Amicus Curiae Brief — Edward D. Jones & Co., L. P., Dba Edward Jones v. Kloss

MOTION FILED

--

No. 02-1112

In Supreme Court of the Gnited States

EDWARD D. JONES & Co., L.P., D/B/A EDWARD JONES, AND

PAUL HUSTED,

Petitioners,

V.

ALICE P. KLoss,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of the State of Montana

MOTION FOR LEAVE TO FILE BRIEF AND BRIEF

OF THE CHAMBER OF COMMERCE

OF THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

STEPHEN A. BOKAT EVAN M. TAGER

ROBIN S. CONRAD MIRIAM R. NEMETZ

ELLEN DUNHAM BRYANT Counsel of Record

National Chamber Litigation STEPHANIE MARTZ

Center, Inc. Mayer, Brown, Rowe & Maw

1615 H Street, N.W. 1909 K Street, N. W.

Washington, D.C. 20062 Washington, D.C. 20006

(202) 463-5337 (202) 263-3000

Counsel for Amicus Curiae

MOTION FOR LEAVE TO FILE BRIEF OF THE

CHAMBER OF COMMERCE

OF THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

Pursuant to Rule 37.2 of the Rules of this Court, the

Chamber of Commerce of the United States respectfully

moves for leave to file the accompanying brief as amicus cu-

riae in support of the petitioners. The petitioners have con-

sented to the filing of the brief, and their written consent has

been filed with the Clerk; the respondent, however, has re-

fused to consent to the filing of the Chamber’s brief.

The Chamber of Commerce of the United States (the

Chamber) is. the world’s largest business federation repre-

senting an underlying membership of more than 3,000,000

businesses and organizations of every size. Chamber mem-

bers operate in every sector of the economy and transact

business throughout the United States, as well as in a large

number of countries around the world. A central function of

the Chamber is to represent the interests of its members in

important matters before the courts, Congress, and the

Executive Branch. To that end, the Chamber has filed

amicus curiae briefs in numerous cases that have raised

issues of vital concern to the nation’s business community.

Many of the Chamber’s members have found that arbitra-

tion allows them to resolve disputes promptly and efficiently,

while avoiding the costs associated with traditional litigation.

Accordingly, many of these interstate businesses routinely

include arbitration provisions in their contracts. Because

some Chamber members can be sued in virtually any state,

they rely on the protection afforded by the Federal Arbitra-

tion Act (“FAA”) to ensure that their arbitration agreements

are enforced in spite of the vagaries and preferences of the

judiciaries of individual states.

The Chamber’s members have observed that the courts of

some states have become increasingly willing to strike down

arbitration clauses based on rules that ostensibly derive from

the common law but are fashioned specifically to address ar-

bitration agreements. The decision below exemplifies this

trend: the Supreme Court of Montana refused to enforce a

clear and prominently displayed arbitration clause, which in-

disputably had been signed by the plaintiff, on the ground

that the defendants had not pointed out the provision and ex-

plained its significance and effect. The court purported to

render its decision under common law rules applicable to all

contracts, but in fact it invented from whole cloth a special

notice requirement for arbitration clauses. If federal law per-

mits courts freely to impose such newly-minted requirements

on arbitration, then the ability of businesses to contract for

alternative dispute resolution procedures will become illu-

sory. Accordingly, the Chamber has a strong interest in en-

couraging this Court to review, and reverse, the decision be-

low.

For the foregoing reasons, the motion of the Chamber

of Commerce of the United States to file the accompanying

brief as amicus curiae in support of Petitioners should be

granted.

Respectfully submitted.

STEPHEN A. BOKAT EVAN M. TAGER

ROBIN S. CONRAD MIRIAM R. NEMETZ

ELLEN DUNHAM BRYANT Counsel of Record

National Chamber Litigation STEPHANIE MARTZ

Center, Inc. Mayer, Brown, Rowe & Maw

1615 H Street, N.W. 1909 K Street, N.W.

Washington, D.C. 20062 Washington, D.C. 20006

(202) 463-5337 (202) 263-3000

Counsel for Amicus Curiae

TABLE OF CONTENTS

Page

RN FAs CREF Hires ssctcsssasesessssveesenenerovenveaesvszanens li

INTEREST OF THE AMICUS CURIAE ............:ccccsseseseseeees ]

INTRODUCTION AND SUMMARY OF

lala Licisaca ites ssedblepiaciiinastocsovienteniandeuioedins ]

adidas inckidabdsaabnnissnibininevccinaneesntstestvibinis 3

A. The Montana Supreme Court’s Decision Re-

flects That Court’s Hostility To Arbitration

I ieicciatieiattinntcuerscdessinnehbinconindpeubitiadwiaweks 3

B. The Montana Supreme Court’s Decision Is

Inconsistent With This Court’s Decisions

Construing Section 2 Of The Faa.............cccceeseeeeeeeee 6

C. The Decision Below Is Part Of A Growing

Trend To Invalidate Arbitration Agreements

On State Common Law Grounds That Apply

SW NE IB anes sscasnsssctsscsscesvescnosseseseness 1]

IIIT init ccaisineeecatscerckintnstbsieinncaseviirinsictioniceninsetoenyeensnes 16

(I)

li

TABLE OF AUTHORITIES

Page(s)

Cases

ACORN v. Household Int’l, Inc., 211 F. Supp.

