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 JohnM. 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: LawrenceA. Anderson,Attorney at Law,Great Falls, Montana (Montana Trial Lawyers Assxn) Michael A. Bowen and Michael G. McCarty, Foley & Lardner, Milwaukee, Wisconsin

(InternationalFranchiseAssxn;Securities IndustryAss'n; Snap-On Tools Corp.)



### CEC

### B5 

### 1994 Submitted: April 19, 1994 r: f ;

,. Decided: 

### December 15, 1994 Filed: 4',.i

, .

# -..'

...Justice Terry N. Trieweilerdelivered 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 damageswhich they claim were caused by the defendants' breach of contract and tortious conduct. Defendants Nick 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 agreement with plaintiffs which requiredthatdisputes "arisingout of or relating to" that contract be settled by arbitration. The DistrictCourt granted defendants' motion, and orderedthat 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 isgovernedbyMontana law, is the notice requirement in5 27-5-114(4),MCA, of Montana's Uniform Arbitration Act, preempted by the Federal Arbitration Act found at 9 U.S.C. 55 1-15 (1988)? FACTUAL BACKGROUND On October 29, 1992, Paul and Pamela Casarotto filed an amended complaint naming Doctor's Associates, Inc., and NickLombardi

### as defendants. Forpurposes of our reviewof the District Courtlsorder,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 to their complaint, the Casarottos agreed to open a shop at a lessdesirable location,based on averbal agreementwith Lombardi thatwhen theirpreferred location became available,they would have the exclusive right to open a store at that location. 

### Contraryto that agreement,thepreferred location

### was subsequently awarded by Lombardi and DAI to another franchisee. As a result, the Casarottoslbusiness suffered irreparably, and they lost their business, alongwith 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. DAI1sfranchiseagreementwith the Casarottos was executed on April 25, 1988. There was no indication on the firstpage of the contract that it was subject to arbitration. However, 3paragraph 10(c) of the contract, found on page 9, included the followingprovision: 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 renderedby theArbitrator(s) may be entered inany courthaving jurisdictionthereof. 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 suchaproceedingwill be born equallyby theparties. On January 29, 1993, DAI moved the District Court to dismiss the Casarottos' complaint, or at least stay further judicial proceedings, pending arbitration pursuant toparagraph 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 suitorproceeding 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, uponbeing satisfiedthat the issue involved in suchsuit or proceeding is referable to arbitration under such an agreement shall on applicationof 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 specificallycalled fortheapplication 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 lawapplied, in spiteof the choiceof 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 othernamed defendantswho 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 toRule 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 theparties provides as follows: Thisagreement 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 ~rbitrationAct 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

### RJ. WilliamsCo. v.Fort BelhapHousingAuthon'ty (9th Cir. 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 isprovided 

### for 

### in the 

### contract. Section 188 

### provides as 

### follows: (1) 

### The rightsandduties

### of 

### theparties with respect to an issue in contract are determined by 

### the local law of the statewhich,with respect to that issue,has themost significant relationship to the transaction and the parties under the principles stated in 

### 5 6.

(2) 

### In the absence of 

### an effective choice of 

### lawby the 

### parties (see5 187), the 

### context tobe 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 respectto theparticular issue. (3) 

### If the place of negotiating the contract and the 

### place of performance 

### are 

### inthe 

### samestate,

### 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.AmericanStatesIns.

### 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.llIn 

### that case, we stated: Here, the general policy language in the insurance contractrequires AmericanStatestopaywhatever damages are required 

### in Montana; that is, the contract is to be 

### performed inMontana. 

### Therefore,unless a contractterm 

### provides otherwiset Kemp

### [v.Allstate

### Im.CO.(1979),183Mont.526, 601P.2d 201 

### and 

### 5 28-3-102, MCA, 

### require the application 

### ofMontana law because the

### contractwas tobe 

### lperformedl in Montana. In 

### this case, however, the insurance contract contains a choice of law provision which 

### requirestheapplicationofOregon subrogationlaw. 

# . . .

. .. [Tlhe

### choiceof 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 contraryto ourpublic policy,we held that:

### [Tfhechoice of law provision in the insurance contract would result inmedical payment subrogationunder Oregon law. Because such subrogation violates Montana's public policy,thatterm of the insurance contractat issuehere 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 chosenby theparties togovern theircontractual rightsanddutieswill 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 reasonablebasis for the parties1choice, or b) 

