Opposition Brief — Mission Insurance v. United States

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No. 92-1517

IN THE

Supreme Court of the United States

OcTOBER TERM, 1992

W.™M. SCHLOSSER COMPANY, INC.

Petitioner,

v.

SCHOOL BOARD OF FAIRFAX COUNTY, VIRGINIA

Respondent.

ON PETITION FOR CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

RESPONDENT’S BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

THOMAS J. CAWLEY

(Counsel of Record)

STUART A. RAPHAEL

HUNTON & WILLIAMS

3050 Chain Bridge Road

Fairfax, Virginia 22030

(703) 352-2200

Counsel for Respondent

Fairfax County School Board

April 9, 1993

QUESTION PRESENTED

Whether the Federal Arbitration Act preempts a principle of

Virginia law by which Virginia school boards lack all powers not

conferred by the State, including the power to enter into arbitration

agreements?

TABLE OF CONTENTS

Page

ESTE FE HO vi vtensencsssinssaniinsentinsntanonnlashaeaee i

Te er CI eo vcennnencessnstnicesssinlenetiaccanccemeemans ii

TAREE GE AAT eiccnsecsesesssessastarsniieeninenaeetinanes iii

Pe CT Se Te A erxcinsxsncssiiniciarvnsthaantnaeevel l

CEE FE Te ae vnneecesvenicccssctascatiectnesesnecueeen l

Re eee eR nF 2

CH) CN SE FUE wn eccectnrcninscscssntsinomencmmiavonn 7

DRIPERAARY GP ABILENE cesscisncecssssanssvistinnisnnsvantvctivaienss 8

FPIIIIIEG tna tsltisiunitiinnintanssianarnndninanaeiiammmmnaaaaan 10

I. The Court of Appeals Properly Ruled That School

Boards Lack the Authority to Arbitrate Under

Virginia Law, and This Court Should Not Revisit

That State Law Determination ...........cssessesssosesssessessess 10

II. | The Court of Appeals’ Decision Creates No Split

OE FIR éssisincishscrysamanusciindibinnsiinaienaiaa ens 11

III. The Court of Appeals’ Construction of Virginia Law

is Not Preempted by the Federal Arbitration Acct ......... 13

A. The Fourth Circuit Correctly Applied Existing

GUE sicinicinicsssibiastenbinbennbaliabaeeriada haniensmaaed teeieniae 14

B. Congress Did Not Intend The FAA to Preempt

A State’s Right to Determine How Its Local

Goveming Bodies Resolve Their Legal Disputes ... 17

IV. The Issue Presented in This Case is Unlikely

BN esiisasitesisesdanaiincensoniannsinmipionsnieatacmeadamdeian pete 24

RE EIINEET ssctsnsaianisassidhinceseusbeteubieiearaioierebaammeaaceeeatan 25

- ii -

TABLE OF AUTHORITIES

Page

U.S. CONSTITUTION:

Rietrs MM ME, Wy Oy ED ona sscccesscsssecesveseccococscsnssoeses 9, 18, 21

Rises SoMIOUIE, GOUNOTIN, FE coon. ssnsenssnscccccssvecseccssecsecseceess 9, 17-18, 23

CASES:

Bishop v. Wood, 426 U.S. 341 (1976) vocccccccccececcccececececeeececcee. 11

Boogher v. Stifel, Nicolaus & Co., 825 S.W.2d 27

SM IEE sao chasescdscasasasssssevecevecccenseasenenesesenseeces 12

Butner v. United States, 440 U.S. 48 ee 11

City of Atlanta v. Brinderson Corp., 799 F.2d 1541

I I a antiicilschcsnssuhinarercecssasesecsseanecaseeseseseces, 12

City of Richmond v. Confrere Club, 239 Va. 77,

IE OD ooo nc cunscvvesassecnsssecsszesesensesnceesssescec.,.. 5

Coastal Indus., Inc. v. Automatic Steam Prod. Corp.,

654 F.2d 375 (Sth Cir. Unit B Aug. 28, 1981) .......cccccc0.-0. 15

County Bd. v. Brown, 229 Va. 341, 329 S.E.2d 468

Cia sssancnsaansunasancrsasenesse 6, 16

County of Middlesex v. Gevyn Constr. Corp., 450 F.2d 53

(Ist Cir. 1971), cert. denied, 405 U.S. 944 (1972) ....ccccccccc-.. 12

Daniels v. Williams, 474 U.S. 327 (1986) voccccccccccccoceceeececceee., 11

District of Columbia v. Bailey, 171 U.S. 161 | oO 10

Erie R.R. v. Tompkins, 304 U.S. 64 ( LT 10

Gregory v. Ashcroft, 111 S. Ct. 2395 | 9, 17-18, 23

Hodel v. Virginia Surface Mining & Reclamation Ass’ n,

a csisnacscchinssvncnicananseceseansnsese..... 23

Johnson Controls, Inc. v. City of Cedar Rapids,

PR Wem BPP CMD COE, 19B3) onc ccecccsccccerecesearonesesess.... 11, 12

Lindon City v. Engineers Constr. Co., 636 P.2d 1070

Nt anintaedpsensccensceicicssesed+uananseencosse--..... 12

Local Div. 732, Amalgamated Transit Union v. Metropolitan

Atlanta Rapid Transit Auth., 253 Ga. 219, 320 S.E.2d

NL aided cstnceconesiiiastacinsbasaraceveseceesns.......... 13

a.

Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,

Re Ric 0 SD iiichiinsehiniccidesctighieilaatidnihataiceabehcado ccaniniattiaicsaha 21

New York v. United States, 112 S. Ct. 2408 (1992) .............. 23

Par-Knit Mills, Inc. v. Stockbridge Fabrics Co.,

ee re I varie iai ear chnirsrenrneensrncninen 15

Pembaur v. City of Cincinnati, 475 U.S. 469 (1986) ................ 11

Perry v. Thomas, 482 U.S. 483 (1987) ............. 7-9, 14, 16-17, 25

Prima Paint Corp. v. Flood & Conklin Mfg.

ai re a I IE iisiictatethndicintincinscheevnecereanennces 14, 16, 21

Richard L. Deal & Assocs. v. Commonwealth,

ZA VG. G18, 299 SE.20 FAG CIDES) ncnssnsccreccnseccscssessessnsscesonse 6

Saturn Distrib. Corp. v. Williams, 905 F.2d 719

(4th Cir.), cert. denied, 498 U.S. 983 (1990) ........0...... tn

Southland Corp. v. Keating, 465 U.S. 1 (1984) ........0.... 21, 23-24

Supak & Sons Mfg. v. Pervel Indus., 593 F.2d 135

EP UTTIEE ccicasesuh ccredaauenesebataccestaceupiatienaheuneaksnamnaelsccainslap 14-17

Swift v. Tyson, 41 U.S. (16 Pet.) 1 (1842) oo... eee 10, 21

Volt Info. Sciences, Inc. v. Stanford Univ., 489 U.S.

