Opposition Brief — Williams v. Saturn Distribution Corp.

i Supreme Court, U.S. é.

i EFEILED

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an | NW 2 3”

In the Supreme Court of the Unit tute

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

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

E. MILTON FARLEY, III KENNETH S. GELLER

DAVID F. PETERS Counsel of Record

Hunton & Williams STEPHEN M. SHAPIRO

707 East Main Street EVAN M. TAGER

Richmond, Virginia 23219 Mayer, Brown & Platt

(804) 788-8200 2000 Pennsylvania Ave., N.W.

RopDERICK D. GILLUM Washington, D.C. 20006

Vice President and (202) 463-2000

General Counsel

Saturn Corporation

P.O. Box 7025

Troy, Michigan 48007

(813) 524-5004

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QUESTIONS PRESENTED

1. Whether the Federal Arbitration Act allows

states to burden the formation of arbitration agree-

ments with requirements that do not apply to the for-

mation of contracts generally.

2. Whether a state may circumvent the Federal

Arbitration Act’s prohibition against placing arbitra-

tion agreements on a different footing from other

contracts by adopting a rule that, while not expressly

mentioning arbitration, admittedly subjects arbitra-

tion provisions to burdens not applicable to contracts

generally.

3. Whether the Dealer’s Day In Court Act, which

gives automobile dealers a cause of action against

manufacturers that have not acted in good faith, con-

stitutes an express indication of congressional intent

to allow states to place disparate burdens on the

formation of arbitration agreements in automobile

franchise contracts.

4. Whether it is appropriate to assume in advance

that arbitration agreements in automobile franchise

contracts will enable manufacturers to deprive deal-

ers of the substantive protections of state law and

will prevent state enforcement officials from oversee-

ing the dealer/manufacturer relationship.

(i)

ii

RULE 29.1 STATEMENT

Respondent Saturn Distribution Corporation is a

wholly-owned subsidiary of Saturn Corporation,

which, in turn, is a wholly-owned subsidiary of Gen-

eral Motors Corporation.

TABLE OF CONTENTS

Page

I a ctecianieiniinnnoansineebinennennntie 1

A. The Saturn Dealer Agreement .............................. 1

B. Saturn’s Efforts To Obtain Approval Of Its

Dealer Agreement In Virginia ...............-...-...........

©. TRO PROCSOTIMES TOGO ..................cececccccccecececeecreee

REASONS FOR DENYING THE PETITION ............ 10

Tee cl laninbdeenneibniemnnesinn 24

(iii)

iv

TABLE OF AUTHORITIES

Cases: Page

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

I eee 11, 14

Cook Chocolate Co. v. Salomon Inc., 684 F. Supp.

oo RR SE ee 11

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

eGR CERCA AEA BS Ss Vet ec 21

Eassa Properties Vv. Shearson Lehman Bros., 851

se 8 Bil gs | 12

In re Ferrara S.p.A., 441 F. Supp. 778 (S.D.N.Y.

1977), aff’d, 580 F.2d 1044 (2d Cir. 1978)........ 11,14

Medical Dev. Corp. v. Industrial Molding Corp.,

479 F.2d $45 (10th Cir. 1978) ............................... 11

Mitsubishi Motors Corp. v. Soler Chryler-

Plymouth, Inc., 473 U.S. 614 (1985) -.............. 20, 22, 23

M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1

REET REE DES SRO oe Ne aE RC Cn NER 23

N&D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d

a ciibinsiealsenseninntn 11

Perry v. Thomas, 482 U.S. 483 (1987) ............000..... passim

Rodriguez de Quijas v. Shearson/American Ex-

press, Inc., 109 S. Ct. 1917 (1989) ........0.. 20, 22, 23

Scherk vy. Alberto-Culver Co., 417 U.S. 506

AIPUIID scenes stiamiethcatas dpheicleeitaeadahaihadca aa Tt a 12

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

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

SE URIPIUI ivhiaciandicnehtiicoceneetitisichensiapelils hice iii i es 10, 11

Securities Indus. Ass’n Vv. Connolly, 703 F. Supp.

146 (D. Mass. 1988), aff’d, 883 F.2d 1114 (1st

Cir. 1989), cert. denied, 110 S. Ct. 2559 (1990).. 11, 12

Seymour V. Gloria Jean’s Coffee Bean Franchising

Corp., 732 F. Supp. 988 (D. Minn. 1990) _......... 11

Shearson/American Express Ine. Vv. McMahon,

re ey 12, 20, 21

Sheridan Vv. United States, 487 U.S. 392 (1988)... 15

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

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

tees of Leland Stanford Junior Univ., 109 S. Ct.

EE TD seichninctiansionsicineiaianidcsniacainreniaditniisaideauaindnines 12

haseneieeceatnieeeneeeieeainel

v

TABLE OF AUTHORITIES—Continued

Page

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

MER, ARE Rane a eee EOE coe Nak Sean 11,14

Wydel Assocs. Vv. Thermasol, Ltd., 452 F. Supp.

