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

P iinet

Supreme Caurt, U.S.

| FILED

No. 02-1112 ~~ MAR 11. 2093

OFFIGE OF THE CLARK

In The

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 Writ Of Certiorari

To The Supreme Court Of Montana

&

Vv

REPLY BRIEF FOR PETITIONERS

.

LISA A. NIELSEN*

SANDRA B. GALLINI

GREENSFELDER, HEMKER &

GALE, P.C.

10 South Broadway,

Suite 2000

St. Louis, Missouri 63102

(314) 241-9090

*Counsel of Record

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

OR CALL COLLECT (402) 342-2831

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TABLE OF CONTENTS

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REPLY BRIEF FOR PETITIONERS ........................ 1

I. THIS CASE CONCERNS THE PREEMPTIVE

SCOPE OF THE FEDERAL ARBITRATION

II. THIS COURT'S DECISION IN GREEN TREE

FINANCIAL CORP. v. BAZZLE WILL LIKELY

INVOLVE ISSUES PERTINENT TO THE

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TABLE OF AUTHORITIES

Page

CASES

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

BGG (LBB) oainccnssscsccvescciccbienaioensansdadiegaicnaamnsiabipanaes 2

Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681

( TI ov icscensctin'snssrsbssicenesctinuncuiesinunhdineeaceiaaaamaniiaas aainaadasiae 2,4

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

(cert. granted January 10, 2003) ..........sscccesseesseeeees 5, 6

Moses H. Cone Mem’ Hosp. v. Mercury Constr.

Corp. , 460: U2. FI issistinsinicssetietntaiiincspnsa 2

Perry v. Thomas, 482 U.S. 483 (1987) .............sssssssesseeeeesees 2

Southland Corp. v. Keating, 465 U.S. 1 (1984) .........:e0 2

Ting v. AT&T, No. 02-15416, 2003 US App. LEXIS

2806 (Olia Cie, Fh. TE, Be ovis cosinccccsicnnncssnaabsemveccns 5

STATUTES

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CONSTITUTIONAL PROVISIONS

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1

REPLY BRIEF FOR PETITIONERS

The United States Supreme Court has previously

stricken statutory limitations on enforcement of arbitra-

tion agreements. This case presents the appropriate

vehicle for the Court to determine whether the Federal

Arbitration Act (“FAA”), 9 U.S.C. § 1 et seg., also prohibits

courts from applying common law principles in a manner

that allows them to accomplish that which the state

legislature cannot. The Montana Supreme Court has

enunciated a state policy conditioning enforcement of

arbitration agreements contained in adhesion contracts on

the oral explanation of the arbitration provision. The

Montana Supreme Court refused to enforce the parties’

agreement because the agreement at issue was an arbitra-

tion agreement which necessarily waived certain state

constitutional rights. In fact, Respondent concedes as

much on page six of her Opposition when she notes that

the question resolved by the court below was “whether

Respondent reasonably expected that Petitioners’ standard

form contract contained waivers of her constitutional and

procedural rights.” The FAA, however, prohibits states

from creating such obstacles to the enforcement of arbitra-

tion agreements, whether cloaked in terms of the common

law or enumerated in a statute.

I. THIS CASE CONCERNS THE PREEMPTIVE

SCOPE OF THE FEDERAL ARBITRATION ACT.

Despite the misplaced focus of Respondent’s Opposi-

tion, this case is not about the correctness of the Montana

Supreme Court’s interpretation of its law on adhesion

contracts and fiduciary duty. The Montana Supreme Court

has the power to establish its common law. Under the

Supremacy Clause, however, a state court may not interpret

2

its law in a manner that conflicts with federal law. U.S.

Const. art. VI, § 2, cl. 2. This Court has long recognized

that through the FAA, Congress declared “a liberal federal

policy favoring arbitration agreements, notwithstanding

any state substantive or procedural policies to the con-

trary.” Moses H. Cone Mem’l Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 24 (1983). The issue in this case is

whether a conflict exists between this federal policy

embodied in Section 2 of the FAA, 9 U.S.C. § 2, and the

decision below.

This Court has held that the FAA preempts state

statutes that limit enforceability of arbitration agreements

on grounds not applicable to contracts generally. See e.g.,

Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)

(striking down a Montana statute requiring specific

written notice of arbitration clause on first page of con-

tract); see also, Allied-Bruce Terminix Co., Inc. v. Dobson,

513 U.S. 265, 282 (1995); Perry v. Thomas, 482 U.S. 483,

490-91 (1987); Southland Corp. v. Keating, 465 U.S. 1, 16

(1984). As state statutes no longer provide a basis for

invalidating arbitration clauses, courts have now turned to

the common law to maintain their hostile treatment of

arbitration agreements. However, this Court has warned

that courts may not “construe [arbitration] agreement(s]

in a manner different from that in which it otherwise

construes nonarbitration agreements.” Perry, 482 U.S. at

492 n.9; accord Doctor’s Assoc., 517 U.S. at 687; Allied-

Bruce Terminix, 513 U.S. at 282. Courts may not “rely on

the uniqueness of an agreement to arbitrate as a basis for

a state-law holding that enforcement would be uncon-

scionable, for this would enable the court to effect what...

