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 John M. 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: 

Lawrence A. Anderson, Attorney at Law, Great Falls, 

Montana (Montana Trial Lawyers Assxn) 

Michael A. Bowen and Michael G. McCarty, 

Foley & Lardner, Milwaukee, Wisconsin 

(International Franchise Assxn; Securities 

Industry Ass'n; Snap-On Tools Corp.) 

CEC B 5 1994 Submitted: April 19, 1994 

r: f ; , . Decided: December 15, 1994 

Filed: 4',.i , . -..' 

. . . 
Justice 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 claim were caused by the defendants' 

breach of contract and tortious conduct. Defendants Nick Lombardi 

and Doctor's Associates, 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 requiredthat disputes "arising out 

of or relating to" that contract be settled by arbitration. The 

District Court granted defendants' motion, and ordered that 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 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)? 

FACTUAL BACKGROUND 

On October 29, 1992, Paul and Pamela Casarotto filed an 

amended complaint naming Doctor's Associates, Inc., and Nick 
Lombardi as defendants. For purposes of our review of the District 

Courtls order, 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 less desirable location, based on a verbal agreement with 

Lombardi that when their preferred location became available, they 

would have the exclusive right to open a store at that location. 

Contrary to that agreement, the preferred location was subsequently 

awarded by Lombardi and DAI to another franchisee. As a result, 

the Casarottosl business suffered irreparably, and they lost their 

business, along with 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. 

DAI1s franchise agreement with the Casarottos was executed on 

April 25, 1988. There was no indication on the first page of the 

contract that it was subject to arbitration. However, 

3 
paragraph 10(c) of the contract, found on page 9, included the 

following provision: 

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 rendered by the Arbitrator(s) may 

be entered in any court having jurisdiction thereof. 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 such a proceeding will be born equally by the parties. 

On January 29, 1993, DAI moved the District Court to dismiss 

the Casarottos' complaint, or at least stay further judicial 

proceedings, pending arbitration pursuant to paragraph 10 (c) of the 

franchise agreement. DAI alleged that the franchise agreement 

affected interstate commerce, and theref ore, 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 suit or proceeding 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, 

upon being satisfied that the issue involved in such suit 

or proceeding is referable to arbitration under such an 

agreement shall on application of 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 specifically called forthe application 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 law applied, in spite of the choice of 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 other named defendants who 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 to Rule 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 

the parties provides as follows: 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. 

DAI contends that, therefore, Connecticut law governs our 
interpretation of the contract and that since Connecticut law is 

identical to the Federal ~rbitration Act 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 R J. Williams Co. 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 is provided for in the contract. 

Section 188 provides as follows: 

(1) The rights and duties of the parties with respect to 

an issue in contract are determined by the local law of 

the state which, with respect to that issue, has the most 

significant relationship to the transaction and the 

parties under the principles stated in 5 6. 

(2) In the absence of an effective choice of law by the 

parties (see 5 187), the context to be 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 respect to the particular issue. 

(3) If the place of negotiating the contract and the 

place of performance are in the same state, 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. American States Ins. CO. ( 199 3 ) , 

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.ll In that case, we stated: 

Here, the general policy language in the insurance 

contract requires American States to pay whatever damages 

are required in Montana; that is, the contract is to be 

performed in Montana. Therefore, unless a contract term 

provides otherwi set Kemp [v. Allstate Im. CO. (1979), 183 Mont. 526, 

601 P.2d 201 and 5 28-3-102, MCA, require the application 

of Montana law because the contract was to be lperformedl 

in Montana. In this case, however, the insurance 

contract contains a choice of law provision which 

requires the application of Oregon subrogation law. . . . 

