No. 93-488
IN THE SUPREME COURT OF THE STATE OF MONTANA
PAUL CASAROTTO and PAMELA CASAROTTO,
Plaintiffs and Appellants,
NICK LOMBARD1 and DOCTOR'S ASSOCIATES, INC.,
Defendants and Respondents,
and
DANIEL L. and DEB HUDSON, and D&D SUBWAY CORPORATION,
Defendants.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable John M. McCarvel, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Grant D. Parker (argued) and Philip.D. Tawney,
Mullendore, Tawney & Watt, Missoula, Montana
For Respondents:
Alan G. Schwartz (argued) and Ian E. Bjorkman,
Wiggin & Dana, New Haven, Connecticut
L. D. Nybo, Conklin, Nybo, LeVeque
& Murphy, Great Falls, Montana
For Amici Curiae:
Lawrence A. Anderson, Attorney at Law, Great Falls,
Montana (Montana Trial Lawyers Assxn)
Michael A. Bowen and Michael G. McCarty,
Foley & Lardner, Milwaukee, Wisconsin
(International Franchise Assxn; Securities
Industry Ass'n; Snap-On Tools Corp.)
CEC B 5 1994 Submitted: April 19, 1994
Decided: December 1 5 , 1 9 9 4
Filed:
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Justice Terry N. Trieweiler delivered the opinion of the Court.
Plaintiffs Paul and Pamela Casarotto filed this suit in the
District Court for the Eighth Judicial District in Cascade County
to recover damages which they claim were caused by the defendants'
breach of contract and tortious conduct. Defendants Nick Lombardi
and Doctor's Associates, Inc. (DAI), moved the District Court for
an order dismissing plaintiffs' complaint, or in the alternative,
staying further judicial proceedings pending arbitration of
plaintiffs' claims pursuant to a provision in DAI's franchise
agreement with plaintiffs which requiredthat disputes "arising out
of or relating to" that contract be settled by arbitration. The
District Court granted defendants' motion, and ordered that further
judicial proceedings be stayed until arbitration proceedings were
completed in accordance with the terms of the parties' agreement.
Plaintiffs appeal from that order. We reverse the order of the
District Court.
The i'ssues raised on appeal are:
1. Based on conflict of law principles, is the franchise
agreement entered into between the Casarottos and DAI governed by
Connecticut law or Montana law?
2. If the contract is governed by Montana law, is the notice
requirement in 5 27-5-114 (4), MCA, of Montana's Uniform Arbitration
Act, preempted by the Federal Arbitration Act found at 9 U.S.C.
5 5 1-15 (1988)?
FACTUAL BACKGROUND
On October 29, 1992, Paul and Pamela Casarotto filed an
amended complaint naming Doctor's Associates, Inc., and Nick
Lombardi as defendants. For purposes of our review of the District
Courtls order, we presume the facts alleged in the complaint to be
true.
DAI is a Connecticut corporation which owns Subway Sandwich
Shop franchises, and Lombardi is their development agent in
Montana. The Casarottos entered into a franchise agreement with
DAI which allowed them to open a Subway Sandwich Shop in Great
Falls, Montana. However, they were told by Lombardi that their
first choice for a location in Great Falls was unavailable.
~ccording their complaint, the Casarottos agreed to open a
to
shop at a less desirable location, based on a verbal agreement with
Lombardi that when their preferred location became available, they
would have the exclusive right to open a store at that location.
Contrary to that agreement, the preferred location was subsequently
awarded by Lombardi and DAI to another franchisee. As a result,
the Casarottosl business suffered irreparably, and they lost their
business, along with the collateral which secured their SBA loan.
This action is based on the Casarottosl allegation that
Lombardi and DAI breached their agreement with the Casarottos,
defrauded them, breached the covenant of good faith and fair
dealing, and engaged in other tortious conduct, all of which
directly caused the Casarottos loss of business and the resulting
damage.
DAI1s franchise agreement with the Casarottos was executed on
April 25, 1988. There was no indication on the first page of the
contract that it was subject to arbitration. However,
3
paragraph 10(c) of the contract, found on page 9, included the
following provision:
Any controversy or claim arising out of or relating
to this contract or the breach thereof shall be settled
by Arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association
at a hearing to be held in Bridgeport, Connecticut and
judgment upon an award rendered by the Arbitrator(s) may
be entered in any court having jurisdiction thereof. The
commencement of arbitration proceedings by an aggrieved
party to settle disputes arising out of or relating to
this contract is a condition precedent to the
commencement of legal action by either party. The cost
of such a proceeding will be born equally by the parties.
On January 29, 1993, DAI moved the District Court to dismiss
the Casarottos' complaint, or at least stay further judicial
proceedings, pending arbitration pursuant to paragraph 10 (c) of the
franchise agreement. DAI alleged that the franchise agreement
affected interstate commerce, and therefore, was subject to the
Federal Arbitration Act found at 9 U.S.C. § 1-15 (1988). They
sought a stay of proceedings pursuant to 5 3 of that Act, which
provides in relevant part that:
If any suit or proceeding be brought in any of the courts
of the United States upon any issue referable to
arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending,
upon being satisfied that the issue involved in such suit
or proceeding is referable to arbitration under such an
agreement shall on application of one of the parties stay
the trial of the action until such arbitration has been
had in accordance with the terms of the agreement ....
DAI claimed that Montana law could not be raised as a bar to
enforcement of the arbitration provision for two reasons: First,
the contract specifically called forthe application of Connecticut
law; and second, Montana law was preempted by the Federal
Arbitration Act.
The Casarottos opposed DAI's motion on the grounds that
Montana law applied, in spite of the choice of law provision in the
contract, and that based on 5 27-5-114(4), MCA, the contract's
arbitration provision was unenforceable because DAI had not
provided notice on the first page of the agreement that the
contract was subject to arbitration.
On June 2, 1993, the District Court issued its order granting
DAI's motion to stay further judicial proceedings pursuant to
9 U.S.C. § 3. The order was made applicable to both DAI and
Lombardi, but not to other named defendants who were not parties to
the franchise agreement and whose alleged conduct raises other
issues. On July 8, 1993, the District Court issued an order
pursuant to Rule 54(b), M.R.Civ.P., certifying its June 2 order as
final for purposes of appeal. The Casarottos appeal from that
order.
ISSUE 1
Based on conflict of law principles, is the franchise
agreement entered into between the Casarottos and DAI governed by
Connecticut law or Montana law?
Paragraph 12 of the franchise agreement entered into between
the parties provides as follows: This agreement shall be governed
by and construed in accordance with the laws of the State of
Connecticut and contains the entire understanding of the parties.
