, the

lower court reasoned that arbitration clauses are favored

under the Motor Vehicle Dealer Licensing Act because

only with respect to those provisions may the parties

agree to “an otherwise impermissible term.” 717 F. Supp. at

1151 (emphasis added). The lower court’s analysis is

flawed because it implies that a state may categorize

arbitration agreements with other specific contractual

terms which are void because they violate public policy -

a hypotheses clearly contrary to the FAA.

Thus, the chief error in the district court’s analysis is

that it fails to use an appropriate comparison group. In

determining whether the Virginia statute impermissibly

burdens arbitration provisions, it must be compared to

A-14

general contract law rather than to laws which apply only

to contracts subject to the Motor Vehicle Licensing Act, or

to miscellaneous statutes which prohibit a narrow assort-

ment of unrelated contractual terms because they violate

public policy.4 The fact that the statute at issue might

affect other terms in dealership agreements does not save

it from preemption. As emphasized by the Supreme

Court in Southland, 465 U.S. at 16-17 n.11, 104 S. Ct. at

861, only those grounds “that [exist] at law or in equity

‘for the revocation of any contract’” are legitimate

defenses to the enforceability of arbitration provisions.

The essential difference between the regulations in Con-

nolly and the U.C.C. provision at issue in Supak & Sons

Mfg. Co. v. Pervel Indus. Inc., supra, is that the former are

targeted at arbitration agreements whereas the latter is “a

general rule of contract formation.” Supak, 593 F.2d at

137.

Thus, in determining whether this statute forms an

idiosyncratic rule specific to arbitration agreements or

whether it is merely an unremarkable part of Virginia’s

general laws of contract formation, we must compare it

with general common law and statutory law. The statute

at issue, like the regulations in Connolly, impact arbitra-

tion agreements by forbidding their formation as

4 Ironically, the district court faulted Connolly for what it

perceived as a similar error, because it believed that the district

court in Connolly erroneously compared the Massachusetts reg-

ulations only to the body of state common law, unenhanced by

statutory law. See Connolly, 703 F. Supp. at 153. We read the

First Circuit opinion as including in the comparative body of

law both general principles of common law and of statutory

law.

A-15

nonnegotiable contractual terms. The statute is clearly

intended to avoid potentially adhessive arbitration con-

tracts between automobile manufacturers and dealers. If

Virginia uniformly barred the formation of nonnegotiable

contractual terms or declared all contracts of adhesion to

be presumptively unenforceable, then the statute at issue

would not be at odds with general contract law. See

Connolly, 883 F.2d at 1120-21. However, as a general rule,

Virginia does not bar parties from making certain provi-

sions of their contracts nonnegotiable.® In fact, no other

Virginia statute requires that a nonnegotiable provision in

a standardized contract be made optional. In addition,

Virginia does not always, or even usually, presume adhe-

sive contracts to be unenforceable. Instead, Virginia

adheres to the general rule that: “The use of a standard

form contract between two parties of admittedly unequal

bargaining power does not invalidate an otherwise valid

contractual provision. To be invalid, the provision at

issue must be unconscionable.” Webb v. R. Rowland & Co.,

Inc., 800 F.2d at 807.

The FAA does not permit a state to single out arbitra-

tion agreements in standardized contracts and, in effect,

declare their very formation to be unconscionable.

> The district court noted that certain provisions of the

Insurance Code, the Beer Franchise Act, the Retail Franchising

Act, the Petroleum Products Franchise Act, and other miscella-

neous provisions of the Virginia Code, like the Motor Vehicle

Dealer Licensing Act, also flatly prohibit certain terms without

opportunity for negotiation. However, specialized provisions

applicable only to certain types of contracts do not form a

cohesive general law or pattern of laws applicable to most

contracts.

A-16

Requiring arbitration provisions in dealership agree-

ments to be optional rather than nonnegotiable unrea-

sonably burdens the formation of arbitration agreements.

If Saturn could not require that Virginia dealers agree to

arbitration, it could be forced to contract with dealers

who agree to all provisions except arbitration, despite the

fact that arbitration is a core provision of Saturn’s Dealer-

ship Agreement.® The Federal Arbitration Act does not

allow such singular hostility to the formation of arbitra-

tion agreements. Because it has no general contract law

restricting nonnegotiable provisions in standardized con-

tracts, Virginia may not bar automobile manufacturers

from making arbitration provisions a nonnegotiable term

of doing business.

Thus, we hold that the statute is preempted because,

as in Southland, it treats arbitration agreements more

harshly than other contracts by disallowing their forma-

tion as mandatory provisions. “[C]ourts must be on

guard for artifices in which the ancient suspicion of arbi-

tration might reappear.” Connolly, 883 F.2d at 1119. Since

the Virginia statute resembles the regulations in Connolly

more than the general rule of contract formation in Supak,

we hold that it is preempted to the extent that it affects

arbitration agreements.

is required to contract with the plaintiff. This is a new com-

pany, a new product, and a new concept of marketing. Dealers

are not required to execute the new agreement in order to

continue as dealers under existing conditions. It is only dealers

wishing to sell the Saturn automobile who are required to

agree to arbitration.

——————

A-17

IV.