ES BS ee sasseaoiadatiitiads ll

Statutes :

Dealer’s Day In Court Act, 15 U.S.C. § 1221 et

ITT ss icici iaenn ce handel asin ihiech easiliceninecebaphiaiabalactbianiieial 19, 20, 21

SR ETRE ee a ER EA sae ar 19

Federal Arbitration Act, 9 U.S.C. §§ 1 et seq......... passim

LSE a 13, 16

COUR, GI, GI, TO I oases ccesnennsescercnecsnssercenss 18

Va. Code Ann. § 46.1-550.5 :24 _ 4

Va. Code Ann. § 46.1-550.5 :27 2... none 5

Va. Code Ann. § 46.1-550.5 :27(10) —....--....... 6, 7, 17, 18

Miscellaneous:

H.R. Rep. No. 96, 68th Cong., Ist Sess. (1924)... 16

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

printed in 1956 U.S. Code Cong. & Admin.

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Pa lr to

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Iu the Supreme Court of the United States |

OCTOBER TERM, 1990

No. 90-585

DONALD E. WILLIAMS, COMMISSIONER OF THE

DEPARTMENT OF MOTOR VEHICLES,

COMMONWEALTH OF VIRGINIA,

and

VIRGINIA AUTOMOBILE DEALERS

ASSOCIATION, INC., PETITIONERS

v.

SATURN DISTRIBUTION CORPORATION, RESPONDENT

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

STATEMENT

A. The Saturn Dealer Agreement

Respendent Saturn Distribution Corporation and

its parent company, Saturn Corporation, (hereinafter

collectively referred to as “Saturn”) were created in

1985 to design, manufacture, and market motor ve-

hicles under the Saturn nameplate. Saturn’s specific

mission is to “market vehicles developed and manu-

factured in the United States that are world leaders

in quality, cost and customer satisfaction through the

2

integration of people, technology and business sys-

tems.” C.A. App. 20.

Saturn has concluded that in order to become an

effective competitor in the automobile market, it

must maintain a relationship with its dealers that

is based upon cooperation, mutual commitment, and

shared responsibility. See Pet. App. A-29; C.A. App.

20-21. To implement this philosophy, Saturn—in

conjunction with a team of 16 dealers, who together

own more than 80 automobile franchises—concluded

that a dispute resolution mechanism that eschews ad-

versarial judicial proceedings should be a core ele-

ment of Saturn’s Dealer Agreement. Pet. App. A-3;

C.A. App. 105-106. Saturn and the dealers agreed

that nonjudicial dispute reselution would enhance the

goal of mutual decisionmaking, while representing a

significant savings of time and money for both Sat-

urn and its dealers. C.A. App. 22, 106-108. They

anticipated that these economies ultimately would

inure to the benefit of the consumers of Saturn prod-

ucts. Id. at 108.

Having decided to make alternative dispute resolu-

tion an essential component of the Dealer Agree-

ment, Saturn and the team of dealers set about to de-

sign a dispute resolution mechanism that would max-

imize the goals of mutual commitment and coopera-

tion while remaining fair to all parties. C.A. App.

106-108. The dealers and Saturn focused upon two

key variables: the method of decisionmaking and the

nature of the decisionmakers. As to the method of

decisionmaking, they concluded that decisionmaking

by consensus, rather than majority vote, would be

1“C.A. App.” refers to the joint appendix submitted to the

court of appeals.

more likely to result in mutually-acceptable solutions

that would foster healthy long-term relationships be-

tween Saturn and its dealers. 7d. at 107. As to the

nature of the decisionmakers, they concluded that it

would be preferable to utilize members of the Saturn

distribution network, who would have a unique

knowledge of the Saturn system as well as a stake

in the enterprise’s long-term success, rather than

outside arbitrators with no particular knowledge of

the Saturn philosophy. Jd. at 106-107.

Accordingly, Saturn and the dealers jointly de-

signed a dispute resolution mechanism that empha-

sizes consensus decisionmaking by members of the

Saturn family. The process begins with either Sat-

urn or a dealer filing a request for mediation. Pet.

App. A-3 n.1. The dispute is then forwarded to a

mediation panel, which is required to recommend a

consensus solution. Jd. at A-3 to A-4 n.1. If either

party rejects the mediated solution, or if both parties

choose to waive mediation, they may proceed to bind-

ing arbitration. 7d. at A-4 n.1. The arbitration pro-

cess provides for document discovery and a hearing,

which is designed to give each party “a full oppor-

tunity to present its position.” C.A. App. 50. The

arbitration panel is required to reach a consensus de-

cision. Pet. App. A-4 n.1. That decision is final and

unappeelable, except as otherwise provided by the

Federal Arbitration Act. /bid.

Mediation and arbitration panels are composed of

two dealers and two Saturn representatives, who are

selected at random from a pool consisting of 10 deal-

ers and 10 company representatives. Pet. App. A-4

n.1; C.A. App. 21-22, 44-45, 107. The dispute resolu-

tion process provides for the removal of prospective

panel members peremptorily and for cause. C.A.

4

App. 45-46, 107. These safeguards are designed to

eliminate not just the existence but also the appear-

ance of partiality.

Significantly, Saturn’s dispute resolution provi-

sions prescribe only the forum in which disputes be-

tween Saturn and its dealers must be resolved, not

the substantive standards to be applied in that

forum. Accordingly, these provisions in no way abro-

gate the substantive rights of the parties under

either state or federal law. C.A. App. 108-109.