DAI contends that, therefore, Connecticut law governs our
interpretation of the contract and that since Connecticut law is
identical to the Federal ~rbitration Act see Conn. Gen. Stat.
§ 52-409 (1993), conspicuous notice that the contract was subject
to arbitration was not required and we need not concern ourselves
with the issue of whether Montana law is preempted.
The Casarottos respond that the issue of whether to apply
Connecticut or Montana law involves a conflict of law issue and
that the answer can be found in our prior decisions. We agree.
In Emerson v. Boyd (lggl), 247 Mont. 241, 805 P.2d 587, we cited
with approval the Ninth Circuit's decision in R J. Williams Co. v. Fort
BelhapHousingAuthon'ty (9th C i r . 1983), 719 F.2d 979, which adopted
the criteria established in Restatement (Second) of Conflict of
Laws 5 188 (1971) to determine which jurisdiction's laws apply to
a contract where no choice of law is provided for in the contract.
Section 188 provides as follows:
(1) The rights and duties of the parties with respect to
an issue in contract are determined by the local law of
the state which, with respect to that issue, has the most
significant relationship to the transaction and the
parties under the principles stated in 5 6.
(2) In the absence of an effective choice of law by the
parties (see 5 187), the context to be taken into account
in applying the principles of 5 6 to determine the law
applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the
contract, and
(e) the domicil, residence, nationality, place of
incorporation and place of business of the
parties.
These contracts are to be evaluated according to their
relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and t h e
place of performance are in t h e same state, the local Paw
of this state will usually be applied, except as
otherwise provided in 189-199 and 203.
In this case, there is a choice of law provision in the
parties' contract. The question is whether it was an "effectiveu
choice. We recently held in Youngblood v American States Ins. CO. ( 1993 ) ,
.
262 Mont. 391, 394, 866 P.2d 203, 205, that this State's public
policy will ultimately determine whether choice of law provisions
in contracts are weffective.ll In that case, we stated:
Here, the general policy language in the insurance
contract requires American States to pay whatever damages
are required in Montana; that is, the contract is to be
performed in Montana. Therefore, unless a contract term
provides otherwis e t Kemp [v. Allstate Im.CO. (1979), 183 Mont. 526,
601 P.2d 201 and 5 28-3-102, MCA, require the application
of Montana law because the contract was to be lperformedl
in Montana. In this case, however, the insurance
contract contains a choice of law provision which
requires the application of Oregon subrogation law. ...
... [Tlhe choice of law provision will be enforced
unless enforcement of the contract provision requiring
application of Oregon law as regards subrogation of
medical payments violates Montana's public policy or is
against good morals.
Based on our conclusion in that case that subrogation of
medical payment benefits was contrary to our public policy, we held
that:
[Tfhe choice of law provision in the insurance contract
would result in medical payment subrogation under Oregon
law. Because such subrogation violates Montana's public
policy, that term of the insurance contract at issue here
is not enforceable.
Youngblood, 866 P.2d at 208.
Restatement (Second) of Conflict of Laws 5 187(2) (1971) is
consistent with our decision in Youngblood, and expands upon the
factors to be considered under the circumstances in this case. It
provides that:
(2) The law of the state chosen by the parties to govern
their contractual rights and duties will be applied, even
if the particular issue is one which the parties could
not have resolved by an explicit provision in their
agreement directed to that issue, unless either
(a) the chosen state has no substantial
relationship to the parties or the transaction
and there is no other reasonable basis for the
parties1 choice, or
b) application of the law of the chosen state
would be contrary to a fundamental policy of a
state which has a materially greater interest
than the chosen state in the determination of
the particular issue and which, under the rule
of 9 188, would be the state of the applicable
law in the absence of an e f f e c t i v e choice of
law by the parties.
Adopting 5 187, then, as our guide, we first look to § 188 to
determine whether Montana law would be applicable absent an
gteffectivelf
choice of law by the parties.
According to the affidavit of Paul Casarotto filed in
opposition to DAI1s motion to dismiss, he executed the contract in
neither Connecticut nor Montana. It was executed while he was
traveling in New York. However, it appears from that same
affidavit, and from the allegations in the complaint, that original
negotiations were conducted by him in Great Falls, the contract was
to be performed in Great Falls, the subject matter of the contract
(the Subway Sandwich Shop) was located in Great Falls, and that he
and Pamela Casarotto resided in Great Falls at the time that the
contract was executed. The only connection to Connecticut was that
DAI was incorporated in that state and apparently had its home
office in that state at the time of the parties1 agreement. We
conclude that based upon the application of the criteria set forth
in 188, and our prior decision in Emerson, Montana has a
materially greater interest than Connecticut in the contract issue
that is presented, and that absent an "effective" choice of law by
the parties, Montana law would apply.
Our remaining inquiry, then, is whether application of
Connecticut law would be contrary to a fundamental policy of this
State by eliminating the requirement that notice be provided when
a contract is subject to arbitration.
In Trammel v. Brotherhood of Locomotive Firemen and Enginemen ( 1953) , 126
Mont. 400, 409, 253 P.2d 329, 334, we held that the public policy
of a state is established by its express legislative enactments.
Here, the legislative history for 5 27-5-114(4), MCA, makes clear
that the legislative committee members considering adoption of the
Uniform Arbitration Act had two primary concerns. First, they did
not want Montanans to waive their constitutional right of access to
Montana's courts unknowingly, and second, they were concerned about
Montanans being compelled to arbitrate disputes at distant
locations beyond the borders of our State.
The facts in this case, and our recent decision in another
case, justify those concerns.
Regardless of the amount in controversy between these parties,
the arbitration clause in the Subway Sandwich Shop Franchise
Agreement requires that the Casarottos travel thousands of miles to
connecticut to have their dispute arbitrated. Furthermore, it
requires that they share equally in the expense of arbitration,
regardless of the merits of their claim. Presumably, that expense
could be substantial, since under the Commercial Arbitration Rules
of the American Arbitration Association (1992), those expenses
would, at a minimum, include: the arbitrator's fees and travel
expenses, the cost of witnesses chosen by the arbitrator, the
American Arbitration Association's administrative charges, and a
filing fee of up to $4000, depending on the amount in controversy.
For a proceeding involving multiple arbitrators, the administrative
fee alone, for which the Casarottos would be responsible, is $150
a day. In addition, since the contract called for the application
of Connecticut law, the Casarottos would be required to retain the
services of a Connecticut attorney.