I IE cisccacievnccesdanecannsneaaiaenteipnnaisioueensisieninaneiininns 14, 23-24

W. M. Schlosser Co. v. School Bd. of Fairfax County,

GOO F 26 253 (4G Car. BGBZ) ncnceserccecccsvveraseisss 1-11, 15-18, 25

Will v. Michigan Dept. of State Police, 491 U.S. 58 (1989)...... 18

STATUTES:

9 U.S.C. $§ 1-16 (IDES & Sepp. 1990) ............0.csnesseccssccssesensese 2

a Be ie I iiencearsasecncaneecctnatasshaiunlentandaixadudinning 6-8, 13-16

Oe eg Oe IIE scciacinckishencseiashonsilssnisipeeensuniusinadiidtnnsnnchceceumovenes 4

* Virginia Public Procurement Act, Va. Code Ann.

§§ 11-35 to -80 (Michie 1989 & Supp. 1992) ........000.... 6, 24-25

Va. Code Ann. § 15.1-S08 (Michie 1989) .00............c cc eeeeeeeeeeeee 6

Va. Code Ann. § 22.1-71 (Michie 1985) ..................cccecceeeeeeeeeees 6

WV «

Page

LEGISLATIVE AUTHORITIES:

BO I iss cisescsnsnsrervceeninevcessiavicescesereconcens 23

SO CI, TURE FG CAG) aici ccscessecsecccecdssecvessessccecsasosessses 20

Arbitration of Interstate Commercial Disputes:

Joint Hearings on S. 1005 and HR. 646 Before the

Subcommittees of the Committees on the Judiciary,

68th Cong., Ist Sess. (1924) o..ccccccccscssceseccscecesseseceseees 19-23

H.R. Rep. No. 96, 68th Cong., Ist Sess. (1924) .o.cccccccccccee. 21-22

S. Rep. No. 536, 68th Cong., Ist Sess. (1924) ooccecceccccccccecececee. 20

MISCELLANEOUS:

Committee on Commerce, Trade and Commercial

Law, The United States Arbitration Law and Its

Application, 11 A.B.A. J. 153 (1924) ...cccccccccccscees 19-20, 22-23

Julius H. Cohen & Kenneth Dayton, The New Federal

Arbitration Law, 12 Va. L. Rev. 265 (1926)......... 19-20, 22-23

Sten MOM E CRIP cacicsovasvsesanosansaseieceescacsaceseeseccsce, 14-15, 17

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No. 92-1517

IN THE

Supreme Court of the United States

OcToser TERM, 1992

W.M. SCHLOssER Company, INc.

Petitioner,

v.

SCHOOL BOARD OF FAIRFAX County, VIRGINIA

Respondent.

RESPONDENT’S BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

The Fairfax County School Board (the “School Board”’) opposes

the Petition for Writ of Certiorari filed by W.M. Schlosser Company,

Inc. (“Schlosser”), for the-reasons set forth below.

STATEMENT OF THE CASE

(1) Nature of the Case

This is an appeal from the Fourth Circuit Court of Appeals’

decision affirming the decision of the District Court declining to

compel the School Board to enter into arbitration of a construction

delay claim asserted by Schlosser. W.M. Schlosser Co. vy. School

Bd. of Fairfax County, 980 F.2d 253 (4th Cir. 1992). The District

Court found that the parties did not intend to arbitrate their dis-

putes, and that the School Board did not have the authority to

arbitrate under Virginia law. The Fourth Circuit affirmed. /d. at

259. Without reaching the question of whether the parties intended

to arbitrate, the Fourth Circuit agreed with the District Court that

school boards in Virginia may exercise only those powers conferred

on them by the State, and that, under Virginia’s strict construction

of this principle, Virginia school boards do not have the authority to

arbitrate. Jd. at 254 n.4, 258. The Court of Appeals rejected

Schlosser’s contention that the Federal Arbitration Act, 9 U.S.C.

§§ 1-16 (1988 & Supp. 1990) (“FAA”), preempted Virginia law on

this subject. The Court reasoned that Virginia law prevents local

goveming bodies from exercising all powers not conferred by the

State, and that it does not single out arbitration, or discriminate

against it. /d. at 258-59. Schlosser does not attempt to appeal

expressly from the Fourth Circuit’s interpretation of Virginia law.

Schlosser contends, however, that this interpretation, endorsed by

both the District Court and the Court of Appeals, is preempted by

the FAA.

(2) Statement of Facts

Schlosser was hired by the School Board in 1988 to perform

certain renovation work at Falls Church High School in Fairfax

County, Virginia. The Contract provided that Schlosser would sub-

stantially complete the renovation project by August 31, 1989, in

time for the beginning of the 1989-1990 school year. Schlosser

failed to complete the project on time, and was wamed in April

1990 that this delay might subject it to liquidated damages under the

Contract.

Several months later, Schlosser contended that it was the School

Board, not Schlosser, that was responsible for Schlosser’s delays,

and Schlosser submitted a claim to the School Board for $1,152,941

in damages that it had supposedly suffered as a result. Schlosser’s

Claim was referred to the Architect, who awarded Schlosser a 7-day

extension of time for completion of the Contract. The Architect,

however, denied Schlosser’s claim for money damages.

Schlosser’s delay damage claim was barred by the “no-damage-

for-delay” provision of the Contract (Petition at 102a, ¢ 7.10.1).

Under that provisior, any construction delays that were attributable

to the School Board or its agents would be credited to Schlosser in

the form of an extension of time for performance, and a correspond-

ing reduetion in any liquidated damages. Schlosser agreed in the

x,

Contract, however, not to seek any money damages against the

School Board resulting from any such delays (id.).

The Contract at issue consisted of a number of documents. The

primary documents were the American Institute of Architects (“AIA”)

Standard Form of Agreement and the AIA standard fprm General

Conditions of the Contract for Construction. In addition, the Con-

tract contained a special set of “Modifications to General Provi-

sions,” which dealt specifically with the high school renovation

project. The AIA standard forms appeared in fine print and occu-

pied 22 single-spaced pages. The Record reflected that no lawyers

for either party were involved in drafting the Modifications to the

standard forms.

The standard AIA General Conditions contained an article call-

ing for “arbitration” of claims and disputes arising under the Con-

tract (Petition at 74a, Art. 7.10). This article required disputes to be

decided by arbitration in accordance with the Construction Industry

Arbitration Rules of the American Arbitration Association. The article

also set forth the mechanism and procedures for demanding arbitra-

tion and provided, among other things, that the contractor would

Carry on its work during the pendency of any arbitration proceed-

ings, unless the parties agreed otherwise.

This entire arbitration article was specifically and completely

deleted by the Modifications, and replaced with the “no-damage-for-

delay” clause mentioned above (Petition at 102a). The Record

established that it was well known in the construction industry in

Virginia that school boards lack any authority to arbitrate. It was

also undisputed that the standard arbitration provision was deleted

from the Contract in accordance with the school system’s long-

standing custom and practice of refusing to enter into ultra vires

arbitration agreements. That practice was based on school officials’

understanding that, under Virginia law, school boards do not have

the authority to enter into arbitration agreements. 980 F.2d at 254

n.2. There was no evidence in the Record that Schlosser was unaware

of this industry custom. -

Although the central arbitration provision was deleted in its

entirety, the draftsmen failed to delete several other references to

arbitration contained in the pre-printed AIA form (Petition at 54a-

55a, Arts. 2.2.10, 2.2.11). Schlosser based its demand for arbitra-

tion upon these unredacted references. This was the first time that

-<.

anyone had ever sought to compel the School Board to arbitrate a

construction dispute.