Moreover, Saturn cannot unilaterally impose its

Dealer Agreement and dispute resolution mechanism

upon unwilling dealers. This is not a situation in

which dealers have already committed resources to

becoming Saturn franchisees and thus are forced to

accept whatever terms Saturn dictates. To the con-

trary, because Saturn is a new company, all fran-

chise relationships will be new relationships. Pet.

App. A-16 n.6. The Saturn Dealer Agreement is

simply an additional option for prospective franchi-

sees, who face no economic pressure to enter into

franchise agreements that they deem to be undesir-

able. Id. at A-18; C.A. App. 109.

B. Saturn’s Efforts To Obtain Approval Of Its Dealer

Agreement In Virginia

Virginia law requires automobile manufacturers

to submit their standard dealer agreement forms to

the Commissioner of Motor Vehicles for approval be-

fore those agreements can be used in Virginia. See

Ya. Code Ann. § 46.1-550.5:24. Pursuant to this re-

quirement, Saturn submitted its Dealer Agreement

2 Like petitioners, we will refer to sections of the Motor

Vehicle Dealer Licensing Act by their designations at the

time the case was decided by the district court.- See Pet. 2

n.1.

5

form to petitioner Williams, who rejected the Agree-

ment because of its mandatory alternative dispute

resolution provision. Pet. App. A-4. Petitioner Wil-

liams made clear to Saturn that under Va. Code

Ann. § 46.1-550.5:27, which prohibits provisions that

deny dealers access to the state forums,* he would

not approve the Agreement unless Saturn altered it

to provide “an option for the dealer to choose bind-

ing arbitration * * * or to choose the forum provided

under Virginia’s dealer franchise laws.” See C.A.

App. 83-84.

Thus, according to the Commissioner, Saturn can-

not set up a dealership network in the Common-

wealth of Virginia unless it abandons the uniform

compulsory arbitration mechanism that is a central

part of its standard dealership agreement through-

out the United States. Saturn may offer its dispute

resolution provision as an option but may not insist

that prospective dealers agree to it. If a prospective

dealer satisfies Saturn’s criteria for being offered a

franchise, Saturn must award that dealer a fran-

3 Section 46.1-550.5:27 provides in relevant part:

It is unlawful for any manufacturer, factory branch, dis-

tributor or distributor branch, or any field representative,

officer, agent or any representative whatsoever of any of

them:

* * x a

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 provi-

sions shall remain in full force and effect,” or words to

that effect.

—— rr

6

chise even if the dealer is unwilling to resolve future

franchise-related disputes by arbitration. In sum, in

order to do business with Virginia dealers who want

to arbitrate future disputes, Saturn has to be willing

to do business with dealers who do not want to arbi-

trate future disputes.

C. The Proceedings Below

After it became clear that the Commissioner would

not permit Saturn to do business in Virginia only

with dealers willing to accept the mandatory arbitra-

tion term in the Dealer Agreement, Saturn filed this

action against the Commissioner in the United States

District Court for the Eastern District of Virginia.

The complaint alleged that Section 46.1-550.5:27(10)

of the Motor Vehicle Dealer Licensing Act, as inter-

preted by the Commissioner, is preempted by the Fed-

eral Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq.

It sought a declaration that the provisions of the

Saturn Dealer Agreement relating to arbitration are

valid and enforceable in Virginia and an injunction

prohibiting the Commissioner from taking any action

to prohibit or discourage use of the provisions in con-

tracts between Saturn and its dealers. ~

The district court granted summary judgment in

favor of petitioners. The court acknowledged that

the FAA applies both to laws that render executed

arbitration agreements unenforceable and to laws

like the Virginia statute that regulate the formation

of arbitration agreements. Pet. App. A-23, A-38 to

A-39. It stated: “[C]ommon sense dictates that a

state should not be able to escape its enforcement

duties under [the FAA] by banning the formation of

arbitration agreements.” Jd. at A-33. The court

nonetheless held that the FAA does not preempt the

7

Motor Vehicle Dealer Licensing Act because “[t]he

Virginia statute does not subject arbitration clauses

to burdens not felt by other types of contracts.” Id.

at A-34. The court based this conclusion on a hand-

ful of Virginia laws that “dictate the form of certain

types of contracts, with no opportunity whatsoever

for negotiation.” Jd. at A-35.

The court of appeals reversed and granted sum-

mary judgment in favor of Saturn. Like the district

court, the court of appeals rejected petitioners’ argu-

ment that the FAA’s preemptive scope does not ex-

tend to laws that burden the formation of arbitration

agreements. The court explained:

It is clear that a state may not refuse to

enforce and may not revoke an existing arbitra-

tion agreement on the ground that the contract

did not comply with rules of contract formation

applicable only to arbitration provisions. It is

likewise clear that in passing the FAA, Congress

intended to foreclose state legislative attempts to

undercut the enforceability of arbitration agree-

ments. To restrict the FAA to existing agree-

ments would be to allow states to wholly eviscer-

ate Congressional intent to place arbitration

agreements upon the same footing as other con-

tracts. The FAA does not allow a state legisla-

ture to circumvent Congressional intent by enact-

ing special rules to discourage or prohibit the

formation of agreements to arbitrate.

Pet. App. A-8 to A-9 (internal quotation marks and

citations omitted; emphasis in original).