Our holding today reflects our disagreement with the

notion adopted by the district court that the Virginia

statute may be harmonized with the FAA because it only

ensures “consensual rather than forced arbitration.” Both

the district court and the Commissioner cite portions of

testimony taken at the legislative hearings on the FAA,

which suggest that some advocates of the bill did not

anticipate that it would be applied to certain stan-

dardized contracts. That these early remarks should not

be over-emphasized is evident both from the absence of

limiting language in the FAA and from the fact that the

Act has often been applied to standardized contracts. See,

e.g., Rodriguez de Quijas, 109 S. Ct. at 1918 (standardized

contract between securities broker and its customers);

Mitsubishi, 473 U.S. at 617, 105 S. Ct. at 3349 (stan-

dardized franchise agreement between automobile manu-

facturer and dealers); Perry v. Thomas, 482 U.S. at 485

(standardized contract between securities broker and its

employees). Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior Univ., 109 S. Ct. 1248, 103

L. Ed. 2d 488 (1989), is not to the contrary. In Volt, 109 S.

Ct. at 1255, the Supreme Court stated that “[a]rbitration

under the Act is a matter of consent, not coercion;” how-

ever, the Court did not intimate that standardized provi-

sions are excluded from the FAA. Rather, the Court’s

language reflects its focus on the issue in that case — that

parties are entitled to incorporate state law restrictions

into their arbitration agreement that would otherwise be

preempted by the FAA. The Court’s statement that arbi-

tration under the FAA is a matter of consent stresses only

A-18

that the Act does not impose terms of arbitration but

instead leaves them to the agreement of the parties.

The Commissioner contends that the Virginia statute

merely prevents coercive agreements, and cites the dis-

parity of bargaining power between manufacturers and

dealers. Saturn counters that any disparity in bargaining

power is less than most dealer/manufacturer agreements,

since Saturn-is new and seeks well-established dealers.

Regardless of which version is closer to the truth, the

FAA simply does not permit a state to legislate policy

concerns in such a way as to thwart Congress’ intent to

place arbitration agreements on equal footing with other

contracts. The argument that the Virginia statute is a

necessary part of the state’s scheme to protect dealers

must therefore fail. Similar arguments have been rejected

by the Supreme Court in Southland, supra (preempting

statute designed to provide special protection for fran-

chisees), and in Perry v. Thomas, supra (preempting statute

designed to protect employees who might sign away in

advance their rights to a judicial forum).

It is not this court’s function to resolve the question

of whether a particular arbitration agreement has been

induced by an overwhelming disparity in economic

power. However, we note in passing that the mere fact

that Saturn requires dealers to agree to its arbitration

provisions in order to obtain a Saturn dealership does not

make its Dealership Agreement non-consensual. If a

dealer does not wish to agree to nonnegotiable arbitration

provisions, the dealers need not do business with Saturn.

The Commissioner’s fears that Saturn’s arbitration provi-

sions will be used to force dealers to waive the protec-

tions given to them by Virginia law are premature.

A-19

Existing Virginia law can and should be applied to revoke

any contract which results from fraud or the sort of

overwhelming economic power which can render an agree-

ment unconscionable. See Rodriguez de Quijas, 109 S. Ct. at

1921.

For the reasons set forth herein, we reverse the dis-

trict court’s grant of summary judgment to the Commis-

sioner, and we grant summary judgment to Saturn. The

challenged provision of the Virginia Motor Vehicle Dealer

Licensing Act is preempted by the Federal Arbitration

Act to the extent that it interferes with the nonnegotiable

arbitration provision contained in Part One, Article 5 of

the Automobile Dealership Agreement of plaintiff. Nei-

ther the Commissioner nor his agents shall take any act to

prevent or discourage the use and/or enforcement of the

contractual terms in contracts between Saturn Distribu-

tion Corporation and its dealers in the Commonwealth of

Virginia requiring the exclusive use of binding arbitration

for the determination of dealer contract disputes.

REVERSED

WIDENER, Circuit Judge, dissenting:

‘In my opinion, the majority abandons the proper and

appropriate preemption analysis and fails to take account

of Virginia’s inherent right to protect her own citizens.

Therefore, I respectfully dissent.

The various circumstances under which a federal

statute may, by virtue of the supremacy clause, preempt

state law are well settled: “when Congress. . . expresses a

A-20

clear intent to preempt state law, when there is outright

or actual conflict between federal and state law, where

compliance with both federal and state law is in effect

physically impossible, where there is implicit in federal

law a barrier to state regulation, where Congress has

legislated comprehensively, thus occupying an entire

field of regulation and leaving no room for the States to

supplement federal law, or where the state law stands as

an obstacle to the accomplishment and execution of the

full objectives of Congress.” Louisiana Public Service

Comm'n v. FCC, 476 U.S. 355, 368-69 (1986) (citations

omitted). It is at once apparent that the preemption vari-

eties just mentioned are not equals, although the preemp-

tive effect is the same if a category applies, but a sliding

scale in which a finding of preemption becomes more

difficult as the tension between state and federal enact-

ments becomes more obscure.

The category of preemption the majority employs

here, the “frustrate the federal policy” theory, 476 U.S. at

369, rests at the bottom of this scale because “preemption

under a frustration of federal purpose theory is more an

exercise of policy choices by a court than strict statutory

construction. An independent judgment that federal pur-

poses require preemption comes in the face of congres-

sional silence, both express and implied, on the subject.”

Abbot v. American Cyanamid Co., 844 F.2d 1108, 1113 (4th

Cir.), cert. denied, 57 U.S.L.W. 3280 (1988). In the face of

Congressional silence, “there is a presumption against

preemption.” Abbot, 844 F.2d at 1112. Moreover, because

statutes that regulate the relationship between dealers

and manufacturers in an attempt to equalize the parties’

respective bargaining power are a legitimate exercise of a

A-21

state’s police powers, Boatland, Inc. v. Brunswick Corp., 558

F.2d 818, 823 (6th Cir. 1977), “ ‘we start with the assump-

tion that the historic police powers of the States were not

to be superseded by the Federal Act unless that was the

clear and manifest purpose of Congress.’” California v.

ARC America Corp., 57 U.S.L.W. 4425, 4427 (1989) (quoting

Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).