(3) Course of Proceedings

Although the Architect’s decision denying Schlosser’s claim for

delay damages was mailed to Schlosser on February 12, 1991,

Schlosser’s president, Andrew Schlosser, claimed that he never

received it. On March 27, 1991, Schlosser mailed a demand for

arbitration to the School Board and promptly filed a Petition to

Compel Arbitration the next day in federal court, claiming that the

School Board had not yet responded to Schlosser’s arbitration

demands. This was the first time that Schlosser had ever contended

that disputes under the Contract were arbitrable.

The School Board filed an Opposition to Schlosser’s Petition

and demanded a jury trial of right, pursuant to 9 U.S.C. § 4 (1988),

on the question of whether the parties had intended to arbitrate their

disputes under the Contract.

The case was first heard by Magistrate Leonie M. Brinkema.

The Magistrate found that it was unclear whether the parties had

actually intended to arbitrate, given that the main arbitration provi-

sion had been deleted from the Contract and that the School Board

had intended to eliminate arbitration altogether (Petition at 31a).

The Magistrate also agreed that the School Board lacked the authority

to arbitrate under Virginia law (id. at 32a). Accordingly, the Magis-

trate denied Schlosser’s petition (id. at 27a).

Schlosser attempted to appeal the Magistrate’s decision directly

to the Fourth Circuit, but the Court of Appeals dismissed the appeal

for lack of jurisdiction, and remanded the case to the District Court.

980 F.2d at 254 n.3. After another hearing on the merits, the Dis-

trict Court affirmed the Magistrate’s findings (Petition at 16a, 26a).

The Honorable Claude M. Hilton ruled as follows:

Well, I find that it was the intent of the parties that

the arbitration clause be removed from this con-

tract. It was removed. The primary arbitration clause

was taken out of the contract. It went even further

when they took it out and said they couldn’t even

make a claim for these kind of damages.

i;

It is just clear the intent of the parties was to

take out the arbitration provisions in the contract

even though it may have been mentioned in passing

in another area or two of the contract.

I also find that the School Board doesn’t have

any authority to arbitrate in Virginia.

(Petition at 26a).

Schlosser appealed both findings to the Court of Appeals for

the Fourth Circuit, which affirmed. 980 F.2d at 259. The Court

Stated that it did not need to reach the question of whether the

parties had intended to arbitrate, because it agreed with the

Magistrate’s and the District Court’s conclusion that Virginia school

boards lack the authority to arbitrate under State law. 980 F.2d at

254 n.4.

The Court noted that Virginia strictly applies the “Dillon Rule”

of statutory construction conceming the powers of local governmen-

tal entities:

According to the Dillon Rule, local governing bod-

ies such as counties, municipal corporations, and

school boards “possess and can exercise only those

powers expressly granted by the General Assem-

bly, those necessarily or fairly implied therefrom,

and those that are essential and indispensable.”

980 F.2d at 255 (quoting City of Richmond v. Confrere Club, 239

Va. 77, 79, 387 S.E.2d 471, 473 (1990)). The Court pointed out

that this rule of statutory interpretation is given particularly strict

enforcement by the courts of Virginia, such that “ ‘[i]f there is any

reasonable doubt whether legislative power exits, that doubt must

be resolved against the local governing body.’ ” /d. at 255 (quoting

Confrere Club, 289 Va. at 79-80, 387 S.E.2d at 473) (alteration in

Original). Indeed, the Court cited one recent case from the Supreme

Court of Virginia in which it was held that the power to lease realty

could not be implied from a county’s express power to sell or

a 7

convey realty. /d. (citing County Bd. v. Brown, 229 Va. 341, 347,

329 S.E.2d 468, 472 (1985)).

The Court of Appeals then canvassed various Virginia authori-

ties, and concluded that Virginia law did not permit the power to

arbitrate to be implied from the School Board’s power to contract,

or from its power to sue and be sued. 980 F.2d at 255-58. The

Court undertook an extensive analysis of the Virginia Public Pro-

curement Act, noting that the General Assembly did not provide for

arbitration of disputes involving school boards. /d. at 256. The

Court also observed that the Virginia General Assembly had, in

1987, amended Va. Code Ann. § 15.1-508 (Michie 1989), to pro-

vide expressly that county governments (which are separate entities

from local school boards in Virginia) could agree to arbitrate, “not-

withstanding that county officials had long been authorized to con-

tract by section 15.1-105 of the Virginia Code... .” 980 F.2d at

257. The Court noted that no similar amendment had been made to

the parallel provisions goveming the authority of Virginia school

boards, found at Va. Code Ann. § 22.1-71 (Michie 1985). /d.

Finally, the Fourth Circuit examined Virginia case law, includ-

ing decisions of the Supreme Court of Virginia, as well as published

and unpublished decisions of the Virginia Circuit Courts. /d. at

257-58 & nn. 11-12. The Court observed that its conclusion that

Virginia school boards lacked the power to arbitrate was fully con-

sistent with these authorities. /d.; see, e.g., Richard L. Deal &

Assocs. v. Commonwealth, 224 Va. 618, 622, 299 S.E.2d 346, 348

(1983) (holding that agents of the State lacked the authority to enter

into arbitration agreements absent an express grant of power from

the Virginia General Assembly). Furthermore, the Court noted that

any doubt about the existence of such an implied power was required

under Virginia law to be resolved against the recognition of that

power. 980 F.2d at 258.

Although Schlosser had not argued in the District Court that the

Federal Arbitration Act preempted the application of Dillon’s Rule

in this case, the Court of Appeals rejected that claim as well. /d. at

258-59. The Fourth Circuit reasoned that the arbitration provision,

even if it had become part of the parties’ contract, was ultra vires

and void under the “savings provision” of § 2 of the FAA, which

provides that:

{a] written provision in . . . a contract evidencing a

transaction involving commerce to settle by arbitra-

tion a controversy thereafter arising out of such

contract Or transaction, . . . shall be valid, irrevo-

cable, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of any

contract.

Id. at 258 (quoting 9 U.S.C. § 2 (1988)) (alteration in Original).

Since the School Board lacked the authority to arbitrate, the arbitra-

tion provision was void under § 2.

The Fourth Circuit distinguished this case from situations where

a State singles out arbitration for discriminatory treatment, as in

Saturn Distrib. Corp. v. Williams, 905 F.2d 719, 722 (4th Cir.),

cert. denied, 498 U.S. 983 (1990). The Fourth Circuit noted that, in

Saturn, it had invalidated a provision of a Virginia motor vehicle

licensing statute that specifically prohibited automobile manufactur-

ers and dealers from entering into agreements that included manda-

tory alternative dispute resolution provisions. 980 F.2d at 259. In

this case, by contrast, the Dillon Rule as applied in Virginia did not

single out arbitration agreements for discriminatory treatment, but

denied all powers to school boards that were not conferred by the

State. /d. at 259. The Court of Appeals pointed out that its decision

was fully consistent with this Court’s observation in Perry v. Tho-

mas, 482 U.S. 483 (1987), that, under the FAA, “state law, whether

of legislative or judicial origin, is applicable if that law arose to

gover issues conceming the validity, revocability, and enforceabil-

ity of contracts generally... .” W. M. Schlosser Co., 980 F.2d at

259 (citing Perry v. Thomas, 482 U.S. at 492 n.9) (first emphasis

added).

