Opposition Brief — Choice Hotels International, Inc. v. Ticknor

JAN 16 2062

No. 01-888

CLERK

In The

Supreme Court of the United States

+

CHOICE HOTELS INTERNATIONAL, INC.,

Petitioner,

JAMES L. TICKNOR; JANET TICKNOR; LARRY

MICKNOR; TICKCO HOLDING, L.L.C., AND

TICKNOR LODGING CORPORATION,

Respondents.

¢

- On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

+

RESPONDENTS’ BRIEF IN OPPOSITION

TO PETITION FOR WRIT OF CERTIORARI

eo

Rosert K. BAtbwin

Goetz, GatuKk, BALDWIN &

Dotan, P.C.

Counsel of Record

35 North Grand Ave.

P.O. Box 6580

Bozeman, MT 59771-6580

(406) 587-0618

Counsel for Respondents

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

OR CALE COLLECT (402) 42-2831

QUESTIONS PRESENTED FOR REVIEW

1. Whether the Ninth Circuit Court of Appeals

erred when it held that, under the law of the State of

Montana, the arbitration clause in the franchise agree-

ment between the parties was unconscionable.

2. Whether the Federal Arbitration Act (9 U.S.C. § 1

et seq.) preempts application of Montana law concerning

the unconscionability of the arbitration clause contained

in the franchise agreement.

li

CORPORATE DISCLOSURE STATEMENT

Pursuant to Supreme Court Rule 29.6, respondents

Tickco Holding, LLC and Ticknor Lodging Corporation,

through counsel, state that they have no parent corpora-

tions, and that no publicly-held company owns 10% or

more of its stock (Ticknor Lodging Corporation) or mem-

bership interests (Tickco Holding, LLC).

iii

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .....cccccccccvcscccccees iv

OPPOSITION TO PETITION FOR WRIT OF CER-

PE ckcapsdvakaddeckerceed) 6c veeeevseveesee 1

STATEMENT OF JURISDICTION..............5545- 1

SEAT ees CO THE CAGE... wccscccccvcccsescess 1

ie CLL wddgueeukveeses oeedcsesedeveneceress 1

B. THE NINTH CIRCUIT DECISION.............. 3

C. STATUTORY FRAMEWORK .............--+0+: 4

EE vuccaeusbessebesapseccecsnswerenctene’ 7

I. THERE IS NO SPLIT AMONG THE

FE eee ee ee ree 7

Il. THE NINTH CIRCUIT OPINION DOES NOT

CONFLICT WITH ANY DECISIONS OF THIS

PRRs wesneveseoetecevsecduseseseerecerdese 11

A. THE NINTH CIRCUIT OPINION DOES NOT

CONFLICT WITH ERIE OR KLAXON ...... ~ ii

B. THE DECISION OF THE NINTH CIRCUIT

DOES NOT CONFLICT WITH CASAROTTO

Oa RUdes Gael ob uaen 6.00000 be 008065006 600005 15

Ill. CHOICE’S “REASONS FOR GRANTING THE

WRIT” STATE, AT MOST, ALLEGEDLY ERRO-

NEOUS FACTUAL FINDINGS OR MISAP-

PLICATION OF A PROPERLY STATED RULE

SEE Win g465 00 venhdeeeess Secencectesense sd 19

iv

TABLE OF AUTHORITIES

Page

Cases:

Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S.

Bee CPs hk ana devevenasdnacstudans Geyvactessanees 6

All-States Leasing Co. v. Top Hat Lounge, Inc., 198

Blows. 1, GOD. FOG TaGO (IGG s es cccccssvcsccccsses 15

Beneficial Commercial Corp. v. Cottrell, 212 Mont.

GEG, Ge Fae Bae CHO orev cccctvuscesévevaceses 17

Bradley v. Harris Research, Inc., 2001 WL 1658728

Cree Gee, CRGSET Fy SED oo ccececccscerecscons 17

Chor v. Piper, Jaffray & Hopwood, Inc., 261 Mont.