Bk TD Ce Se BED cecencenereresianenstncrnsoisnene 13, 14

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

GED ntciiideneniabinannaiaeen bicleinaionaie 6, 7,9

Armendariz v. Foundation Health Psychcare

Servs., Inc., 6 P.3d 669 (Cal. 2000) .0...... eens 15

Badie v. Bank of America, 79 Cal. Rptr. 2d 273

Pe Ss MI ID aaisiciindsscibicelccissiasaptinobnionanieiods 13,15

Dillard v. Merrill, Lynch, Pierce, Fenner &

Smith, Inc., 961 F.2d 1148

CO ITED ctkchicinscihtonsnceanenditesnnnninceiuonehiateiaintatonss 8

Doctor’s Associates Inc. v. Casarotto,

mie pis Fy. erence an ee ererome 8,9, 11

EZ Pawn Corp. v. Mancias, 934 §.W.2d 87

CN, FOIE vchtnincesmicnivinsictnliladnaiehciscibiellasiaicdasbaiaiiileamiienatale oa

Green Tree Fin. Corp. v. Vinston, 753 So. 2d

PE I, SE secinincsatbcuenaovadenniapeisaiiua-ammaieiia 14

Hill v. Gateway 2000, Inc., 105 F.3d 1147

Cas SHPIPE D cienclbcceicebisepancciandiiediubiicbinsinsaimaeneions 13

Iwen v. U.S. West Direct, 977 P.2d 989

Es CIID. sccicenmnccciciecdesacgleiauianalenaumaonitiincanteiens 12

Long v. Fidelity Water Sys., Inc., 2000 WL

989914 (N.D. Cal. May 26, 2000) ........ ee eee eeeeees 13

Luna v. Household Fin. Corp. III, 236 F. Supp.

2B 1166. CW.D. Waar. BOGE) siesecserssesececsesesereseses 12, 14

Mandel v. Household Bank, 129 Cal. Rptr. 380

CEA Ca Fe biietisienceseteernsiticeninansncnbanicincamapbicad 14

iii

TABLE OF AUTHORITIES

Page(s)

Mattingly v. Hughes Elec. Corp., 2002 WL

31444472 (Md. Ct. Spec. App. Nov. 4,

UE sinninicicciechicidde igiddaadinldadindaandaaaidngaaicie 13

Ex Parte McNaughton, 728 So. 2d 592

Oe ET e OREN TR ME LTS 13

Mendez v. Palm Harbor Homes, Inc.,

45 P.3d 594 (Wash. App. 2002)...........cccceceseeeeeeeees 1]

Mercuro v. Superior Court, 116 Cal. Rptr. 2d

FE Gia CAs BE vastninecinietebeh dietitian 12

Passage v. Prudential-Bache Securities, Inc.,

Ft Ee EA CR, TIO sevtciseieesncctinpeetantiinnnteiaaa ie

Perry v. Thomas, 482 U.S. 483 (1987) ...cccccccesseseeeeee 2, 6, 7

Powertel, Inc. v. Bexley, 743 So. 2d 570

COO, BAIT, CE, FR, TD ccnscernsenteccrscecsesecsansunnns 13, 14

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

52: EA ONES TOED LAURA eR MD Hee DS 6

Southland Corp. v. Keating, 465 U.S.1 (1994) woes 6

State of West Virginia ex rel. Dunlap v. Berger,

POT De Ae BOO CW. VE. BUD tectcinrnervicesctcineressines ia

Szetela v. Discover Bank, 118 Cal. Rptr. 2d 862

(Cal Ct. App. 2002), cert. denied,

<1: Al GOO ARN Schishallchddicbinldsstiuaipekaecesilediokanaad 12, 15

Ex Parte Thicklin, 824 So. 2d 723 (Ala. 2002) .......0..eceee 14

Three Valleys Mun. Water Dist. v. E.F. Hutton

& Co., 925 F.2d 1136 (9th Cir. 1991) ww. 15

Ting v. AT&T, 2003 WL 292296 (9th Cir. Feb.