Therefore, the appropriate starting point in examin-

ing the statute in question is not a “liberal federal policy

favoring arbitration agreements,” as the majority would

have it. Every federal statute presumably was enacted to

further a strong or liberal federal policy in favor of or

against something, but that does not lead inexorably to

preemption of every state law that touches on the same

subject matter. See Pacific Gas & Elec. Co. v. State Energy

Resources Conservation & Dev. Comm'n, 461 U.S. 190 (1983)

(upholding state moratorium on construction of new

nuclear power plants despite federal policy promoting

nuclear power); Commonwealth Edison Co. v. Montana, 453

U.S. 609 (1981) (upholding state’s coal severance tax

despite federal policy favoring production and use of

coal); see also L. Tribe, American Constitutional Law § 6-26,

at 488 (1988) (“state laws that merely push against the

grain of ‘general expressions of national policy’ in federal

statutes will not, for that reason alone, be deemed to be

preempted”). Instead, the proper analytical starting point

is the presumption, double strength in this case to be

sure, against preemption absent a clear and manifest

Congressional intent to the contrary.

Applying the preceding principles to the Virginia

statute is neither difficult nor lengthy, and requires a

different decision than the majority obtains. First, “[t]he

A-22

FAA contains no express pre-emptive provision, nor does

it reflect a congressional intent to occupy the entire field

of arbitration.” Volt Information Sciences, Inc. v. Board of

Trustees, 57 U.S.L.W. 4295, 4298 (1989). To support a find-

ing of preemption, therefore, the Virginia statute must in

some way directly conflict with the FAA.

Because the FAA “[b]y its terms, does not apply until

the arbitration clause in question is determined to be part

of the contract,” Supak & Sons Mfg. Co. v. Pervel Indus., 593

F.2d 135, 137 (4th Cir. 1979), virtually every reported case

in which a court has determined that the FAA preempts

state law has dealt with the enforceability of otherwise

valid arbitration agreements. The Virginia statute in

issues deals not with the enforceability of arbitration

agreements, however, but with their formation. As inter-

preted by the Commissioner, the statute only precludes

Saturn from unilaterally imposing agreements to arbitrate

upon its dealers. If a dealer agrees to arbitrate, the Vir-

ginia statute is no impediment to the agreement’s

enforceability. Because there is no direct conflict between

the state statute and the FAA, this should end the inquiry

under a proper preemption analysis. Because I believe the

majority also errs by failing to recognize the significance

of the Dealer’s Day in Court Act (DDCA), 15 U.S.C.

§§ 1221-1225, however, I will address that issue.

The majority recognized that “[a]n exception to fed-

eral preemption exists if Congress has overridden the

FAA by indicating its intent to preclude waiver of the

judicial forum for a particular statutory right.” Slip op. at

7,n.2. Although refusing to decide whether DDCA claims

may be arbitrated, the majority notes that “the DDCA

pene

A-23

does not evince clear Congressional intent to override the

FAA. ...” I disagree.

A Congressional intent to preclude waiver of a judi-

cial forum for a particular statutory right “will be deduc-

ible from text or legislative history.” Mitsubishi Motors v.

Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). The leg-

islative history of the DDCA, written some thirty years

after the FAA was enacted in 1925, could not be more

clear: “The bill creates a cause of action where none

previously existed in that, irrespective of contractual provi-

sions, it grants a right of review in the Federal courts of

disputes between automobile manufacturers and their

dealers. ...” H.R. Rep. No. 2850, 84th Cong., 2d Sess.,

reprinted in 3 U.S. Code Cong. & Ad. News 4596, 4596

(1956) (italics added); see Blenke Brothers Co. v. Ford Motor

Co., 217 F. Supp. 459, 463-64 (N.D. Ind. 1963) (dealer may

pursue DDCA claim despite failing to comply with con-

tractual provision requiring notice to defendant’s Dealer

Policy Board).

Perhaps mindful of the DDCA’s legislative history,

the majority declines to decide “whether all DDCA claims

may be arbitrated.” Instead, the majority invalidates the

Virginia statute because it “also preclude[s] some waivers

of a judicial forum for the enforcement of non-DDCA

claims.” In my view, this both mischaracterizes the Vir-

ginia statute and understates the significance of the

DDCA’s legislative history.

First, as noted earlier, the Virginia statute not only

does not preclude waiver of a judicial forum for non-

DDCA claims, it does not preclude waiver of a judicial

forum for any claim. The statute merely ensures that, if a

A-24

waiver occurs, the waiver is a voluntary choice on the

part of the dealer and is not extracted by the manufac-

turer as part of a nonnegotiable contract of adhesion.

Second, the DDCA in terms supplies an automobile

dealer with an action for the failure of an automobile

manufacturer “to act in good faith in performing or com-

plying with any of the terms or provisions of the fran-

chise, or in terminating, canceling, or not renewing the

franchise.” 15 U.S.C. § 1222. This broad private action,

which could extend to disputes over every aspect of the

franchise relationship, was enacted for much the same

reasons as the Virginia statute:

Concentration of economic power in the auto-

mobile manufacturing industry of the United

States has developed to the point where legisla-

tion is required to remedy the manifest disparity

in the ability of franchised dealers of automotive

vehicles to bargain with their manufacturers. .. .

The bill as amended proceeds from the conclu-

sion that in the automobile industry concentra-

tion of economic power has increased to the

degree that traditional contractual concepts are

no longer adequate to protect the automobile

dealers under their franchises.

H.R. Rep. No. 2850, 3 U.S. Code Cong. & Ad. News at

4596-97. Moreover, the DDCA explicitly does not preempt

state law on the subject unless there is an express and

direct conflict between state and federal statutes. 15

U.S.C. § 1225.