me ew BE rer rrr re rTrrT rer re 18

Comm'r v. Bosch, 387 U.S. 456 (1967) ................ 12

Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681

GNU coven sevenesensnensausexosceeees 6, 8, 15, 16, 18

Eigeman v. Miller, 229 Mont. 28, 745 P.2d 320 (1987) .... 17

Erie Railroad Co. v. Tompkins, 304 U.S. 64

CIG <'9- 4x6 dns deuncccaceensecveneteness 11, 12, 15, 20

Harris v. Green Tree Financial Corp., 183 F.3d 173

SOO See Cees ce devessscvesbessbeaheavendscstet 8, 10

Iwen v. U.S. West Direct, 293 Mont. 512, 977 P.2d

GE SOP OO Rs or cccdccvenceeseenesndoevewss 7, 13, 14, 17

Johnson v. Circuit City Stores, Inc., 148 F.3d 373 (4th

Cir. 1998), cert. denied, 530 U.S. 1276 (2000) ...... 8, 9

Kelly v. Widner, 236 Mont. 523, 771 P.2d 142

SOP er EOP ET OT PEE CE Ere py rerer er soe, T7

OS LPT OER OR 11, 15

Vv

TABLE OF AUTHORITIES - Continued

Kroll v. Doctor’s Associates, Inc., 3 F.3d 1167 (7th

CO, FRUGE cos evdcccvsngcesesexdtsnevouneeie ss

Marriage of Pearson, 291 Mont. 101, 965 P.2d 268

CPOE cedvccatesdvsasicdsicveceucencusenasiune

COE n't once cccedsetndessenersteesseeene

Michael's Estate, 264 Mont. 261, 871 P.2d 272 (1994)....

Michalski v. Circuit City Stores, Inc., 177 F.3d 634

Cs ie SII ooo ovis op cd cass canta ee

O’Neil v. Hilton Head Hospital, 115 F.3d 272 (4th

CR BOOT) ve tcevncs 0bseus sande okeeusatacsauee

Passage v. Prudential-Bache Securities, Inc., 223

Mont. 60, 727 P.2d 1298 (1986)................

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

Spiegel’s Estate v. Comm’r, 335 U.S. 701 (1949) ....

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

GO VES, G6 COR | oo sci cnceidces cea

Wilkerson v. Wilkerson, 555 S.W.2d 689 (Mo. App.

WF osc cctccccoscacussecdaacnicenedee seca

Wilkes v. Estate of Wilkes, 305 Mont. 335, 27 P.3d

Gee GN 6 obs ce dbddvssucencceteeraseccestnaee

Zalewski v. Simpson, 435 N.E.2d 74 (Ind. App. 1982)

220 West 42 Associates v. Ronbet Newmark Co., 84

Misc.2d 259, 375 N.Y.S.2d 255 (1975)..........

vi

TABLE OF AUTHORITIES - Continued

Page

RULES AND STATUTES:

Rule 10, Supreme Court Rules.............-..555 11, 19

Federal Arbitration Act:

F USC. 6 1 68 OR. svcccvscvesvescvccssevessscssense 3

OTB. B B06 GIGI occ ceves ciuvivendstsetoeeses 4

PUG. BZ ieccevecvcessccectsdeusvesevassd 4, 6, 16, 18

Bib ut | ererrrrrrrrrrrrrrr rr Tre kor yr. 5

DAE. 6 6 ov iccsanne50es0esv0ns000e ee cane

OTHER:

Restatement (Second) of Conflict of Laws........... 19

Moore's Federal Practice, (Matthew Bender 3d ed.

BE sc 0.6 0:006.6040nnnneens6oscbinysaakeekel ane 12

OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

Respondents James L. Ticknor, Janet Ticknor, Larry

Ticknor, Tickco Holding, L.L.C., and Ticknor Lodging

Corporation (collectively “Ticknors”) respectfully oppose

the petition for a writ of certiorari requested by Choice

Hotels International, Inc.

ee

STATEMENT OF JURISDICTION

Certiorari is not appropriate because the Ninth Cir-

cuit’s decision does not conflict with an applicable deci-

sion of this Court or of any other Circuit Court of

Appeals.

+

STATEMENT OF THE CASE

A. FACTS

Respondents James Ticknor and Ticknor Lodging

Corporation signed a franchise agreement with Choice

Hotels International, Inc., in 1998. Petition, App., p. 2.

Under the agreement, the Ticknors were to pay franchise

fees, and Choice was to allow them to use the Econo-

Lodge mark and provide certain assistance. Id. The other

respondents, Janet and Larry Ticknor and Tickco Hold-

ing, L.L.C., signed a separate guarantee. Id. There were 2

addenda to the franchise agreement. Id., p. 4. The fran-

chise agreement and the addenda were generated by

Choice, and the Ticknors were “forced to accept or reject

without negotiation.” Id., p. 12.

The franchise agreement contains an arbitration

clause providing that arbitration would occur at Choice’s

“headquarters office in Maryland.” Id., p. 3. The arbitra-

tion clause required all of the Ticknors’ claims to be

arbitrated, but excepted from its scope any claims that

Choice may have against the Ticknors for “indemnifica-

tion, actions for collections of moneys owed us under the

Agreement, or action seeking to enjoin you...” Id. The

guarantee agreement contained no arbitration clause. Id.,

pp. 4-5.

Disagreements arose between the parties concerning

Choice’s performance or non-performance and the Tick-

nors suspended payment of the franchise fees. Id., p. 4.

Choice then commenced arbitration proceedings. Id., p. 4.

