IN 

### THE SUPREME 

### COURT OF 

### THE STATE OF MONTANA 1995

PAUL CASAROTTO and PAMELA CASAROTTO, Plaintiffs and Appellants,

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

### , ~ud~e prsiding. COUNSEL OF RECORD: For Appellant: Grant D. Parker (argued)and Philip D. Tawney, Mullendore, Tawney & Watt, Missoula, Montana For Respondent: 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 Anderson, Attorney at Law, Great Falls, Montana (MontanaTrial Lawyers Association) Michael A. Bowen and Michael G. McCarty, Foley & Lardner,Milwaukee, Wisconsin

(International Franchise Association; Securities Industry Association; Snap-OnTools Corporation)

Filed: Submitted: August 22, 1995 Decided: August 31, 1995Justice 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 claimwere caused by the defendants' breach of contract and tortious conduct. DefendantsNick Lombardi and Doctor'sAssociates, 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 agreementwithplaintiffs which required that disputes "arisingout of or relating to" that contract be settled by arbitration. The DistrictCourt granteddefendants'motion,and ordered that further judicial proceedings be stayed until arbitration proceedings were completed in accordance with the terms of the parties' agreement. Plaintiffs appealed from that order, and on December 15, 1994,we reversed the order of the District Court and remanded this case to that court for further proceedings. Casarottov.Lombardi (1994) , 268 Mont. 369, 886 P.2d 931. Following this Court's decision, the defendantspetitioned the Supreme Court of the United States for a writ of certiorari. That petition was granted, and on June 12, 1995, theUnited States Supreme Court ordered that the December 15, 1994, judgment of this Court be vacated, and remanded this case to the Supreme Court of Montana for further consideration in light of that Court

### 'sdecision inAllied-BruceTerminixCos.v.Dobson (1995) 

### , 513 U.S

### .

, 115 S. Ct. 834, 130 L. Ed. 2d 753. Having further considered -our prior decision in light ofDobson, we now reaffirm and reinstate our prior opinion. FACTUAL BACKGROUND Paul and Pamela Casarotto entered into a franchise agreement with DAIwhich allowed them to open a Subway Sandwich Shop in Great Falls,Montana. DAI's franchise agreement included onpage nine a provision which required that controversies or claims related to the contract shall be settled by arbitration in Bridgeport, Connecticut. However, the franchise agreement did not include notice on the front page to the effect that the contract was subject to arbitration, as required by § 27-5-114(4),MCA. The Casarottos filed this action in the District Court based on their allegations that DAI breached its agreement with them, defrauded them,and engaged inother tortious conduct,all of which resulted in loss of business and the resulting damage. DAI moved to dismiss the Casarottos' claim or to stay further judicial proceedings pending arbitration pursuant to the arbitration provision in its franchise agreement. The District Court granted DAI's motion to stay further judicial proceedings pursuant to 9U.S.C.

### 5 3,which is part of the Federal Arbitration Act found at 9 U.S.C.§§ 1-15 (1988). On appeal from the District Court's order, we considered whether Montana'snotice requirement was preempted by the Federal Arbitration Act in light of the U.S. Supreme Court's recent decision in VoltInformation Sciences,Inc.v.Board ofTrusteesofLelandStanfordJuniorUniversity (1989),489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488. In that case, the Supreme Court stated that: The FAA contains no express pre-emptiveprovision, 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 pre-empted to the extent that it actually conflicts with federal law--thatis, to the extent that it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hinesv. Davidowilz, 312 U. S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed.2d 581 (1941). 

### The questionbefore us,therefore,iswhether application of Cal.Civ.Proc.Code Ann. § 1281.2(c)to stav arbitration under this contract in interstatecommerce,inaccordance with the terms of the arbitration aqreement itself,would undermine the qoals and policies of the FAA. We conclude that it would not. Volt, 489 U.S. at 477-78, 109 S. Ct. at 1255 (citationomitted; emphasis added)



### . Based on the cited language from Volt, we concluded that the nature of our inquiry was whether Montana's notice requirement found at 

### 5 27-5-114(4),MCA, would "undermine the goals and policies of the FAA." We concluded that it does not. Casarotto, 886 P.2d at 931. We explained our conclusion as follows: 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'sintent 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, 109 S.Ct. at 1253.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 arbitrationagreementswhich are entered intoknowingly. Therefore,we concludethatMontana'snotice statute found at 5 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). Casarotto, 886 P.2d at 938-39. On January 18, 1995,subsequent to our decision in this case, the U.S.Supreme Court decided Dobson. On June 12, 1995, the same Court vacated ourprior Casarottodecision and remanded the matter to this Court for further consideration in light of the Dobson decision. InDobson, the plaintiffs were the assignees of a contract with Terminix for life-time protection against termites. They sued Terminix in Alabama state court when they found their house "swarming with termites." Terminix moved the court for a stay pursuant to 5 2 of the Federal Arbitration Act (9 U.S.C. 5 2