. . . [Tlhe choice of 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 contrary to our public policy, we held 

that: 
[Tfhe choice of law provision in the insurance contract 

would result in medical payment subrogation under Oregon 

law. Because such subrogation violates Montana's public 

policy, that term of the insurance contract at issue here 

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 chosen by the parties to govern 

their contractual rights and duties will 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 reasonable basis for the 

parties1 choice, or 

b) application of the law of the chosen state 

would be contrary to a fundamental policy of a 

state which has a materially greater interest 

than the chosen state in the determination of 

the particular issue and which, 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 same 
affidavit, and from the allegations in the complaint, that original 

negotiations were conducted by him in Great Falls, the contract was 

to be performed in Great Falls, the subject matter of the contract 

(the Subway Sandwich Shop) was located in Great 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 is presented, and that absent an "effective" choice of law by 

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 Trammel v. Brotherhood of Locomotive Firemen and Enginemen ( 19 53 ) , 12 6 

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 to waive their constitutional right of access to 

Montana's courts unknowingly, and second, they were concerned about 
Montanans 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 in controversy between these parties, 

the arbitration clause in the Subway Sandwich Shop Franchise 

Agreement requires that the Casarottos travel thousands of miles to 

connecticut to have their dispute arbitrated. Furthermore, it 

requires that they share equally in the expense of arbitration, 

regardless of the merits of their claim. Presumably, that expense 

could be substantial, since under the Commercial Arbitration Rules 

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. 

For a proceeding involving multiple arbitrators, the administrative 

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 Casarottos would 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 

arbitration proceeding. The extent of pretrial discovery is within 

the sole discretion of the arbitrator and the rules of evidence are 
not 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 May v. First NationalPawn Brokers, Ltd. (Mont . Dec . 15 , 1994) , 

Slip Op. 94-189. 

Based upon the determination by 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. Supreme 
Court decisions in Peny v. Thomas (l987), 482 U.S. 483, 107 S. Ct. 

2520, 96 L. Ed. 2d 426, SouthlandCop. v. Keatikg (1984), 465 U.S. 1, 104 

S . Ct . 852 , 79 L . Ed. 2d 1, and Moses H. Cone Memorial Hospital v. Merculy 

ConstructionCop. (l983), 460 U.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 casesu which "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 state provisions. " David P. Pierce, The Federal ArbitrationAct: 

Conflicting Intepretatiom of its Scope 61 cinn. L. Rev. 62 3, 63 0 (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 DAIgs included an arbitration provision. Southland was sued 

in california by several of its franchisees, based on claims which 

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 Investment Law required judicial consideration of claims 

brought under that statute, and therefore, held that arbitration 

could not be compelled. The U.S. Supreme Court disagreed, and held 

that: 

In creating a substantive rule applicable in state 

as well federal courts, Congress intended to foreclose 

state legislative attempts to undercut the enforceability 
of 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 2 which 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 (quoting Cal. 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 

substantive or 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 to arbitrate is not part 

of a contract evidencing interstate commerce or is 

revocable kpon such grounds as exist at law or in equity 
for 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 subject to 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 . See Downey v. Chnktensen (1992) , 2 51 Mont. 

386, 825 P.2d 557; Vukasinv. DA. Davidson&Co. (1990), 241 Mont. 126, 

7 8 5 P .2 d 7 13 ; William Gibson, Jr., Inc. v. James Gruff Communications ( 19 8 9 ) , 2 3 9 

Mont. 335, 780 p.2d 1131; Larsen v. Opie (1989), 237 Mont. 108, 771 

P. 2d 977 ; Passage v. Prudential-Bache Securities, Inc. (198 6) , 22 3 Mont. 60, 727 

P.2d 1298. 

The Casarottos, however, contend that Southland and Peny must be 

considered in light of the Supreme Court's more recent decision in 

Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior 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, the parties entered into a construction contract which 

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 construction project. Volt 

petitionedthe Superior Court to compel arbitration ofthe dispute. 

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 that basis, the Superior Court denied Volt'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 review and 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 even when Congress has 

not completely displaced state regulation in an area, 

state law may nonetheless be preempted to the extent 

that it actually conflicts with 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. Hines v. Davidowitz, 312 U.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, in accordance with the terms of the arbitration 
aureement itself. would undermine the uoals and aolicies 

of the FAA. We conclude that it would not. 