Because Congress has expressed a clear intent to

preclude a contractual requirement of waiver of a judicial

forum for DDCA claims, the fact that the DDCA might

A-25

not encompass every conceivable claim between manu-

facturer and dealer is of no consequence. I believe the

DDCA is directly relevant not only to whether an excep-

tion to preemption exists, but, especially under a “frus-

trate the federal policy” theory, to whether preemption

should apply in the first instance. Thus, the paramount

question is revealed as not whether the DDCA immu-

nizes a presumptively suspect state statute, but whether

Congress has expressed a clear intent to preempt a pre-

sumptively valid state statute. Not only does the FAA fail

to manifest such intent, but the DDCA, enacted thirty

years after the FAA to advance exactly the same interests

as the Virginia statute, appears to go even further than

does the state statute. I believe that, if the most that can

be said, as here, is that a presumptively valid state statute

is in general tension with a federal statute of general

application, and yet furthers precisely the same goals as

another federal statute dealing with the specific subject in

issue, the state enactment should stand until Congress

says otherwise.

At bottom, the majority opinion rests on the one case

in which a court determined that a state rule prohibiting

unilateral imposition of arbitration agreements was pre-

empted by the FAA, Securities Indus. Ass'n v. Connolly, 883

F.2d 1114 (1st Cir. 1989). Even if we assume the FAA may

preempt state rules of contract formation (an assumption

with which it is at once apparent I do not agree),' Con-

nolly is unpersuasive for at least two reasons.

1 The Eleventh Circuit has adhered to the FAA’s distinc-

tion between contract formation and contract enforcement

(Continued on following page)

A-26

First, the underlying reasoning of Connolly is its con-

cern with “[i]ncreased resort to the courts, and the conse-

quent tumefaction of already-swollen court calenders,”

883 F.2d at 1116, a consideration I think is impermissible

in view of Article III’s command that Congress establish

our jurisdiction. As well, Connolly relegates Massa-

chusetts’ regulation of arbitration agreements for “the

public weal” as “self-congratulatory casuistry [that] will

not wash.” 883 F.2d at 1120. Such reliance, I suggest, only

reveals the weakness of the position.

More to the point, Connolly is a securities case, and

securities regulation is one area in which the Supreme

Court has addressed the effect of the FAA. See Rodriguez

de Quijas v. Shearson/American Express, Inc., 57 U.S.L.W.

4539 (1989); Shearson/American Express, Inc. v. McMahon,

482 U.S. 220 (1987). Thus, although I disagree with the

Connolly court’s analysis, it is at least understandable

that, in light of Supreme Court precedent, that court

found that “nothing in the Securities Act, the Exchange

Act, or the grant of concurrent power to the states to

regulate securities manifests a congressional intent to

limit or prohibit waiver of a judicial forum... . or to

abridge the sweep of the FAA.” Connolly, 883 F.2d at 1121.

Even on that basis, however, the result the majority

(Continued from previous page)

even though the state rule of formation singled out arbitration

clauses for somewhat less favorable treatment. See Eassa Prop-

erties v. Shearson Lehman Brothers, 851 F.2d 1301, 1304 n.7 (1ith

Cir. 1988) (upholding provision of Uniform Partnership Act

which provided that all partners must agree to submit claim or

liability to arbitration). I advocate, of course, that we should

agree with Eassa rather than with Connolly.

A-27

obtains here is not warranted. By contrast, the Virginia

statute arises not from a grant of concurrent power, but

from the State’s inherent police power, and Congress in

the DDCA did manifest an intent to preclude waiver of a

judicial forum for claims between automobile dealers and

manufacturers.

Virginia has determined, as did Congress, that a

manifest disparity in bargaining power exists between

automobile dealers and their manufacturers. By preclud-

ing Saturn from making arbitration clauses nonnegotia-

bie, Virginia is merely seeking to ensure that arbitration

“is a matter of consent, not coercion. .. . “2 Volt Informa-

tion Sciences, Inc. v. Board of Trustees, 57 U.S.L.W. 4295,

4298 (1989). Although Congress may have enacted the

FAA to “revers[e] centuries of judicial hostility to arbitra-

tion agreements,” Scherk v. Alberto-Culver Co., 417 USS.

506, 510 (1974) (footnote omitted), I cannot believe that

our federalism will tolerate replacing judicial hostility

with judicial advocacy. We sit, after all, to do justice

between man and man and citizen and sovereign, not to

keep our dockets clear.

2 I take cold comfort in the majority’s “important” recog-

nition of the fact that “no automobile dealer is required to

contract with [Saturn].” Slip op. at 16, n.6. No one is required

in the legal sense to execute any contract of adhesion, or by

definition a contract would not exist, yet that does not prevent

courts and legislatures from designating certain contracts as

adhesive. Moreover, it is equally true that General Motors is

not required to sell Saturn automobiles in Virginia, as the

Court indicated was the case with Audis or Volkswagens in

World Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 287

(1980).

A-28

Appendix B

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

Richmond Division

SATURN DISTRIBUTION

CORPORATION,

Plaintiff,

DONALD E. WILLIAMS,

Commissioner of the Civil Action

Department of Motor Pe oe

Vehicles, Commonwealth of : a ,

Virginia,

Defendant,

and

VIRGINIA AUTOMOBILE

DEALERS ASSOCIATION,

INC.,

Intervenor.

Nee ee ee eee ee i i ie ee eae ee

MEMORANDUM OPINION

The plaintiff in this case is suing for a declaratory

judgment that § 46.1-550.5:27(10) of the Code of Virginia,

as interpreted by the Commissioner of Motor Vehicles is

preempted by Section 2 of the Federal Arbitration Act, 9

U.S.C. § 2. The parties agree that there are no issues of

material fact in dispute, and have submitted opposing

motions for summary judgment pursuant to Rule 56 of

the Federal Rules of Civil Procedure.