15 SE ick ota cca 14

iv

TABLE OF AUTHORITIES

Page(s)

Statutes

DUG 6S ccisesnenitancconaniibndsenaa aaa passim

ART. TS SO BROT, COs sccrcieenennniionamanaen 4

ART. 5h, 2 BRGIT. COUNT. sccnsvevssiinnsensniiintnddioncitiniinkianie 4

Mont. Code Ann. § 27-5-114(4) (1995) wo... eeesteeeeeenees 7

Miscellaneous

2 I. MacNeil, R. Speidel, T. Stipanowich and

G. Shell, FEDERAL ARBITRATION LAW

CRGDSD : sanctciiasiisssinvhisi piles clenciaiipanbeihiinsidasaltaanaiesliindastit 8,13

Jean S. Sternlight, The Basic Structure of the

FAA: Possible Challenges to Arbitration

Agreements, 2 ANN. 2000 ATLA CLE

204 8 GHEE stoceunsmainianaaaadaes 11-12

David G. Wirtes, Suggestions for Defeating Ar-

bitration, 24 AM. J. TRIAL ADVOC. 111

CIEE TIE seiveeveciteuniscinnstntnchiacinniialaiiasaaon 10

BRIEF OF THE CHAMBER OF COMMERCE

OF THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE'

The interest of the amicus curiae is described in the pre-

ceding motion for leave to file this brief.

INTRODUCTION AND

SUMMARY OF ARGUMENT

The Montana Supreme Court has held that an otherwise

valid arbitration provision, signed by the respondent after she

had an opportunity to review the contract, is unenforceable

because the petitioners did not orally highlight and explain

the arbitration provision. Although the court said that it was

applying the state common law rules that govern all contracts

of adhesion, nothing about the opinion suggests that the court

would apply this “oral notice” requirement to any other sort

of contract term. Indeed, in holding that the arbitration

clause was not within the respondent’s reasonable expecta-

tions, the court was moved principally by the key feature of

all such provisions — i.e., that by agreeing to arbitrate respon-

dent waived her right to a jury trial and to access to the

courts. The concurring opinion filed by Justice Nelson,

which was joined by all of the other justices in the majority,

makes especially clear that the court was moved by its view

that heightened notice standards should apply to arbitration

agreements because they necessarily involve the waiver of

constitutional rights.

1

This brief was not authored in whole or in part by counsel for a

party, and no person or entity, other than the amicus curiae, its

members, and its counsel made a monetary contribution to the

preparation and submission of this brief.

2

Section 2 of the Federal Arbitration Act (“FAA”) pro-

vides that “a written provision in * * * a contract * * * to set-

tle by arbitration a controversy thereafter arising out of such

contract * * * shall be valid, irrevocable, and enforceable,

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

revocation of any contract.” 9 U.S.C. § 2. As this Court has

made clear, the role of state law in determining the enforce-

ability of an arbitration clause, while significant, is carefully

circumscribed by the FAA. Although an arbitration provi-

sion may be invalidated under state law for reasons that

would apply equally to the other terms of the contract, “the

uniqueness of an agreement to arbitrate” may not be raised as

grounds for its invalidation under state law. Perry v. Tho-

mas, 482 U.S. 483, 492 n.9 (1987). The Montana Supreme

Court’s decision plainly runs afoul of this limitation; indeed,

this Court has already held that the Montana legislature could

not impose by statute special notice requirements for arbitra-

tion of the sort that the court below has mandated.

This case is 2 particularly clear example of a burgeoning

trend among certain courts to invalidate arbitration agree-

ments based on state-law rules that are described under the

rubric of general contract law, but in fact have been fash-

ioned solely to deal with arbitration agreements. These deci-

sions threaten to make the validity of arbitration agreements

entirely a matter of the various courts’ ad hoc articulations of

state law, diluting the strong federal policy favoring the pri-

vate ordering of dispute resolution. This case provides the

Court with a perfect vehicle to begin to explain the appropri-

ate role of state common law in det-rmining the validity of

contractual arbitration clauses.

3

ARGUMENT

A. The Montana Supreme Court’s Decision Reflects

That Court’s Hostility To Arbitration Agreements

The Montana Supreme Court’s decision is a classic ex-

ample of judicial hostility to arbitration, expressed through

the discriminatory application of state common law. The

court purported to apply the state-law principles that govern

all contracts. In fact, however, its refusal to order Kloss to

abide by the arbitration agreement that she signed reflected

the court’s distaste for arbitration — in particular the fact that

by agreeing to arbitrate individuals give up their ights to the

judicial resolution of their claims.

In invalidating the arbitration provision in Kloss’s con-

tract with Edward Jones, the Montana Supreme Court pur-

ported to apply “generally applicable contract law defenses”

(Pet. App. 16) — in particular, those concerning contracts of

adhesion. According to the court:

Contracts of adhesion arise when a standardized

form of agreement, usually drafted by the party

having superior bargaining power, is presented to

a party, whose choice is either to accept or reject

the contract without the opportunity to negotiate

its terms. * * * [Sjuch a contract * * * will not be

enforced against the weaker party when it is (1)

not within the reasonable expectations of said

party or (2) within the reasonable expectations of

the party, but, when considered in its context, is

unduly oppressive, unconscionable, or against

public policy.