Accordingly, the Court of Appeals affirmed the District Court’s

decision denying Schlosser’s Petition to Compel Arbitration. 980

F.2d at 259. Schlosser’s petition for a rehearing and Suggestion for

rehearing in banc was denied (Petition at 14a), and this Petition for

Wnit of Certiorari followed.

SUMMARY OF ARGUMENT

Applying State law, the Court of Appeals properly ruled that

school boards in Virginia do not have the authority to enter into

agreements to arbitrate. That conclusion was amply supported by a

variety of Virginia legal authorities. Although Schlosser refers to

these State law rulings in its Petition as “erroneous,” it does not

expressly contest these rulings, no doubt because Schlosser is well

aware of this Court’s “settled practice” of deferring to the Courts of

Appeals on matters of State law interpretation. Accordingly, the

only issue upon which Schlosser has petitioned for review by this

Court is whether the FAA preempts Virginia’s application of the

Dillon Rule, pursuant to which school boards lack all powers not

conferred by the State, including the power to enter into arbitration.

Schlosser cites a number of cases in its Petition in an effort to

show that the Fourth Circuit’s decision created a split in the Cir-

Cuits on the preemption issue presented here. Those cases are inap-

posite, however, because they addressed the question of whether

municipal corporations in other States possessed the implied author-

ity to arbitrate under the law of those other States. None of those

cases is controlling in Virginia. Moreover, Schlosser has not cited

any case that interpreted the preemption issue presented for review

here in a manner differently from the Fourth Circuit.

In any event, the Fourth Circuit properly found that Virginia

law was not preempted by the FAA. Section 2 of the FAA provides

that a written agreement to arbitrate in a contract involving inter-

state commerce is “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 (emphasis added). This Court observed in

footnote 9 of Perry v. Thomas, 482 U.S. 483 (1987), that state law,

whether legislative or judicial, applies to questions conceming con-

tract formation, unless that law singles out or discriminates against

arbitration.

Dillon’s Rule, as applied in Virginia, denies to municipal corpo-

rations and school boards all powers not conferred by the laws of

Virginia, and this rule is very strictly construed. Arbitration is only

one of many powers that school boards are unable to exercise pur-

suant to this rule. Because Dillon’s Rule is, as Schlosser acknowl-

. -

:

edges, a general rule of contract formation that does not single out

arbitration for discriminatory treatment, it is not preempted by the

FAA.

Nonetheless, Schlosser urges this Court to adopt a new rule that

provides that whenever the result of the application of State law is

that arbitration cannot go forward, then that State law is preempted

by the FAA. This sweeping rule would completely eliminate any

need to look to State law because it would create a per se rule

favoring arbitration. Schlosser does not attempt to anchor this pro-

posed rule in any prior decision of this Court, and the Petition for

Certiorani fails even to mention Perry v. Thomas.

Moreover, to the extent that Schlosser interprets the FAA as

prohibiting States from deciding how their political subdivisions

should resolve their legal disputes, Schlosser’s unrestrained inter-

pretation would also run afoul of this Court’s recent Tenth Amend-

ment jurisprudence. Where an interpretation of a federal statute

enactes pursuant to the Commerce Clause would intrude upon areas

traditionally occupied by State law, as in this case, preemption will

not be presumed. Gregory v. Ashcroft, 111 S. Ct. 2395 (1991).

Instead, this Court requires that Congress provide a “plain state-

ment” that this is the intended effect of the statute. The legislative

history of the FAA, however, conclusively shows that Congress had

no intention whatsoever of encroaching upon the rights of the States.

Accordingly, the “plain statement” rule of Gregory is not satisfied

here, and Schlosser’s preemption theories must be rejected.

Finally, this case is factually unique. As the District Court

determined, the draftsmen of the Contract intended to delete the

arbitration provisions in their entirety, but they inadvertently failed

to delete several scattered references to arbitration contained in the

pre-printed form. Because this case arose solely by virtue of an

omission in the drafting process, similar cases are not likely to arise

in the future, and the precedential value of this case would be

limited.

Accordingly, this Court should deny the Petition for Writ of

Certiorari.

ARGUMENT

I. | The Court of Appeals Properly Ruled That School

Boards Lack the Authority to Arbitrate Under

Virginia Law, and This Court Should Not Revisit

That State Law Determination.

The principal issue that Schlosser appealed to the Fourth Cir-

Cuit was whether school boards have the authority to arbitrate under

Virginia law. Now that the Court of Appeals has ruled squarely

against Schlosser on that question, Schlosser couches its Petition to

this Court as a request to review whether the Fourth Circuit’s inter-

pretation of Virginia law is preempted by the FAA. Although this

appeal is ostensibly limited to that issue, however, Schlosser repeat-

edly asserts in its Petition for Certiorari that the Fourth Circuit’s

State law determinations were erroneous.

Schlosser carefully avoids any discussion of the Fourth Circuit’s

exhaustive analysis of Virginia law on this subject, W.M. Schlosser

Co., 980 F.2d at 255-57, and Schlosser’s discussion of the law in

other States falls short of the mark. While it is true, as Schlosser

contends in part I of its Argument, that local governmental bodies in

several other states have been found to have an implied power to

arbitrate (Petition at 9-12), these cases are irrelevant to determining

whether school boards in Virginia have the authority to arbitrate

under Virginia law. Schlosser also relies heavily on the 1897 deci-

sion of this Court in District of Columbia v. Bailey, 171 U.S. 161

(1897), stating that the power to arbitrate may be implied from a

municipality’s power to contract. Yet Bailey applied a general fed-

eral common law of municipal corporations that did not survive

Erie R.R. v. Tompkins.' Like the other cases cited by Schlosser,

Bailey is simply not probative of how Virginia defines the authority

of its own political subdivisions.

' 304 U.S. 64, 78 (1938) (abandoning doctrine of Swift v. Tyson, 41 U.S. (16

Pet.) 1 (1842), and stating that “[t}here is no federal general common law.”).

-10-

Se

Schlosser does not challenge the Fourth Circuit’s interpretation

of Virginia law on this subject, and the reason is obvious. It is this

Court's “settled practice to defer to the Courts of Appeals on ques-

tions of state law.” Daniels v. Williams, 474 U.S. 327, 341-42

(1986) (emphasis added). This Court has repeatedly declined to

revisit the state law determinations made by district courts and

courts of appeals, even in cases where ‘‘an examination of the state

law issue without such guidance might have justified a different

conclusion.” Bishop v. Wood, 426 U.S. 341, 346 (1976); see also

Pembaur v. City of Cincinnati, 475 U.S. 469, 484 n.13 (1986)

(“We generally accord great deference to the interpretation and

application of state law by the courts of appeals.”); Butner v. United

States, 440 U.S. 48, 58 (1979) (“The federal judges who deal regu-

larly with questions of state law in their respective districts and

circuits are in a better position than we to determine how local

courts would dispose of comparable issues.”’). In Bishop, for instance,

this Court deferred to the district court’s and the divided Fourth

Circuit's interpretation of North Carolina law, in the absence of any

authoritative interpretation by any North Carolina state court con-

ceming the ordinance at issue. /d. at 345-46. Unlike in Bishop,

however, there was ample Virginia authority on the State law ques-

tion presented in this case, including at least three directly analo-

gous holdings by the Supreme Court of Virginia. See W.M. Schlosser

Co., 980 F.2d at 257-58 & n.11 (collecting cases).