The claims which Choice sought to arbitrate were for

“fees, service charges and damages for lost profits pur-

suant to a franchise agreement.” Exhibit 6 to Sept. 15,

1999 hearing, admitted at transcript p. 4. The franchise

agreement’s arbitration clause, of course, had excepted

from arbitration all of Choice’s claims against Ticknors

for “moneys owed us under the Agreement.”

Facing arbitration in Choice’s corporate headquarters

of claims which they had never agreed to arbitrate, the

Ticknors brought this action. Petition, App., pp. 4-5. In

their complaint, the Ticknors pled not only that the arbi-

tration clause did not require arbitration of Choice’s

claims, but also that the arbitration clause was invalid as

unconscionable. See Amended Complaint.

Choice moved to compel arbitration and, after an

evidentiary hearing, the District Court denied it on the

grounds that the arbitration clause was unconscionable

.

and therefore unenforceable. Id., p. 5. The Ninth Circuit

affirmed. Id., p. 17.

B. THE NINTH CIRCUIT DECISION

Choice portrays this case as having great signifi-

cance. To the contrary, this case concerns an extremely

narrow issue of state law: Given the facts of the case, is

the agreement to arbitrate invalid as unconscionable

under the law of the state of Montana? This is evident

from the Ninth Circuit opinion itself. The Ninth Circuit

noted that the Ticknors had raised “the state law defense

of unconscionability ...” Petition, App., p. 7. The Ninth

Circuit then applied Montana’s choice of law analysis

(Petition, App., pp. 7-9), and Montana law regarding

unconscionability (Petition, App., pp. 11-15). The Ninth

Circuit then held that the district court had not erred in

finding that the arbitration clause “was unenforceable as

unconscionable under Montana law ...” Petition, App.,

p. 17.

The only other issue is preemption: whether the Fed-

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

application of that Montana law. As is shown below, this

Court has declared, on numerous occasions, that such

state law principles of general applicability may be

applied, and are not preempted by the FAA. Montana’s

law of unconscionability is such a generally applicable

principle. Thus, there is no conflict with the decisions of

this Court.

C. STATUTORY FRAMEWORK

Congress enacted the Federal Arbitration Act

(“FAA”), 9 U.S.C. § 1-16 (1999), to overcome judicial

hesitation to enforce arbitration agreements. Volt Informa-

tion Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478

(1989). The FAA does not require arbitration; only that

courts enforce valid agreements to arbitrate. Volt, 489 U.S.

at 478.

Thus, § 2 of the FAA merely provides that an agree-

ment to arbitrate is enforceable just as any other agree-

ment, and subject to the same defenses which would

support the revocation of any other agreement.

A written provision . . . to settle by arbitration a

controversy thereafter arising out of such con-

tract or transaction . . . shall be valid, irrevoca-

ble, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of

any contract. ;

9 U.S.C. § 2. |

Because arbitration agreements are enforceable, a

party may obtain a stay of a legal action over an issue

which the parties agreed to arbitrate. The FAA does not,

however, make issues arbitrable absent a binding agree-

ment to arbitrate.

If any suit or proceeding be brought in any of

the courts of the United States upon any issue

referable to arbitration under an agreement in writ-

ing for such arbitration, the court in which such

suit is pending, upon being satisfied that the issue

involved in such suit or proceeding is referable to

arbitration under such an agreement, shall on

5

application of one of the parties stay the trial of

the action until such arbitration has been had in

accordance with the terms of the agreement.

9 U.S.C. § 3 (emphasis added).

Besides staying litigation over issues that the parties

agreed to arbitrate, the court can force the party to arbi-

trate, but only if the court is satisfied that a binding

agreement to arbitrate exists. Thus, a party aggrieved by

the failure of another to arbitrate “under a written agree-

ment for arbitration” may petition a court to compel

arbitration.

The court shall hear the parties, and upon being

satisfied that the makiug of the agreement for

arbitration or the failure to comply therewith is

not in issue, the court shall make an order

directing the parties to proceed to arbitration in

accordance with the terms of the agreement... .

If the making of the arbitration agreement or the

failure, neglect, or refusal to perform the same

be in issue, the court shall proceed summarily to

the trial thereof. If no jury trial be demanded by

the party alleged to be in default . . . the court

shall hear and determine such issue.

9 U.S.C. § 4. The remainder of section 4 provides for a

jury trial, if requested, on the making of the agreement to

arbitrate, and requires dismissal of the petition to compel

arbitration if the jury finds no agreement. Id.

- Thus, under the FAA, because the Ticknors contested

the validity of the arbitration agreement, it was the duty

of the district court summarily to try and decide that

issue. That is what happened. The district court held an

evidentiary hearing (Petition, App., p. 5), and decided

ee

that, under the facts of this case, the arbitration clause

was unenforceable. See generally Petition, App., pp. 23-34.