Id. at 12 (quoting Passage v. Prudential-Bache Securities,

Inc., 727 P.2d 1298, 1302 (Mont. 1986)).

Finding that the contract between Edward Jones and

Kloss was one of adhesion (Pet. App. 13), the court invali-

= LPS ARREST

|

dated the arbitration provision because it determined that the

provision was “clearly not within Kloss’s reasonable

expectations.” Jd at 14. The court’s basis for that finding

was merely that Kloss’s broker “did not explain the

arbitration provision (a provision by which Kloss waived at

least two constitutional rights, i.e., a right of access to the

courts pursuant to Article II, Section 16, and her right to a

jury trial pursuant to Article II, Section 26 of the Montana

Constitution) to Kloss.” Jbid.

In finding that the agreement was not within Kloss’s rea-

sonable expectations, the court did not consider any of the

factors one might expect to be part of that analysis — for ex-

ample, whether Kloss was generally familiar with arbitration

provisions; whether she had prior experience in dealing with

brokerage contracts; whether she was aware that some such

contracts contain arbitration clauses; whether such provisions

are ubiquitous in the industry; or whether an individual in

Kloss’s position would be surprised by having to submit to

an arbitrator the type of dispute at issue. Instead, the court

appeared to be moved solely by its view that “Kloss waived

her right of access to this State’s courts, her right to a jury

trial, her right to reasonable discovery, her right to findings

of fact based on the evidence, and her right to enforce the law

applicable to her case by way of appeal.” Jbid. Thus, the

decision turned solely on the fact that arbitration, by its very

nature, proceeds outside the court system. Indeed, the deci-

sion can be read to adopt a rule that no arbitration provision

can be enforced against an individual who chooses not to

read a standard form contract, unless the offerer specifically

points out and explains the provision before the contract is

signed.

The discomfort with arbitration that underlies the court’s

decision was more fully laid bare in Judge Nelson’s concur-

rence, which was joined by every one of the Justices in the

majority. Judge Nelson wrote his concurrence to “further

5

develop” what he called the “additional rationale supporting

our decision in this case — i.e., whether Kloss effectively

waived her rights to a trial by jury and to access to the courts

***” Id at 22 (emphasis added).”

Justice Nelson posited that the “constitutionally guaran-

teed right of a jury trial is ‘fundamental’ and, therefore, de-

serving of the highest level of court scrutiny and protection.”

Id. at 25. “Given the sacredness and inviolability of the fun-

damental right to trial by jury,” he concluded, “any contract

provision that openly or subtly causes the forfeiture of the

exercise of this right must be rigorously examined by the

courts.” Jd. at 26. He found, further, that “the right of access

to the courts must be protected as the fundamental constitu-

tional right it is.” Jd. at 28-29.

Justice Nelson made no secret of his disapproval of the

arbitration agreements that interfere with these “fundamental

rights.” In his view, the inclusion of an arbitration clause in a

standard form contract “is at one and the same time an ‘open

attack’ on the right of jury trial and a ‘secret machination’

causing forfeiture of the right that Blackstone predicted

would ‘sap and undermine’ the right, and with that our ‘pub-

lic and private libert[ies].’” Jd. at 26 Indeed, he professed

dramatically that “large national and multi-national corpora-

tions are effectively privatizing an important segment of the

civil justice system in this country by including fine-print,

? Justice Nelson added that “other constitutional rights may be im-

plicated in these sorts of cases, including the right to due process

of law * * * and equal protection. Moreover, as our Opinion points

out, arbitration results in loss of certain procedural rights such as

the right to engage in discovery and the right to have the admissi-

bility of evidence judged under the Montana Rules of Evidence.

Additionally, the right to judicial review of arbitration decisions is

severely restricted — i.e. effectively there is no right of appeal from

these decisions.” Pet. App. 22 n.1

a i i Ss

6

non-negotiable, take-it-or-leave-it, mandatory, binding arbi-

tration clauses in their standard-form contracts.” Jd. at 29.

Justice Nelson continued that, “where fundamental con-

stitutional rights are involved * * * the law is eminently clear

that the waiver of such rights will not be lightly presumed.”

Id. at 31. Thus, despite the undisputed findings that the arbi-

tration clause appeared on the second page of the contract in

boldface type and was referenced again in a boldface notice

immediately above the signature line, that Kloss had the op-

portunity to read the contract before she signed it, and that

she would have understood the arbitration provision had she

read it (id. at 46), Judge Nelson found that “there is no evi-

dence to support a conclusion that Kloss knowingly and in-

telligently waived her rights to trial by jury and access to the

courts.” Jd. at 32. On this ground, he and the other justices

in the majority (all of whom joined his concurring opinion)

found that the arbitration clause was unenforceable.