A-29

Background

The plaintiff, Saturn Distribution Corporation, is a

wholly-owned subsidiary of Saturn Corporation, which

is, in turn, a wholly-owned subsidiary of General Motors

Corporation. Saturn was created in 1985 to design, manu-

facture and market a new model of car. In so doing, it

adopted what it calls a new “Mission and Philosophy” of

manufacturing and marketing cars, including a deter-

mination “to further the spirit of trust and respect which

is critical to the relationship” between Saturn and its

dealers. Saturn Distribution Corporation Dealer Agreement,

at 1 (hereinafter “Dealer Agreement”). In order to pro-

mote this new Mission and Philosophy and further coop-

eration, Saturn developed an alternative dispute

resolution system, including binding arbitration,’ and

made it a mandatory part of the Dealer Agreement.?

1 The system involves two steps, the first of which

involves nonbinding mediation. If the claim is not resolved by

mediation, it may then be submitted to binding arbitration.

Both the mediation and the arbitration panels are to consist of

two dealers and two Saturn representatives, and are expected

to reach a consensus solution. Dealer/Saturn Dispute Resolution

Guide, at 14-20.

2 The relevant language is found in Article 5 of the Dealer

Agreement:

[Saturn] and Dealer acknowledge that, at the state

and federal levels, various courts and agencies

would, in the absence of this Article 5, be available

to them to resolve claims or controversies which

might arise between them. [Saturn] and Dealer agree

that it is inconsistent with the Mission and Philoso-

phy for either to use courts or governmental agen-

cies to resolve such claims or controversies.

(Continued on following page)

A-30

The Virginia Motor Vehicle Dealer Licensing Act, Va.

Code Ann. §§ 46.1-515 et seq., was enacted to protect

automobile dealers from the imbalances in bargaining

power inherent in their relationships with automobile

manufacturers> Section 46.1-550.5:27(10) states that an

automobile distribution agreement must contain lan-

guage identical in effect to the following:

If any provision herein contravenes the valid

laws or regulations of any state or other jurisdic-

tion wherein this agreement is to be performed,

or denies access to the procedures, forums, or

remedies provided for by such laws or regula-

tions, such provision shall be deemed to be

modified to conform to such laws or regula-

tions, and all other terms and provisions shall

remain in full force and effect.

Section 46.1-550.5:24 requires that distributors submit

franchise agreements to the Commissioner cf Motor Vehi-

cles for approval.

(Continued from previous page)

THEREFORE, CONSISTENT WITH THE PROVI-

SION OF THE UNITED STATES ARBITRATION ACT

(9 U.S.C. Section 1 et seq.), DEALER AND [SATURN]

AGREE THAT THE DISPUTE RESOLUTION PRO-

CESS OUTLINED IN THIS ARTICLE, WHICH

INCLUDES BINDING ARBITRATION, SHALL BE

THE EXCLUSIVE MECHANISM FOR RESOLVING

ANY CONTROVERSY OR CLAIM BETWEEN THEM

ARISING OUT OF OR RELATING TO THIS AGREE-

MENT, ITS CREATION, OR TERMINATION.

Dealer Agreement, at 3.

A-31

Defendant Donald E. Williams is Commissioner of

the Department of Motor Vehicles. When Saturn submit-

ted its agreement, containing the exclusive arbitration

clause, to him, he refused to approve it. He stated that he

would, however, approve an agreement that gives the

dealer the option to delete the exclusive arbitration

clause. He made it clear that this did not mean that

Saturn would be prohibited from including an arbitration

clause in its agreement. Rather, Saturn would not be

permitted to make the inclusion of the arbitration clause

a prerequisite to becoming a Saturn dealer.? The Commis-

sioner informed Saturn that it would be able to develop,

on its own, a method of explaining to potential dealers

that they had the option to accept or reject the arbitration

clause in their agreements.

Saturn is now suing under the Supremacy Clause,

U.S. Const., art. 6, claiming that § 46.1-550.5:27(10) is

preempted by § 2 of the Federal Arbitration Act (FAA), 9

U.S.C. § 2. That section reads:

A... contract evidencing a transaction involv-

ing commerce to settle by arbitration a contro-

versy thereafter arising out of such contract or

transaction, or the refusal to perform the whole

3 The Commissioner notes that he could have chosen to

interpret § 46.1-550.5:27(10) as forbidding even bargained-for

arbitration clauses, but that such an interpretation would

clearly conflict with federal policies favoring voluntary arbitra-

tion. Instead, he has chosen the more flexible interpretation

that such clauses are acceptable if the dealer has the option to

reject them. This interpretation should be accepted as authori-

tative. Hoffman Estates v. Flipside, Hoffman Estates Inc., 455 U.S.

489, 494 n.5 (1982).

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or any part thereof... shall be valid, irrevoca-

ble, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of

any contract.

Saturn requests a declaratory judgment stating that

§ 46.1-550.5:27(10) as applied by the Commissioner to

Saturn’s agreement is preempted by § 2 of the FAA, and

that the exclusive arbitration provision of Saturn’s agree-

ment is valid, as well as a permanent injunction prohibit-

ing the Commissioner from preventing or discouraging

the use or enforcement of exclusive arbitration clauses

between Saturn and its dealers.

The Virginia Automobile Dealers Association

(VADA) is a trade association representing six hundred

new car and truck dealers in Virginia. On June 27, 1989,

VADA sought, and the Court granted, leave to intervene

as a defendant in this case.

Discussion

The defendant and intervenor first argue that this

Court does not have subject matter jurisdiction of this

case. The Supreme Court has ruled that Supremacy

Clause challenges to state laws present federal questions

under 28 U.S.C. § 1331. Shaw v. Delta Airlines, 463 U.S. 85,

96 n.14 (1983). This Court therefore properly has jurisdic-

tion of this case.

In order to prevail on its preemption argument, the

plaintiff must demonstrate that the Virginia statute, as

interpreted by the Commissioner, “stands as an obstacle

to the accomplishment and execution of the full purposes

and objectives” of the Federal Arbitration Act. Hines v.

