Doctor's Associates, Inc. v. Casarotto et ux.
517 U.S. 681 (1996)
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Rule of Law:
The Federal Arbitration Act (FAA) preempts state laws that impose notice requirements or other conditions on the enforceability of arbitration agreements that are not applicable to contracts generally. State law cannot single out arbitration provisions for suspect status; they must be placed on the same footing as other contracts.
Facts:
- In April 1988, Doctor's Associates, Inc. (DAI), the franchisor of Subway sandwich shops, entered into a franchise agreement with Paul Casarotto to open a shop in Great Falls, Montana.
- The franchise agreement contained an arbitration clause on page nine, written in ordinary type.
- The clause stated that 'Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by Arbitration.'
- The contract did not include any notice on its first page that it was subject to arbitration, as required by Montana state law for an arbitration clause to be enforceable.
- A dispute later arose between Casarotto and DAI related to the franchise agreement.
Procedural Posture:
- Paul Casarotto sued Doctor's Associates, Inc. (DAI) and its agent in a Montana state trial court.
- DAI moved to stay the lawsuit and compel arbitration pursuant to the franchise agreement.
- The Montana trial court granted DAI's motion.
- Casarotto, as appellant, appealed to the Montana Supreme Court.
- The Montana Supreme Court reversed the trial court, holding the arbitration clause was unenforceable for failing to comply with Montana's statutory notice requirement.
- DAI, as petitioner, sought a writ of certiorari from the U.S. Supreme Court, which granted the petition, vacated the judgment, and remanded the case for reconsideration in light of Allied-Bruce Terminix Cos. v. Dobson.
- On remand, the Montana Supreme Court adhered to its original ruling.
- DAI again petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does the Federal Arbitration Act preempt a Montana state law that renders an arbitration clause unenforceable unless notice of the clause is typed in underlined capital letters on the first page of the contract?
Opinions:
Majority - Justice Ginsburg
Yes. The Federal Arbitration Act (FAA) preempts Montana's notice requirement because state law cannot subject an arbitration agreement to conditions for enforceability that are not applicable to all other contracts. Section 2 of the FAA dictates that arbitration agreements must be placed 'upon the same footing as other contracts.' While generally applicable contract defenses like fraud, duress, or unconscionability may be used to invalidate an arbitration clause, a state law that singles out arbitration provisions for special treatment, such as Montana's unique first-page notice requirement, directly conflicts with the FAA's mandate and is therefore displaced by the federal statute.
Dissenting - Justice Thomas
No. The Federal Arbitration Act (FAA) does not preempt the Montana law because §2 of the FAA does not apply to proceedings in state courts. Consistent with the reasoning in his dissent in Allied-Bruce Terminix Cos. v. Dobson, the FAA's provisions should not extend to state court matters, leaving states free to regulate arbitration clauses as they see fit within their own judicial systems.
Analysis:
This decision significantly strengthens the preemptive power of the Federal Arbitration Act over state laws that attempt to regulate arbitration agreements. By striking down a state-mandated notice requirement designed to protect consumers, the Court solidified the 'equal footing' doctrine, making it clear that states cannot create special hurdles for arbitration clauses, even for public policy reasons. This ruling limits states' ability to pass consumer protection laws targeting arbitration and forces any challenge to an arbitration clause into the framework of general contract defenses. The decision has had a lasting impact on contract law, particularly in the areas of consumer, franchise, and employment agreements, by broadly validating the enforceability of arbitration clauses against state-level legislative challenges.
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