B. The Montana Supreme Court’s Decision Is Incon-

sistent With This Court’s Decisions Construing

Section 2 Of The FAA

In enacting the FAA, Congress “declared a national pol-

icy favoring arbitration and withdrew the power of the states

to require a judicial forum for the resolution of claims which

the contracting parties agreed to resolve by arbitration.”

Southland Corp. v. Keating, 465 U.S. 1, 10 (1994). The

Act’s “basic purpose” is “to put arbitration provisions on ‘the

same footing’ as a contract’s other terms.” Allied-Bruce Ter-

minix Cos. v. Dobson, 513 U.S. 265, 275 (1995) (quoting

Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974)).

Accordingly, Section 2 of the FAA “embodies a clear federal

policy of requiring arbitration unless the agreement to arbi-

trate * * * is revocable ‘upon such grounds as exist at law or

in equity for the revocation of any contract.” Perry, 482

U.S. at 489 (quoting 9 U.S.C. § 2). Unless that savings clause

7

applies, “[a]n agreement to arbitrate is valid, irrevocable, and

enforceable, as a matter of federal law.” Id. at 492 n.9 (1987)

(emphasis in original).

Section 2 of the FAA carves out a limited role for the

states in the regulation of contractual arbitration. An agree-

ment to arbitrate may be invalidated on state law grounds “if

that law arose to govern issues concerning the validity, revo-

cability, and enforceability of contracts generally.” Perry,

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

Section 2 gives the States, for example, “a method for pro-

tecting consumers against unfair pressure to agree to a con-

tract with an unwanted arbitration provision.” Allied-Bruce,

513 U.S. at 281. However, “[a] state-law principle that takes

its meaning precisely from the fact that a contract to arbitrate

is at issue does not comport with this requirement of § 2.”

Perry, 482 U.S. at 493 n.9. “Nor may a court rely on the

uniqueness of an agreement to arbitrate as a basis for a state-

law holding that enforcement would be unconscionable, for

this would enable the court to effect what * * * the state leg-

islature cannot.” Jbid.

In sum, as this Court has ruled:

What States may not do is decide that a contract is

fair enough to enforce all its basic terms (price,

service, credit), but not fair enough to enforce its

arbitration clause. The Act makes any such state

policy unlawful, for that kind of policy would

place arbitration clauses on an unequal “footing,”

directly contrary to the Act’s language and Con-

gress’ intent.

Allied-Bruce, 513 U.S. at 281.

The Court recently applied these principles to invalidate a

Montana statute requiring that “[n]Jotice that [the] contract is

subject to arbitration” be “typed in underlined capital letters

8

on the first page of the contract.” Doctor’s Associates Inc. v.

Casarotto, 517 U.S. 681, 683 (1996) (quoting Mont. Code

Ann. § 27-5-114(4) (1995)). The Court reiterated that, in the

FAA, “Congress precluded States from singling out arbitra-

tion provisions for suspect status.” Jd. at 682. Montana’s

first-page notice requirement was impermissible under Sec-

tion 2 because the requirement “governs not ‘any contract,’

but specifically and solely contracts ‘subject to arbitration.’”

Ibid. Put another way, “state legislation requiring greater

information or choice in the making of agreements to arbi-

trate than in other contracts is pre-empted” by the FAA. Jd.

at 687 (quoting 2 I. MacNeil, R. Speidel, T. Stipanowich and

G. Shell, FEDERAL ARBITRATION LAW § 19.1.1, at 19:4-19:5

(1995)).

In the decision below, the Montana Supreme Court has

used the cloak of the common law to do precisely what this

Court ruled that the Montana legislature may not do by stat-

ute: it has “condition{ed] the enforceability of arbitration

agreements on compliance with a special notice requirement

not applicable to contracts generally.” Casarotto, 517 U.S. at

687. Notably, the court did not rule that all significant con-

tract provisions must be explained to a person in Kloss’s po-

sition. The court’s decision to invalidate the provision instead

“singl[ed] out arbitration provisions for suspect status” (id. at

682), turning on the fact that, in agreeing to arbitrate, Kloss

“waived at least two constitutional rights” under State law.

Pet. App. 14.2 The concurrence of Justice Nelson — a diatribe

> As many federal courts have held, the fact that an arbitration

agreement constitutes a waiver of the Seventh Amendment right to

a jury trial does not provide a basis upon which to invalidate the

agreement. See, e.g., Dillard v. Merrill, Lynch, Pierce, Fenner &

Smith, Inc., 961 F.2d 1148, 1155 n.12 (Sth Cir. 1992) (“the Sev-

enth Amendment does not preclude ‘waiver’ of the right to jury

trial through the signing of a valid arbitration agreement”).