### application of the law of 

### the chosen state would be contraryto a fundamentalpolicy of a state which has 

### a materially greater interest than the chosen state 

### in the determination of 

### theparticular issue andwhich, under 

### the rule of 9 

### 188,would be the state of the 

### applicable law 

### in the absence of 

### an effective 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 

### sameaffidavit,and fromthe allegations in the complaint, that original negotiations were conductedby him inGreat Falls,the contractwas to be performed in Great Falls, the subject matter of the contract

(theSubway Sandwich Shop)was located inGreat 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 ispresented, and that absent an "effective" choice of lawby 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 

### Trammelv.BrotherhoodofLocomotiveFiremenandEnginemen (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 towaive their constitutional right of access to Montana's courts unknowingly,and second,they were concerned aboutMontanans 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 incontroversy between these parties, the arbitration clause in the Subway Sandwich Shop Franchise Agreement requires that the Casarottos travel thousandsof miles to connecticut to have their dispute arbitrated. Furthermore, it requires that they share equally in the expense of arbitration, regardless of themerits of their claim. Presumably, that expense couldbe substantial, sinceunder the Commercial ArbitrationRules 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. Foraproceeding involving multiple arbitrators,theadministrative 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 Casarottoswould 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 arbitrationproceeding. Theextentof pretrial discovery iswithin the solediscretion of the arbitratorand the rules of evidence arenot 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

### Mayv.FirstNationalPawnBrokers,

### Ltd. (Mont

# .Dec

# . 15 

## , 1994)

## , Slip Op. 94-189. Based upon the determinationby 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. 55 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. SupremeCourt decisions in Peny v. Thomas (l987), 482 U.S. 483, 107 S. Ct. 2520, 96 L. Ed. 2d 426,SouthlandCop.

### v.Keatikg (1984), 465U.S. 1, 104 S

# . Ct

# . 852

## , 79 L

# . Ed. 2d 1, and Moses H. ConeMemorial Hospitalv.Merculy ConstructionCop. (l983), 460U.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 casesuwhich "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 stateprovisions. " David P. Pierce,TheFederalArbitrationAct: ConflictingIntepretatiomofits Scope 61 cinn. L. Rev. 623, 630 (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 DAIgsincluded an arbitration provision. Southland was sued in california by several of its franchisees,based on claimswhich included violations of the disclosure requirements of the California Franchise Investment Law, Cal. Corp. Code 31000, et seq. (West 1977). The California Supreme Court held that the 

## - Franchise InvestmentLaw required judicial considerationof claims brought under that statute, and therefore, held that arbitration could not be compelled. TheU.S. SupremeCourt disagreed,and held that: In creating a substantive rule applicable in state as well federal courts, Congress intended to foreclose statelegislative attemptstoundercut the enforceabilityof 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 2which 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 (quotingCal. 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 55 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 substantiveor 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 toarbitrate isnotpart of a contract evidencing interstate commerce or is revocable kponsuchgroundsas exist at lawor in equityfor 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 subjectto 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

# . SeeDowney

### v. Chnktensen (1992)

## , 251 Mont. 386, 825 P.2d 557; Vukasinv.DA.Davidson&Co. (1990), 241 Mont. 126, 7 8 5 P.2d 713 ;WilliamGibson,Jr., Inc.v.JamesGruffCommunications (198 9)

## , 23 9 Mont. 335, 780 p.2d 1131; Larsenv. Opie (1989), 237 Mont. 108, 771 P.2d 977;Passagev.Prudential-BacheSecurities,Inc. (198 6)

## , 223 Mont. 60, 727 P.2d 1298. The Casarottos, however,contend thatSouthland andPeny must be considered in light of the Supreme Court'smore recent decision in VoltInformation Sciences,Inc. 

### v.Board of TrusteesofLeland StanfordJunior 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. In Volt, theparties entered intoa construction contractwhich 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 constructionproject. Volt petitionedtheSuperior Court to compel arbitrationofthedispute. 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 thatbasis,the SuperiorCourt deniedVolt'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 reviewand affirmed the decision of the California courts. volt, 489 U.S. 

### at 471-73. 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 evenwhen Congress has not completely displaced state regulation in 

### an area, state law may nonetheless be preempted to the extent that it actually conflictswith 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. Hinesv.