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Davidowitz, 312 U.S. 52, 67 (1941), quoted in Volt Informa-

tion Sciences v. Board of Trustees, ____ U.S. __, 103 L.Ed.2d

488, 499 (1989). The FAA was enacted to ensure that

agreements to arbitrate would be enforced in court

“ “upon the same footing as other contracts.’ ” Dean Witter

Reynolds Inc. v. Byrd, 470 U.S. 213, 219 (1985), quoting

H.R. Rep. No. 96, 68th Cong., 1st Sess. 1 (1924). ” ‘[T]he

purpose of the act was to assure those who desired arbi-

tration and whose contracts related to interstate com-

merce that their expectations would not be undermined

by federal judges or by state courts or legislatures.’ ”

Southland Corp. v. Keating, 465 U.S. 1, 13 (1984), quoting

Metro Industrial Painting Corp. v. Terminal Construction Co.,

287 F.2d 382, 387 (2d Cir. 1961); accord Moses H. Cone

Memorial Hospital v. Mercury Construction Corp., 460 U.S.

1, 10 (1983). Indeed, on all previous occasions in which

the FAA has come before the Supreme Court, it was in the

context of the enforceability of an existing arbitration

agreement. See, e.g., Rodriguez de Quijas v. Shearson/Ameri-

can Express, 104 L.Ed.2d 526 (1989); Volt Information, supra;

Shearson/American Express v. McMahon, __ U.S. __, 96

L.Ed.2d 185 (1987); Perry v. Thomas, __ U.S. __, 96

L.Ed.2d 426 (1987); Mitsubishi Motors Corp. v. Soler Chrys-

ler-Plymouth, Inc., 473 U.S. 614 (1985); Byrd, supra; South-

land, supra; Moses H. Cone, supra; Scherk v. Alberto-Culver,

417 U.S. 506 (1974); Prima Paint Corp. v. Flood & Conklin

Mfg. Co., 388 U.S. 395 (1967).

Although the primary purpose of the FAA is to

ensure the enforceability of arbitration agreements, com-

mon sense dictates that a state should not be able to

escape its enforcement duties under § 2 by banning the

formation of arbitration agreements. The Fourth Circuit

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recognized this principle in Supak & Sons Mfg. Co., Inc. v.

Pervel Industries, Inc., 593 F.2d 135 (4th Cir. 1979).

Although Supak held that § 2 “does not displace state law

on the general principles governing formation of the con-

tract itself,” it also stated:

Perhaps, although we do not decide the point,

§ 2 would preempt a state rule of contract for-

mation which applied only to arbitration clauses

and which placed an unreasonable burden on

the parties’ ability to commit themselves to arbi-

tration.

Id. at 137; see also Perry, 96 L.Ed.2d at 437, n.9 (“A state

law principle that takes its meaning precisely from the

fact that a contract to arbitrate is at issue does not com-

port with... § 2.”). The plaintiff in the present case

argues that § 46.1-550.5:27(10) is preempted by the FAA

because it singles out arbitration clauses and subjects

only such clauses to the opt-out treatment.

The Virginia statute does not subject arbitration

clauses to burdens not felt by other types of contracts. In

fact, an overview of the law of Virginia that governs the

formation of contracts reveals that § 46.1-550.5:27(10), as

interpreted by the Commissioner, affords privileged sta-

tus to arbitration agreements. Other provisions of the

Virginia Motor Vehicle Dealer Licensing Act, not to men-

tion the Insurance Code, Va. Code §§ 38.2-100 et seq., the

Beer Franchise Act, id. §§ 4-118.3 et seq., the Wine Fran-

chise Act, id. §§ 4-118.42 et seq., the Retail Franchising

Act, id. §§ 13.1-557 et seq., the Petroleum Products Fran-

chise Act, id. §§ 59.1-21.8 et seq., as well as provisions

governing sports agents contracts, id. §§ 18.2-501.1 et

A-35

seq., and preneed funeral contracts, id. § 54.1-2820, dic-

tate the form of certain types of contracts, with no oppor-

tunity whatsoever for negotiation.

In the case of the Motor Vehicle Dealer Licensing Act,

for example, the manufacturer may not prevent the sale

or transfer of the dealership without notice to the dealer

and, if requested, a hearing before the Commissioner,

§ 46.1-550.5:27(3), nor may it sign a contract with a new

dealership within a certain geographic proximity to an

existing dealer, without notice and a hearing.

§ 46.1-550.5:27(4). It is unlawful to include provisions in a

franchise agreement that violate these sections.

§ 46.1-550.5:27(9).4 The Commissioner has not interpreted

§ 46.1-550.5:27(9) to allow the parties to give evidence, in

the form of opt-out language, that they have negotiated

and agreed to a provision that violates one of these

sections. It is simply unlawful to include such a provi-

sion. Only with respect to arbitration clauses does the

Commissioner allow the parties to negotiate to include an

otherwise impermissible term. Section 46.1-550.5:27(10)

does not, therefore, single out arbitration agreements for

special treatment that “burden[s] . . . the parties’ ability to

commit themselves to arbitration,” Supak, 593 F.2d at 137.

Rather, among the plethora of Virginia laws designed to

govern the formation of various types of contracts, it

grants a flexibility not permitted with respect to any

other type of provision.

4 The Fourth Circuit has held that the predecessor to the

statute presently at issue does not violate the commerce clause

or the due process clause. American Motors Sales Corp. v. Depart-

ment of Motor Vehicles, 592 F.2d 219 (1979); see also New Motor

Vehicle Board v. Orrin W. Fox Co., 439 U.S. 96 (1978).

A-36

Section 46.1-550.5:27(10), as interpreted by the Com-

missioner, in no way “stands as an obstacle to the accom-

plishment and execution of the full purposes and

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

the Federal Arbitration Act. Arbitration, in order to be

legitimate, must result from the acquiescence of both

parties; it may not be imposed by one party upon the

other. A New York state court has noted that

arbitration is consensual in nature. The funda-

mental assumption of arbitration is that it may

be invoked as an alternative to the settlement of

disputes through the judicial process “solely by

reason of an exercise of choice by [all] parties.”