The court of appeals went on to hold that Section

46.1-550.5:27(10) of the Motor Vehicle Dealer Li-

censing Act is preempted by the FAA because it im-

poses burdens on the formation of arbitration agree-

8

ments not found in Virginia’s general law of con-

tracts. The court observed:

If Virginia uniformly barred the formation of

nonnegotiable contractual terms or declared all

contracts of adhesion to be presumptively unen-

forceable, then the statute at issue would not be

at odds with general contract law. However, as

a general rule, Virginia does not bar parties

from making certain provisions of their con-

tracts 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 adhesive contracts to be unen-

forceable.

Pet. App. A-15 (citation and footnote omitted; em-

phasis added).

The court of appeals rejected the district court’s

conclusion that a state law burdening arbitration is

not preempted so long as the state has some other

statutes that forbid or burden a few other contrac-

tual terms. Pet. App. A-15 n.5. It also dismissed

petitioners’ argument that the Licensing Act does not

single out arbitration because it applies to all forum-

selection clauses in automobile franchise agreements,

explaining:

[T]he mere fact that a statute or regulation does

not expressly refer ‘o arbitration is not deter-

minative on the question of whether it impermis-

sibly singles out arbitration provisions. In

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

the Supreme Court held that a California fran-

chise statute which did not expressly refer to

arbitration, but which voided any term that

9

waived its protections, was preempted to the ex-

tent that it had the effect of prohibiting arbitra-

tion provisions.

Id. at A-12 to A-13. Finally, the court rejected peti-

tioners’ argument that prohibiting mandatory arbi-

tration agreements is necessary to prevent manu-

facturers from depriving dealers of the substantive

protections of state law, stating:

[T]he 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 nec-

essary part of the state’s scheme to protect deal-

ers must therefore fail. * * *

The Commissioner’s fears that Saturn’s arbitra-

~ tion provisions will be used to force dealers to

waive the protections given to them by Virginia

law are premature. Existing Virginia law can

and should be applied to revoke any contract

which results from fraud or the sort of over-

whelming economic power which can render an

agreement unconscionable.

Id. at A-18 to A-19 (emphasis in original).

10

REASONS FOR DENYING THE PETITION

There is no reason to grant the petition for cer-

tiorari in this case. Petitioners do not contend that

the court of appeals’ decision is inconsistent with any

decision of this Court, nor do they even allege that

it is in conflict with the decision of any lower court.

To the contrary, the Fourth Circuit’s ruling is fully

consistent with—and indeed was plainly compelled by

—this Court’s numerous decisions interpreting the

Federal Arbitration Act, particularly Perry v.

Thomas, 482 U.S. 483 (1987), and Southland Corp.

v. Keating, 465 U.S. 1 (1984). In both of those cases,

the Court made clear that the FAA preempts state

laws, such as the Virginia Motor Vehicle Dealer Li-

censing Act, that treat arbitration provisions less

favorably than the state’s general contract law treats

other contractual terms.

Just last Term, the Court denied review in a case

virtually identical to the decision below. In Secur-

ties Indus. Ass’n v. Connolly, 883 F.2d 1114 (1st Cir.

1989), cert. denied, 110 S. Ct. 2559 (1990), the Com-

monwealth of Massachusetts filed a certiorari peti-

tion making essentially the same arguments that

petitioners make here. In an amicus curiae brief

filed at the Court’s request, the Solicitor General

analyzed these arguments and, contrary to petition-

ers’ suggestions (Pet. 19-20 & n.11), found them

wholly without merit. Nothing has changed in the

six months since certiorari was denied in Connolly

to warrant a different result in this case.

1. Petitioners’ principal argument is that the

FAA applies only to executed arbitration agreements,

not to state efforts to burden the formation of such

agreements. See Pet. 9-14. This argument is utterly

lacking in legal or logical support.

11

a. All four courts in which the issue was squarely

presented have rejected petitioners’ argument. Spe-

cifically, it was rejected by both courts below, Pet.

App. A-8 to A-9, A-33, A-38 to A-39, and by both the

court of appeals and the district court in Connolly,

883 F.2d at 1123-1124; 703 F. Supp. 146, 151 (D.

Mass. 1988). Moreover, in cases involving executed

arbitration agreements, the federal courts repeatedly

—and without exception—have held that the FAA

preempts state law requirements for the formation of

arbitration agreements that do not apply to contracts

generally.*

4 See, e.g., Webb v. R. Rowland & Co., 800 F.2d 803, 807

(8th Cir. 1986) (Missouri law requiring agreements contain-

ing arbitration provisions to include a notice to that effect in

ten-point capital letters) ; N&D Fashions, Inc. vy. DHJ Indus.,

Inc., 548 F.2d 722, 727 (8th Cir. 1976) (special state law

rules for determining whether an arbitration agreement has

been made part of the contract when there is a “battle of the

forms”) ; Medical Dev. Corp. v. Industrial Molding Corp.,

479 F.2d 345, 348 (10th Cir. 1973) (same) ; Collins Radio Co.

Vv. Ex-Cell-O Corp., 467 F.2d 995, 997-998 & n.2 (8th Cir.

1972) (Texas law rendering arbitration agreements unen-

forceable unless they are “concluded upon the advice of coun-

sel to both parties as evidenced by counsels’ signatures

thereto”) ; Seymour v. Gloria Jean’s Coffee Bean Franchising

Corp., 732 F. Supp. 988, 994-995 (D. Minn. 1990) (Minnesota

rule making it unlawful to include a mandatory arbitration

provision in a franchise agreement) ; Cook Chocolate Co. Vv.