Accordingly, this Court should decline Schlosser’s invitation to

reexamine the Court of Appeals’ interpretation of State law.

fl. The Court of Appeals’ Decision Creates No Split

of Authorities.

Despite several references in the Petition for Certiorari to sup-

posed splits in the Circuits created by the Fourth Circuit’s decision,

the cases cited by Schlosser simply do not reveal any such division

on the question presented here.

In the principal case relied upon by Schlosser, Johnson Con-

trols, Inc. v. City of Cedar Rapids, 713 F.2d 370 (8th Cir. 1983),

the Court of Appeals found that, under Jowa law, the City of Cedar

, aes

Rapids had the authority to enter into an arbitration agreement and

that, having voluntarily done so, the City could be compelled to

arbitrate under the FAA. /d. at 373, 379. That holding, of course, is

of no moment with respect to whether Virginia school boards have

the authority to arbitrate under Virginia law. The fact that Virginia

law and Iowa law differ on this subject is an unremarkable feature

of a multi-State system. It does not amount to a “split” among the

United States Courts of Appeals on the federal preemption question

presented in this case.

Similarly, Schlosser asserts that City of Atlanta v. Brinderson

Corp., 799 F.2d 1541 (11th Cir. 1986), and County of Middlesex v.

Gevyn Constr. Corp., 450 F.2d 53 (1st Cir. 1971), cert. denied,

405 U.S. 944 (1972), are also at odds with the Fourth Circuit’s

holding. Like the court in Johnson, however, the Eleventh Circuit in

Brinderson merely held that the City of Atlanta had the power

under the law of the State of Georgia to enter into an arbitration

agreement. 799 F.2d at 1543-44. In County of Middlesex, the First

Circuit ruled that Massachusetts counties and cities have the authority

under Massachusetts law to enter into arbitration agreements. 450

F.2d at 55. Neither the Eleventh Circuit nor the First Circuit even

addressed the preemption issue.

The state court cases cited by Schlosser likewise fail to show

any conflict with the Fourth Circuit’s decision conceming federal

preemption. In Lindon City v. Engineers Constr. Co., 636 P.2d

1070, 1073-74 (Utah 1981), the Utah Supreme Court held that

municipalities had the power to arbitrate under the law of Utah. No

FAA issue was presented. Similarly, in Boogher v. Stifel, Nicolaus

& Co., 825 S.W.2d 27 (Mo. Ct. App. 1992), no question was raised

about the authority of a municipality to submit a dispute to arbitra-

tion under the law of Missouri.

In short, therefore, Schlosser attempts to persuade this Court

that there is somehow a split of authorities on the issue of FAA

preemption, when the only cases Schlosser can point to are those

holding that some municipalities in other states have been found to

have the authority to arbitrate under State law. That Virginia school

boards have been held not to have such authority under the law of

Virginia does not contradict these cases, and Virginia is not alone

«32.

among those jurisdictions applying Dillon’s Rule in this fashion.2

Accordingly, there is no “split of authorities” on the question of

whether the FAA preempts a State rule of construction by which

municipalities are held to lack all powers not conferred by the State,

including the power to arbitrate.

Ii. The Court of Appeals’ Construction of Virginia Law

is Not Preempted by the Federal Arbitration Act.

Stripped of its tacit invitation to this Court to review the con-

struction of Virginia law by the courts below, Schlosser’s Petition

raises Only the question of whether the FAA preempts the Fourth

Circuit’s holding that Virginia school boards lack the authority un-

der State law to enter into agreements to arbitrate. As demonstrated

above, Schlosser cites no case that reaches a conclusion on this

subject that is contrary to the Fourth Circuit’s.

In any event, however, the Fourth Circuit Clearly decided this

issue correctly under § 2 of the Federal Arbitration Act. That sec-

tion provides, in pertinent part, as follows:

A written provision in any . . . contract

evidencing a transaction involving commerce to settle

by arbitration a controversy thereafter arising out

of such contract or transaction . . . shall be valid,

irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revoca-

tion of any contract.

* See Local Div. 732, Amalgamated Transit Union v. Metropolitan Atlanta

Rapid Transit Auth., 253 Ga. 219, 223, 320 S.E.2d 742, 746 (1984), applying

the law of Georgia, and deciding the State law and the FAA preemption issues

identically to the Fourth Circuit in this case. /d. at 223, 320 S.E.2d at 746 (“The

arbitration clause here is invalid as an unauthorized arbitration agreement, and

in a more general sense it is also invalid as an unlawful delegation of legislative

authority. Since any contract unlawfully delegating legislative authority is ultra

vires and void, we conclude that this arbitration clause is revocable upon ‘grounds

as exist at law or in equity for the revocation of any contract.’ "’).

sth.

9 U.S.C. § 2 (1988) (emphasis added). As this Court has recog-

nized, Congress’ purpose in 1925 in enacting this “savings clause”

in § 2 “was to make arbitration agreements as enforceable as other

contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin

Mfg. Co.; 388 U.S. 395, 404 n.12 (1967) (emphasis added); Volt

Info. Sciences, Inc. v. Stanford Univ., 489 U.S. 468, 478 (1989).

In Perry v. Thomas, 482 U.S. 483 (1987), this Court addressed

the question of what law must be applied in determining in the first

instance whether arbitration has properly become part of the con-

tract between the parties. The Court observed that “state law, whether

of legislative or judicial origin, is applicable if that law arose to

gover issues conceming the validity, revocability, and enforceabil-

ity of contracts generally.” Jd. at 493 n.9 (first emphasis added).

The Court went on to explain, however, that state law may not

single out arbitration for discriminatory treatment as compared to

its treatment of other kinds of contracts. /d.

A. The Fourth Circuit Correctly Applied Existing

Law.

The Fourth Circuit has had three occasions on which to apply

these principles, and it has done so correctly each time. First, in

Supak & Sons Mfg. v. Pervel Indus., 593 F.2d 135 (4th Cir. 1979),

the Fourth Circuit considered a claim that the FAA preempted

application of § 2-207 of the Uniform Commercial Code. That case

involved the sale of fabric by a New York seller to a North Carolina

buyer. Each verbal request by the buyer was memorialized by the

seller through a standard confirmation form that contained an arbi-

tration clause. 593 F.2d at 136. After a dispute arose, the seller

moved to compel arbitration under this provision. The district court

denied the motion, finding that the arbitration provision had not

become part of the parties’ contract, and the Fourth Circuit affirmed.

Id. at 137. The Court of Appeals reasoned that, whether construed

under the U.C.C. provisions of New York or of North Carolina, an

agreement to arbitrate contained in a seller’s confirmatory memo-

randum constituted a “material alteration” to the buyer’s offer that

did not become part of the parties’ contract under U.C.C. § 2-207.

Id. at 136-37.