9

against the use of arbitration clauses in standard form con-

tracts that was joined by ail of the justices in the majority —

makes it even more clear that the decision was motivated by

hostility to arbitration, not by general common law principles

that govern the enforceability of all contracts.’

It is no answer to say that the court would have applied

its rule even-handedly to any contract provision effecting a

waiver of fundamental rights. The FAA permits the states to

invalidate arbitration provisions only by employing princi-

ples that apply to “contracts generally.” Casarotto, 517 U.S.

at 688 (emphasis added). Thus, Montana’s discriminatory

requirement is not immunized from pre-emption simply be-

cause it can be framed in terms that theoretically might en-

compass some contract provision other than an arbitration

clause. Because the decision below undoubtedly “places ar-

bitration agreements in a class apart from ‘any contract,’ and

singularly limits their validity,” the rule approved by the

Montana Supreme Court is “inconsonant with, and is there-

fore pre-empted by, the federal law.” Jd. at 688.

The Montana Supreme Court’s error is a grave one that

threatens to substantially undermine the FAA’s policy favor-

ing arbitration. First, the decision will cast into doubt the

enforceability of the arbitration clauses in an untold number

of existing contracts in Montana. The many trial attorneys

who dislike arbitration clauses will seize upon the decision

* This Court’s decisions do not suggest that standard form agree-

ments signed by consumers are any less entitled to protection un-

der Section 2 than are individually negotiated agreements. See,

e.g., Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995)

(upholding arbitration clause in contract between termite control

company and homeowner). Indeed, the Court observed in Allied-

Bruce that “arbitration’s advantages often would seem helpful to

individuals, say, complaining about a product, who need a less ex-

pensive alternative to litigation.” Jd. at 280.

10

below — which could be used to contest the enforceability of

any arbitration clause, no matter how prominently disclosed,

in virtually any standard-form contract — as a ground for

avoiding arbitration.> Even in the event that some of the

many existing arbitration agreements were explained orally

to those signing them, companies are unlikely to have re-

tained records of those discussions. With the Montana Su-

preme Court having articulated no obvious limits on its hold-

ing, all arbitration provisions governed by Montana law that

were not the subject of specific negotiations by the parties

will be up for grabs.°

Second, companies trying to enter into enforceable arbi-

tration provisions in the future will be forced to assume sub-

stantial new burdens. To satisfy the Montana Supreme

Court’s requirements, they will have to adopt procedures to

orally disclose and explain to each person who signs an arbi-

tration agreement the effect and significance of the provision.

They will have to be careful what they say: the oral state-

ments of the party proposing an arbitration clause have been

* Indeed, trial attorneys are keenly aware that state contract law

provides fertile ground for avoiding enforcement of arbitration

agreements. See, e.g., David G. Wirtes, Suggestions for Defeating

Arbitration, 24 AM. J. TRIAL ADVOC. 111, 138 (Summer 2000)

(describing the “factors [counsel should] look for when attempting

to establish that [an arbitration] agreement would be unconscion-

able if enforced against your client”).

° Much was made below of the fact that the respondent is “a 95-

year old widow.” Pet. App. 18. But there was no finding that Mrs.

Kloss lacked mental acuity, was financially vulnerable, or was par-

ticularly unsophisticated. Nor was it shown that arbitrating her

claim (which surely would have been more expeditious) rather

than litigating it would have been particularly disadvantageous to

her. Certainly, the court’s decision did not turn on any such spe-

cific facts.

1]

cited as grounds for invalidating the agreement. See Mendez

v. Palm Harbor Homes, Inc., 45 P.3d 594, 602 (Wash. App.

2002) (fact that sales representative told the plaintiff that “ar-

bitration would be cheaper and more convenient” contributed

to the finding that an arbitration agreement was unconscion-

able). Moreover, they will have to employ significantly more

onerous and expensive record-keeping practices: with a

signed arbitration agreement now insufficient in Montana to

demonstrate the parties’ agreement to arbitrate, a company

seeking to enforce its arbitration agreements also will have to

keep detailed and verifiable records of the oral conversations

that accompany the signing of these contracts.

This Court having ruled in Casarotto that the Montana

legislature could not require that “[n]Jotice that the contract is

subject to arbitration” be “typed in underlined capital letters

on the first page of the contract” (517 U.S. at 683), it is in-

conceivable that the Montana courts, purporting to apply

their common law, may impose far more extensive notice

requirements. Review by this Court clearly is warranted to

ensure that a new strand of the common law, developed

solely to give expression to some courts’ continued suspicion

of arbitration, does not interfere with the FAA’s principles.

C. The Decision Below Is Part Of A Growing Trend

To Invalidate Arbitration Agreements On State

Common Law Grounds That Apply Only to Such

Provisions

The Montana Supreme Court is not alone in refusing to

enforce an arbitration clause by applying a common law

principle fashioned particularly to express the court’s dis-

comfort with arbitration. As a presenter at the annual meet-

ing of a prominent association of trial lawyers recently noted,

“courts seem to be increasingly willing to refuse to enforce

arbitration agreements on standard contractual grounds.”

