Doctor’s Assocs., Inc. v. Lombardi, 517 U.S. 681 (1996)

Doctor’s Assocs., Inc. v. Lombardi

No. 95-559

Argued April 16, 1996
Decided May 20, 1996
517 U.S. 681

CERTIORARI TO THE SUPREME COURT OF MONTANA

Syllabus

When a dispute arose between parties to a standard form franchise agreement for the operation of a Subway sandwich shop in Montana, respondent franchisee sued petitioners, franchisor Doctor’s Associates, Inc. (DAI) and its agent, Lombardi, in a Montana state court. The court stayed the lawsuit pending arbitration pursuant to the arbitration clause set out in ordinary type on page nine of the franchise agreement. The Montana Supreme Court reversed, holding that the arbitration clause was unenforceable because it did not meet the state law requirement that "[n]otice that a contract is subject to arbitration" be "typed in underlined capital letters on the first page of the contract." Mont. Code Ann. § 27-5-114(4). DAI and Lombardi unsuccessfully argued that § 27-5-114(4) was preempted by § 2 of the Federal Arbitration Act (FAA), which declares written provisions for arbitration "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." In arguing for preemption, DAI and Lombardi dominantly relied on Southland Corp. v. Keating, 465 U.S. 1, and Perry v. Thomas, 482 U.S. 483, in which this Court established that "state law . . . is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally," but not if the state law principle "takes its meaning precisely from the fact that a contract to arbitrate is at issue." Id. at 493, n. 9 (emphasis added). The Montana Supreme Court, however, thought Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, limited § 2’s preemptive force and correspondingly qualified Southland and Perry; the proper inquiry, the Montana Supreme Court said, should focus not on the bare words of § 2, but on the question: would the application of § 27-5-114(4)’s notice requirement undermine the FAA’s goals and policies. In the Montana court’s judgment, the notice requirement did not undermine these goals and policies, for it did not preclude arbitration agreements altogether. On remand from this Court for reconsideration in light of Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, the Montana court adhered to its original ruling.

Held: Montana’s first-page notice requirement, which governs not "any contract," but specifically and solely contracts "subject to arbitration," conflicts with the FAA, and is therefore displaced by the federal measure. Generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2, see, e.g., Allied-Bruce, 513 U.S. at 281, but courts may not invalidate arbitration agreements under state laws applicable only to arbitration provisions, see, e.g., ibid. By enacting § 2, Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed upon the same footing as other contracts. Scherk v. Alberto-Culver Co., 417 U.S. 506, 511. Montana’s § 27-5-114(4) directly conflicts with § 2 because the State’s law conditions the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally. The Montana Supreme Court misread Volt in reaching a contrary conclusion. The state rule examined in Volt determined only the efficient order of proceedings; it did not affect the enforceability of the arbitration agreement itself. Applying § 27-5-114(4) here, in contrast, would invalidate the arbitration clause. Pp. 686-688.

274 Mont. 3, 901 P.2d 596, reversed and remanded.

GINSBURG, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and STEVENS, O’CONNOR, SCALIA, KENNEDY, SOUTER, and BREYER, JJ., joined. THOMAS, J., filed a dissenting opinion, post, p. 689.