Montana Supreme Court Applies U.S. Supreme Court’s Buckeye Holding

Upholding a district court’s ruling that an employment agreement’s arbitration clause was valid but finding that the lower court exceeded its authority by deciding substantive disputes under the agreement, the Montana Supreme Court held that an arbitrator must rule on a contract’s validity once a court has determined an arbitration clause is valid.

In Larsen v. Western States Ins. Agency, Inc., No. DA 06-0802, 2007 WL 3054963 (Mont. Oct 22, 2007), Western hired Larsen as an insurance agent in 2000 and provided her with a book of business. The employment agreement contained a non-competition clause prohibiting Larsen from accepting business from Western customers after her employment with Western and a liquidated damages clause imposing a financial penalty for beach of the non-competition agreement. Additionally, the agreement contained an arbitration provision governing all employment related disputes.

Larsen resigned from Western in July 2005 to start her own insurance agency. Western informed Larsen that it intended to enforce the non-competition and liquidated damages clauses. However, Western referred clients to Larsen when it lacked the resources to serve those clients. Larsen objected to Western referring clients while simultaneously enforcing the liquidated damages clause.

Larsen sought a declaratory judgment against Western asserting the agreement was an unconscionable adhesion contract, which rendered the arbitration clause unenforceable. Western moved for summary judgment. The court granted the motion finding the non-competition and liquidated damages were reasonable and supported by consideration. Larsen appealed.

The Court held that an arbitrator must decide the contract’s validity rather than the district court. The district court correctly decided the arbitration agreement was not unconscionable because the agreement did not fall outside Larsen’s expectation, as the arbitration agreement was printed in large bold letters and Larsen had signed similar agreements before.

However, the district court exceeded its authority by deciding substantive issues under the agreement, as the Supreme Court’s holding in Buckeye Check Cashing v. Cardegna, 546 U.S. at 445 mandates that the arbitrator decide the contract’s validity unless the challenge is to the underlying agreement itself. The Court vacated the district court’s ruling and remanded the case with instruction to order the parties to arbitrate the dispute.