Jean S. Sternlight, The Basic Structure of the FAA: Possible

12

Challenges to Arbitration Agreements, 2 ANN. 2000 ATLA

CLE 2211 (2000). These courts, purporting to apply only

“such grounds as exist at law or in equity for the revocation

of any contract” (9 U.S.C. § 2), are fashioning a new body of

law imposing a host of procedural and substantive require-

ments on arbitration. Although the cases often are decided

under principles having familiar names — most often they

purport to apply the doctrine of unconscionability — the deci-

sions depend on considerations that are peculiar to arbitration

agreements and reflect the judges’ views that arbitration dis-

favors the “weaker” party.

For example, many arbitration agreements have been held

to be unconscionable because they fail some ad hoc test of

mutuality. See, e.g., jwen v. U.S. West Direct, 977 P.2d 989

(Mont. 1999) (arbitration clause between yellow pages pub-

lisher and purchaser of advertisement was unconscionable

because it allowed the publisher to sue in court to collect

payments under the contract). In some cases, courts have

found arbitration agreements to be unconscionable on the

ground that they suffer from non-mutuality even when the

agreements are facially neutral. See Mercuro v. Superior

Court, 116 Cal. Rptr. 2d 671, 679 (Cal. Ct. App. 2002) (neu-

tral provision specifying arbitration forum contributed to

finding of unconscionability because the “repeat player ef-

fect” rendered the provision disadvantageous to the “weaker

party”); Szetela v. Discover Bank, 118 Cal. Rptr. 2d 862, 867

(Cal Ct. App. 2002), cert. denied, S.Ct. (2003) (mutual

prohibition on class actions was “manifest(ly] one-sided[]”

and therefore substantively unconscionable “because card

companies typically do not sue their customers in class action

lawsuits”); Luna v. Household Fin. Corp. III, 236 F. Supp.

2d 1166, 1180 (W.D. Wash. 2002) (holding that facially neu-

tral confidentiality provision in arbitration agreement unfairly

disadvantaged consumers and accordingly was unconscion-

able, after noting “[t]he advantages repeat participants pos-

13

sess over ‘one time’ participants in arbitration proceedings”);

ACORN v. Household Int'l, Inc., 211 F. Supp. 2d 1160, 1172

(N.D. Cal. 2002) (same). But other courts have recognized

that the “application of any state law principle establishing a

mutuality requirement for arbitration clauses stricter than that

governing other contract clauses would violate the FAA.”

21. MacNeil, et al., supra, § 17.4.2; see, e.g, Ex Parte

McNaughton, 728 So. 2d 592, 598 (Ala. 1998) (holding that

it was improper to apply the non-mutuality doctrine to an ar-

bitration clause where it rested on the concern that the agree-

ment causes one party to “waiv[e] his right to a remedy by

due process of law * * * and his right to trial by jury”).

Other courts, like the Montana Supreme Court in the de-

cision below, have refused to recognize in the case of arbitra-

tion clauses the forms of offer and acceptance that they have

found sufficient to make enforceable the other terms and

conditions of consumer contracts. See, e.g., Long v. Fidelity

Water Sys., Inc., 2000 WL 989914, *3 (N.D. Cal. May 26,

2000); Badie v. Bank of America, 79 Cal. Rptr. 2d 273, 277-

278 (Cal. Ct. App. 1998); Powertel, Inc. v. Bexley, 743 So.

2d 570, 575 (Fla. Dist. Ct. App. 1999); Mattingly v. Hughes

Elec. Corp., 2002 WL 31444472, *7-*8 (Md. Ct. Spec. App.

Nov. 4, 2002). In Powertel, for example, the Florida court

held that an arbitration clause in a customer’s contract with a

cellular telephone service provider was unenforceable be-

cause, among other things, “Powertel should have given a

more prominent notice of such an important change.” 743

So. 2d at 575. The courts imposing such special notice re-

quirements often insist that they are necessary because the

customer must be alerted that “he or she is waiving an impor-

tant constitutional right.” Badie, 79 Cal. Rptr. 2d at 805. In

contrast, other courts applying this Court’s decisions have

deemed Section 2 of the FAA to be “inconsistent with any

requirement that an arbitration clause be prominent.” Hill v.

Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997)

14

(enforcing arbitration clause after noting that the “[t]erms

inside Gateway’s box stand or fall together”); see also Green

Tree Fin. Corp. v. Vinston, 753 So. 2d 497, 502 (Ala. 1999)

(burden is on customer to read what he or she signs; defen-

dant had no duty “to disclose, or explain, the arbitration

clause to the Vinstons”); EZ Pawn Corp. v. Mancias, 934

S.W.2d 87, 90 (Tex. 1996) (“We presume a party * * * who

has the opportunity to read an arbitration agreement and

Signs it, knows its contents.”).