In spite of the expense set forth above, the procedural
safeguards which have been established in Montana to assure the
reliability of the outcome in dispute resolutions are absent in an
arbitration proceeding. The extent of pretrial discovery is within
the sole discretion of the arbitrator and the rules of evidence are
not applicable. The arbitrator does not have to follow any law,
and there does not have to be a factual basis for the arbitrator's
.
decision. See May v. First NationalPawn Brokers, Ltd. (Mont Dec . 15 , 1994),
Slip Op. 94-189.
Based upon the determination by the Legislature of this State
that the citizens of this State are at least entitled to notice
before entering into an agreement which will limit their future
resolution of disputes to a procedure as potentially inconvenient,
expensive, and devoid of procedural safeguards as the one provided
for by the rules of the American Arbitration Association, and the
terms of this contract, we conclude that the notice requirement of
g 27-5-114, MCA, does establish a fundamental public policy in
Montana, and that the application of Connecticut law would be
contrary to that policy. Therefore, we conclude that the law of
Montana governs the franchise agreement entered into between the
Casarottos and Doctor's Associates, Inc.
ISSUE 2
If the contract is governed by Montana law, is the notice
requirement in 5 27-5-114 ( 4 ) , MCA, of Montana's Uniform Arbitration
Act, preempted by the Federal Arbitration Act found at 9 U.S.C.
5 5 1-15 (1988)?
DAI contends that even if Montana law is applicable,
5 27-5-114 ( 4 ) , MCA, is preempted by the Federal Arbitration Act
because it would void an otherwise enforceable arbitration
agreement. In support of its argument, DAI relies on U.S. Supreme
Court decisions in Peny v. Thomas (l987), 482 U.S. 483, 107 S. Ct.
2520, 96 L. Ed. 2d 426, SouthlandCop. v. Keatikg (1984), 465 U.S. 1, 104
S . Ct. 852 , 79 L . Ed. 2d 1, and Moses H. Cone Memorial Hospital v. Merculy
ConstructionCop. (l983), 460 U.S. 1, 103 S. Ct. 927, 74 L. Ed. 2d 765.
These cases have been referred to as "[a] trilogy of United States
Supreme Court casesu which "developed the federal policy favoring
arbitration and the principle that the FAA is substantive law
enacted pursuant to Congress's commerce powers that preempts
contrary state provisions. " David P. Pierce, The Federal ArbitrationAct:
Conflicting Intepretatiom of its Scope 61 cinn. L. Rev. 623, 63 0 (1992) . From
this trilogy, Southland and Peny appear to be closest on point and
warrant some discussion.
Southland Corporation was the owner and franchisor of
7-Eleven Convenience Stores. Its standard franchise agreements,
like DAIgs included an arbitration provision. Southland was sued
in california by several of its franchisees, based on claims which
included violations of the disclosure requirements of the
California Franchise Investment Law, Cal. Corp. Code 31000,
- seq. (West 1977).
et The California Supreme Court held that the
Franchise Investment Law required judicial consideration of claims
brought under that statute, and therefore, held that arbitration
could not be compelled. The U.S. Supreme Court disagreed, and held
that:
In creating a substantive rule applicable in state
as well federal courts, Congress intended to foreclose
state legislative attempts to undercut the enforceability
of arbitration agreements. We hold that 931512 of the
California Franchise Investment Law violates the
Supremacy Clause.
Southland, 465 U.S. at 16 (footnotes omitted).
In Peny, the Supreme Court was called upon to reconcile
9 U.S.C. 5 2 which mandates enforcement of arbitration agreements,
with 5 229 of the California Labor Code, "which provides that
actions for the collection of wages may be maintained 'without
regard to the existence of any private agreement to arbitrate.'"
Peiiy, 465 U.S. at 484 (quoting Cal. Lab. Code 5 229 (West 1971)).
In that case, Kenneth Thomas sued his former employer for
commissions he claimed were due for the sale of securities. His
employer sought to stay the proceedings pursuant to 5 5 2 and 4 of
the Federal Arbitration Act, based on the arbitration provision
found in Thomas's application for employment. Peny, 465 U.S. at
484-85. In an opinion affirmed by the California Court of Appeals
and the California Supreme Court, the California Superior Court
denied the motion to compel arbitration. On appeal, the U.S.
Supreme Court held that 5 2 of the FAA reflected a strong national
policy favoring arbitration agreements, notwithstanding "state
substantive or procedural policies to the contrary.I' Peny , 482 U . S.
at 489. Citing its decision in Southland, the Court held that:
"Congress intended to foreclose state legislative
attempts to undercut the enforceability of arbitration
agreements.'' Id. at 16 (footnote omitted). Section 2,
therefore, embodies a clear federal policy of requiring
arbitration unless the agreement to arbitrate is not part
of a contract evidencing interstate commerce or is
revocable kpon such grounds as exist at law or in equity
for the revocation of any contract.It 9 U.S.C. 5 2. "We
see nothing in the Act indicating that the broad
principle of enforceability is subject to any additional
limitations under state law." Keating, supra, at 11.
Peny, 482 U.S. at 489-90.
As additional authority, DAI cites to our own previous
decisions which have enforced arbitration agreements in Montana
based on Southland and Peny . See Downey v. Chnktensen (1992), 2 51 Mont.
386, 825 P.2d 557; Vukasinv. DA. Davidson&Co. (1990), 241 Mont. 126,
785 P .2d 713 ; William Gibson, Jr., Inc. v. James Gruff Communications ( 1989 ) , 239
Mont. 335, 780 p.2d 1131; Larsen v. Opie (1989), 237 Mont. 108, 771
P.2d 977 ; Passage v. Prudential-Bache Securities, Inc. (1986) , 22 3 Mont. 60, 727
P.2d 1298.
The Casarottos, however, contend that Southland and Peny must be
considered in light of the Supreme Court's more recent decision in
Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University
(1989), 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488, and that
our prior arbitration decisions did not deal with the
enforceability of arbitration agreements which violated Montana's
statutory law. We agree.
I n Volt, the parties entered into a construction contract which
contained an agreement to arbitrate all disputes between the
parties relating to the contract. The contract also provided that
it would be governed by the law in the state where the project was
located. Volt, 489 U.S. at 470.
As a result of a contract dispute between the parties,
Stanford filed an action in California Superior Court naming Volt
and two other companies involved in the construction project. Volt
petitionedthe Superior Court to compel arbitration ofthe dispute.
However, the California Arbitration found Cal . Proc.