Salomon Inc., 684 F. Supp. 1177, 1182 (S.D.N.Y. 1988) (New

York doctrine making it more difficult to incorporate an arbi-

tration agreement by reference than to incorporate other

agreements by reference) ; Wydel Assocs. v. Thermasol, Ltd.,

452 F. Supp. 739, 742 (W.D. Tex. 1978) (Texas law render-

ing unenforceable any arbitration agreement purporting to

bind a partnership that is not signed by all of the partners) ;

In re Ferrara S.p.A., 441 F. Supp. 778, 781 (S.D.N.Y. 1977),

aff’d, 580 F.2d 1044 (2d Cir. 1978) (rule of Italian law ren-

12

Petitioners’ contention (Pet. 14) that “[t]his Court

has consistently interpreted the Act’s provisions as

applying only to the enforcement of an arbitration

agreement” is simply wrong. The Court has never

so held. To the contrary, the Court has consistently

observed that Congress’s purpose in enacting the

FAA was to place arbitration agreements “upon the

same footing as other contracts.” See, e.g., Volt In-

formation Sciences, Inc. v. Board of Trustees of

Leland Stanford Junior Univ., 109 S. Ct. 1248,

1253 (1989); Shearson/American Express Inc. v.

McMahon, 482 U.S. 220, 225-226 (1987); Southland,

465 U.S. at 16 n.11; Scherk v. Alberto-Culver Co.,

417 U.S. 506, 510-511 (1974). That purpose applies

dering unenforceable any arbitration provision that is not

signed by both parties directly beneath the provision).

By contrast, petitioners cite only Eassa Properties v. Shear-

son Lehman Bros., 851 F.2d 1801 (11th Cir. 1988), which

they properly do not claim to create a conflict among the

courts. In a brief footnote that has been correctly character-

ized as “dicta” (see Connolly, 703 F. Supp. at 152 n.9), the

Eassa court stated simply that “state law governs the ques-

tion of whether * * * an [arbitration] agreement exists in

the first instance.” Jd. at 1804-1305 n.7. This “general obser-

vation” (Connolly, 703 F. Supp. at 152 n.9) on its face is

unobjectionable. This Court has made clear that “state law

* * * is applicable if that law arose to govern issues concern-

ing the validity, revocability, and enforceability of contracts

generally.” Perry, 482 U.S. at 493 n.9 (emphasis omitted).

On the other hand, to the extent that the Eassa court meant

that special state law principles can be applied to the forma-

tion of arbitration contracts, that view is “nonpersuasive.”

Connolly, 703 F. Supp. at 152 n.9. The Eleventh Circuit cited

nothing to support that proposition and apparently did not

consider a single case interpreting the preemptive scope of

the FAA. It thus hardly represents a considered holding that

the FAA does not apply to state laws that disparately burden

the formation of arbitration agreements.

TT |

13

fully whether the state law burdens enforcement of

existing arbitration agreements or instead burdens

the formation of new arbitration agreements.

b. The reason that petitioners cannot point to a

single case supporting their view is because it is com-

pletely contrary to the language of the federal stat-

ute. Section 2 of the FAA expressly provides that a

written agreement te arbitrate a contractual dispute

“shall be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for

the revocation of any centract.” 9 U.S.C. § 2. Peti-

tioners’ assertion that “the Act applies only to enforce

an agreement to arbitrate’ (Pet. 10; emphasis

added) thus ignores the fact that the “validity” and

not just the “enforceability” of such an agreement

must he tested by general rules of contract interpre-

tation rather than by special rules applicable only to

arbitration clauses. The FAA plainly prohibits a

state from refusing to recognize the “validity” of an

arbitration provision on grounds that do not apply to

contract terms generally. Yet that is precisely what

the Commissioner has done here.

Furthermore, if the FAA did not apply to the

formation of arbitration agreements, then the states

would have the power to do indirectly what the fed-

eral statute indisputably prohibits them from doing

directly—rendering arbitration provisions unenforce-

able on grounds that do not apply to other contracts.

Suppose, for example, that a state wanted to evade

the Court’s holding in Southland that the FAA pre-

empts state statutes that make franchise-related

claims non-arbitrable. Under petitioners’ proposed

interpretation of the FAA, the state need only enact

a law entitling it to pass on all franchise agreements

in advance and then refuse approval of any agree-

14

ment that required arbitration of franchise-related

claims. Similarly, the states easily could circumvent

the numerous cases holding that arbitration agree-

ments may not be revoked for failure to comply with

rules of contract formation that apply only to arbi-

tration provisions.’ All they would need to do is es-

tablish a process for reviewing certain categories of

contracts and then refuse to approve any arbitration

provision that does not comply with their discrimina-

tory contract formation requirements. Because no

arbitration agreement that violates the discrimina-

tory state law would ever be “executed,” the FAA

would not apply.

Thus, as the court of appeals recognized, “[t]o

restrict the FAA to existing arbitration agreements

would be to allow states to wholly eviscerate Con-

gressional intent to place arbitration agreements

upon the same footing as other contracts.” Pet. App.