Miner v. Walden, 101 Misc. 2d 814, 422 N.YS. 2d 335, 337

(N.Y.Sup. Ct. 1979), quoting Henderson, Contractual Problems

in the Enforcement of Agreements to Arbitrate Medical Malprac-

tice, 58 Va. L. Rev. 947, 985 (1972); see also Domke on Commer-

cial Arbitration at 1 (1988). A colloquy that occurred during

the 1923 hearings on the proposed FAA indicates that several

of the proponents of the bill did not envision that it would

be applied to contracts of adhesion, but rather to voluntary

agreements among merchants. Hearings on $.4213 and

S.4214 Before the Subcommittee of the Committee on the

Judiciary, 67th Cong., 4th Sess. 9-11 (1923). The Supreme

Court also acknowledged this principle when it stated that,

“Arbitration under the Act is a matter of consent, not coer-

cion.” Volt Information, 103 L.Ed.2d at 500. By ensuring con-

sensual rather then forced arbitration, the Virginia statute is

entirely in harmony with the Federal Arbitration Act.5

> Considering the glowing terms in which the plaintiff's

attorneys, briefs and documents all describe Saturn’s new

(Continued on following page)

A-37

The plaintiffs cite two appellate court cases and one

recent district court case in support of their motion. Col-

lins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995 (8th Cir.

1972), Webb v. R. Rowland & Co., Inc., 800 F.2d 803 (8th Cir.

1986), and Securities Industry Ass’n v. Connolly, 703

F.Supp. 146 (D.Mass 1988). Collins Radio and Webb are

both easily distinguishable from the present case, as both

involved existing agreements to arbitrate, which the

Eighth Circuit held enforceable in accordance with the

dictates of § 2. In addition, the state statutes at issue in

those two cases very explicitly singled out arbitration

agreements, with one requiring the acknowledgment of

an attorney for each party that his client has been advised

of the ramifications of agreeing to arbitrate, Collins Radio,

467 F.2d at 997, and the other requiring arbitration

clauses to be introduced by a notice, in ten-point capital

letters. Webb, 800 F.2d at 805. As explained above, the

statute challenged in the present case does not single out

arbitration clauses for such special treatment, but rather

forms part of an overall program of regulation of poten-

tially adhesive contracts. fi

Connolly is the only other preemption case under the

FAA in which the plaintiffs were seeking the invalidation

of a state law regulating the formation of arbitration

agreements, rather than the enforcement of an existing

(Continued from previous page)

Mission and Philosophy, the Court rests easy in the knowledge

that the plaintiff should have little need for the coercion for

which it is fighting here, but instead will easily persuade its

new dealers to consent voluntarily to its dispute resolution

process.

A-38

arbitration agreement. The Massachusetts regulations

challenged in Connolly prohibited broker-dealers from

making an arbitration agreement a prerequisite for open-

ing an account, and required broker-dealers to disclose

the legal effect of such an agreement. Id., 703 F.Supp. at

148-49. These regulations are, with respect to the first of

these provisions, similar to the statute at issue in the

present case, in that they basically prohibit adhesive arbi-

tration agreements. Judge Woodlock held that the state

regulations were preempted

[because the voluntariness concerns expressed

in the unique Massachusetts securities arbitra-

tion regulations impose conditions on the for-

mation and execution of arbitration agreements

which are not part of the generally applicable

contract law of Massachusetts . .

Id. at 153.

The present case is distinguishable from Connolly.

The defendants in that case admitted that the regulations

in question singled out arbitration agreements. Id., 703

F.Supp. at 152. In view of the dicta in Perry that “[a] state

law principle that takes its meaning precisely from the

fact that a contract to arbitrate is at issue does not com-

port with... § 2,” 96 L.Ed.2d at 437, n.9, the Massa-

chusetts court could not but hold that the regulations

were preempted by the FAA. The defendant in this case

does not make this concession, and this Court has agreed,

supra, that the statute here at issue does not single out

arbitration agreements for especially burdensome treat-

ment.

Furthermore, while this Court agrees that arbitration

agreements may not be burdened with “conditions on

A-39

[their] formation and execution . . . which are not part of

the generally applicable contract law,” Connolly, 703

F.Supp. at 153, it does not agree with the result reached

by the Massachusetts court. Judge Woodlock, in holding

that the regulations were preempted, stated that they

“represent[ed] a radical departure from the treatment of

contracts generally in the State’s common law.” Id. He

acknowledged that “Massachusetts law does contain a

variety of idiosyncratic statutory provisions which

require special treatment of — and disclosure regarding -

certain types of contractual provisions,” but wrote these

off as “the exceptions that prove the rule.” Id. It appears

that, underlying the holding in Connolly is the premise

that the body of law governing the formation of contracts

generally which may constitutionally be applied to arbi-

tration agreements should be limited to the state’s com-

mon law, unenhanced by statutory law. This Court does

not take such a restricted view, but instead believes that

this body of law should consist of all statutory and com-

mon law that governs the formation of contracts. This

approach finds support in Supak, 593 F.2d 135, in which

the Fourth Circuit held that Uniform Commercial Code

provisions governing the formation of contracts applied

to invalidate an arbitration clause.

Because § 46.1-550.5:27(10) does not single out arbi-

tration agreements for special treatment, but rather forms

an unexceptional part of the law of Virginia applicable to

the formation of contracts, and because the effect that it

has on arbitration agreements does not “stand[] as an

obstacle to the accomplishment and execution of the full

purposes and objectives of Congress,” the statute is not

preempted by § 2 of the Federal Arbitration Act. The

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plaintiff's motion is DENIED, the defendant's and inter-

venor’s motions are GRANTED, and judgment is entered

in their favor.