In doing so, the district court applied Montana state

law regarding unconscionable contracts. Petition, App.,

pp. 29-33. The Ninth Circuit did likewise. Petition, App.,

pp. 11-15. This is entirely consistent with federal law.

Section 2 of the FAA states that arbitration agree-

ments are enforceable “save upon such grounds as exist

at law or in equity for the revocation of any contract.”

The source of that law is obviously state law. Indeed, this

Court has declared on numerous occasions that state

contract principles may be applied.

States may regulate contracts, including arbitra-

~ tion clauses, under general contract law princi-

ples and they may invalidate an arbitration

clause “upon such grounds as exist at law or in

equity for the revocation of any contract.”

Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281

(1995). Yet again, in Casarotto, this Court stated:

Repeating our observation in Perry, the text of

§ 2 declares that state law may be applied “if

that law arose to govern issues concerning the

validity, revocability, and enforceability of con-

tracts generally.” Thus, generally applicable

contract defenses, such as fraud, duress, or

unconscionability, may be applied to invalidate

arbitration agreements without contravening

§ 2.

Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 686-87

(1996). See also Perry v. Thomas, 482 U.S. 483, 492, n.9

(1987). Thus, this Court has clearly stated that state law

principles of unconscionability may be applied “without

contravening” the FAA. That is what the lower courts

did.

*

ARGUMENT

I. THERE IS NO SPLIT AMONG THE CIRCUITS.

Choice attempts to demonstrate a conflict between

the Ninth Circuit and other Courts of Appeals by citing

cases from other circuits which refused to invalidate arbi-

tration clauses on the grounds of a lack of mutuality of

obligation. Petition, pp. 21-23. The resulting “conflict” is

an illusion. In fact, the cases cited by Choice, like the

Ninth Circuit, applied state law of general applicability.

Some of them reached different results, not because of

any conflict about the rule of law to be applied, but

because they considered different arbitration clauses,

under different sets of facts, in light of different argu-

ments, and applying the law of different states.

The Ninth Circuit did not find the arbitration clause

at issue to be unenforceable solely on the basis of a lack

of mutuality of obligation. It found it to be unconscion-

able because it was, inter alia, “unreasonably favorable to

the drafter.” Petition, App., p. 14. Indeed, the Ninth Cir-

cuit specifically recognized that, under Montana law,

“{t]here is no requirement that . . . ‘arbitration agree-

ments must contain mutual promises that give parties

identical rights and obligations or that the parties must

be bound in the exact same manner.’ ” Petition, App., pp.

13-14, quoting Iwen v. U.S. West Direct, 293 Mont. 512, 977

P.2d 989, 996 (1999). The Ninth Circuit understood that,

rather than requiring exact mutuality, Montana law sim-

ply inquires as to whether the disparities are so one sided

and unreasonably favorable to the drafter so as to be

oppressive and unconscionable. Id., p. 14. The Ninth Cir-

cuit thus did not decide the case based upon a lack of

mutuality of obligation, and it avails nothing to try to

compare its decision to cases which did.

That different courts have reached different results

on the issue of unconscionability of a particular clause in

a particular fact situation would hardly be surprising,

given that it is a fact intensive question of state law. The

unconscionability analysis is a question of state law. See

Casarotto, supra. The Ninth Circuit in this case applied

Montana law. None of the cases cited by Choice applied

Montana law. See, e.g., Johnson v. Circuit City Stores, Inc.,

148 F.3d 373, 376 (4th Cir. 1998), cert. denied, 530 U.S. 1276

(2000) (applying Maryland law); Harris v. Green Tree

Financial Corp., 183 F.3d 173, 181 (3rd Cir. 1999) (Pennsyl-

vania law); and Michalski v. Circuit City Stores, Inc., 177

F.3d 634, 637 (7th Cir. 1999) (Wisconsin law). To the extent

the law varies from one state to another, different results

may be expected, particularly given the fact intensive

nature of the inquiry.

Further, the entire analysis is highly dependent upon

the facts of each case. See, e.g., Zalewski v. Simpson, 435

N.E.2d 74, 78 (Ind. App. 1982) (“[i]t is impossible to lay

down any definite rules as to what may or may not be

unconscionable, for each case must depend upon its own

particular facts”); Wilkerson v. Wilkerson, 555 S.W.2d 689,

691 (Mo. App. 1977) (whether a property settlement is

unconscionable is a question which “depends on the par-

ticular facts of each individual case”); 220 West 42 Associ-

ates v. Ronbet Newmark Co., 84 Misc.2d 259, 263, 375

N.Y.S.2d 255, 260 (1975).

