Source: http://openjurist.org/465/us/1
Timestamp: 2015-09-02 06:48:42
Document Index: 749654533

Matched Legal Cases: ['§ 2', '§ 31512', '§ 1257', '§ 31512', '§ 1257', '§ 2', '§ 2', '§ 31512', 'art; 31', '§ 31000', '§ 2', '§ 2', '§ 1257', '§ 1257', '§ 31512', '§ 1257', '§ 31512', '§ 2', '§ 2']

465 US 1 Southland Corporation v. D Keating | OpenJurist
465 U.S. 1 - Southland Corporation v. D Keating Home
465 US 1 Southland Corporation v. D Keating 465 U.S. 1
104 S.Ct. 852
79 L.Ed.2d 1
SOUTHLAND CORPORATION, et al., Appellantsv.Richard D. KEATING et al.
Appellant Southland Corp. (hereafter appellant) is the owner and franchisor of 7-Eleven convenience stores. Appellees are 7-Eleven franchisees. Each franchise agreement between appellant and appellees contains a clause requiring arbitration of any controversy or claim arising out of or relating to the agreement or breach thereof. Several of the appellees filed individual actions against appellant in California Superior Court, alleging fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violation of the disclosure requirements of the California Franchise Investment Law. These actions were consolidated with a subsequent class action filed by another appellee making substantially the same claims. Appellant moved to compel arbitration of the claims pursuant to the contract. The Superior Court granted the motion as to all claims except those based on the Franchise Investment Law, and did not pass on appellees' request for class certification. The California Court of Appeal reversed the trial court's refusal to compel arbitration of the claims under the Franchise Investment Law, construing the arbitration clause to require arbitration of such claims and holding that the Franchise Investment Law did not invalidate arbitration agreements and that if it rendered such agreements involving commerce unenforceable, it would conflict with § 2 of the United States Arbitration Act, which provides that "a contract evidencing a transaction involving commerce to settle by arbitration a controversy . . . arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The court also directed the trial court to conduct class certification proceedings. The California Supreme Court reversed the ruling that claims asserted under the Franchise Investment Law are arbitrable, interpreting § 31512 of that Law—which renders void any provision purporting to bind a franchisee to waive compliance with any provision of that Law—to require judicial consideration of claims brought under that statute and holding that the statute did not contravene the federal Act. The court remanded the case to the trial court for consideration of appellees' request for class certification.
1. This Court has jurisdiction under 28 U.S.C. § 1257(2) to decide whether the United States Arbitration Act pre-empts § 31512 of the California statute. Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 95 S.Ct. 1029, 43 L.Ed.2d 328 (1975). To delay review of a state judicial decision denying enforcement of an arbitration contract until the state litigation has run its course would defeat the core purpose of the contract. On the other hand, since it does not affirmatively appear that the request for class certification was "drawn in question" on federal grounds, this Court is without jurisdiction to resolve this question as a matter of federal law under § 1257(2). Pp. 6-9.
2. Section 31512 of the California statute directly conflicts with § 2 of the United States Arbitration Act and hence violates the Supremacy Clause. Pp. 10-16.
(a) In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims that the contracting parties agreed to resolve by arbitration. That Act, resting on Congress' authority under the Commerce Clause, creates a body of federal substantive law that is applicable in both state and federal courts. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. ----, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). To confine the Act's scope to arbitrations sought to be enforced in federal courts would frustrate what Congress intended to be a broad enactment. Pp. 10-14.
(c) The California Supreme Court's interpretation of § 31512 would encourage and reward forum shopping. This Court will not attribute to Congress the intent to create a right to enforce an arbitration contract and yet make that right dependent on the particular forum in which it is asserted. Since the overwhelming proportion of civil litigation in this country is in the state courts, Congress could not have intended to limit the Arbitration Act to disputes subject only to federal -court jurisdiction. In creating a substantive rule applicable in state as well as federal courts, Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements. Pp. 15-16.
Appeal dismissed in part; 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192, reversed in part and remanded.
Mark J. Spooner, Washington, D.C., for appellants.
John F. Wells, Oakland, Cal., for appellees.
We noted probable jurisdiction to consider (a) whether the California Franchise Investment Law, which invalidates certain arbitration agreements covered by the Federal Arbitration Act, violates the Supremacy Clause and (b) whether arbitration under the Federal Act is impaired when a class action structure is imposed on the process by the state courts.
* Appellant The Southland Corporation is the owner and franchisor of 7-Eleven convenience stores. Southland's standard franchise agreement provides each franchisee with a license to use certain registered trademarks, a lease or sublease of a convenience store owned or leased by Southland, inventory financing, and assistance in advertising and merchandising. The franchisees operate the stores, supply bookkeeping data, and pay Southland a fixed percentage of gross profits. The franchise agreement also contains the following provision requiring arbitration:
"Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the Rules of the American Arbitration Association . . . and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof."
Appellees are 7-Eleven franchisees. Between September 1975 and January 1977, several appellees filed individual actions against Southland in California Superior Court alleging, among other things, fraud, oral misrepresentation, breach of contract, breach of fiduciary duty, and violation of the disclosure requirements of the California Franchise Investment Law, Cal.Corp.Code § 31000 et seq. (West 1977). Southland's answer, in all but one of the individual actions, included the affirmative defense of failure to arbitrate.