It is so ORDERED.

Let the Clerk send a copy of this Order to all counsel

of record.

AUG 17 1989 /s/ Richard L. Williams

DATE UNITED STATES DISTRICT JUDGE

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

Richmond Division

SATURN DISTRIBUTION

CORPORATION,

Plaintiff,

DONALD E. WILLIAMS,

Commissioner of the

Department of Motor

Vehicles, Commonwealth of

Virginia,

Defendant,

Civil Action

No. 89-319-R

(Filed August

17, 1989)

and

VIRGINIA AUTOMOBILE

DEALERS

ASSOCIATION, INC.,

Intervenor.

ee ee ee eee

FINAL ORDER

This matter is before the Court on the cross motions

for summary judgment pursuant to Rule 56 of the Federal

Rules of Civil Procedure.

For the reasons set forth in the accompanying mem-

orandum opinion, the motions of defendant Williams and

intervenor Virginia Automobile Dealers Association are

GRANTED, and judgment is hereby ENTERED in their

favor. The plaintiff’s motion is hereby DENIED.

It is so ORDERED. Let the Clerk send a copy of this

Order to all counsel of record.

A-42

AUG 17 1989 /s/ Richard L. Williams

DATE UNITED STATES DISTRICT JUDGE

A-43

Appendix C

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

FILED

July 20, 1990

No. 89-2773

SATURN DISTRIBUTION CORPORATION, a Delaware

Corporation

Plaintiff-Appellant

DONALD E. WILLIAMS, Commissioner of the Depart-

ment of Motor Vehicles, Commonwealth of Virginia; VIR-

GINIA AUTOMOBILE DEALERS ASSOCIATION;

Defendants-Appellees

CENTER FOR PUBLIC RESOURCES, INC.

Amicus Curiae

On Petition for Rehearing with

Suggestion for Rehearing In Banc

The appellee’s petition for rehearing and suggestion

for rehearing in banc were submitted to this Court. In a

requested poll of the Court, Judge Widener voted to

rehear the case in banc; and Judges Ervin, Russell, Hall,

Phillips, Murnaghan, Sprouse, Chapman, Wilkinson and

Wilkins voted against rehearing the case in banc. As a

majority of the Judges voted to deny rehearing in banc,

and

As the panel considered the petition for rehearing

and is of the opinion that it should be denied,

»’

A-44

IT IS ADJUDGED and ORDERED that the petition for

rehearing and suggestion for rehearing in banc are

denied.

Entered at the direction of Judge Chapman with the

concurrence of Judge Wilkinson. Judge Widener dissents.

He would grant rehearing for the reasons expressed in

his dissenting opinion.

For the Court,

JOHN M. GREACEN

CLERK

A-45

Appendix D

CONSTITUTION OF THE UNITED STATES

ARTICLE VI

Clause 2.

This Constitution, and the Laws of the United States

which shall be made in Pursuance thereof; and all

Treaties made, or which shall be made, under the Author-

ity of the United States, shall be the supreme Law of the

Land; and the Judges in every State shall be bound

thereby, any Thing in the Constitution or Laws of any

State to the Contrary notwithstanding.

A-46

Appendix E

9 USC § 2

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out

of such contract or transaction, or the refusal to perform

the whole or any part thereof, or an agreement in writing

to submit to arbitration an existing controversy arising

out of such a contract, transaction, or refusal, shall be

valid, irrevocable, and enforceable, save upon such

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

any contract.

A-47

Appendix F

15 USC § 1222

An automobile dealer may bring suit against any

automobile manufacturer engaged in commerce, in any

district court of the United States in the district in which

said manufacturer resides, or is found, or has an agent,

without respect to the amount in controversy, and shall

recover the damages by him sustained and the cost of suit

by reason of the failure of said automobile manufacturer

from and after August 8, 1956 to act in good faith in

performing or complying with any of the terms or provi-

sions of the franchise, or in terminating, canceling, or not

renewing the franchise with said dealer: Provided, That in

any such suit the manufacturer shall not be barred from

asserting in defense of any such action ihe failure of the

dealer to act in good faith.

A-48

Appendix G

15 USC § 1225

This chapter shall not invalidate any provision of the

laws of any State except insofar as there is a direct

conflict between an express provision of this chapter and

an express provision of State law which can not be recon-

ciled.

A-49

Appendix H

CODE OF VIRGINIA § 46.1-550.5:24.

On or before July 1, 1975, each motor vehicle manu-

facturer, factory branch, distributor, distributor branch,

or subsidiary thereof shall file with the Commissioner a

true copy of each basic form of franchise or sales agree-

ment then in effect with motor vehicle dealers in Virginia,

and thereafter shall file with the Commissioner a true

copy of each new or different form of franchise or sales

agreement thereafter offered to a motor vehicle dealer or

prospective motor vehicle dealer in this Commonwealth

no later than sixty days prior to the date such franchise or

sales agreement is offered, provided that in no event shall

a new or different torm of franchise or sales agreement be

offered a motor vehicle dealer in this Commonwealth

until the form has been approved by the Commissioner as

not containing terms inconsistent with the provisions of

this chapter.

A-50

Appendix I

CODE OF VIRGINIA § 46.1-550.5:27.

It is unlawful for any manufacturer, factory branch

distributor or distributor branch, or any field representa-

tive, officer, agent or any representative whatsoever of

any of them:

10. To fail to include in any franchise with a motor

vehicle dealer the following language: “If any provision

herein contravenes the valid laws or regulations of any

state or other jurisdiction wherein this agreement is to be

performed, or denies access to the procedures, forums, or

remedies provided for by such laws or regulations, such

provision shall be deemed to be modified to conform to

such laws cr regulations, and all other terms and provi-

sions shall remain in full force and effect,” or words to

that effect.

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