A-8 (internal quotation marks omitted). This Court

has steadfastly refused to countenance such a result

in the past. See, e.g., Southland, 465 U.S. at 15-16

(rejecting argument that the FAA does not apply in

state courts); id. at 17 n.11 (rejecting argument

that a state’s policy of providing special protection

for franchisees constitutes a ground that exists at

5 Discriminatory rules of contract formation that have been

held preempted, but that the states easily could impose as a

prerequisite to approving certain kinds of contracts, include

the requirement that contracts containing an arbitration pro-

vision include a notice to that effect in ten-point type (Webb,

800 F.2d at 806-807), the requirement that parties enter into

arbitration agreements only upon advice of counsel (Collins,

467 F.2d at 997-998 & n.2), and the requirement that both

parties indicate their informed consent to an arbitration pro-

vision by signing directly beneath it (Ferrara, 441 F. Supp. at

780-781).

Ee

15

law or in equity for the revocation of any contract

and thus is a legitimate ground under the FAA for

refusing to enforce an arbitration provision in a

franchise agreement). Petitioners have provided no

reason why it should deviate from that sensible course

here. See generally Sheridan v. United States, 487

U.S. 392, 402 n.7 (1988) (“courts should strive to

avoid attributing absurd designs to. Congress, par-

ticularly when the language of the statute and its

legislative history proviae little support for the prof-

fered, counterintuitive reading’’).

2. Petitioners argue (Pet. 14-17) that the Motor

Vehicle Dealer Licensing Act is not preempted by the

FAA because the two statutes are not in conflict.

In particular, they assert (id. at 16) that “[t]he

Virginia statute, as interpreted by the Commissioner,

disturbs neither the parties’ ability to agree to arbi-

trate their disputes, nor the right to enforce such an

agreement.” As the court of appeals held, however,

[rJequiring arbitration provisions in dealership

agreements to be optional rather than nonnegoti-

able unreasonably burdens the formation of arbi-

tration 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 part of

Saturn’s Dealership Agreement. The Federal

Arbitration Act does not allow such singular

hostility to the formation of arbitration agree-

ments.

Pet. App. A-16 (footnote omitted).

What is more, petitioners ignore the preemption

standard clearly enunciated by this Court:

16

[S]tate law, whether of legislative or judicial

origin, is applicable if that law arose to govern

issues concerning the validity, revocability, and

enforceability of contracts generally. A _ state

law principle that takes its meaning precisely

from the fact that a contract to arbitrate is at

issue does not comport with [and therefore is

preempted by] this requirement of [the FAA].

Perry, 482 U.S. at 493 n.9 (emphasis in original).°

There can be no doubt that the Commissioner’s re-

quirement that arbitration clauses be offered as op-

tions rather than as nonnegotiable conditions of ob-

taining a franchise is not a state law principle that

“arose to govern issues concerning the validity,

revocability, and enforceability of contracts gener-

ally.” Yather, it plainly is a rule that “takes its

meaning precisely from the fact that a contract to

arbitrate is at issue.” Jbid. (emphasis added).

3. Petitioners next contend (Pet. 17-21) that be-

cause the Virginia statute applies to all forum selec-

® Instead, petitioners take this Court to task for being

“less than diligent in recognizing and fully~discussing the

accepted preemption analysis.” See Pet. 16 n.9. This criticism

is misguided. The FAA expressly provides that arbitration

agreements shall be enforceable except “upon such grounds

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

tract.” 9 U.S.C. §2. The legislative history of the Act indi-

cates that Congress intended to place arbitration agreements

“upon the same footing as other contracts.”’ H.R. Rep. No. 96,

68th Cong., Ist Sess. 1 (1924). The preemption standard

enunciated in Perry follows naturally from the FAA’s lan-

guage and legislative history: a state law conflicts with the

FAA and therefore is preempted if it places arbitration

agreements on a different footing from other agreements. No

extended discussion of general preemption principles is neces-

sary to reach this conclusion.

17

tion clauses it cannot be said to “single out” arbitra-

tion and therefore is not preempted by the FAA.

This argument completely misunderstands the re-

quirements of the federal statute. This Court has

repeatedly emphasized that the crucial inquiry is

whether a state statute imposes burdens on arbitra-

tion agreements that do not apply to contracts gen-

erally. See Perry, 482 U.S. at 493 n.9; Southland,

465 U.S. at 16 n.11; see also Pet. App. A-13 to A-14.

That is precisely what Section 46.1-550.5:27(10) of

the Motor Vehicle Dealer Licensing Act does. As

interpreted by the Commissioner, the Virginia stat-

ute requires that arbitration provisions be converted

from mandatory terms into options. It is undisputed

that this is not a requirement that applies broadly

to all contractual provisions, or even to all provisions

in automobile franchise agreements.

Virginia law does not bar parties from making

certain provisions of their contracts nonnegotiable.

To the contrary, Virginia, like other American juris-

dictions, allows each contracting party to determine

the terms upon which that party will do business.

See Pet. App. A-15. Only with respect to arbitration

provisions in automobile franchise agreements has

the Commonwealth departed from that general prin-

ciple of neutrality. Indeed, the Saturn Dealer Agree-

ment itself contains dozens of provisions that, accord-

ing to the Commissioner, Saturn may insist upon

before approving a dealer; the arbitration provision

alone must be made optional. Accordingly, as the

court of appeals concluded, the Virginia statute “con-

flicts with the FAA because [it] * * * singles out

arbitration provisions as an exception to” Virginia’s

general contract rules. Pet. App. A-11.