Code 5 1280, & sea. (West l982), contained a provision allowing
the court to stay arbitration pending resolution of related
litigation. On that basis, the Superior Court denied Volt's motion
to compel arbitration, and instead, stayed arbitration proceedings
pending outcome of the litigation. The California Court of Appeals
affirmed that decision, and the California Supreme Court denied
Volt's petition for discretionary review. The U . S . Supreme Court
granted review and affirmed the decision of the California courts.
v l , 489 U.S. at 471-73.
ot
On appeal, the Supreme Court considered Volt's argument that
California's arbitration laws were preempted by the Federal
Arbitration Act. In its analysis of the preemption issue, the
Supreme Court stated that:
The FAA contains no express pre-emptive provision,
nor does it reflect a congressional intent to occupy the
entire field of arbitration. But even when Congress has
not completely displaced state regulation in an area,
state law may nonetheless be preempted to the extent
that it actually conflicts with federal law--that is, to
the extent that it Itstands as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress. Hines v. Davidowitz, 312 U.S. 52, 67
(1941). The question before us, therefore, is whether
application of Cal.Civ.Proc. Code Ann. 3 1281.2(cj to
stay arbitration under this contract in interstate
commerce, in accordance with the terms of the arbitration
aureement itself. would undermine the uoals and aolicies
of the FAA. We conclude that it would not.
Volt, 4 8 9 U.S. at 477-78 (citation omitted; emphasis added).
The Supreme Court explained that the purpose of the Federal
Arbitration Act was to enforce lawful agreements entered into by
the parties, and not to impose arbitration on the parties
involuntarily. It noted that in this case the parties' agreement
was to be bound by the arbitration rules from California.
Therefore, it held that:
Where, as here, the parties have agreed to abide by state
rules of arbitration, enforcing those rules according to
the terms of the agreement is fully consistent with the
goals of the FAA, even if the result is that arbitration
is stayed where the Act would otherwise permit it to go
forward. By permitting the courts to rigorously
enforce" such agreements according to their terms, see
[Dean Witter Reynolds, Znc. v. ]Byrd, [ 4 7 0 U.S. ] at 221, we give
effect to the contractual rights and expectations of the
parties, without doing violence to the policies behind
the FAA.
Volt, 4 8 9 U.S. at 4 7 9 .
While the Court in Volt applied state laws that had been chosen
by the parties in their contract, and this case involves state law
which is applied pursuant to conflict of law principles, it has
been observed that:
The real significance of the Volt decision is not in
the Court's holding, but rather in what the Court failed
to hold. For example, the Court found no preemption of
the California arbitration law by the FAA. Instead, the
Court merely stated that Congress did not intend that the
FAA occupy the entire field of arbitration law. Thus,
enforcing the California law was merely a procedural
issue and did not frustrate the policy behind the FAA of
enforcing the agreement.
David P . Pierce, The Federal Arbitration Act: Conflicting Interpretations of its Scope
61 Cinn. L. Rev. 623, 635 (1992) (footnotes omitted).
Section 2 of 9 U.S.C. provides that:
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising
out of such contract or transaction, or the refusal to
perform the whole or any part thereof, or an agreement in
writing to submit to arbitration an existing controversy
arising out of such a contract, transaction, or refusal,
shall be valid, irrevocable, and enforceable, save w o n
such qrounds as exist at law or in equity for the
revocation of any contract.
(Emphasis added.)
Based upon the Supreme Court's decision in Volt, we conclude
that the nature of our inquiry is whether Montana's notice
requirement found at 5 27-5-114 (4), MCA, would vfundermine
the goals
and policies of the FAA." We conclude that it does not.
DAI re1ies on decisions in Threkeld & Co., Znc. v. MetallgeseIlschaft Ltd.
(2d Cir. lggl), 923 F.2d 245, SecuritiesIndustlyAss~nv.Connolly (1st Cir.
1989), 883 F.2d 1114, Webb v. R Rowland& Co., Inc. (8th Cir. 1986), 800
F.2d 803 , and Bunge Cop. v. Penyville Feed & Produce, Inc. (Mo . 1985) , 685
S.W.2d 837, in support of its argument that notice provisions are
preempted by federal law.
The Casarottos, on the other hand, rely on decisions in
American Physicians v. Port Lavaca Clinic (Tex. Ct . App. 1992) , 843 S W.2d.
675, and Albrightv.EdwardD.Jones&Co. (Ind. Ct. App. 1991), 571 ~.E.2d
1329, for the principle that since volt, other courts have held that
notice provisions in state arbitration laws are not preempted by
the Federal Arbitration Act.
However, the cases cited by the parties either precede the
Supreme Court's decision in Volt, or contain little or no reference
to the Volt decision. We conclude that none are persuasive, and we
must rely on our own analysis of whether Montana's notice
requirement undermines the goals and policies of the FAA.
Our conclusion that Montana's notice requirement does not
undermine the policies of the FAA is based on the Supreme Court's
conclusion that it was never Congress's intent when it enacted the
FAA to preempt the entire field of arbitration, and its further
conclusion that the FAA does not require parties to arbitrate when
they have not agreed to do so. That Court held that the purpose of
the FAA is simply to enforce arbitration agreements into which
parties had entered, and acknowledged that the interpretation of
contracts is ordinarily a question of state law. Volt, 489 U.S. at
474.
Presumably, therefore, the Supreme Court would not find it a
threat to the policies of the Federal Arbitration Act for a state
to require that before arbitration agreements are enforceable, they
be entered knowingly. To hold otherwise would be to infer that
arbitration is so onerous as a means of dispute resolution that it
can only be foisted upon the uninformed. That would be
inconsistent with the conclusion that the parties to the contract
are free to decide how their disputes should be resolved.
Montana's notice requirement does not preclude parties from
knowingly entering into arbitration agreements, nor do our courts
decline to enforce arbitration agreements which are entered into
knowingly.
Therefore, we conclude that Montana's notice statute found at
27-5-114(4), MCA, would not undermine the goals and policies of
the FAA, and is not preempted by 9 U.S.C. § 2 (1988).
Because the agreement of the parties in this case did not
comply with Montana's statutory notice requirement, it is not
subject to arbitration, according to the law of Montana. The
District Court's order dated June 2, 1993, is, therefore, reversed,
and this case is remanded to the District Court for further
proceedings consistent with this opinion.
We concur:
Chief Justice
w
Justices
Justice Terry N. Trieweiler specially concurring.
The majority opinion s e t s forth principles of law agreeable to
the majority of this Court in language appropriate for judicial
precedent. I offer this special concurring opinion as my personal
o b s e r v a t i o n regarding many of t h e federal d e c i s i o n s which have been
cited to u s as authority.
