The Clash Between Federal and State Arbitration Law and the Appropriateness of Arbitration as a Dispute Resolution Process

• Publication year: 2021

77 Nebraska L. Rev. 397. The Clash Between Federal and State Arbitration Law and the Appropriateness of Arbitration as a Dispute Resolution Process

397

Margaret M. Harding*

The Clash Between Federal and State Arbitration Law and the Appropriateness of Arbitration as a Dispute Resolution Process

TABLE OF CONTENTS

I. Introduction ............................................. 398
II. Doctor's Associates, Inc. v. Casarotto ................... 405
A. The Facts ............................................. 405
B. Montana Uniform Arbitration Act ....................... 407
C. Casarotto v. Lombardi (Casarotto I)-Judicial
Hostility To Arbitration Revisited .................... 409
1. The Majority Opinion ............................... 409
2. Justice Trieweiler's Concurrence ................... 413
3. The Dissents ....................................... 415
D. The Supreme Court's Remand ............................ 417
E. Casarotto v. Lombardi (Casarotto II)-The First
Remand ................................................ 420
F. The Supreme Court's Opinion in Doctor's Associates,
Inc. v. Casarotto ..................................... 422
G. Casarotto v. Lombardi (Casarotto III)-The Second
Remand ................................................ 425
III. Federalism Issues and the FAA ............................ 425
A. Background of the Passage of the FAA .................. 425
1. Law in the United States Prior to the
Enactment of the FAA-The Revocability
Doctrine ........................................... 425
2. The Demise of the Revocability Doctrine ............ 430
3. The FAA ............................................ 435

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4. The Uniform Arbitration Act ("UAA") and State
Arbitration Law .................................... 437
B. Origins of the Clash .................................. 440
1. The Problems Created by Erie and the Court's
Perspective Regarding Arbitration .................. 441
2. Prima Paint Corp. v. Flood and Conklin Mfg. Co.,
Resolves the Erie Dilemma .......................... 447
3. The Consequences of Prima Paint .................... 454
i. The FAA's Strong Federal Policy Favoring
Arbitration ................................... 455
ii. The Applicability of the FAA to State Court
Proceedings ................................... 460
iii. Consequences of Southland ..................... 468
C. Role of State Law After Southland and Doctor's
Associates ............................................ 472
IV. Appropriateness of Arbitration ........................... 476
V. Conclusion ............................................... 491

OF ALL mankind's adventure in search of peace and justice, arbitration

is among the earliest.(fn1)

I. INTRODUCTION

The prevalence of arbitration clauses in contracts of adhesion has

caused a backlash against arbitration.(fn2) While the Supreme Court is
continuing to expand the scope and reach of the Federal Arbitration
Act ("FAA")(fn3), some states, relying on their traditional police powers,

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are either attempting or have attempted to legislatively regulate the use of arbitration clauses in adhesion contracts.(fn4) Some judges, too, are expressing suspicion of arbitration, reminiscent of the judiciary's attitude toward arbitration prior to the passage of the FAA in 1925 (fn5) and commentators are denouncing arbitration when it is the product of an adhesion contract.(fn6) Private arbitration service providers are even concerned. For example, the American Arbitration Association ("AAA") and JAMS/Endispute have crafted due process standards that must be followed in mandatory employment arbitrations.(fn7)

The clash between the FAA and state arbitration law was most acute in Doctor's Associates, Inc. v. Casarotto,(fn8) where the Supreme Court, reversing a decision by the Montana Supreme Court, held that a Montana law (since repealed) requiring conspicuous notice of a predispute arbitration clause (fn9) in a contract was preempted by the FAA.(fn10) That decision thwarted state legislatures in their effort to protect persons of unequal bargaining power from unknowingly agreeing

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to forego their right to resolve a controversy in a judicial forum.(fn11) Although at first glance it is hard to believe that the Court would strike down a state law, the sole purpose of which was to insure that persons knowingly waive their right to a judicial forum, the decision was not remarkable or unexpected. Indeed, it clearly followed precedent (fn12) and was the "correct" decision from that perspective.