Volt, 489 U.S. at 477-78 (citation omitted; 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, the parties have agreed to abide by 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 Witter Reynolds, 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 Volt decision is not in 

the Court's holding, but rather in what the Court failed 

to hold. For example, the Court found no preemption of 

the California arbitration law by the FAA. Instead, the 

Court merely stated that Congress did not 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, The Federal Arbitration Act: Conflicting Interpretations of its Scope 

61 Cinn. L. Rev. 623, 635 (1992) (footnotes omitted). 

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 the whole or any part 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. 

(Emphasis added.) 

Based upon the Supreme Court's decision in Volt, we conclude 

that the nature of our inquiry is whether Montana's notice 

requirement found at 5 27-5-114 (4), MCA, would vfundermine the goals 

and policies of the FAA." We conclude that it does not. 

DAI re1 ies on decisions in Threkeld & Co., Znc. v. MetallgeseIlschaft Ltd. 

(2d Cir. lggl), 923 F.2d 245, SecuritiesIndustlyAss~nv. Connolly (1st Cir. 

1989), 883 F.2d 1114, Webb v. R Rowland& Co., Inc. (8th Cir. 1986), 800 

F .2d 8 03 , and Bunge Cop. v. Penyville Feed & Produce, Inc. (Mo . 1985 ) , 68 5 

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 

American Physicians v. Port Lavaca Clinic (Tex. Ct . App. 1992 ) , 84 3 S . W. 2d 

675, and Albrightv.EdwardD.Jones&Co. (Ind. Ct. App. 1991), 571 ~.E.2d 

1329, for the principle that since volt, other courts have held that 
notice 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 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. 

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 arbitration agreements which are entered into 

knowingly. 

Therefore, we conclude that Montana'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 order dated June 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 forth principles of law agreeable to 

the majority of this Court in language appropriate for judicial 

precedent. I offer this special concurring opinion as my personal 

observation regarding many of the federal decisions which have been 

cited to us as authority. 

To those federal judges who consider forced arbitration as 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, I would 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 the purpose 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 appellate review 

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 for venue, and jurisdictional requirements based 

on the assumption that it is unfair to force people 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 surest way to resolve claims 

on their merits and avoid unnecessary trials. 

We have contract laws and tort laws. We have laws to protect 

our citizens from bad faith, fraud, unfair business practices, and 

oppression by the many large national corporations who control many 

aspects of their lives but with whom they have no bargaining power. 

While our system of justice and our rules are imperfect, they 

have as their ultimate purpose 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 misinterpretation of congressional intent when it enacted the 

Federal Arbitration Act, and due to their naive assumption that 

arbitration provisions and choice of law provisions are knowingly 
bargained 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 in the process we 

refer to as arbitration. 

I am particularly offended by the attitude of federal judges, 

typified by the remarks of Judge Selya in the First Circuit, which 

were articulated in Securities Industry Asstn v. Connolb (1st Cir . 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-swollen court calendars." He 

refers to arbitration as "a contractual device that relieves some 

of the organic pressure by operating as a shunt, allowing parties 

to resolve disputes 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 resolve disputes according to traditional notions 
of 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, Judge Selya's opinion illustrates an all 

too frequent preoccupation on the part of federal judges with their 

own case load and a total lack of consideration for the rights of 

individuals. Nowhere in Judge 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. 

Nowhere does Judge Selya acknowledge that the "patient" (presumably 

courts like this one) who resists the "treatment" (presumably the 

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 at 
worst. 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 system of justice as we 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 

separation of powers. What these interpretations do, in effect, is 

permit a few major 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, 

24 
they 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 crowded dockets. These decisions have perverted the purpose 

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 rights they 

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 the majority opinion in its expression of the deeply 

held conviction that arbitration of the type expressed in the 

contract in this case should not 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.2d 488, 497, in which the 

United States Supreme Court stated: 

The Act [Federal Arbitration Act1 was designed l1to 

overrule the judiciary's longstanding refusal to enforce 

agreements to arbitrate," . . . and place such 

agreements "upon the same footing as 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 "shall be 

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 

26 
on 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, Emerson v. 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 

Legislature had determined that its citizens are entitled to notice 

before entering into an agreement which will limit their future 

resolution of disputes to a procedure inconvenient, expensive and 

devoid of procedural safeguards--and further 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 such notice is displayed thereon, the contract may 

not be subject to arbitration. (Emphasis supplied.) 