To those federal judges who consider forced arbitration as the
panacea for their "heavy case loadsn and who consider the
reluctance of state courts to buy into the arbitration program as
a sign of intellectual inadequacy, I would like to explain a few
things.
In Montana, we are reasonably civilized and have a
sophisticated system of justice which has evolved over time and
which we continue to develop for the primary purpose of assuring
fairness to those people who are subject to its authority.
Over the previous 100 years of our history as a state, our
courts have developed rules of evidence for the purpose of assuring
that disputes are resolved on the most reliable bases possible.
Based on the presumption that all men and women are fallible
and make mistakes, w e have developed standards for appellate review
which protect litigants from human error or the potential
arbitrariness of any one individual.
We believe in the rule of law so that people can plan their
commercial and personal affairs. If our trial courts decline to
follow those laws, our citizens are assured that this Court will
enforce them.
We have rules for venue, and jurisdictional requirements based
on the assumption that it is unfair to force people to travel long
distances from their homes at great expense and inconvenience to
prosecute or defend against lawsuits.
We believe that our courts should be accessible to all,
regardless of their economic status, or their social importance,
and therefore, provide courts at public expense and guarantee
access to everyone.
We have developed liberal rules of discovery (patterned after
the federal courts) based on the assumption that the open and
candid exchange of information is the surest way to resolve claims
on their merits and avoid unnecessary trials.
We have contract laws and tort laws. We have laws to protect
our citizens from bad faith, fraud, unfair business practices, and
oppression by the many large national corporations who control many
aspects of their lives but with whom they have no bargaining power.
While our system of justice and our rules are imperfect, they
have as their ultimate purpose one overriding principle. They are
intended, and continue to evolve, for the purpose of providing
fairness to people, regardless of their wealth or political
influence.
What I would like the people in the federal judiciary,
especially at the appellate level, to understand is that due to
their misinterpretation of congressional intent when it enacted the
Federal Arbitration Act, and due to their naive assumption that
arbitration provisions and choice of law provisions are knowingly
bargained for, all of these procedural safeguards and substantive
laws are easily avoided by any party with enough leverage to stick
a choice of law and an arbitration provision in its pre-printed
contract and require the party with inferior bargaining power to
sign it.
The procedures we have established, and the laws we have
enacted, are either inapplicable or unenforceable in the process we
refer to as arbitration.
I am particularly offended by the attitude of federal judges,
typified by the remarks of Judge Selya in the First Circuit, which
.
were articulated in Securities Industry Asstn v. Connolb (1st Cir 1989) , 883
F.2d 1114, cert. denied (1990), 495 U.S. 956, 110 S. Ct. 2559, 109
L. Ed. 2d 742.
Judge Selya considered "[ilncreased resort to the courts" as
the cause for 'ltumefaction already-swollen court calendars." He
of
refers to arbitration as "a contractual device that relieves some
of the organic pressure by operating as a shunt, allowing parties
to resolve disputes outside of the legal system.'I Conno&, 883 F.2d
at 1116. He states that [tlhe hope has long been that the Act
could serve as a therapy for the ailment of the crowded docket."
Connolb, 883 F.2d at 1116. He then bemoans that fact that, lf[a]s
might be expected, there is a rub: the patient, and others in
interest, often resist the treatment." C O ~ Z ~ O ~ &F.2d at 1116.
883 ,
Judge Selya refers to the preference in the various state
jurisdictions to resolve disputes according to traditional notions
of fairness, and then suggests that "[tlhe FAA was enacted to
overcome this anachronism'.^^ Conno&, 883 F.2d at 1119 (citation
omitted). He considers it the role of federal courts to be "on
guard for artifices in which the ancient suspicion of arbitration
might reappear." Conno&, 883 F . 2d at 1119.
This type of arrogance not only reflects an intellectual
detachment from reality, but a self-serving disregard for the
purposes for which courts exist.
With all due respect, Judge Selya's opinion illustrates an all
too frequent preoccupation on the part of federal judges with their
own case load and a total lack of consideration for the rights of
individuals. Nowhere in Judge Selya's lengthy opinion is there any
consideration for the total lack of procedural safeguards inherent
in the arbitration process. Nowhere in his opinion does he
consider the financial hardship that contracts, like the one in
this case, impose on people who simply cannot afford to enforce
their rights by the process that has been forced upon them.
Nowhere does Judge Selya acknowledge that the "patient" (presumably
courts like this one) who resists the "treatment" (presumably the
imposition of arbitration in lieu of justice) has a case load
typically three times as great as Justice Selya's case load.
The notion by federal judges, like Judge Selya, that people
like the Casarottos have knowingly and voluntarily bargained and
agreed to resolve their contractual disputes or tort' claims by
arbitration, is naive at best, and self-serving and cynical at
worst. To me, the idea of a contract or agreement suggests
mutuality. There is no mutuality in a franchise agreement, a
securities brokerage agreement, or in any other of the agreements
which typically impose arbitration as the means for resolving
disputes. National franchisors, like the defendant in this case,
and brokerage firms, who have been the defendants in many other
arbitration cases, present form contracts to franchisees and
consumers in which choice of law provisions and arbitration
provisions are not negotiable, and the consequences of which are
not explained. The provision is either accepted, or the business
or investment opportunity is denied. Yet these provisions, which
are not only approved of, but encouraged by people like Judge
Selya, do, in effect, subvert our system of justice as we have come
to know it. If any foreign government tried to do the same, we
would surely consider it a serious act of aggression.
Furthermore, if the Federal Arbitration Act is to be
interpreted as broadly as some of the decisions from our federal
courts would suggest, then it presents a serious issue regarding
separation of powers. What these interpretations do, in effect, is
permit a few major corporations to draft contracts regarding their
relationship with others that immunizes them from accountability
under the laws of the states where they do business, and by the
courts in those states. With a legislative act, the Congress,
according to some federal decisions, has written state and federal
courts out of business as far as these corporations are concerned.
They are not subject to California's labor laws or franchise laws,
24
they are not subject to our contract laws or tort laws. They are,
in effect, above the law.
These insidious erosions of state authority and the judicial
process threaten to undermine the rule of law as we know it.
Nothing in our jurisprudence appears more intellectually
detached from reality and arrogant than the lament of federal
judges who see this system of imposed arbitration as "therapy for
their crowded dockets. These decisions have perverted the purpose
of the FAA from one to accomplish judicial neutrality, to one of
open hostility to any legislative effort to assure that
unsophisticated parties to contracts of adhesion at least
understand the rights they are giving up.
It seems to me that judges who have let their concern for
their own crowded docket overcome their concern for the rights they
are entrusted with should step aside and let someone else assume
their burdens. The last I checked, there were plenty of capable
people willing to do so.