(1988))so that arbitration could proceed pursuant to a provision for arbitration in the termite protection plan. The stay was denied. The Supreme Court of Alabama upheld the denial on thebasis of Ala. Code § 8-1-41(3) (l993), which made written, predispute arbitration agreements invalid and unenforceable. The Alabama court concluded that its state statutewas not preemptedby the Federal Arbitration Act because the connection between the termite contract and interstate commerce was too slight. In the court'sview, the Act applies to a contract only if "'atthe time [theparties entered into the contract] and accepted the arbitration clause, they contemplated substantial interstate activity.'" Despite some interstate activities (e.g., Allied-Bruce,like Terminix, is a multistate firm and shipped treatment and repair material from out of state), the court found that the parties "contemplated" a transaction that was primarily local and not "'substantially" interstate. Dobson, 115 S. Ct. at 837 (citations omitted)

## . Before addressing the issue presented, the Dobson majority reiterated its conclusion that the purpose of the Federal ArbitrationAct was to "overcomejudicial hostility to arbitration agreements and that applies in both federal and state courts." Dobson, 115 S. Ct. at 835. The Court then went on to conclude that the language in 5 2 

### of the Act which applied its provisions to any "contractevidencing a transaction involving commerce"had broader significance than the words of art "in commerce,"and therefore, covered more than persons or activities "within the flow" of interstate commerce. Dobson, 115 S. Ct. at 839. The Court held that the word "involving,"like "affecting,"signaled an intent on the part of Congress "toexercise Congress's commerce power to the full," Dobson, 115 S. Ct. at 841, and secondly that the Act's preemptive force applies to transactions which, in fact, involveinterstate commerce, even though a connection to interstate

commercemay not have been contemplatedby the parties at the time they entered into the agreement. For these reasons, the judgment of the Supreme Court of Alabama was reversed. Dobson, 115 S. Ct.at 843.After careful review, we can find nothing in the Dobson decision which relates to the issues presented to this Court in this case. Our prior Casarotto decision did not involve state law which made arbitration agreements invalid and unenforceable. Our state law simply requires that the parties be adequately informed of what they are doing before they enter into an arbitration agreement. Our decision did not involve an analysis of what was meant by "involving commercew or "affecting commerceu or "in commerce." We assumed, in the Casarotto decision, that the transaction with which we were concerned involved interstate commerce, and that any state law which frustrated the purposes of the Federal ArbitrationAct would be preempted. Finally,there isno suggestion in theDobson decision that the principles from Volt on which we relied have been modified in any way. To our knowledge, it is still the law, therefore, that state law is onlypreempted to the extent that it "standsas an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Volt, 489 U.S.at 477, 109 S.Ct. at 1255(citingHinesv.Davidowitz (1941),312 U.S. 52, 67, 61 S. Ct. 399, 404, 85 L. Ed. 2d 581). While the Dobson decision does include a discussion extolling the virtues of arbitration as a "less expensive alternative to litigation," Dobson, 115 S.Ct. at 843 (apparentlybased on input from the American Arbitration Association), and while that conclusion is at odds with facts set forth in Justice Trieweiler's concurring opinion to our earlierdecision,the concurring opinion was not the basis for our decision. For these reasons,we conclude, after thorough review of our earlier decision in light of the U.S. Supreme Court'sdecision in Dobson, that thedecisions arenot inconsistent, and therefore,that there is no basis formodifying or reversing our earlier opinion. We reaffirm and reinstate our opinion dated December 15, 1994, in the above matter, and remand this case to the District Court for further proceedings consistent with this opinion.

We concur:

Chief JusticeJustice W. William Leaphart, specially concurring.

Justice John C.Harrison was in the majority in this Court's initial decision in Casarotto v. Lombardi (1994), 268 Mont. 369, 886 P.2d 931. Justice Harrison has since retired. As the

successorto Justice Harrison, it is incumbentonme to reviewthat decision in light of the remand from the United States Supreme Court. Having reviewed the Casarottodecision, I specially concur with the Court's conclusion that Montana's notice requirement in § 27-5-114(4),MCA,does not undermine the goals and policies of the FAA and is not preempted by 9 U.S.C. § 2 (1988). 

