Doctor's Associates, Inc. v. Casarotto

1996-06-03

Headline: State rule forcing first-page, underlined-capital notice for arbitration clauses is struck down as inconsistent with federal law, reversing Montana and making standard franchise arbitration clauses enforceable.

Holding: The Court held that Montana’s law requiring underlined-capital first-page notice only for arbitration clauses conflicts with the Federal Arbitration Act and is preempted, so the franchise arbitration clause is enforceable.

Real World Impact:

Prevents states from singling out arbitration clauses with special notice rules.
Makes standard franchise arbitration clauses enforceable under the federal Arbitration Act.
Limits states’ ability to require first-page conspicuous notice for arbitration terms.

Topics: arbitration clauses, federal law vs state law, franchise contracts, contract notice rules

Summary

Background

A Subway franchisee, Paul Casarotto, sued the national franchisor, Doctor’s Associates, Inc., and its local agent in Montana state court over contract and tort claims. The franchise contract included an arbitration clause on page nine. The franchisor asked the trial court to stop the lawsuit and send the dispute to arbitration. The Montana Supreme Court ruled the arbitration clause unenforceable because Montana law required notice that a contract was subject to arbitration to be typed in underlined capital letters on the first page, and that notice was not present.

Reasoning

The Court addressed whether Montana’s special first-page notice rule could stand alongside the Federal Arbitration Act (FAA). The FAA says written arbitration agreements are valid and enforceable unless general contract defenses apply. The Court explained that Montana’s rule singled out arbitration clauses for special treatment rather than treating them like any other contract term. Because that state rule applied only to arbitration provisions, it conflicted with the FAA and was preempted. The Court distinguished cases about applying ordinary state procedural rules and relied on prior decisions holding that arbitration clauses must be placed on the same footing as other contracts.

Real world impact

The ruling means that standard arbitration clauses in franchise agreements and similar contracts are enforceable when covered by the FAA, even if a state statute requires special conspicuous notice for arbitration terms. The case was reversed and returned to Montana courts for further proceedings consistent with the opinion.

Dissents or concurrances

Justice Thomas dissented, arguing that the FAA does not apply to state court proceedings and therefore should not preempt Montana law.