18

Because the Motor Vehicle Dealer Licensing Act

plainly treats arbitration provisions less favorably

than Virginia law treats contractual terms generally,

the fact that other kinds of forum selection provi-

sions are similarly burdened is irrelevant. The Cali-

fornia franchise statute at issue in Southland voided

any contractual term that waived any of the protec-

tions of the state statute.’ That fact did not stop this

Court from holding the statute preempted to the ex-

tent that it prohibited arbitration provisions. 465

U.S. at 10.°

In Southland, this Court admonished that it will

not tolerate arguments that could “wholly eviscerate”

the FAA’s purpose of ending efforts by the states to

discourage arbitration. 465 U.S. at 17 n.11. Peti-

tioners’ contention that the FAA does not apply if

7 The wording of the California statute is quite similar to

the wording of the Motor Vehicie Dealer Licensing Act.

Compare Cal. Corp. Code Ann. §31512 (“Any condition,

stipulation or provision purporting to bind any person acquir-

ing any franchise to waive compliance with any provision of

this law or any rule or order hereunder is void.”) with Va.

Code Ann. § 46.1-550.5:27(10) (manufacturer is required to

include language to effect that “[i]f any provision herein

* * * denies access to the procedures, forums, or remedies

provided for by [the laws or regulations of the state in which

the contract is to be performed], such provision shall be

deemed to be modified to conform to such laws or regula-

Gens © * 9").

® Petitioners assert (Pet. 18-19) that Southland is inappo-

site because the Court did not hold that the statute at issue

“singled out” arbitration. In fact, however, the Southland

Court expressly concluded that “the defense to arbitration

found in the California Franchise Investment Law is not a

ground that exists at law or in equity ‘for the revocation of

any contract’ * * *.” 465 U.S. at 16 n.11 (emphasis in

original).

19

the state burdens arbitration provisions along with

a small number of other contractual terms is just

such an argument. If accepted, it would enable the

states to completely avoid the strictures of the FAA

merely by artful statutory drafting. For example, in

Perry, the Court held that the FAA preempts state

statutes that permit wage claims to be brought in

state court “without regard to the existence of any

private agreement to arbitrate.” Under petitioners’

approach, the states could circumvent this holding

merely by substituting the term “any private forum

selection agreement” for the term “any private agree-

ment to arbitrate.” Congress could not possibly have

intended the FAA to be defeated so easily.

4, Petitioners next contend (Pet. 21-24) that the

court of appeals’ decision is inconsistent with the

congressional intent underlying the federal Dealer’s

Day In Court Act (“DDCA”’), 15 U.S.C. § 1221 et

seq. The DDCA provides that:

An automobile dealer may bring suit against

any automobile manufacturer engaged in com-

merce, in [federal district court], without re-

spect to the amount in controversy, and shall re-

cover the damages by him sustained and the cost

of suit by reason of the failure of said automo-

bile 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 purpose of this statute is

crystal clear. As the House Report explains:

The purpose of the bill * * * is to supplement

the antitrust laws of the United States so as to

permit a franchised automobile dealer to bring

20

suit for damages * * * for the failure of the

automobile 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 dealer’s fran-

chise. The bill creates a cause of action where

none previously existed * * *.

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

in 1956 U.S. Code Cong. & Admin. News 4596, 4596

(emphasis added).

This language makes plain that Congress’s sole

purpose in enacting the DDCA was to create a new

federal cause of action to supplement the antitrust

laws. Nothing in the wording of the DDCA or its

legislative history even arguably suggests, as peti-

tioners assert (Pet. 22), that Congress intended ‘‘to

prohibit a mandatory waiver of a judicial forum by

automobile dealers.” ° Nor can petitioners point to

*In the district court, petitioners contended that DDCA

vlaims are non-arbitrable even if both parties consent. They

have subsequently abandoned that argument, and for good

reason. Within the last three years, this Court has held that

three different statutes, all with language indistinguishable

from the DDCA’s, do not override the FAA. See Rodriguez

de Quijas v. Shearson/American Express, Inc., 109 8S. Ct.

1917 (1989) (Securities Act of 1933); McMahon, supra

(Racketeer Influenced and Corrupt Organizations Act and

Securities Exchange Act of 1934) ; see also Mitsubishi Motors

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

(international antitrust claims are arbitrable).

Even if Congress had wanted to bar arbitration of DDCA

claims, that intent could not possibly support the Commis-

sioner’s refusal to permit Saturn to require its dealers to

arbitrate non-DDCA claims, and it therefore could not justify

the Commissioner’s failure to approve the Saturn Dealer

Agreement. As the court of appeals recognized (see Pet. App.

A-7 n.2), the question of whether Congress intended all

DDCA claims to be non-arbitrable should be determined if and

when a dispute under the DDCA arises. The dealer can argue

21

any support for their contention that the DDCA en-

titles states to require automobile manufacturers to

make arbitration provisions—but no other material

terms—optional. Even if there were some evidence

that Congress was concerned with mandatory terms

in automobile franchise agreements, there is no rea-

son for concluding that any such concern was lim-

ited to arbitration provisions.

