## Facts

- Massachusetts securities regulators promulgated rules governing broker-dealers’ use of predispute arbitration clauses in customer agreements.
- The rules restricted requiring arbitration agreements as a condition of opening an account, mandated specific arbitration-focused disclosures, and authorized sanctions for noncompliance.
- The covered broker-customer contracts involved interstate and international commerce.
- The Securities Industry Association and several brokerage firms sued state officials for declaratory and injunctive relief, alleging federal preemption under the Federal Arbitration Act (FAA).
- The district court held the rules preempted by the FAA and enjoined enforcement; state officials appealed.

## Issues

1. Whether the FAA preempts state securities regulations that single out predispute arbitration agreements for special restrictions and disclosure requirements.
2. Whether a state may condition account opening and impose arbitration-specific prerequisites on brokerage contracts subject to the FAA.

## Decision

- The First Circuit affirmed the judgment for the securities-industry plaintiffs.
- The court held the challenged Massachusetts regulations were preempted by the FAA and invalid under the Supremacy Clause.
- The court upheld declaratory relief and a permanent injunction against enforcement.
- Because the challenged provisions were treated as a unit and no severability argument was developed below, the court invalidated the set of provisions in full.

## Legal Principles

- The FAA reflects a federal policy requiring arbitration agreements to be placed on the same footing as other contracts and enforced according to their terms when the transaction involves interstate commerce.
- States may apply generally applicable contract defenses (e.g., fraud, duress, unconscionability) to arbitration clauses, but may not impose rules that target arbitration provisions for special burdens or suspect status.
- State regulations are preempted when they conflict with the FAA by creating obstacles to the federal objective of enforcing arbitration agreements on equal terms with other contract provisions, even when the state asserts consumer-protection goals in a regulated field.

## Conclusion

The First Circuit held that Massachusetts could not impose arbitration-specific restrictions and disclosure prerequisites on broker-customer agreements covered by the FAA, and it affirmed an injunction barring enforcement because the regulations conflicted with federal law requiring equal treatment of arbitration agreements.


Securities Indus. Ass’n v. Connolly, 883 F.2d 1114 (1st Cir. 1989)