A review of the cases cited by Choice reveals r>

direct conflict. O’Neil v. Hilton Head Hospital, 115 F.3d 272

(4th Cir. 1997) did not even address an argument that the

arbitration agreement was unconscionable. Instead, the

argument was a lack of consideration because the hospi-

tal was supposedly not bound by the arbitration. O’Neil,

115 F.3d at 274. O’Neil did not even consider an argument

of unconscionability. Likewise, in Johnson, the district

court invalidated an arbitration clause in an employment

application for lack of consideration, reasoning that the

employer had not incurred a detriment because it had not

affirmatively agreed to consider the application if the

applicant agreed to the arbitration clause. Johnson, 148

F.3d at 377. The Fourth Circuit relied upon O’Neil to hold

that both parties were bound by the arbitration clause,

and therefore consideration existed. Johnson, 148 F.3d at

378. Once again, the court did not apply any

unconscionability analysis. Indeed, there is no suggestion

that the applicant even raised the argument that the

agreement was unconscionable. Similarly, in Michalski,

the court considered an argument of lack of consider-

~ ation, not unconscionability. Kroll v. Doctor's Associates,

Inc., 3 F.3d 1167, 1171 (7th Cir. 1993) is even more

removed, involving a case in which the parties were both

“mutually obligated to arbitrate all disputes.” Kroli, 3

F.3d at 1171. It has nothing in common with the Ninth

Circuit opinion, and certainly does not conflict. In fact,

ee een

10

none of these cases conflict with the Ninth Circuit opin-

ion because the litigants therein did not even raise an

unconscionability argument.

Harris considered claims that an arbitration clause in

a loan document lacked mutuality and was unconscion-

able. Applying Pennsylvania law (183 F.3d at 181-82), the

Third Circuit held that the agreement was not unenforce-

able for lack of mutuality. Harris, 183 F.3d at 179-182.

When it reached the issue of substantive uncons-

cionability (distinguished from procedural uncons-

cionability due to the arbitration agreement appearing in

- fine print on the reverse of the contract), the court simply

referenced its earlier holding about the lack of mutuality.

Harris, 183 F.3d at 183. There is scant independent anal-

ysis on that issue, and no suggestion that the applicable

(Pennsylvania) law would invalidate a contract on those

grounds. Nor did Harris involve arbitration in the

drafter’s corporate offices, another factor supporting a

finding of unconscionability in this case. In short, Harris

involved a different agreement, different facts, and the

law of a different state. It does not conflict with the Ninth

Circuit opinion.

Consistent with the Ninth Circuit, these cases recog-

nized that state law defenses can apply. There is no split

among the circuits on that rule of law. Most of them did

not even address an argument that the agreement was

unconscionable. They may have, under different facts and

law, and in light of different arguments, reached a differ-

ent result. The conflict, if any, is a conflict among the law

of different states, and not appropriate for resolution by

this Court.

11

Il. THE NINTH CIRCUIT OPINION DOES NOT

CONFLICT WITH ANY DECISIONS OF THIS

COURT.

A. THE NINTH CIRCUIT OPINION DOES NOT

CONFLICT WITH ERIE OR KLAXON.

In its Argument I (Petition, pp. 14-17), Choice argues

that the method in which the Ninth Circuit applied Mon-

tana law violates the principles of Erie Railroad Co. v.

Tompkins, 304 U.S. 64 (1938) and Klaxon Co. v. Stentor

Electric Mfg. Co., 313 U.S. 487 (1941) because the Court

concluded that Montana law would apply the principle of

unconscionability, even in the context of a contract

between business persons. Thus, according to Choice, the

Ninth Circuit decision conflicts with Erie and Klaxon,

requiring review by this Court.

While Choice dresses this argument as a violation of

the doctrines of Erie and Klaxon, the argument is, at

bottom, simply that the Ninth Circuit reached an incor-

rect result while applying Montana law. Notably, Choice

does not argue that Montana law should not have been

applied. The rules of Erie and Klaxon require the Ninth

Circuit to apply Montana law. Indeed, the pronounce-

ments of this Court leave no doubt that state law princi-

ples of unconscionability apply. See discussion, supra, p.

6. The Ninth Circuit properly understood that it must

apply state law. Choice simply argues that the result was

wrong, and asks this Court to correct the asserted error.

Under Rule 10, Supreme Court Rules, this is not a basis

for granting certiorari.

More fundamentally, however, Choice’s argument

misunderstands the duty of a federal court to apply state

i

law when sitting in diversity. Choice recognizes that the

district court, sitting in diversity, was bound by Erie to

apply Montana law. Petition, p. 15.1 Choice argues, how-

ever, that the district court and the Ninth Circuit incor-

rectly applied Montana law because, absent a Montana

decision directly on point, the lower courts were prohib- |

ited from “speculating as to which line of cases Montana

courts would ultimately adopt.” Petition, p. 17. Thus,

Choice’s argument is that the Ninth Circuit improperly |

divined Montana law 9n an issue not directly addressed

by the Montana courts, i.e., would an unconscionability

analysis apply even in a contract between businessmen. |

Choice’s argument does not state a ground for granting

certiorari because the Ninth Circuit was bound to do |

precisely what it did, i.e., to decide how the state’s high-

est court would decide that issue. Further, this Court will

not disturb the Ninth Circuit’s determination of that

question because it is supported by Montana law.