The Fourth Circuit specifically rejected the seller’s claim that

this operation of state law was preempted by § 2 of the FAA. /d. at

137. The Court reasoned that § 2-207 expressed a “general rule of

contract formation” that did not apply “only to arbitration clauses,”

but to any term in a confirmatory memorandum that constituted a

“material alteration.” Jd. Accordingly, § 2-207 was not preempted,

even though it prevented arbitration from going forward.?

The Fourth Circuit again confronted the preemption issue in

Saturn Distrib. Corp. v. Williams, 905 F.2d 719, 722 (4th Cir.),

cert. denied, 498 U.S. 983 (1990). The Court in Saturn held that

the FAA did preempt a Virginia statute that specifically prohibited

automobile manufacturers from entering into agreements that included

mandatory dispute resolution provisions. /d. at 726. This statute

was preempted, the Court reasoned, because it “single{d] out arbi-

tration claus and unreasonably burdened the ability to form arbi-

tration agreements.” /d. at 723. The Court distinguished that statute

from the “general rule of contract formation” that it had considered

in Supak & Sons. Id. at 726.

Finally, in its holding below in this case, the Fourth Circuit

determined that the inability of Virginia school boards to exercise

powers not expressly granted to them, including the power to arbi-

trate, was a general rule of contract formation, and that the case,

therefore, was governed by Supak & Sons:

The Dillon Rule . . . does not sing! out and dispro-

portionately burden arbitration provisions. It is a

tule of general applicability that defines and invali-

dates ali ultra vires acts of local governing bodies.

> The Fourth Circuit's holding in Supak & Sons has been followed by other

courts construing the interplay between U.C.C. § 2-207 and § 2 of the FAA.

E.g., Coastal Indus., Inc. v. Automatic Steam Prod. Corp., 654 F.2d 375, 379

(Sth Cir. Unit B Aug. 28, 1981) (‘Whether an arbitration clause is a material

alteration is a determination which is made on a state-by-state basis.”); Par-Knit

Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 53 & n.6 (3d Cir. 1980)

(holding that a jury trial was required to determine if the parties intended to

arbitrate their disputes and, following Supak & Sons, assuming that an arbitra-

tion provision contained in unilateral confirmation was a material term that did

not become part of the parties’ contract under U‘C.C. § 2-207).

5 >

)

Unlike the provision drawn into question in Saturn,

the Rule is not “an idiosyncratic rule specific to

arbitration agreements,” but is instead “merely an

unremarkable part of Virginia’s general laws of con-

tract formation.” [905 F.2d] at 725. As “‘a general

rule of contract formation,” Supak & Sons Mfg.

Co. v. Pervel Indus., Inc. 598 F.2d 135, i37 (4th

Cir. 1979), it constitutes a “ground[] as exist[s} at

law or in equity for the revocation of any contract,”

within the meaning of 9 U.S.C. § 2. As such, it

falls within the exception to section 2’s general rule

of enforceability of arbitration, and therefore is not

. preempted by the FAA.

980 F.2d at 259. Under Virginia’s application of Dillon’s Rule,

arbitration is treated no better and no worse than any other govern-

mental power that has not been conferred by the legislature. Cf.

County Bd. v. Brown, 229 Va. 341, 346-47, 329 S.E.2d 468, 471-

72 (1985) (holding that the power to lease realty could not be

implied from the county’s express power to sell or to convey realty).

The FAA does not require that Virginia alter its rules of statu-

tory construction in order to make unauthorized arbitration con-

tracts more enforceable than other kinds of unauthorized contracts.

“As the ‘savings clause’ in § 2 indicates, the purpose of Congress in

1925 was to make arbitration agreements as enforceable as other

contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin

Mfg. Co., 388 U.S. 395, 404 n.12 (1967) (emphasis added).

The Supak-Saturn-Schlosser trilogy of Fourth Circuit cases

clearly reflects the correct application of this Court’s choice-of-law

rules as articulated in footnote 9 of Perry v. Thomas, 482 U.S. at

493 n.9 (“[S]tate law, whether of legislative or judicial origin, is

applicable if that law arose to govern issues conceming the validity,

revocability, and enforceability of contracts generally.”). By con-

trast, Schlosser advocates a rule that looks only at the “result” of

the application of State law (Petition at 13) (“While the Dillon

Rule, by itself, is not subject to preemption, the result flowing from

the court’s misapplication of the Dillon Rule in this case is subject

“2

to preemption.”).* Schlosser’s argument essentially boils down to

this: (a) any State law hostile to arbitration is preempted; (b) if

applying State law results in a denial of arbitration, then that State

law must be hostile to arbitration; (c) therefore, all State laws

resulting in a denial of arbitration are preempted. This approach,

héwever, would eliminate the need to resort to State law in the first

place, since any State law “resulting” in the denial of arbitration

would be necessarily overridden. This Court has never promoted

such a tortured syllogism, much less the per se rule compelling

arbitration that Schlosser advocates. Not surprisingly, Schlosser does

not attempt to ground such a rule in the decisions of this Court, and

the Petition for Certiorari does not even mention this Court’s deci-

sion in Perry v. Thomas.

B. Congress Did Not Intend The FAA to Preeinpt A

State’s Right to Determine How Its Local Govern-

ing Bodies Resolve Their Legal Disputes.

It is axiomatic that a State’s determination of the powers that

may be exercised by the various organs of its loca’ sovernmment

represents a quintessential feature of a State’s sovereignty. Indeed,

a function of this sort “‘goes beyond an area traditionally regulated

by the States; it is a decision of the most fundamental sort fora

sovereign entity.” Gregory v. Ashcroft, 111 S. Ct. 2395, 2400

(1991) (emphasis added). To the extent that Schlosser claims that

the preemptive sweep of the FAA is so broad that it forbids States

from directing their political subdivisions not <o consent to arbitration,

whether by affirmatively prohibiting arbitration, or by declining to

grant the authority to arbitrate, Schlosser’s interpretation would run

afoul of this Court’s recent Tenth Amendment jurisprudence.°

* Thus, Schlosser is forced to concede that Dillon’s Rule is a “general rule of

contract formation,” just like U.C.C. § 2-207 considered in Supak & Sons. 593

F.2d at 137.

* Judge Niemeyer made precisely this observation at oral argument in the Fourth

Circuit, when he stated that if the FAA were interpreted as forbidding States

from expressly withholding from municipalities the power to arbitrate, this could

Continued on next page

S. 2

)

In Gregory, for example, this Court held that the Age Discrimi-

nation in Employment Act, 29 U.S.C. §§ 621-634, did not preempt

a provision of the Missouri Constitution that imposed a mandatory

retirement age on Missouri judges. In so holding, this Court made

clear that when Congress enacts a statute pursuant to its powers

under the Commerce Clause, the exercise of that power is con-

strained by the Tenth Amendment, and the Court will not lightly

conclude that Congress intended to “upset the usual constitutional

balance of federal and state powers.” 111 S. Ct. at 2401. The Court

applied the following familiar standard:

“Congress should make its intention ‘clear and mani-

fest’ if it intends to pre-empt the historic powers of

the States. ... ‘In traditionally sensitive areas,

such as legislation affecting the federal balance, the

requirement of clear statement assures that the leg-

islature has in fact faced, and intended to bring into

issue, the critical matters involved in the judicial

decision.” ”

Id. at 2401 (quoting Will v. Michigan Dept. of State Police, 491

U.S. 58, 65 (1989) (citations omitted)). The ADEA failed this “‘plain

Statement rule,” the Court held, because it was ambiguous with

respect to whether Congress intended for appointed state judges to

be included within the scope of the ADEA’s coverage, even though

the Act otherwise extended to the States and their political subdivi-

sions. 111 S. Ct. at 2406.