### Davidowitz, 312U.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,inaccordancewith the termsofthearbitrationaureement itself.would undermine the uoals and aolicies of the FAA. We conclude that it would not. Volt, 489 U.S. at 477-78 (citationomitted; 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, theparties have agreed to abideby 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 WitterReynolds,Znc. v.]Byrd, [470 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, 489 U.S. at 479. 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 Voltdecision is not in the Court's holding,but rather inwhat the Court failed to hold. For example, the Court found no preemption of the California arbitration lawby the FAA. Instead,the Courtmerely stated that Congress didnot 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, TheFederalArbitrationAct: ConflictingInterpretationsofitsScope 61Cinn. L. Rev. 623, 635 (1992) (footnotesomitted). 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 thewhole or anypart 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 won such qrounds as exist at law or in equity for the revocation of any contract. (Emphasisadded.) Based upon the Supreme Court's decision in Volt, we conclude that the nature of our inquiry is whether Montana's notice requirement foundat 

### 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.MetallgeseIlschaftLtd. (2dCir. lggl), 923 F.2d 245,

### SecuritiesIndustlyAss~nv. Connolly (1st Cir. 1989), 883 F.2d 1114, Webb

### v.

### RRowland&Co.,Inc. (8thCir. 1986), 800 F.2d 803

## , and Bunge Cop.v.PenyvilleFeed &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 AmericanPhysiciansv. PortLavaca Clinic (Tex. Ct

# . App. 1992)

## , 843 S

# . W.2d 675,andAlbrightv.EdwardD.Jones&Co. (Ind. Ct. App. 1991), 571 ~.E.2d 1329, for the principle that sincevolt, other courts have held thatnotice 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 arbitratewhen theyhave not agreed to do so. That Court held that thepurpose 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 torequire thatbefore 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 thatMontana'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 orderdatedJune 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 sets 

### forthprinciples of 

### law agreeable to 

### the majority of this Court in language appropriate for judicial precedent. 

### I 

### offer this special concurring opinion as

### my personal observationregardingmany 

### of thefederaldecisionswhich

### havebeen 

### cited to us 

### as authority. To 

### those federal judgeswho consider forcedarbitrationas 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, 

### Iwould 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 thepurpose 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, we

### have developed standards for

### appellatereview 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 forvenue, and jurisdictionalrequirementsbased

on the assumption that it is unfair to forcepeople 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 surestway to resolve claims

on their merits and avoid unnecessary trials. We have contract laws and tort laws. We have laws to protect

our citizens frombad faith, fraud,unfair business practices, and oppressionby themany largenational corporationswho controlmany aspectsof their livesbut with whom theyhave nobargainingpower. While our system of justice and our rules are imperfect, they have as their ultimatepurpose 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 misinterpretationof congressional intentwhen it enacted the Federal Arbitration Act, and due to their naive assumption that arbitration provisions and choice of law provisions are knowinglybargained 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 intheprocesswe refer to as arbitration. Iamparticularly offended by the attitude of federal judges, typifiedby the remarks of Judge Selya in the First Circuit,which

were articulated inSecurities IndustryAsstn

### v. Connolb (1stCir

# . 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 of already-swollencourt calendars." He refers to arbitration as "a contractual device that relieves some of the organic pressure by operating as a shunt, allowing parties to resolvedisputes 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." CO~Z~O~&, 883 F.2d at 1116. Judge Selya refers to the preference in the various state jurisdictions to resolvedisputes according to traditionalnotionsof 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,JudgeSelya'sopinion illustratesanall too frequentpreoccupation on thepart of federal judgeswith their

own case load and a total lack of consideration for the rights of individuals. Nowhere inJudge 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. NowheredoesJudgeSelya acknowledgethat the "patient" (presumably courts like this one) who resists the "treatment" (presumablythe 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 atworst. 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 systemof justiceaswe 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 separationof powers. What these interpretationsdo, in effect, is permit a fewmajor 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,

24they 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 crowdeddockets. Thesedecisionshaveperverted thepurpose 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 rightsthey 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 themajority opinion in its expressionof the deeply held conviction that arbitration of the type expressed in the contract in this case shouldnot 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.2d488,497, inwhich the United States Supreme Court stated: The Act [Federal Arbitration Act1 was designed l1to overrule the judiciary'slongstanding refusal to enforce agreements to arbitrate,"