When sitting in diversity and therefore applying the

law of the forum state, a federal court may be faced with

unsettled questions of state law. If so, “the federal court

must decide how the state’s highest court would decide

the issue.” 17A Moore’s Federal Practice, § 120.31[1][b] [iii]

(Matthew Bender 3d ed. 2001). See also Comm'’r v. Bosch,

387 U.S. 456, 465 (1967) (absent controlling precedent by

highest state court, federal courts “must apply what they

find to be the state law .. . ”). Federal courts have a duty

to apply state law even where that state law is “uncertain

1 In spite of that concession, Choice later, in an aside,

suggests that “it was improper for the Ninth Circuit to apply

Montana law ... in the first instance.” Petition, p. 16.

13

or difficult to determine.” Meredit! . City of Winter

Haven, 320 U.S. 228, 236 (1943). In such a case, this Court

has answered questions of state law, “although the high-

est court of the state had not answered them,” “with the

aid of such light as was afforded by the materials for

decision at hand, and in accordance with the applicable

principles for determining state law.” Meredith, 320 U.S.

at 237. Clearly, the Ninth Circuit correctly discerned that

it was bound to determine how the highest court of

Montana would decide an issue of state law which was

not addressed in existing precedent. Petition, App., p. 11.

In other words, even if the Ninth Circuit had erred in its

application, it was a “properly stated rule of law” which

is “rarely” a basis for granting certiorari.

Where lower federal courts have decided an unset-

tled question of state law in a manner that is supported

by “reasonable arguments”, this Court’s “general policy”

is to “leave undisturbed” the Court of Appeals’ holding

on state law. Spiegel’s Estate v. Comm’r, 335 U.S. 701, 708

(1949). Spiegel’s Estate noted that the circuit judges were

constantly required to apply the law of the state in ques-

tion. 335 U.S. at 707. Further, examination of the state law

had left this Court “unable to say with any degree of

certainty that the Court of Appeals’ holding was wrong.”

335 U.S. at 708. The same applies in this case. The Ninth

Circuit is often called upon to apply Montana law. Fur-

ther, there are reasonable arguments supporting the

Ninth Circuit’s conclusion that the Montana Supreme

Court would apply an unconscionability analysis even in

the context of a contract between businessmen.

The crux of Choice’s argument is that Montana law,

and notably Iwen v. U.S. West Direct, 293 Mont. 512, 977

14

P.2d 989 (1999), do not apply the unconscionability test to

contracts between businessmen. Petition, pp. 14-17. How-

ever, Iwen involved an attorney who purchased an adver-

tisement for his law office. Iwen, 977 P.2d at 991. It is a

“reasonable argument” that Mr. Iwen was as much a

businessman as James Ticknor, and that the same analysis

would apply. Further, the test for unconscionability, as

framed by Iwen, does not require that one of the parties

be a consumer as opposed to a businessman. Iwen, 977

P.2d at 995.

The test focuses, initially, on disparity of bargaining

power. Id. The record in this case contains financial infor-

mation concerning the parties, showing: Choice with total

assets of more than $445 million and annual revenues of

$140 million (see Exhibit 5 to Sept. 15, 1999 hearing, pp.

1-4, admitted at transcript p. 4); Mr. Ticknor with a net

worth of $684,412 (Exhibit 12, admitted at transcript, p.

4); and the other franchisee, Ticknor Lodging Corp., with

total assets of $14,305 (Exhibit 13, admitted at transcript,

p. 4) and annual gross revenues of $344,650 (Exhibit 14,

admitted at transcript, p. 4).

Finally, the Ninth Circuit also relied upon In re:

Michael’s Estate, 264 Mont. 261, 266, 871 P.2d 272, 275

(1994), in which the Montana Supreme Court had stated

the “indicia of unconscionability relating to a [contract]

between two business professionals.” The Montana

Supreme Court, far from ruling out application of the

doctrine of unconscionability in contracts between busi-

ness people, had spelled out the test for such an analysis.

Thus, the Ninth Circuit did not err when it concluded

that, under Montana law, the test applied even between

business people.

eee

15

In light of all of the foregoing, “reasonable argu-

ments” exist in favor of the Ninth Circuit’s construction

of Montana law, and this Court cannot conclude “with

any degree of certainty” that such determination was

wrong. See Spiegel’s Estate, supra. While Choice disagrees

with the result, it is plain that the Ninth Circuit did not

violate the doctrines of Erie, Klaxon, or any other federal

principle. Choice asks this Court to correct alleged error

(that Montana would apply an unconscionability analysis

to contracts between business persons) which is not even

erroneous.

