October 22 2007
DA 06-0802
IN THE SUPREME COURT OF THE STATE OF MONTANA
2007 MT 270
DEBRA LARSEN,
Plaintiff and Appellant,
v.
WESTERN STATES INSURANCE AGENCY, INC.,
Defendant and Appellee.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and For the County of Yellowstone, Cause No. DV 06-0056
Honorable Gregory R. Todd, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Tom Singer, Axilon Law Group, Billings, Montana
For Appellee:
Jared S. Dahle and Randall G. Nelson, Nelson & Dahle, Billings, Montana
Submitted on Briefs: September 19, 2007
Decided: October 22, 2007
Filed:
__________________________________________
Clerk
Justice Brian Morris delivered the Opinion of the Court.
¶1 Debra Larsen (Larsen) appeals from an order of the Thirteenth Judicial District,
Yellowstone County, granting Western States Insurance Agency, Inc.’s (Western) motion for
summary judgment. We affirm in part and reverse and remand in part.
¶2 Larsen presents the following issues for review:
¶3 Whether the District Court properly determined that the employment agreement
between Larsen and Western contained a valid arbitration clause.
¶4 Whether the District Court properly determined that the employment agreement
contained a valid non-competition clause.
¶5 Whether the District Court properly determined that the employment agreement was
enforceable as a whole.
PROCEDURAL AND FACTUAL BACKGROUND
¶6 Western hired Larsen as a “personal lines” insurance agent in May, 2000. Western
supplied Larsen with an existing book of business when she began work. The book of
business consisted of clients who already owned Western insurance policies. Western
required Larsen to sign a non-negotiable Producer’s Employment Agreement (Agreement)
upon hiring. The Agreement had a one-year term and governed all employment matters,
including matters post-employment if the employee resigned or was terminated. The
Agreement’s first page stated in bold, capital letters: “THIS AGREEMENT IS SUBJECT
TO ARBITRATION.” Western required Larsen to re-sign the Agreement in March of each
succeeding year of her employment.
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¶7 The Agreement limited Larsen’s post-employment rights regarding her Western book
of business. The Agreement included a non-competition clause and a liquidated damages
clause. The non-competition clause prohibited Larsen from accepting business after
terminating her employment relationship with Western from clients included in Larsen’s
Western book of business. The liquidated damages clause imposed a penalty on Larsen
equivalent to two-hundred percent of the annual commission for each violation.
¶8 Larsen resigned from Western on July 13, 2005, to start her own insurance agency.
Western informed Larsen of its intention to enforce the terms of the Agreement’s non-
competition and liquidated damages clauses shortly after she left. Western referred its
clients covered by the non-competition clause to Larsen, however, when Western lacked the
resources to serve those clients. Larsen objected to the fact that Western could enjoy a short-
term increase in profits by referring clients to Larsen while enforcing the liquidated damages
clause against her. Larsen pointed out that Western could receive twice the value of the
annual commission for each policy covered by the non-competition clause without
expending any time or resources.
¶9 Larsen commenced this declaratory judgment action against Western on January 18,
2006. Larsen claimed that the entire Agreement amounted to an unconscionable contract of
adhesion. As a result, she argued that Western could not enforce the arbitration clause.
Larsen also claimed that the non-competition clause and the liquidated damages clause
represented unreasonable restrictions on trade and therefore the court should void them as
against public policy.
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¶10 Western moved for summary judgment. The District Court determined that the terms
of the Agreement, particularly the arbitration clause, fell within Larsen’s reasonable
expectation. The District Court concluded that the non-competition and liquidated damages
clauses satisfied the three-part test articulated in Montana Mountain Products v. Curl, 2005
MT 102, ¶ 11, 327 Mont. 7, ¶ 11, 112 P.3d 979, ¶ 11. The court noted that the Agreement
restricted application of the clauses in time and space and that good consideration supported
them. The court further determined the clauses to be reasonable based on Larsen’s status as
an insurance industry veteran who easily could comprehend their effect. Larsen appeals.
STANDARD OF REVIEW
¶11 We review de novo a district court’s decision to grant summary judgment, using the
same criteria applied by the district court under M. R. Civ. P. 56. Shelton v. State Farm Mut.
Auto Ins. Co., 2007 MT 132, ¶ 13, 337 Mont. 378, ¶ 13, 160 P.3d 531, ¶ 13. Summary
judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is no genuine issue as
to any material fact and that the moving party is entitled to a judgment as a matter of law.”
M. R. Civ. P. 56(c). We draw all reasonable interferences in favor of the party opposing
summary judgment. Shelton, ¶ 13.
DISCUSSION
¶12 Whether the District Court properly determined that the employment agreement
between Larsen and Western contained a valid arbitration clause.
¶13 Larsen relies solely on our decision in Kloss v. Edward D. Jones & Co., 2002 MT
129, 310 Mont. 123, 54 P.3d 1, to challenge the arbitration clause’s validity. Larsen points
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to the following factors to argue that the clause fell outside her reasonable expectation: (1)
the Agreement was standardized, (2) the party with superior bargaining power prepared the
Agreement, (3) Larsen did not have the opportunity to negotiate the Agreement’s terms, and
(4) Western did not explain the Agreement to her. Kloss, ¶¶ 27-28. Larsen also argues that
the pervasive nature of arbitration clauses in insurance employment agreements rendered the
Agreement unreasonable. Larsen claims that her refusal to accept the arbitration clause
would have shut her out of the industry. Kloss, ¶ 27.
