Doctor's Associates Inc. v. Casarotto

PETITIONER: Doctor's Associates Inc.
RESPONDENT: Casarotto
LOCATION: 10th Judicial Circuit Court - Jefferson

DOCKET NO.: 95-559
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: Montana Supreme Court

CITATION: 517 US 681 (1996)
ARGUED: Apr 16, 1996
DECIDED: May 20, 1996

ADVOCATES:
Lucinda A. Sikes - Argued the cause for the respondents
Mark R. Kravitz - Argued the cause for the petitioners

Facts of the case

Paul Casarotto, a Subway sandwich shop franchisee, sued franchisor Doctor's Associates, Inc. (DAI) and its agent, Nick Lombardi, in a Montana state court when a dispute arose between the parties with regard to a standard form franchise agreement for the operation of the shop. The court stayed the lawsuit pending arbitration pursuant to the arbitration clause set out in ordinary type on page nine of the franchise agreement. In reversing, the Montana Supreme Court held that the arbitration clause was unenforceable because it did not meet the state-law requirement, 27-5-114(4), that "[n]otice that a contract is subject to arbitration" be "typed in underlined capital letters on the first page of the contract." DAI and Lombardi unsuccessfully argued that the state-law requirement was preempted by the Federal Arbitration Act (FAA), which declares written provisions for arbitration "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The Montana Supreme Court focused on the question of whether the application of 27-5-114(4)'s notice requirement would undermine the FAA's goals and policies. In the Montana court's judgment, the notice requirement did not undermine these goals and policies, for it did not preclude arbitration agreements altogether.

Question

Does the Federal Arbitration Act preempt Montana's first-page notice of arbitration requirement?

Media for Doctor's Associates Inc. v. Casarotto

Audio Transcription for Oral Argument - April 16, 1996 in Doctor's Associates Inc. v. Casarotto

William H. Rehnquist:

We'll hear argument next in Number 85... 95-559, Doctor's Associates, Inc., v. Paul Casarotto.

Mr. Kravitz.

Mark R. Kravitz:

Thank you, Mr. Chief Justice, and may it please the Court:

Section 2 of the Federal Arbitration Act makes written provisions valid, irrevocable, and enforceable except for grounds that apply for the revocation of any contract.

In this case, however, the Montana supreme court refused to enforce the parties' agreement to arbitrate because it failed to comply with the heightened notice statute that, by its plain language, applies only to arbitration agreements and not to other contracts.

Respondents thus have tried to recast Montana's notice statute as codifying some general principle of unexpectedness, but that effort fails for two reasons.

First, Montana's law does no such thing, since it applies to only one type of provision, arbitration agreements, and it applies to them whether they're unexpected or not.

Second, the FAA prevents a court from refusing to enforce the parties' agreement to arbitrate on the basis of a State law principle that turns on the fact that the subject matter involved is arbitration.

Thus, under the FAA, a State may not decide, as Montana has decided here, that a contract is fair enough to enforce its basic terms but not fair enough to enforce its arbitration clause.

Congress enacted the Federal Arbitration Act to clear away judicial and legislative suspicion of arbitration, in and so doing, Congress decided for itself to determine the circumstances under which arbitration clauses would be enforceable, unencumbered by State law constraints.

To that end, the text of section 2 alone determines the enforceability of an arbitration agreement, and that text provides that arbitration provisions are enforceable and valid and irrevocable, save for one explicit, and explicitly limited, exception: upon grounds that exist for the revocation of any contract.

We believe that in determining whether or not a State law or principle fits within that savings clause, two considerations are paramount.

First, the savings clause is an exception to a sweeping general rule of enforcement.

Therefore, the Court must be on its guard not to allow the exceptions to swallow or undercut the general rule.

Second, section 2 establishes a principle of what I'll call rigorous equality for arbitration clauses.

They may be no less valid, no less enforceable, and no less irrevocable than other contract terms under State law.

As a result, this Court has identified two tests that State laws or principles must pass before a law fits within the savings clause.

First, the law must be one of general application.

That is to say, it must apply to contracts generally.

Secondly, even if it is in theory a general principle of law, the particularized application of that general principle cannot turn on the fact that the subject matter involved is arbitration.

Anthony M. Kennedy:

Suppose that the State had a statute which said that the following terms have to be in bold face type: price, term of the contract, choice of law, add a few more if you can think of them, and arbitration.

Would that be a valid State law that's enforceable?

Mark R. Kravitz:

Depending upon the law, the nature of the law and the things that are included, I think not, and I think it would fail really under two principles.

First, unless the list was quite long, it would not apply to contracts generally but just apply to a few things, and secondly--

Anthony M. Kennedy:

No, this... no... well, I'll amend the hypothetical, then.

It applies to contracts generally, it says.

Mark R. Kravitz:

--Right.

Well, it applies to all written contract terms?

Anthony M. Kennedy:

All written contracts.

Mark R. Kravitz:

Okay, and does it apply to--