What was remarkable about the Doctor's Associates case was the reaction of two of the Justices of the Montana Supreme Court to the opinion. Justices Trieweiler and Hunt dissented from the Montana Supreme Court's Order remanding the case for proceedings not inconsistent with the Supreme Court's opinion, on the basis that the Supreme Court's interpretation of the FAA was "legally unfounded, socially detrimental and philosophically misguided."(fn13) Although a largely "symbolic protest,"(fn14) the dissent by Justices Trieweiler and Hunt highlights the profound difference of opinion regarding the FAA and its application in state court proceedings and the federalism issues that have arisen due to the Supreme Court's expansive interpretation of the FAA. The Court's continued willingness to find that the FAA preempts state arbitration law is strikingly contrary to the deference the Court has otherwise shown to state sovereignty in other areas of the law.(fn15)

It is beyond dispute that arbitration is playing a role today not envisioned by those who drafted the FAA.(fn16) When the FAA was enacted,

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arbitration was occurring primarily in the commercial context between business persons of equal bargaining power.(fn17) In fact, such commercial interests lobbied for passage of the FAA.(fn18) Arbitration was the mutually chosen method of dispute resolution in this context because of its perceived advantages over traditional judicial litigation. It was believed to be more efficient than litigation, less costly and a better process for parties with continuing business relationships.(fn19) Arbitration today, however, is not limited to the same commercial context. Indeed, provisions providing for arbitration of disputes can be found in a variety of contracts, many of which are adhesion contracts. Predispute arbitration clauses can be found in contracts between investors and broker-dealers,(fn20) employment contracts,(fn21) franchise

402

agreements,(fn22) health care contracts,(fn23) and in a whole array of other consumer contracts,(fn24) ranging from contracts for termite services (fn25) to contracts between depositors and credit card holders and banks.(fn26) Arbitration provisions have been upheld in cases involving breach of contract claims to cases involving violation of statutory rights, including rights based on the federal securities laws, antitrust laws, and antidiscrimination laws.(fn27)

It is the Supreme Court's expansive interpretation of the FAA that has fueled the widespread use of predispute arbitration clauses. There are few limits on the use of such clauses. The FAA, which makes predispute arbitration provisions specifically enforceable, requires only that the clause be in writing and that the transaction be in interstate or maritime commerce for the clause to be enforceable.(fn28) The Court has further narrowed the possible restrictions on the use of such provisions by finding that the FAA preempts state laws that prohibit arbitration of certain categories of claims or, like the law in Doctor's Associates, regulate the procedures by which arbitration Practioners' Guide to Arbitration, Employment Disputes, Punitive Damages, and the Implications of the Civil Rights Act of 1991, 23 HOFSTRA L. REV. 913 (1995).

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agreements are formed.(fn29) Indeed, the Court has stated, time and time again, that the FAA was enacted precisely to prevent state legislative and judicial attempts to undercut the enforceability of predispute arbitration agreements.(fn30) The Court's interpretation of the FAA and the corresponding weakening of state authority (fn31) have empowered those with superior bargaining strength to insist on the inclusion of a predispute arbitration clause in adhesion contracts.

Such insistence has had the unfortunate consequence of reviving hostility to the arbitral process itself. While inclusion of a predispute arbitration clause in an adhesion contract is antithetical to the very concept of arbitration, the process itself, when viewed realistically, can be beneficial to both parties to the agreement, including the party with lesser bargaining power. However, until arbitration is mutually agreed upon by both parties to a transaction, arbitration will continue to be viewed with suspicion, compared as inferior to litigation (fn32) and fought every step of the way. Judges and state legislatures will continue to look for ways to protect parties from arbitration and predispute arbitration clauses, and the arbitration process will be further undermined. Those compelled to arbitrate will continue to view it as a cover for the interests of the stronger party (fn33) and the benefits of arbitration will be largely ignored, deemed irrelevant or belittled.

In Part II of this Article, I will discuss in detail the Doctor's Associates case. I use that case because it so aptly represents the clash between federal and state arbitration law. I will describe and critique the reasoning of the Montana Supreme Court when it refused to stay a state court proceeding pending arbitration because the predispute arbitration clause failed to comply with Montana law which required conspicuous notice of the clause. Special emphasis will be given to the concurring opinion of Justice Trieweiler for the insight it provides into his view of...