Under the rubric of unconscionability, moreover, some

courts have refused to enforce arbitration clauses in which

the parties agree to waive punitive damages. See, e.g., State

of West Virginia ex rel. Dunlap v. Berger, 567 S.E.2d 265,

279-280 (W. Va. 2002); Ex Parte Thicklin, 824 So. 2d 723,

733 (Ala. 2002). Other courts have concluded that arbitration

agreements that do not permit the arbitrator to entertain class

actions are unconscionable, and thus unenforceable. See,

e.g., Ting v. AT&T, 2003 WL 292296, at *20 (9th Cir. Feb.

11, 2003); ACORN, 211 F. Supp. 2d at 1172; Mandel v.

Household Bank, 29 Cal. Rptr. 380, 386 (Cal. Ct. App. 2003)

(applying Nevada law); Powertel, 743 So. 2d at 576; Luna,

236 ®. Supp. 2d at 1182-1183; Dunlap, 567 S.E.2d at 279-

280.

Courts applying California law have been particularly

aggressive in imposing both substantive and procedural limi-

tations on arbitration clauses. See Ting, 2003 WL 292296, at

*20-*21 (holding that three aspects of the arbitration agree-

ment between AT&T and its customers were unconscionable

under California law). The California courts justify the im-

’ The Chamber recently filed an amicus brief in support of the

petitioner in Green Tree Financial Corp. v. Bazzle, No. 02-634,

arguing that arbitration agreements that do not permit the arbitrator

to award punitive damages should not be considered unconscion-

able.

15

position of these arbitration-specific rules on the theory that

“the ordinary principles of unconscionability may manifest

themselves in forms peculiar to the arbitration context.” Ar-

mendariz v. Foundation Health Psychcare Servs., Inc., 6

P.3d 669, 693 (Cal. 2000). Yet these decisions appear to be

premised, not on the principles of contract law that are appli-

cable to all contracts, but on the courts’ view that arbitration

is an inferior forum for the vindication of a party’s rights.

In Armendariz, for example, the court invalidated an arbi-

tration agreement for lack of mutuality after observing that

the “perceived advantages of the judicial forum for plaintiffs

include the availability of discovery and the fact that courts

and juries are viewed as more likely to adhere to the law and

less likely than arbitrators to ‘split the difference’ between

the two sides, thereby lowering damages awards for plain-

tiffs.” Jbid. Such general suspicion of arbitration permeates

the decisions of courts applying California law — including

the Ninth Circuit. See, e.g., Three Valleys Mun. Water Dist.

v. E.F. Hutton & Co., 925 F.2d 1136, 1141. (9th Cir. 1991)

(“Before a party to a lawsuit can be ordered to arbitrate and

thus be deprived of a day in court, there should be an ex-

press, unequivocal agreement to that effect.”) (emphasis

added); Szetela, 118 Cal. Rptr. 2d at 868 (agreement requir-

ing individual arbitration of claims “prohibit[s] any effective

means of litigating Discover’s business practices” and grants

Discover a “‘get out of jail free’ card while compromising

important consumer rights”) (emphasis added); Badie, 79

Cal. Rptr. 2d at 801 (“by agreeing to a unilateral change of

terms provision,” customers could not have “intended to give

the Bank the power in the future to terminate [their] existing

right to have disputes resolved in the civil justice system, in-

cluding their constitutionally based right to a jury trial”)

(emphasis added). It is exceedingly hard to credit the view

that these courts are applying “such grounds as exist at law or

in equity for the revocation of any contract.” 9 U.S.C. § 2.

16

* * *

We by no means deny that state contract law has a role to

play in determining whether an arbitration agreement is en-

forceable — just as state law determines whether the parties

are bound by contract terms regarding price, warranties, con-

ditions of sale, and similar matters. However, Congress

plainly did not intend to authorize courts to employ ad hoc

interpretations of state law for purposes of frustrating agree-

ments to arbitrate. Guidance from this Court with respect to

the appropriate role of state common law in determining the

enforceability of arbitration agreements is acutely needed.

CONCLUSION

The petition for writ of certiorari should be granted.

Respectfully submitted.

STEPHEN A. BOKAT EVAN M. TAGER

ROBIN S. CONRAD MIRIAM R. NEMETZ

ELLEN DUNHAM BRYANT Counsel of Record

National Chamber Litigation STEPHANIE MARTZ

Center, Inc. Mayer, Brown, Rowe & Maw

1615 H Street, N.W. 1909 K Street, N.W.

Washington, D.C. 20062 Washington, D.C. 20006

(202) 463-5337 (202) 263-3000

Counsel for Amicus Curiae

FEBRUARY 2003