Finally, Choice faults the Ninth Circuit for

“ignor[ing]” other Montana cases, notably All-States Leas-

ing Co. v. Top Hat Lounge, Inc., 198 Mont. 1, 649 P.2d 1250

(1982). Choice, however, never cited either All-States, or

any similar case, for the proposition which it now urges.

This Court should not grant certiorar: to review an argu-

ment which the Ninth Circuit had no opportunity to

address.

B. THE DECISION OF THE NINTH CIRCUIT

DOES NOT CONFLICT WITH CASAROTTO.

Choice argues that, by invalidating the arbitration

agreement based upon state law, the Ninth Circuit vio-

lated the standards enunciated in Doctor’s Associates, Inc.

v. Casarotto, 517 U.S. 681 (1996). Petition, pp. 17-21.

According to Choice, the unconscionability analysis con-

tained in Montana law which the Ninth Circuit applied to

invalidate the arbitration provision, singles out arbitra-

tion agreements and therefore is preempted. See Petition,

App., pp. 17-21. To the contrary, the Ninth Circuit did not

_

16

run afoul of Casarotto, or any other pronouncements by

this Court, in applying state law on the question of the

unconscionability of the arbitration provision.

Casarotto specifically stated that “generally applicable

contract defenses, such as . . . unconscionability, may be

applied to invalidate arbitration agreements without con-

travening § 2.” Casarotto, 517 U.S. at 686-87. Unlike

Casarotto, which involved a state statute requiring a

notice, in certain size type, on the front of any contract

containing an arbitration clause, this case involves a stan-

dard contract defense of general applicability.

Perhaps recognizing that state law does apply, Choice

attempts to argue that the Ninth Circuit misapplied that

law by failing to recognize that Montana law does not

inquire into the adequacy of consideration. Petition,

App., pp. 18-19. This argument, once again, is simply that

there has been a misapplication of a properly stated rule

of law. Such error correction is not a basis for granting

certiorari. More fundamentally, however, it misunder-

stands what the Ninth Circuit held. The Ninth Circuit did

not hold that, under Montana law, the arbitration provi-

sion was void for lack of consideration. It held that it was

void as unconscionable. Petition, App., p. 17. Certainly,

_the fact that Choice reserved the right to sue on its

monetary claims, but the Ticknors had to arbitrate their

claims, was relevant to that inquiry. Kelly v. Widner, 236

Mont. 523, 528, 771 P.2d 142, 145 (1989) (stating in the

context of a release of claims for personal injury, that

“{iJnadequacy of consideration does not by itself invali-

date a bargain, but may be a factor in determining cons-

cionability”). However, the basis for the Ninth Circuit’s

holding was not simply failure of consideration, but

ei it

17

unconscionability of the arrangement as a whole, includ-

ing the requirement that arbitration occur in Choice’s

headquarters office.

Choice next argues that the Iwen unconscionability

analysis is preempted because it singles out arbitration

clauses. Thus, Choice argues that Montana law is “hostile

to, or applicable only to, agreements to arbitrate.” Peti-

tion, p. 20. The Ninth Circuit found otherwise, speci-

fically noting that, under Montana law, the principles of

Iwen were “general principles that exist at law or in

equity for the revocation of any contract.” Petition, App.,

p. 16. Moreover, the Ninth Circuit has since demonstrated

that it understands full well the difference between gen-

erally applicable contract defenses, and those which

would serve only to invalidate an arbitration clause. See

Bradley v. Harris Research, Inc., 2001 WL 1658728 (9th Cir.,

December 28, 2001), at 5, n. 7.

A review of Montana cases demonstrates that the

Ninth Circuit was correct in finding the unconscionability

analysis to be applicable to contracts generally, and not to

single out arbitration clauses. First, the unconscionability

analysis has long been applied in varied coritexts. See,

e.g., Wilkes v. Estate of Wilkes, 305 Mont. 335, 27 P.3d 433

(2001) (prenuptial agreement); In re Marriage of Pearson,

291 Mont. 101, 965 P.2d 268 (1998) (settlement agreement

in divorce); Kelly v. Widner, 236 Mont. 523, 771 P.2d 142

(1989) (release of claims for personal injury); Eigeman v.

Miller, 229 Mont. 28, 745 P.2d 320 (1987) (provisions of an

installment land contract); Beneficial Commercial Corp. v.

Cottrell, 212 Mont. 493, 688 P.2d 1254 (1984) (limitation

of remedies in equipment lease). The principle of

18

unconscionability is a well known, and oft-applied, con-

tract defense. Its application does not “single out” arbi-

tration agreements, and is therefore not preempted.

