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Doctor's Assocs. v. Casarotto - 517 U.S. 681, 116 S. Ct. 1652 (1996)

Rule:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C.S. § 2. What states may not do is decide that a contract is fair enough to enforce all its basic terms, but not fair enough to enforce its arbitration clause. The Federal Arbitration Act (Act) makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act's language and Congress's intent.

Facts:

Under § 2 of the Federal Arbitration Act (FAA), 9 U.S.C.S. § 2, written provisions for arbitration are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. However, a Montana notice statute,  Mont. Code Ann. § 27-5-114(4) (1995), which specifically and solely applies to contracts "subject to arbitration," declared a contract's arbitration clause unenforceable unless notice that the contract was subject to arbitration was typed in underlined capital letters on the first page of the contract. Petitioner Doctor's Associates, Inc. (DAI), the national franchisor of Subway sandwich shops, entered into a standard-form franchise agreement with a franchisee for the operation of a sandwich shop in Montana. On page 9 of the franchise agreement was an arbitration clause in ordinary type. When a dispute arose, the franchisee filed a suit against DAI and its agent in the state district court, which alleged state-law contract and tort claims relating to the franchise agreement. DAI successfully moved in the Montana trial court to stay the suit pending arbitration. The Supreme Court of Montana reversed, but left undisturbed the trial court's findings that the franchise agreement fell within the FAA's scope and that the agreement covered the claims at issue. However, the state supreme court expressed the view that the Montana notice statute rendered the arbitration clause unenforceable; and was not pre-empted by § 2, as the Montana statute did not undermine the FAA's goals and policies; the statute merely prescribed that before arbitration agreements were enforceable, they had to be entered into knowingly. The United States Supreme granted certiorari, vacated, and remanded for further proceedings in light of a recent United States Supreme Court decision in another case involving § 2's pre-emption of state law. On remand, the Montana Supreme Court reaffirmed and reinstated its prior opinion.

Issue:

Did the Montana statute conflict with the Federal Arbitration Act?

Answer:

Yes.

Conclusion:

The United States Supreme Court held that the Montana notice statute directly conflicted with § 2 of the FAA and was, therefore, pre-empted by the FAA; with respect to arbitration agreements covered by the FAA, the state statute conditioned the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally.

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