Applying Gregory to the facts of this case requires exactly the

same conclusion, particularly since the legislative history of the

FAA makes clear that Congress had no intention whatsoever of

encroaching upon the States’ authority to control how their locali-

ties resolve their legal disputes. The legislative history is silent with

respect to the FAA’s intended effect on contracts to which a State

continued from previous page

unconstitutionally encroach upon the rights of the States to direct the manner in

which their local governing bodies resolve their legal disputes. In finding that

the FAA did not preempt Virginia's application of Dillon's Rule, however, the

Court of Appeals did not have to reach this issue.

« 9

or local government was a party. It was clear, however, that the

FAA was not viewed as creating a source of authority to arbitrate,

but only a mechanism for the enforcement of arbitration agree-

ments. In fact, Congress did not believe that the FAA even affected

substantive rights or that it would encroach upon the rights of the

States in any way.

The initial draftsman of the FAA was Julius H. Cohen, a mem-

ber of the American Bar Association Committee responsible for

preparing the FAA, and General Counsel to the New York City

Chamber of Commerce.® In Joint Hearings before Congress, Mr.

Cohen explained that the FAA was needed, not as source of author-

ity to arbitrate as a matter of substantive law, but because the

antiquated common law as applied by the federal courts declined to

grant specific performance of private arbitration agreements.

Neither is it true that such a statute, when it declares

arbitration agreements tc be valid, declares their

existence as a matter of substantive law. The courts

have always recognized that such agreements have

existed but have refused to enforce them. It was

often said loosely that arbitration agreements were

void, even under the common law rule. This state-

ment was not accurate. While the courts refused to

enforce arbitration agreements specifically, they rec-

ognized their existence because they gave another

remedy. From the earliest times it was held that for

a breach of arbitration agreement the aggrieved party

was entitled to damages.

* Arbitration of Interstate Commercial Disputes: Joint Hearings on S. 1005 and

H.R. 646 Before the Subcommittees of the Commitiees on the Judiciary, 68th

Cong., Ist Sess. 13, 15 (1924) [hereinafter Joint Hearings}. Following the FAA's

enactment, Mr. Cohen also co-authored two of the commentaries illustrative of

the contemporary understanding of the scope of the new law. See Committee on

Commerce, Trade and Commercial Law, The United States Arbitration Law and

Its Application, 11 A.B.A. J. 153, 156 (1924); Julius H. Cohen & Kenneth

Dayton, The New Federa! Arbitration Law, 12 Va. L. Rev. 265 (1926).

-19-

In no proper sense, therefore, was the arbitra-

tion agreement void. It was valid in the same sense

that most contracts are valid, i.e., while specific

performance would not be given, a remedy for a

breach existed in the right to recover damages.

Joint Hearings, supra note 6, at 38 (citations omitted).”? The Senate

Report on the Bill echoed this theme,® as did the floor debates.°

Indeed, the sponsors of the Bill complained that federal courts

sitting in states like New York and New Jersey — which had made

arbitration agreements enforceable as a matter of State law — were

declining to enforce arbitration agreements because they believed

7 See also Cohen & Dayton, supra note 6, at 276-77 (same); Committee on

Commerce, Trade and Commercial Law, supra note 6, at 155 (same).

* The Senate Report stated:

It is not contended that agreements to arbitrate have no validity what-

ever. A party may be liable in an action for damages for the breach of

an execulory agreement to arbitrate; or, if the agreement has been

executed according to its terms and an award made, the appropriate

action may be brought at law or in equity to enforce the award. Both

maritime contracts or transactions and contracts involving interstate

commerce are at least valid to this extent.

But it is very old law that the performance of a written agreement to

arbitrate would not be enforced in equity, and that if an action at law

were brought on the contract containing the agreement to arbitrate,

such agreement could not be pleaded in bar of the action; nor would

such an agreement be ground for a stay of proceedings until arbitration

was had. Further, the agreement was subject to revocation by either of

the parties at any time before the award. With this as the state of the

law, such agreements were in large part ineffectual, and the party

aggrieved by the refusal of the other party to carry out the arbitration

agreement was without adequate remedy.

S. Rep. No. 536, 68th Cong., Ist Sess. 2 (1924).

* 66 Cong. Rec. 984 (1924) (statement of Sen. Walsh) (“In short, the bill

provides for the abolition of the rule that agreements for arbitration will not be

specifically enforced.”).

. -

the issue to be controlled by the law of federal procedure.'° Although

recent decisions by this Court have since grounded the FAA in

Congress’ powers to regulate interstate commerce,'! this was not

'° Southland Corp. v. Keating, 465 U.S. 1, 34 (1984) (O’Connor, J., dissenting)

(“[T}he FAA was passed specifically to rectify forum-shopping problems created

by this Court's decision in Swift v. Tyson, 16 Pet 1, 10 L. Ed. 865 (1842). By

1925 several major commercial States had passed state arbitration laws, but the

federal courts refused to enforce those laws in diversity cases.”); Joint Hearings,

supra note 6, at 16 (noting that federal courts sitting in New York and New

Jersey would not apply state law favoring arbitration in federal proceedings); id.

at 39-40 (“the question of the enforcement of [arbitration agreements] relates to

the law of remedies and not to substantive law .... Every one of the States in

the Union might declare such agreement to be valid and enforcable [sic], and

still in the Federal courts it would remain void and unenforceable . . . .”); H.R.

Rep. No. 96, 68th Cong., Ist Sess. 1 (1924) [hereinafter House Report] (“Whether

an agreement for arbitration shall be enforced or not is a question of procedure

to be determined by the law court in which the proceeding is brought and not

one of substantive law to be determined by the law of the forum in which the

contract is made. Before such contracts could be enforced in the Federal courts,

therefore, this law is essential.”).

'' The genesis of the notion that Congress exercised its powers under the Com-

merce Clause in enacting the FAA appeared in this Court's decisions for the first

time in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 405

(1967). Subsequently, in Moses H. Cone Memorial Hosp. v. Mercury Constr

Corp., this concept matured into the observation in dictum, without citation to

the legislative history, that the Act created “a body of federal substantive law of

arbitrability, applicable to any arbitration agreement within the coverage of the

Act.” 460 U.S. 1, 24 (1983) (citing Prima Paint, 388 U.S. at 395) (emphasis

added). This oft-cited quotation from Moses H. Cone blossomed into this Court's

holding in Southland Corp. v. Keating, 465 U.S. 1, 11-12 (1984), where Chie!

Justice Burger, writing for the Majority, ruled that the FAA created fed

substantive law that was enforceable in state courts, but that it did nor create any

independent federal question jurisdiction for federal courts. /d at 15n.9 But see

id. at 24-25 (O'Connor, J., dissenting) (stating that the conclusion that the FAA

creates “federal substantive rights” “is unquestionably wrong as a matter of

statutory construction. . . . One rarely finds a legislative history as unambiguous

as the FAA's. That history establishes conclusively that the 1925 Congress

viewed the FAA as a procedural statute, applicable only in federal courts, derived,

Congress believed, largely from the federal power to control the jurisdiction of

federal courts.”’).