Second, the Montana Supreme Court has upheld

arbitration clauses in the face of arguments of

unconscionability. See Chor v. Piper, Jaffray & Hopwood,

Inc., 261 Mont. 143, 149, 862 P.2d 26, 30 (1993) (reversing

trial court’s decision invalidating arbitration clause, and

explaining that “an arbitration clause may be enforced

even if the agreement in which the clause appears is an

adhesion contract, absent evidence that the arbitration

clause was not within the parties’ reasonable expectations

or that the clause is oppressive or unconscionable”); Pas-

sage v. Prudential-Bache Securities, Inc., 223 Mont. 60, 727

P.2d 1298 (1986). The cases simply do not demonstrate

any hostility to arbitration clauses per se. Instead, as

permitted under Casarotto, under Montana law the con-

cept of unconscionability is applicable to contracts gener-

ally, and does not invalidate even arbitration clauses

absent the same factors which must be found to invali-

date any other contract.

Unlike Casarotto, this case does not involve a statute

or principle which applies only to arbitration clauses. It

involves, instead, a state law principle which is applica-

ble to contracts generally. Indeed, it involved a defense

which this Court has specifically enumerated as a permis-

sible state law contract defense.

In short, this Court has specifically recognized that

state law principles, such as unconscionability, may be

applied to invalidate arbitration agreements without run-

ning afoul of § 2 of the FAA. That is what the Ninth

19

Circuit did. Choice argues that this is a wrong result, but

there can be no question that the rule of law was properly

stated. Accordingly, this is not a ground to grant cer-

tiorari.

III. CHOICE’S “REASONS FOR GRANTING THE

WRIT” STATE, AT MOST, ALLEGEDLY ERRO-

NEOUS FACTUAL FINDINGS OR MISAPPLICA-

TION OF A PROPERLY STATED RULE OF LAW.

Supreme Court Rule 10 states that “certiorari is rarely

granted when the asserted error consists of erroneous

factual findings or the misapplication of a properly stated

rule of law.” Choice’s petition complains not about the

rules of law applied by the Ninth Circuit, but only about

the result it reached. In other words, Choice asserts erro-

neous factual findings and misapplication of a properly

stated rule of law.

For instance, Choice complains about alleged inac-

curacies in the factual findings of both the trial court and

the Ninth Circuit. Petition, p. 8. See also id, p. 10, n. 4.

Both passages argue about the accuracy of the lower

courts’ application of the choice of law analysis. Choice

does not attempt to argue, however, that the Ninth Cir-

cuit applied the wrong analysis altogether. Indeed,

Choice conceded in its Ninth Circuit briefs that “a federal

court sitting in diversity must look to the law of the

forum state in making a choice of law determination” and

that “Montana courts apply the Restatement (Second) of

Conflict of Laws, § 187 (2) in resolving the question. .. .”

Choice’s Ninth Circuit opening brief, p. 17; Choice’s

Ninth Circuit reply brief, p. 10. That is precisely the

20

analysis which the Ninth Circuit applied. Petition, App.,

pp. 7-9. Thus, Choice argues only that the Ninth Circuit

reached an incorrect result while applying the correct

rule of law. Such alleged error is not within Sup. Ct. Rule

10, nor worthy of this Court’s attention.

Similarly, Choice’s Argument I (Petition, pp. 14-17)

argues that the Ninth Circuit reached an incorrect result

in applying Montana’s test for the unconscionability of a

contractual provision. Choice argues that the Ninth Cir-

cuit misunderstood, and therefore misapplied, Montana

law. For instance, it argues that the Ninth Circuit

“ignored the facts” of controlling Montana precedent,

and ignored other Montana case law. Petition, App., p. 15.

Thus, according to Choice, the Ninth Circuit improperly

extended the holding of the controlling Montana case,

and failed to properly “apply the law of Montana as it

existed ... ” Petition, App., p. 16. Accordingly, Choice

concludes that “the Ninth Circuit ignored [the controlling

principles of state law] and instead relied upon inapplica-

ble precedents ... ” Petition, App., p. 17.

Further, as discussed supra, while Choice tries to

demonstrate a conflict with Erie, its argument is essen-

tially that, while obligated to apply state law, the Ninth

Circuit misapplied that law. Once again, Choice is asking

this Court to correct alleged error in applying a properly

stated rule of law.

Finally, even the error which Choice does claim is

illusory. The Ninth Circuit properly applied state law.

,%

v

21

CONCLUSION

The Ninth Circuit opinion conflicts with neither deci-

sions of this Court nor decisions by other Circuit Courts

of Appeals. The issue is both fatt intensive and state law

dependent, and not appropriate for consideration by this

Court.

Respectfully submitted,

Rosert K. BALDWIN

Goetz, GALLIK, BALDWIN &

Dotan, P.C.

35 North Grand Ave.

P.O. Box 6580

Bozeman, MT 59771-6580

(406) 587-0618

Counsel for Respondents

Dated: January 16, 2002