Justice Fred J. Weber dissents as follows:
I respect the majority opinion in its expression of the deeply
held conviction that arbitration of the type expressed in the
contract in this case should not be enforced in Montana and thereby
deprive the parties of access to the court system. The answer to
such a judicial approach was stated by the United States Supreme
Court in Volt Info, Sciences v. Ed. of Trustees (1989)~489 U.S.
468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488, 497, in which the
United States Supreme Court stated:
The Act [Federal Arbitration Act1 was designed l1to
overrule the judiciary's longstanding refusal to enforce
agreements to arbitrate," . . . and place such
agreements "upon the same footing as other contracts," .
. . Section 2 of the Act therefore declares that a
written agreement to arbitrate in any contract involving
interstate commerce or a maritime transaction "shall be
valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation
of any contract." (Citations omitted.)
I specifically disagree with the majoriey opinion's refusal to
enforce the agreement to arbitrate in the present case.
Issue I
As stated in the majority opinion: Based on conflict of law
principles, is the franchise agreement entered into between the
Casarottos and DAI governed by Connecticut law or Montana law?
I point out that the issue as stated by the parties
essentially was whether an out-of-state corporation can avoid
Montana Arbitration Act's conspicuous notice requirement by
claiming preemption under the FAA?
The majority opinion refers to this Court's 1991 case of
Emerson v. Boyd. In determining whether a contract dispute arose
26
on an Indian reservation, that case adopted language from R J
..
Williams Co., a Ninth Circuit case with regard to the factors to be
used to determine whether an action did arise on the reservation.
In contrast to the present case, Emerson v. Bovd did not contain an
agreed choice of law as is present in this case. I do not find
this to be appropriate authority.
The majority opinion on this issue concludes that the Montana
Legislature had determined that its citizens are entitled to notice
before entering into an agreement which will limit their future
resolution of disputes to a procedure inconvenient, expensive and
devoid of procedural safeguards--and further concludes that the
notice requirements of § 27-5-114, MCA, established a fundamental
public policy in this State which is contrary to the policy of the
Connecticut law. On the basis of those conclusions, the majority
opinion further concludes that the law of Montana governs. I do
not agree with that conclusion.
The key parts of § 27-5-114, MCA, which apply to this issue
are the following:
Validity of arbitration agreement--exceptions. (1) A
written agreement to submit an existing controversy to
arbitration is valid and enforceable except upon such
grounds as exist at law or in equity for the revocation
of a contract.
~~~
(4) Notice that a contract is subiect to arbitration
pursuant to this chauter shall be tvped in underlined
capital letters on the first paqe of the contract; and
unless such notice is displayed thereon, the contract may
not be subject to arbitration. (Emphasis supplied.)
Our question then becomes whether the contract here is subject to
"arbitration pursuant to this chapter" so that the notice must be
typed in underlined capital letters on the first page of the
contract. Two specific paragraphs of the contract are controlling
here. section 10(c) of the contract stated in pertinent part:
Any controversy or claim arising out of or relating to
this contract or the breach thereof shall be settled by
Arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association at a
hearing to be held in Bridgeport, Connecticut, . . .
Section 12 of the agreement further stated:
12. This Agreement shall be governed by and
construed in accordance with the laws of the State of
Connecticut and contains the entire understanding of the
parties. Other than the representations contained in the
Agreement, the Offering Circular and advertising
materials of the Franchisor, no other representations
have been made to or relied upon by the Franchisee except
as set forth below: (None are set forth)
When the foregoing contract provisions are compared to subsection
(4) of 5 27-5-114, MCA, it is apparent that these contract
provisions do not fit within the statute. There is no statement in
the Franchise Agreement which specifies that the contract is
subject to arbitration pursuant to Montana law or to the Uniform
Arbitration Act as enacted in Montana under §§ 27-5-111 to 115,
MCA .
I conclude that the contract provisions are controlling in
this instance and that the contract between the parties is not by
its terms subject to Montana law or arbitration under Montana law.
In fact the reverse is true. As above specified, the agreement
requires that the commercial rules of the American Arbitration
Association shall be applied in any arbitration, and also provides
that the agreement is governed by and construed under the laws of
the State of Connecticut. This clearly rebuts any suggestion that
28
this particular contract is subject to arbitration pursuant to the
laws of the State of Montana and in particular § 27-5-114, MCA. I
therefore conclude that the notice requirement of 5 27-5-114, MCA,
does not in any way establish a fundamental public policy which is
applicable to the present contract.
I further point out that the reference to Restatement (Second)
of Conflict of Laws, § 188 (19711, is applicable only in the
absence of an "effective" choice of law and I conclude there was
such an effective choice of law in the present case.
Issue I1
If the contract is governed by Montana law, is the notice
requirement of § ,
27-5-114(4) MCA, of Montana's Uniform Arbitration
Act, preempted by the Federal Arbitration Act found at 9 U.S.C. 5
The majority opinion quotes the following from the 1987 United
States Supreme Court opinion of Perry v. Thomas:
. . . Congress intended to foreclose state legislative
attempts to undercut the enforceability of arbitration
agreements. . . . Section 2, therefore, embodies a clear
federal policy of requiring arbitration unless the
agreement to arbitrate is not part of a contract
evidencing interstate commerce . . . We see nothinq in
the Act indicatinq that the broad princiwle of
enforceability is subiect to any additional limitations
under state law. . . . (Emphasis supplied.)
The affidavit of the vice president of DAI establishes without
contradiction that the present agreement to arbitrate is part of a
contract in interstate commerce:
5. Before July 1991, DAI was a corporation
organized under the laws of the State of Connecticut,
with a principal place of business at 325 Bic Drive,
Milford, CT 06460. On July 1, 1991, DAI of Florida
merged with DAI of Connecticut, leaving DAI of Florida as
a surviving corporation.
6. DAI has sold a total of 8500 Subway franchises
in the United States and estimates that there are
approximately 7400 stores in operation world wide.