### . 

## . . and place such agreements "uponthe same footingas 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 "shallbe 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 26on 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,Emersonv. 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 Legislaturehad determined that its citizens are entitled tonotice before entering into an agreement which will limit their future resolution of disputes to a procedure inconvenient, expensive and devoid of procedural safeguards--andfurther 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 suchnotice is displayed thereon,the contract may not be subject to arbitration. (Emphasis supplied.) Our question then becomes whether the contract here is subject to "arbitrationpursuant to this chapter" so that the notice must betyped 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 accordancewiththe CommercialArbitration 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 beenmade to or relieduponby the Franchisee except as set forth below: (Noneare 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 isno 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 28this particular contract is subject to arbitrationpursuant to the laws of the State of Montana and inparticular § 27-5-114,MCA. I therefore conclude that the notice requirement of 5 27-5-114,MCA, does not in anyway establish a fundamental public policy which is applicable to the present contract. I furtherpoint out that the referencetoRestatement (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 requirementof § 27-5-114(4) 

### , MCA,of Montana's Uniform Arbitration Act, preempted by the Federal Arbitration Act found at 9 U.S.C. 5

Themajority opinionquotes 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 ispart 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 Floridamerged with DAI of Connecticut, leavingDAI ofFlorida 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'sdecision in

### Volt and from that concludes that the nature of the inquiry is whether Montana'snotice 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 litigationbetween aparty to the arbitration agreementand third parties not bound by it. The California court stayed the arbitration proceedingspending 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 evenwhen congress hasnot completelydisplaced state regulation inanarea, state lawmay nonethelessbe preempted 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 C~ngress.~~ 

### . . .The question before us, therefore,iswhether applicationof 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 itwould 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. (TheAct "doesnot mandate the arbitration of all claims"),nor does it prevent parties who do agree to arbitrate from excluding certain claims fromthe scope

- of their arbitration agreement. It simply requires courts to enforce privately neqotiated aqreements to arbitrate,likeother contracts,in accordancewith their terms. 

### . . (Citations omitted.) (Emphasis supplied.) Volt 489 U.S. at 477-78, 109 S.Ct. at 1255, 103 L.Ed.2d at 499- I 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 agreementsas 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 consistentwith the goals of FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward. 

# u, 489 U.S. at 479, 109 S.Ct. at 1256, 103 L.Ed.at 500. It is essential to keep inmind that the keyholding 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 Voltdecision 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 31State 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 toMontana'sstatutory requirementof 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 lawvoided any arbitration agreement which does not have a specific acknowledgementof arbitration signed by bothpartiesandwhere 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 rigorousVermont standard. The circuit court then concluded that the Vermont statute is preempted by federal law and stated: Because federal arbitration law governs this dispute,wemust determine whether the Vermont statute is sufficiently consistent with federal law that the twomay 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~t the Vermont statute, and that the



### . . . arbitration provisions, as drafted, are not enforceable. (Emphasis supplied.)Threlkeld, 923 F.2dat 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 theMissouri court inBunqe,theMissouri 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 substantiallyas 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 lawwhich 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 todefeat the arbitrationprovisionof 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 underfederal law would be in violation of the Montana statute even though itmeets the requirement of the FederalArbitration Act. As

a result, even if we accept the majority opinion conclusion that the Montana code section applies, 

### Iwould hold that Montana lawmay 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 JusticeJustice Karla M. Gray, dissenting.

I respectfullydissent from the Court'sopinion onboth 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'ssynopsis of our decision in Emerson

v. Boyd and, on the basis that the agreementbefore us does include

a choice of law provision, on the inapplicability of that decision to the case before us. Inmy view,Younqblood also is not onpoint 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 thanConnecticut 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 typedinunderlined 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 chapter1'--the MUAA. 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

(Curtisv. 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 someother 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 noticerequirement under conflict of law principles, that requirement is preempted by the Federal Arbitration Act (FAA). Therefore, I also dissent from the Court'sopinion on this issue. The Court suggests that theUnited States SupremeCourt'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 statuteprecluded arbitrationunder an agreement containing an arbitration provision. Determining that the FAAwas a substantive rule applicable in state courts by which Congress intended "to foreclose state legislative attempts toundercut 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 involvingadifferent California statutewhich--byits 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'seffort to render arbitration agreements unenforceable. And again theUnited 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 "'Weseenothing 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--Southlandand 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--partof 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 theparties' choice of California arbitration law and that that lawpermitted a stay--butnot a voiding--of arbitration, the Supreme Court held that enforcing the California stayprovision 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 parties1agreement 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 proceduralmatter; 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 casesdiscussed 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.