¶14 Kloss first requires us to determine whether the contract as a whole represents a
contract of adhesion. Kloss, ¶ 23 (citing Iwen v. U.S., 1999 MT 63, 293 Mont. 512, 977
P.2d 989). A standardized form of agreement, drafted by the party with superior bargaining
power, and without offering the weaker party the opportunity to negotiate its terms,
constitutes a contract of adhesion. Kloss, ¶¶ 23-24. We determined that the securities
agreement at issue in Kloss was adhesive. The superior party had prepared the standardized
investment agreement, the weaker party had no opportunity to negotiate, and the superior
party did not explain the consequences of the arbitration clause to the weaker party. Kloss,
¶¶ 27-28. No one in the present case disputes that the Agreement was a standardized
agreement, prepared by the superior party, that the weaker party had no opportunity to
negotiate its terms, and the superior party did not explain it to the weaker party. The
agreement between Larsen and Western qualifies as a contract of adhesion. Kloss, ¶¶ 27-28.
¶15 As the District Court correctly noted, however, simply being adhesive does not render
a contract invalid and unenforceable under the Kloss analysis. Kloss, ¶ 24. The contract also
either must fall outside the weaker party’s reasonable expectation or must be unconscionable.
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Kloss, ¶ 24. Larsen’s challenge to the Agreement focuses exclusively on her reasonable
expectation. Larsen argues that, like the plaintiff in Kloss, Western forced her into a contract
of adhesion without the reasonable expectation that it would subject her to arbitration.
Larsen asserts that the District Court erroneously concluded that the Agreement fell within
her reasonable expectation.
¶16 The District Court noted that Larsen had signed similar agreements in her long
experience in the insurance industry, and that the arbitration clause was “so boldly stated in
large font on the first page” of the Agreement. Larsen correctly argues that it is
inappropriate to consider the express written arbitration clause alone as evidence that the
weaker party expected to arbitrate any disputes. Kloss, ¶ 29. We agree that the written term
alone is insufficient to establish the weaker party’s reasonable expectation. In this case,
however, the District Court based its conclusion on several additional factors.
¶17 The District Court considered Larsen’s twenty years experience in the insurance
industry. It considered the fact that Larsen had entered various, similar employment
agreements that contained arbitration clauses at Western and at other insurance agencies over
her years in the insurance industry. The District Court also considered that the Agreement
stated in bold, capital letters on the first page that “THIS AGREEMENT IS SUBJECT TO
ARBITRATION.” We hold that this factual analysis constitutes sufficient grounds to
support the District Court’s conclusion that the arbitration clause fell within Larsen’s
reasonable expectation.
¶18 Larsen argues that the concurring opinion in Kloss required the District Court to
consider whether Larsen voluntarily, knowingly, and intelligently waived her right to redress
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before court and jury. Kloss, ¶ 64 (Nelson, J. concurring). Larsen contends that factors such
as whether the parties negotiated a term, whether disparity in bargaining power existed,
whether counsel represented the parties, and whether the parties actually signed or initialed
the agreement, among others, are relevant to whether a party has waived its fundamental
rights to trial by jury or right to access the courts. Kloss, ¶ 65 (Nelson, J. concurring).
¶19 The adhesion, reasonable expectation, and unconscionability prongs of the Kloss
analysis, however, weave together, either expressly or impliedly, all of these factors. Kloss,
¶¶ 23-32. Larsen mistakenly reads the concurring opinion in Kloss as creating law
independent from Kloss. The concurring opinion served primarily to further explicate the
rationale that animates the principal holding and analysis in Kloss. Kloss, ¶ 48 (Nelson, J.
concurring). We did not recognize an independent analysis of the enforceability of
arbitration clauses in the concurring opinion in Kloss. The District Court correctly
determined that the arbitration clause in the Agreement was valid and enforceable.
¶20 Whether the District Court properly determined that the employment agreement
contained a valid non-competition clause.
¶21 Whether the District Court properly determined that the employment agreement was
enforceable as a whole.
¶22 We address together Larsen’s arguments regarding the validity of the non-competition
clause and the enforceability of the Agreement as a whole. In Martz v. Beneficial Montana,
Inc., 2006 MT 94, ¶ 11, 332 Mont. 93, ¶ 11, 135 P.3d 790, ¶ 11, we considered “whether a
court or an arbitrator decides the question of a contract’s validity where the contract contains
an arbitration provision.”
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¶23 We adopted two relevant arbitration principles from the U.S. Supreme Court’s
decision in Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204 (2006).
First, a court must sever an arbitration clause from a contract as a whole. Martz, ¶ 15 (citing
Buckeye, 546 U.S. at 445, 126 S. Ct. at 1209). Second, “‘unless the challenge is to the
arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator’” if
the contract contains a valid arbitration clause. Martz, ¶ 15 (quoting Buckeye, 546 U.S. at
445-46, 126 S. Ct. at 1209).
¶24 In light of Martz, the District Court properly heard and determined the validity of the
arbitration clause in the Agreement. Once the District Court determined the arbitration
clause’s validity, however, it exceeded its authority when it decided further substantive
issues under the Agreement. Those issues properly should be decided by an arbitrator
according to the terms of the Agreement. Martz, ¶ 15. We vacate the District Court’s
decision as to the validity of the non-competition and liquidated damages clauses and
remand for arbitration.
¶25 Affirmed in part, reversed and remanded in part.
/S/ BRIAN MORRIS
We Concur:
/S/ KARLA M. GRAY
/S/ JIM RICE
/S/ PATRICIA COTTER
/S/ W. WILLIAM LEAPHART
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