5. Petitioners conclude by protesting (Pet. 24-27)

that a finding of preemption in this case will under-

mine the substantive dealer protection provisions of

Virginia law.” They assert (Pet. 27), for example,

at that time that the DDCA overrides the FAA, and petition-

ers can file an amicus curiae brief in support of that view,

but they may not use the DDCA to bootstrap a rule that would

burden the arbitration of non-DDCA claims. Cf. Dean Witter

Reynolds Inc. v. Byrd, 470 U.S. 213 (1985) (where a case

involves some claims that are subject to arbitration and other

claims that Congress has excluded from arbitration, the courts

have no discretion to refuse to compel arbitration of the

arbitrable claims).

10 [In their efforts to equate arbitration with deprivation of

substantive rights, petitioners repeatedly raise the specter of

other manufacturers imposing arbitration provisions on their

existing dealers as a condition of franchise renewal. Pet. 26

n.14, 27 n.15. Whether or not the FAA permits the unilateral

imposition of mandatory arbitration provisions on existing

dealers, that issue simply is not presented in this case. As

the Fourth Circuit pointed out,

no automobile dealer is required to contract with

[Saturn]. This is a new company, 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.

Pet. A-16 n.6. See also id. at A-18 (“the mere fact that Saturn

requires dealers to agree to its arbitration provisions in order

22

that “Saturn’s challenge, if successful, would render

Virginia’s dealer protection statutes a nullity by per-

mitting manufacturers to force dealers to waive all

rights under the Virginia law.” This Court recently

has made clear, however, that arguments based on

“suspicion of arbitration as a method of weakening

the protections afforded in the substantive law to

would-be complainants [are] far out of step with

[the Court’s] current strong endorsement of the fed-

eral statutes favoring this method of resolving dis-

putes.” Rodriguez de Quijas, 109 S. Ct. at 1920.

See also McMahon, 482 U.S. at 232; Mitsubishi, 473

U.S. at 628.

Nothing in the FAA prevents the states from en-

suring that parties to arbitration agreements do not

waive the substantive protections of state law. If a

particular arbitration provision were expressly to do

so—and Saturn’s most assuredly does not (see C.A.

App. 108-109)—the Commissioner would be entitled

to refuse to approve the franchise agreement of

which it is a part. Similarly, if an arbitration

agreement were applied in such a way as to deprive

a dealer of substantive rights, the dealer could at-

tempt to revoke the arbitration agreement as uncon-

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 dealer need not

do business with Saturn”’).

In any event, the answer to petitioners’ irrelevant argu-

ment is obvious under the FAA. A dealer would be entitled

to argue that the unilateral imposition of a new term in an

existing agreement is unconscionable in light of the relative

bargaining power of dealer and manufacturer. Rodriguez de

Quijas, 109 S. Ct. at 1921. Because that argument would

apply to all new terms, it would not disfavor arbitration

agreements and would not be inconsistent with the FAA.

23

scionable. Rodriguez de Quijas, 109 S. Ct. at 1921.

All that the FAA forbids the states from doing is

to assume in advance that all arbitration provisions

will result in the waiver of substantive rights. That,

of course, is precisely what the Commissioner has

done here.

Petitioners also assert (Pet. 27 n.16) that “[i]f

the Virginia statute is preempted there would be

nothing to protect dealers from being coerced into an

arbitration agreement which provides that all dis-

putes will be settled by arbitration in Michigan or

Japan and under the laws of another state or coun-

try.” They fail to recognize, however, that nothing

in the FAA bars a litigant from attempting to show

that a forum-selection clause should be invalidated

on the ground that “proceedings ‘in the contractual

forum will be so gravely difficult and inconvenient

that [the resisting party] will for all practical pur-

poses be deprived of his day in court.’ But absent

such a showing * * * there is no basis for assuming

the forum inadequate or its selection unfair.” Muit-

subishi, 473 U.S. at 632-633 (quoting M/S Bremen

v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972)).

Finally, petitioners suggest (Pet. 26-27) that a

finding of preemption will exempt Saturn from over-

sight by a neutral official. Again, they are mistaken.

Just as the Justice Department can continue to po-

lice antitrust violations involving the signatories to

an arbitration provision and the Securities and Ex-

change Commission can continue to regulate the se-

Jn fact, the Saturn Dispute Resolution Guide provides

that the arbitration hearing must be held “in the general

vicinity of the Dealer’s Marketing Area unless the parties

otherwise agree.” C.A. App. 49-50.

24

curities industry despite the ubiquity of arbitration

agreements in that area, the Commissioner retains

the authority to oversee Saturn’s treatment of its

dealers. If the Commissioner believes that Saturn

has violated one of the substantive provisions of the

Motor Vehicle Dealer Licensing Act, the FAA will

not prevent him from taking appropriate adminis-

trative action.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

E. MILTON FARLEY, III KENNETH S. GELLER

DAVID F.. PETERS Counsel of Record

Hunton & Williams STEPHEN M. SHAPIRO

707 East Main Street EVAN M. TAGER

Richmond, Virginia 23219 Mayer, Brown & Platt

(804) 788-8200 2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

RODERICK D. GILLUM

(202) 463-2000

Vice President and

General Counsel

Saturn Corporation

P.O. Box 7025

Troy, Michigan 48007

(313) 524-5004

NOVEMBER 1990