### I have also reviewedthe United StatesSupremeCourt's decision inAllied-Bruce Terminix Cos.v. Dobson (1995),115 S.Ct.834,130L.Ed.2d 753,and I see no reason why the principles enunciated in that decision should have any effect upon this Court's decision in Casarotto. In Dobson, the United'States Supreme Court held that the FAA preempts anti-arbitration state statutes which invalidate arbitration agreements. Section 27-5-114(4)

### , MCA, cannot be characterized as anti-arbitration nor does it invalidate arbitration agreements. On the contrary, it is one section of Montana's Uniform Arbitration Act which specifically recognizes arbitration agreements: "Awritten 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. Section 27-5-114(1) 

### , MCA. The notice requirement of subsection (4) merely protects the consumer by requiring that notice of an arbitration provision be conspicuouslyplaced on thefront page of the contract. This does not undermine the proarbitration policy of the FAA. Rather, it furthers the policy of meaningful and consensual arbitration by helping ensure that the consumer who signs what is most often a nonnegotiated, form contract, knowingly agrees to arbitration in the event of a dispute. I see no inconsistencybetweenDobsonand ourdecision in Casarotto and I specially concur in the Court's decision to reaffirm and reinstate its December 15, 1994 opinion.Justice Karla M. Gray, dissenting.



### I dissent from the 

### Court's opinion 

### and order 

### and its reinstatement of its prior opinion in this case. My dissent is based on the procedures used 

### by the Court in addressing the United States Supreme Court's vacating of our earlier opinion 

### and remanding for our reconsiderationbased on its decision inAlliedBruce Terminix Cos. 

### v. Dobson (1995), 115 S.Ct. 834, 130 L.Ed.2d 753. 1 also dissent from the Court's conclusion that nothing in the Dobson case relates to the issuespresented to this Court. In dissenting, I also reaffirm and reinstate 

### my earlier dissent in this case. A remand for reconsideration to this Court from the 

### United States SupremeCourt isanuncommon occurrence 

### forwhich we have no procedural rules or practices in place. Counsel for the parties

were left without guidance as to how they should proceed 

### in order to be heard during this phase of the case. Counsel for the defendants/respondents requested the opportunity to brief the 

### issues 

### raised 

### by the 

### United States Supreme Court's 

### remand and 

### to present oral argument. Without so much as 

### a mention of this request, the Court apparently denies it. While one can only speculate on the reasons for such an implicit decision, one must

assume that the Court is simplyunwilling to considerany analysis that would require a change in the result it remainsdetermined to reach, I cannot join in such an arrogant and cavalier approach to this important case onremand from theUnited States SupremeCourt. More importantly,

### Idisagreewith the Court's conclusion that nothing in Dobson relates to the issues before us. While I agreethat the substantive issue addressed at length in Dobson is not before us here, I read more importance into the early language in Dobson than does the Court. In Dobson, the United States Supreme Court reiterates the fundamental premise of the Federal Arbitration Act 

### by citing to Volt, the very case which this Court erroneously interpretsand onwhich itpremises its erroneousdecision, forthe proposition that "thebasic purpose of the FederalArbitrationAct is to overcome courts1 refusals to enforce agreements to arbitrate.l1 Dobson, 115 S .Ct

# . at 838; citing Volt Information Sciences, Inc.v. Board of Trusteesof Leland StanfordJuniorUniv.

(1989),489 U.S. 468, 474. The Supreme Court goes on to say that 

### "Cnlothing significant has changed 

### in the 10 years subsequent to Southland; no later cases have eroded Southland's authority[

# .I" Dobson, 115 S.Ct. at 839. It is this latter statement on which 

### I believe 

### we must focus in reconsidering our decision here. The Court refuses to 

### do so. I continue to believe that this Court erroneously interprets Volt, which was decided by the Supreme Court five years after Southland. Volt is clearly distinguishable on its facts from the

casebefore this Court and cannotproperly serve as abasis for the result the Court reaches. Volt is neither inconsistent with, nor a retrenchment from, Southland, as this Court suggested in its earlier opinion and suggests again today. This is the message 

### I take from the Supreme Court's statement in Dobson that "no later cases have eroded Southland's authority;" 

### this is 

### the portion 

### of this Court's earlier opinion to which I believe the Supreme Court

was directing our attention on remand.For the reasons stated in my earlier dissent, it is my view that application of Montana's notice statute is preempted by the Federal Arbitration Act in this case because application of that statute undercuts, undermines and renders unenforceable the parties' agreement to arbitrate. This view is entirely consistent both with Southland and with a proper interpretation of 

# m. Therefore, 

### I dissent from the Court's opinion and order and reinstatemy prior dissent in this case.

Chief Justice J.A. Turnage and Justice Fred J. Weber join in the foregoing dissent of Justice Karla M. Gray.

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