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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386015_1066%3A3

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2003
- **Citation:** 538 U.S. 956

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386015_1066%3A3. Public record. Not legal advice.