Clearly the present agreement to arbitrate is part of a contract
evidencing interstate commerce so the Federal Arbitration Act is
applicable
The majority opinion analyzes the United States Supreme
Court's decision in Volt and from that concludes that the nature of
the inquiry is whether Montana's notice requirement under 5 27-5-
114 ( 4 ) , MCA, would undermine the goals and policy of the FAA and
further concludes it does not. I disagree with that analysis of
In w, Volt petitioned the California court to compel
arbitration of a dispute and the defendant moved to stay
arbitration pursuant to California law. The California statute
permitted the court to stay arbitration pending resolution of
related litigation between a party to the arbitration agreement and
third parties not bound by it. The California court stayed the
arbitration proceedings pending the outcome of the litigation. In
considering whether the California code section in question was
preempted by the FAA, the United States Supreme Court stated:
The FAA contains no express preemptive provision,
nor does it reflect a congressional intent to occupy the
entire field of arbitration. . . . But even when congress
has not completely displaced state regulation in an area,
state law may nonetheless be preempted to the extent that
it actually conflicts with federal law--that is, to the
extent that it "stands as an obstacle to the
accomplishment and execution of the full purposes and
objectives of C ~ n g r e s s .. ~. .The question before us,
~
therefore, is whether application of Cal. Civ. Proc. Cod.
Ann. 5 1281.2 (c) to stay arbitration under this contract
in interstate commerce, in accordance with the terms of
the arbitration agreement itself, would undermine the
goals and policies of the FAA. We conclude it would not.
. . . Accordingly, we have recognized that the FAA does
not require parties to arbitrate when they have not
agreed to do so. See id., at 219, 84 L.Ed.2d 158, 105
S.Ct. 1238. (The Act "does not mandate the arbitration
of all claims"), nor does it prevent parties who do agree
to arbitrate from excluding certain claims from the scope
-
of their arbitration agreement. It simply requires
courts to enforce privately neqotiated aqreements to
arbitrate, like other contracts, in accordance with their
terms. . . (Citations omitted.) (Emphasis supplied.)
Volt
I 489 U.S. at 477-78, 109 S.Ct. at 1255, 103 L.Ed.2d at 499-
500. The court further stated and concluded:
Arbitration under the Act is a matter of consent, not
coercion, and parties are generally free to structure
their arbitration agreements as they see fit . . . Where,
as here, the parties have agreed to abide by state rules
of arbitration, enforcing those rules according to the
terms of the agreement is fully consistent with the goals
of FAA, even if the result is that arbitration is stayed
where the Act would otherwise permit it to go forward.
u, U.S. at 479, 109 S.Ct. at
489 1256, 103 L.Ed. at 500. It is
essential to keep in mind that the key holding of Volt as expressed
by the United State Supreme Court was that the agreement to
arbitrate should be enforced according to its terms--and that
allowed application of the California law which provided for the
stay in proceedings where other parties besides the arbitration
parties were involved in the case. That conclusion does not assist
the majority opinion. The rationale of the V o l t decision in the
present case would require enforcement of the contract as agreed
upon by the parties--which would require application of the
American Arbitration Association rules as well as the laws of the
31
State of Connecticut. I conclude that the contract here should be
enforced to require application of the American Arbitration
Association Rules and the laws of the State of Connecticut under
Volt.
In addition to the conclusion reached under Volt, I will
discuss several cases which have concluded that a statutory
provision similar to Montana's statutory requirement of a statement
in capital letters on page one of a contract is in conflict with
the Federal Arbitration Act and therefore not enforceable. In
David L . Threlkeld and Co. v. Metallgesellschaft Ltd. (2nd Cir.
1991), 923 F.2d 245, Threlkeld asserted that Vermont law voided any
arbitration agreement which does not have a specific
acknowledgement of arbitration signed by both parties and where the
agreement to arbitrate has not been displayed prominently in the
contract. The circuit court acknowledged that Threlkeld was
correct in asserting that the contracts did not comply with the
rigorous Vermont standard. The circuit court then concluded that
the Vermont statute is preempted by federal law and stated:
Because federal arbitration law governs this
dispute, we must determine whether the Vermont statute is
sufficiently consistent with federal law that the two may
peacefully coexist. . . . The First Circuit has recently
held that restrictive provisions similar to those found
in the Vermont statute are preempted by federal law. .
* .
We agree with the First Circuit that state statutes
such as the Vermont statute directly clash with the
Convention and with the Arbitration Act because they
effectively reincarnate the former judicial hostility
towards arbitration. Accordingly we hold that the
Convention and the Arbitration Act oreem~tthe Vermont
statute, and that the . . . arbitration provisions, as
drafted, are not enforceable. (Emphasis supplied.)
Threlkeld, 923 F.2d at 250. Threlkeld is clear authority for
concluding that the Montana statute directly clashes with the
Federal Arbitration Act and therefore is not enforceable
In a similar manner, Bunge Corp. v. Perryville Feed and
Produce (Mo.1985), 685 S.W.2d 837, addresses a similar issue. As
pointed out by the Missouri court in Bunqe, the Missouri statute is
based on the Uniform Arbitration Act (as is the Montana statute)
and contains a provision that each contract shall include a
statement in 10 point capital letters which reads substantially as
follows: THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION
WHICH MAY BE ENFORCED BY THE PARTIES. The Missouri Supreme Court
then stated:
It is clear that 5 435.460, if applied to this case,
seeks to impose a requirement for contracts to arbitrate
which is in addition to the requirements of the Federal
Arbitration Act. All that is apparently required under
that act is contractual language and format sufficient
for an ordinarily written contract. . . . If the Missouri
statute applies, then a commercial contract sufficient
under federal law would be in violation.
There is a manifest violation of the supremacy
clause if our statute is so applied. The Federal
Arbitration Act was passed by Congress pursuant to its
power to regulate interstate commerce . . Any
requirement of state law which adds a burden not imposed
by Congress is in derogation of the Congressional power,
and pro tanto invalid. A very recent case so holding is
Southland Corp. v. Keetinq. . .
We do not hold that the Missouri statute is
unconstitutional. We simply hold that it may not be
applied to defeat the arbitration provision of a contract
which is within the coverage of the federal statute. .
. . (Citations omitted.) (Emphasis supplied.)
Bunqe, 685 S.W.2d at 839. The Bunqe conclusion is directly
applicable to our present case. If our Montana statute applies to
the present case, then a commercial contract sufficient under
federal law would be in violation of the Montana statute even
though it meets the requirement of the Federal Arbitration Act. As
a result, even if we accept the majority opinion conclusion that
the Montana code section applies, I would hold that Montana law may
not be applied to defeat the arbitration principles of a contract
which is clearly within the coverage of the Federal Arbitration
Act.
The District Court held that the Federal Arbitration Act
required that the present suit should be stayed until the
arbitration has been held in accordance with the terms of the
agreement. I would affirm that holding
- A / ,
Chief Justice J. A. Turnage concurs in ing dissent.
Chief Justice
Justice Karla M. Gray, dissenting.
I respectfully dissent from the Court's opinion on both issues
presented therein. I write separately because the reasons for my
dissent are not altogether identical to those which form the basis
for Justice Weber's dissent.