Our question then becomes whether the contract here is subject to 

"arbitration pursuant to this chapter" so that the notice must be 
typed 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 accordance with the Commercial Arbitration 

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 been made to or relied upon by the Franchisee except 

as set forth below: (None are 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 is no 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 

2 8 
this particular contract is subject to arbitration pursuant to the 

laws of the State of Montana and in particular § 27-5-114, MCA. I 

therefore conclude that the notice requirement of 5 27-5-114, MCA, 

does not in any way establish a fundamental public policy which is 

applicable to the present contract. 

I further point out that the reference to Restatement (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 

requirement of § 27-5-114 (4) , MCA, of Montana's Uniform Arbitration 

Act, preempted by the Federal Arbitration Act found at 9 U.S.C. 5 

The majority opinion quotes 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 is part 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 Florida 
merged with DAI of Connecticut, leaving DAI of Florida 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's decision in Volt and from that concludes that the nature of 

the inquiry is whether Montana's notice 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 litigation between a party to the arbitration agreement and 

third parties not bound by it. The California court stayed the 

arbitration proceedings pending 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 even when congress 

has not completely displaced state regulation in an area, 

state law may nonetheless be preempted to the extent that 

it actually conflicts with federal law--that is, 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, is whether application of 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 it would 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. (The Act "does not mandate the arbitration 

of all claims"), nor does it prevent parties who do agree 

to arbitrate from excluding certain claims from the scope - 

of their arbitration agreement. It simply requires 

courts to enforce privately neqotiated aqreements to 

arbitrate, like other contracts, in accordance with their 

terms. . . (Citations omitted.) (Emphasis supplied.) 

I Volt 489 U.S. at 477-78, 109 S.Ct. at 1255, 103 L.Ed.2d at 499- 

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 agreements as 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 consistent with 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 in mind that the key holding 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 Volt decision 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 

3 1 
State 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 to Montana's statutory requirement of 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 law voided any 

arbitration agreement which does not have a specific 

acknowledgement of arbitration signed by both parties and where 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 

rigorous Vermont standard. The circuit court then concluded that 

the Vermont statute is preempted by federal law and stated: 

Because federal arbitration law governs this 

dispute, we must determine whether the Vermont statute is 

sufficiently consistent with federal law that the two may 

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.2d at 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 the Missouri court in Bunqe, the Missouri 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 substantially as 

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 law which 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 to defeat the arbitration provision of 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 under 
federal law would be in violation of the Montana statute even 

though it meets the requirement of the Federal Arbitration Act. As 

a result, even if we accept the majority opinion conclusion that 

the Montana code section applies, I would hold that Montana law may 

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 Justice 
Justice Karla M. Gray, dissenting. 

I respectfully dissent from the Court's opinion on both 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's synopsis of our decision in Emerson 

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

a choice of law provision, on the inapplicability of that decision 

to the case before us. In my view, Younqblood also is not on point 

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 than Connecticut 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 " [nl otice that a contract 

is subject to arbitration pursuant to this chapter shall be typed 
in underlined 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 

(Curtis v. 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 some other 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 notice 
requirement under conflict of law principles, that requirement is 

preempted by the Federal Arbitration Act (FAA). Therefore, I also 

dissent from the Court's opinion on this issue. 

The Court suggests that the United States Supreme Court'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 statute precluded arbitration under an agreement containing an 

arbitration provision. Determining that the FAA was a substantive 

rule applicable in state courts by which Congress intended "to 

foreclose state legislative attempts to undercut 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 involving a different California statute which--by its 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's effort 

to render arbitration agreements unenforceable. And again the 
United 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 "'We see nothing 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--Southland and 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--part of 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 the parties' 

choice of California arbitration law and that that law permitted a 

stay--but not a voiding--of arbitration, the Supreme Court held 

that enforcing the California stay provision 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 parties1 agreement 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 procedural 
matter; 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 cases discussed 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.