the state legislature cannot.” Perry, 482 U.S. at 492 n.9.

ee ee

3

Despite these warnings, the Montana Supreme Court

created an oral notice requirement for the enforcement of

arbitration agreements because these agreements neces-

sarily encompass a waiver of the state constitutional

rights of access to courts and trial by jury. Respondent

claims that the Montana Supreme Court did not rely on

the unique qualities of arbitration agreements in its

analysis, repeatedly noting that the Court was only

analyzing the reasonableness of Kloss’ waiver of her

constitutional and procedural rights. (Rep’t Opp’n Br. at 2,

6-7, 14.) This is a distinction without a difference. By its

very nature, an agreement to arbitrate requires the

parties to forego these same constitutional and procedural

rights in favor of an alternative forum.

There is no doubt that the Montana Supreme Court

fashioned its analysis of the parties’ arbitration agreement

based on the fact that an arbitration agreement was at

issue. The Montana Supreme Court determined that oral

explanation of the arbitration provision was necessary

because the provision effectuated a waiver of Kloss’ “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.” (Pet. App. at

App.14.) The Court relied on the fact that Husted “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 IT, Section

26 of the Montana Constitution) to Kloss” and concluded

that absent an oral explanation, the clause could not be

within Kloss’ reasonable expectations. (Pet. App. at

App.14.)

4

The oral notice requirement imposed by the decision

below resurrects the same state policy embraced by the

Montana statute at issue in Doctor’s Associates, 517 U.S.

at 685. In enacting that statute, the Montana Legislature

determined that because arbitration agreements would

preclude parties from resolving their disputes in Montana

courts, all contracts containing arbitration provisions had

to include a notice typed in underlined capital letters on

the first page of the contract so that such agreements

would be entered into knowingly. Jd. In this case, by

utilizing its common law, the Montana Supreme Court

determined that because the arbitration provision in-

cluded a waiver of access to Montana courts and their

procedures, Petitioners must orally explain the arbitration

provision before the court will enforce it. (Pet. App. at

App.14, App.18.)

The only real difference between the policy put in

place by the Legislature and that of the Montana Supreme

Court is that the oral notice requirement imposed by the

Court is even more arduous. This Court struck down the

Montana statute because it applied only to contracts

containing arbitration agreements and not to any contract.

Doctor’s Assoc., 517 U.S. at 687. This Court should like-

wise strike the decision below because its analysis singles

out arbitration agreements solely due to the parties’

waiver of state constitutional rights of access to the courts

and trial by jury. If allowed to stand, this decision will set

precedent for the imposition of stricter enforcement

standards on arbitration agreements by packaging them

in the context of common law contract defenses such as

unconscionability. Clearly, such practice will eviscerate the

effectiveness of the prohibition of statutorily imposed

requirements. Such policy is contrary to Congress’ intent

5

of equal enforcement of arbitration agreements and contracts

generally.

ii. THIS COURT’S DECISION IN GREEN TREE

FINANCIAL CORP. v. BAZZLE WILL LIKELY

INVOLVE ISSUES PERTINENT TO THE DECI-

SION BELOW.

This Court’s decision in Green Tree Financial Corp. v.

Bazzle, No. 02-634 (cert. granted January 10, 2003), will

likely resolve issues directly impacting the decision below.

Therefore, if the Court is not inclined to grant the petition,

it should at least hold the petition until resolution of

Bazzle. Respondent argues that Bazzle presents a different

issue because it involves class actions in arbitration while

this case does not. (Resp’t Opp’n Br. at 14-15.) Respondent

uses a superficial classification for Bazzle in an attempt to

avoid the true issues presented in that case. Under this

superficial reasoning, however, Respondent’s reliance on

Ting v. AT&T, No. 02-15416, 2003 US App. LEXIS 2395

(9th Cir. Feb. 11, 2003), is also misplaced because Ting

involves class action issues.

The connection between Bazzle and the decision below

comes not from the style of the case but from the funda-

mental basis for the holdings in each case. In each case,

the court demonstrated its unwillingness to enforce the

parties’ arbitration agreements as written and instead

substituted its own notions of fairness. In Bazzle, the

South Carolina Supreme Court altered the parties’ arbi-

tration agreement and required class arbitration because

otherwise the parties would have waived the right to

utilize class mechanisms available in court. In this case,

the Montana Supreme Court refused to enforce the arbi-

tration agreement altogether because it determined that

6

Respondent had not knowingly waived the right to resolve

her dispute in court with all of its procedural protections.

The fact that parties waive the right to certain procedures

available in court in arbitration agreements provides the

underlying basis for the holdings in both Bazzle and the

decision below. Thus, this Court will likely decide issues

determinative of the decision below in its decision in

Bazzle.

CONCLUSION

The petition for writ of certiorari should be granted.

Respectfully submitted,

Lisa A. NIELSEN*

SANDRA B. GALLINI

GREENSFELDER, HEMKER &

GALE, P.C.

10 South Broadway, Suite 2000

St. Louis, Missouri 63102

(314) 241-9090

Dated: March 10, 2003 *Counsel of Record