<M.

the contemporary understanding at the time of the statute’s

enactment. '?

But regardless of whether the FAA was enacted pursuant to

Congress’ powers under the Commerce Clause, or under its Article

III powers to establish and control the federal courts, it is clear that

the FAA’s drafters were concemed with Creating a mechanism for

the enforcement of private arbitration agreements,'? and not with

creating a source of authority to agree to arbitrate in the first

instance.'* As a result, the Act was not seen as affecting the author-

ity of the States in any way. Thus, Congress was assured that:

So far as the present law declares simply the

policy of recognizing and enforcing arbitration agree-

ments in the Federal courts it does not encroach

upon the province of the individual States.

** *

There is no disposition therefore by means of

the Federal bludgeon to force an individual State

into an unwilling submission to arbitration enforce-

ment. The statute cannot have that effect.

Joint Hearings, supra note 6, at 38, 40 (emphasis added); see also

id. at 37 (“It is no infringement on the right of each State to decide

? Joint Hearings, supra note 6, at 37 (“It has been Suggested that the proposed

law depends for its validity upon the exercise of the interstate-commerce and

admiralty powers of Congress. This is not the fact. The statute as drawn estab-

lishes a procedure in Federal courts for the enforcement of arbitration agree-

ments. It rests upon the constitutional provision by which Congress is authorized

to establish and control inferior Federal courts.”); see also Cohen & Dayton,

supra note 6, at 275 (same); Committee on Commerce, Trade and Commercial

Law, supra note 6, at 155 (same).

'? House Report, supra note 10, at 1.

* See, e.g., Cohen & Dayton, supra note 6, at 276 (“Neither is it true that such a

statute, declaring arbitration agreements to be valid, is the source of their exist-

ence as a matter of substwitive law.”’).

2

|

for itself what contracts shall or shall not exist under its laws.”).

Indeed, the Act’s sponsor in the House, Representative Graham,

Stated in the floor debates that the Act “grants no new rights, except

a remedy to enforce an agreement in commercial contracts and in

admiralty contracts.” 64 Cong. Rec. 1931 (1924) (emphasis added).

Contemporary articles following passage of the Act also observed

that it was not intended to encroach in any way upon the authority

of the States.'5

It would be a mockery of these repeated assurances to suggest

that Congress somehow intended the FAA to upset the balance

between state and federal goverment by dictating the way in which

the States and their political subdivisions must resolve their legal

disputes. Such a suggestion would also fly in the face of this Court’s

recent Tenth Amendment jurisprudence. E.g., New York v. United

States, 112 S. Ct. 2408, 2420 (1992) (“Congress may not simply

‘commandee[r] the legislative processes of the States by directly

compelling them to enact and enforce a federal regulatory program.’ ”’)

(quoting Hodel v. Virginia Surface Mining & Reclamation Ass'n,

452 U.S. 264, 288 (1981)). Indeed, “the Constitution has never

been understood to confer upon Congress the ability to require the

States to govern according to Congress’ instructions.” New York,

112 S. Ct. at 2421.

No field is more traditionally occupied by State law than the

law conceming the scope of authority that may be exercised by a

State’s political subdivisions. Under Schlosser’s view of the FAA,

however, States could no longer determine the manner in which

their political subdivisions resolve their legal disputes, because States

could not withhold the power to arbitrate. Not Surprisingly, there is

nothing in the text or the legislative history of the FAA to support

that result. The “plain statement rule” articulated in Gregory is not

Satisfied here, and Schlosser’s expansive construction of the FAA

must be rejected. Accord Volt Info. Sciences, Inc. v. Stanford Univ.,

489 U.S. 468, 499 (1989) (“The FAA contains no express pre-

emptive provision, nor does it reflect a congressional intent to occupy

the entire field of arbitration.”); Southland Corp. v. Keating, 465

'* Cohen & Dayton, supra note 6, at 276, 277: Committee on Commerce, Trade

and Commercial Law, supra note 6, at 155.

a.

U.S. 1, 18 (1984) (“The exercise of state authority in a field tradi-

tionally occupied by state law will not be deemed preempted by a

federal statute unless that was the clear and manifest purpose of

Congress.””) (Stevens, J., concurring in part, dissenting in part).

IV. The Issue Presented in This Case is Unlikely to Recur.

It is a rare occurrence when municipalities that do not believe

themselves to have the power to arbitrate, and that do not intend to

enter into arbitration agreements, nonetheless find themselves sub-

jected to motions to compel arbitration. That anomalous situation

arose in this case only by virtue of a drafting oversight. While

deleting the central arbitration provision and replacing it with a

provision that barred the contractor from seeking any damages for

construction delays, the drafters of the Contract in this case,

unassisted by counsel, inadvertently failed to delete several other

references to arbitration contained in the standard, pre-printed AIA

form. Although Schlosser later seized on these unredacted refer-

ences to support its arbitration demands, Schlosser did not dispute

that it was well known in the construction industry that the School

Board could not arbitrate. As the District Court concluded, “the

intent of the parties was to take out the arbitration provisions in the

contract even though it may have been mentioned in passing in

another area or two of the contract.” (Petition at 26a).'* Since this

case would not have arisen but for this unintended drafting omis-

sion, its precedential value is quite limited, and it provides an ill-

equipped vehicle with which to revisit the law Surrounding the FAA.

'© The Contract at issue here also provided that Virginia law would apply,

(Petition at 71a, 4 7.1.1); and that, if any conflict arose between the provisions of

the Contract and the Virginia Public Procurement Act, the Virginia Public Pro-

curement Act would control (Petition at 102a-103a, q 7.11.1). The first choice-

of-law provision was identical to that applied by this Court in Volt Info. Sci-

ences, Inc. v. Stanford Univ., 489 U.S. 468, 470 (1989) (holding that the FAA

did not preempt a California statute permitting a court to stay arbitration pro-

ceedings pending litigation of related claims, where the parties had agreed that

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CONCLUSION

The Court of Appeals’ decision properly applied the principles

enunciated by this Court in footnote 9 of Perry v. Thomas, and did

not create any split in the Circuits. Accordingly, review by this

Court is not warranted, and the Petition for Writ of Certiorari should

be denied.

Respectfully submitted,

FAIRFAX COUNTY SCHOOL BOARD

By:_/s/ Thomas J, Cawley

Counsel

Thomas J. Cawley

(Counsel of Record)

Stuart A. Raphael

HUNTON & WILLIAMS

3050 Chain Bridge Road

Fairfax, Virginia 22030

(703) 352-2200

Counsel for Respondent

Fairfax County School Board

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California law would apply). The second provision also reflected that the parties

never intended to arbitrate their disputes, because the Virginia Public Procure-

ment Act, Va. Code Ann. §§ 11-35 to -80 (Michie 1989 & Supp. 1992), which

sets forth procedures for resolving contract disputes between public entities and

private contractors, does not provide for arbitration. See W.M. Schlosser Co..

980 F.2d at 256 (“Indeed, the Act would appear to prohibit, by negative infer-

ence, decision by an arbitrator. . . .”).

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