With regard to issue one, I conclude that the franchise
agreement entered into between the Casarottos and DAI was governed
by Connecticut law. It is my view that the Court's analysis of
this issue is incomplete and erroneous.
I agree with the Court's synopsis of our decision in Emerson
v. Boyd and, on the basis that the agreement before us does include
a choice of law provision, on the inapplicability of that decision
to the case before us. In my view, Younqblood also is not on point
here, since that case did not relate to whether a statute
represents a statement of public policy by the Montana legislature
and, if so, the extent of that statement of public policy.
I agree with the Court that Montana has a materially greater
interest than Connecticut in the contract issue presented and that,
absent an "effective" choice of law by the parties, Montana law
would apply. I disagree with the remainder of the Court's
discussion and analysis on this issue.
My primary concern is that the Court neither presents nor
discusses the specific language contained in the statutory notice
requirement. That statute provides that " [nlotice that a contract
is subject to arbitration pursuant to this chapter shall be typed
in underlined capital letters on the first page of the contract; .
. . ." Section 27-5-114(4), MCA. By its terms, the franchise
agreement before us is subject to Connecticut law, not "this
MUAA.
chapter1'--the The legislature's specific limitation on the
applicability of the notice requirement is clear and unambiguous;
under such a circumstance, we are obligated to so interpret it
(Curtis v. Dist. Court of 21st Jud. Dist. (Mont. 1994), 879 P.2d
1164, 1166, 51 St.Rep. 776, 778) and conclude that the notice
requirement is applicable to the contract before us. Since the
statute is inapplicable by its terms to the contract, it cannot
form the basis of a public policy broad enough to negate the
parties' choice of Connecticut law.
The Court does not even address the specific statutory
language, preferring to resort inappropriately to generalized
legislative history for its overly broad interpretation of the
extent to which the notice requirement applies and the extent to
which the legislature adopted the notice requirement as a public
policy. Had the legislature intended the notice requirement to
apply to every arbitration agreement entered into by a citizen or
resident of Montana, notwithstanding that some other jurisdiction's
law would otherwise apply, it would have done so; it did not. It
is inappropriate for the Court to judicially broaden the
legislature's clear statute in the guise of a conflict of law
analysis.
With regard to issue two, I conclude that even if the Court
were correct regarding the applicability of Montana's notice
requirement under conflict of law principles, that requirement is
preempted by the Federal Arbitration Act (FAA). Therefore, I also
dissent from the Court's opinion on this issue.
The Court suggests that the United States Supreme Court's Volt
decision was a departure from its earlier Southland/Perry line of
cases. It then presents an inadequate analysis of m. Finally,
the Court concludes, purportedly under a Volt analysis, that
Montana's notice requirement does not undermine the goals and
policies of the FAA. Nothing could be further from the truth.
In Southland, the United States Supreme Court was faced with
a California statute which required judicial consideration of
certain claims brought under it; the California courts held that
the statute precluded arbitration under an agreement containing an
arbitration provision. Determining that the FAA was a substantive
rule applicable in state courts by which Congress intended "to
foreclose state legislative attempts to undercut the enforceability
of arbitration agreements," the Supreme Court held that the
California statute violated the supremacy clause. Southland was
decided in 1984.
In 1987, the Supreme Court decided Perry, another California
case involving a different California statute which--by its terms--
provided that legal actions for the collection of wages could be
maintained notwithstanding an agreement to arbitrate such claims.
Again the California courts denied a motion to compel arbitration
under the parties' agreement, favoring their legislature's effort
to render arbitration agreements unenforceable. And again the
United States Supreme Court reversed, quoting its Southland
language that Congress intended to foreclose state legislatures
from undercutting the enforceability of arbitration agreements.
For additional clarity, the Supreme Court added "'We see nothing in
the [FAA] indicating that the broad principle of enforceability is
subject to any additional limitations under state law.'" Perrv,
482 U.S. at 489-90 (citations omitted). Southland and Perrv are,
as the Court notes, consistent with each other.
In 1989, the Supreme Court decided u.There, faced with
yet another California statute and another decision from the
California courts denying a motion to compel arbitration on the
basis of the state statute, the Supreme Court affirmed. Contrary
to this Court's suggestion, Volt is entirely consistent with--and
not a retrenchment from--Southland and Perrv. A11 three cases
require this Court to conclude that Montana's notice requirement is
preempted by the FAA.
In u,
the parties had specifically agreed to submit
disputes under their contract to arbitration under the California
arbitration statutes. The California arbitration statute at issue
in Volt differed markedly from those in Southland and Perrv. As
noted above, the earlier cases involved statutes which clearly
undercut the enforceability of arbitration agreements. In u,
however, the statute--part of the California Arbitration Act--
merely allowed a court to stav arbitration pending resolution of
related litigation; the right to arbitrate remained. The issue
before the Supreme Court was the same as in the earlier cases:
whether the stay provision would undermine the goals and policies
of the FAA.
The Supreme Court reiterated that the purpose of the FAA was
to enforce arbitration agreements entered into by parties, and
specifically noted the parties' agreement to apply California's
arbitration rules, one of which permitted the stay of arbitration
pending related litigation. On these facts, including the parties'
choice of California arbitration law and that that law permitted a
stay--but not a voiding--of arbitration, the Supreme Court held
that enforcing the California stay provision did not frustrate the
policy behind the FAA of enforcing arbitration agreements.
The Court's opinion fails--or refuses--to recognize two
important differences between Volt and the case presently before
us. First, the Supreme Court in Volt relied heavily on the fact
that the parties had affirmatively chosen California arbitration
law, including the stay statute, to govern their agreement.
Second, the stay statute did not undercut, undermine or render
unenforceable the parties1 agreement to arbitrate.
Here, the parties did not affirmatively choose Montana
arbitration law, which includes the notice requirement, to govern
their agreement. They chose Connecticut law.
Moreover, it is clear under Southland, Perry and Volt that
Montana's notice requirement is preempted by the Federal
Arbitration Act. The reason for this constitutes the second
important difference between this case and Volt: here, the
application of the notice requirement is not merely a procedural
matter; indeed, it totally undermines the purposes of the FAA by
rendering the parties' arbitration agreement unenforceable. This
is precisely the result prohibited by the United States Supreme
Court in all three of the cases discussed herein and in the Court's
opinion on this issue.
I would affirm the District Court's grant of defendants'
motion to stay judicial proceedings pending arbitration of
plaintiffs' claims.
-
Chief Justice J.A. Turna
Justice Karla M. Gray.