The Superior Court granted Southland's motion to compel arbitration of all claims except those claims based on the Franchise Investment Law. The court did not pass on appellees' request for class certification. Southland appealed from the order insofar as it excluded from arbitration the claims based on the California statute. Appellees filed a petition for a writ of mandamus or prohibition in the California Court of Appeal arguing that the arbitration should proceed as a class action.
The California Court of Appeal reversed the trial court's refusal to compel arbitration of appellees' claims under the Franchise Investment Law. 109 Cal.App.3d 784, 167 Cal.Rptr. 481 (1980). That court interpreted the arbitration clause to require arbitration of all claims asserted under the Franchise Investment Law, and construed the Franchise Investment Law not to invalidate such agreements to arbitrate.1 Alternatively, the court concluded that if the Franchise Investment Law rendered arbitration agreements involving commerce unenforceable, it would conflict with § 2 of the Federal Arbitration Act, 9 U.S.C. § 2 (1976), and therefore be invalid under the Supremacy Clause. 167 Cal.Rptr. at 493-494. The Court of Appeal also determined that there was no "insurmountable obstacle" to conducting an arbitration on a classwide basis, and issued a writ of mandate directing the trial court to conduct class certification proceedings. Id., at 492.
The California Supreme Court, by a vote of 4-2, reversed the ruling that claims asserted under the Franchise Investment Law are arbitrable. 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 (1982). The California Supreme Court interpreted the Franchise Investment Law to require judicial consideration of claims brought under that statute and concluded that the California statute did not contravene the federal Act. Id., at 604, 183 Cal.Rptr., at 371-372, 645 P.2d, at 1203-1204. The court also remanded the case to the trial court for consideration of appellees' request for classwide arbitration.
We postponed consideration of the question of jurisdiction pending argument on the merits. --- U.S. ----, 103 S.Ct. 721, 74 L.Ed.2d 948 (1983). We reverse in part and dismiss in part.
Jurisdiction of this Court is asserted under 28 U.S.C. § 1257(2) which provides for an appeal from a final judgment of the highest court of a state when the validity of a challenged state statute is sustained as not in conflict with federal law. Here Southland challenged the California Franchise Investment Law as it was applied to invalidate a contract for arbitration made pursuant to the Federal Arbitration Act. Appellee argues that the action of the California Supreme Court with respect to this claim is not a "final judgment or decree" within the meaning of § 1257(2).
Under Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 482-483, 95 S.Ct. 1029, 1039-1040, 43 L.Ed.2d 328 (1975), judgments of state courts that finally decide a federal issue are immediately appealable when "the party seeking review here might prevail [in the state court] on the merits on nonfederal grounds, thus rendering unnecessary review of the federal issue by this Court, and where reversal of the state court on the federal issue would be preclusive of any further litigation on the relevant cause of action. . . ." In these circumstances, we have resolved the federal issue "if a refusal immediately to review the state-court decision might seriously erode federal policy." Id., at 483, 95 S.Ct., at 1040.
The judgment of the California Supreme Court with respect to this claim is reviewable under Cox Broadcasting, supra. Without immediate review of the California holding by this Court there may be no opportunity to pass on the federal issue and as a result "there would remain in effect the unreviewed decision of the State Supreme Court" holding that the California statute does not conflict with the Federal Arbitration Act. Id., at 485, 95 S.Ct., at 1041. On the other hand, reversal of a state court judgment in this setting will terminate litigation of the merits of this dispute.
Finally, the failure to accord immediate review of the decision of the California Supreme Court might "seriously erode federal policy." Plainly the effect of the judgment of the California court is to nullify a valid contract made by private parties under which they agreed to submit all contract disputes to final, binding arbitration. The federal Act permits "parties to an arbitrable dispute [to move] out of court and into arbitration as quickly and easily as possible." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S. ----, ----, 103 S.Ct. 927, 940, 74 L.Ed.2d 765 (1983).
Contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts. Such a course could lead to prolonged litigation, one of the very risks the parties, by contracting for arbitration, sought to eliminate. In The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 92 S.Ct. 1907, 1914, 32 L.Ed.2d 513 (1972), we noted that the contract fixing a particular forum for resolution of all disputes
"the forum clause was a vital part of the agreement, and it would be unrealistic to think that the parties did not conduct their negotiations, including fixing the monetary terms, with the consequences of the forum clause figuring prominently in their calculations." Id., at 14, 92 S.Ct., at 1915.
For us to delay review of a state judicial decision denying enforcement of the contract to arbitrate until the state court litigation has run its course would defeat the core purpose of a contract to arbitrate. We hold that the Court has jurisdiction to decide whether the Federal Arbitration Act preempts § 31512 of the California Franchise Investment Law.
That part of the appeal relating to the propriety of superimposing class action procedures on a contract arbitration raises other questions. Southland did not contend in the California courts that, and the State courts did not decide whether, State law imposition class action procedures was preempted by federal law. When the California Court of Appeal directed Southland to address the question whether state or federal law controlled the class action issue, Southland responded that State law did not permit arbitrations to proceed as class actions, that the Federal Rules of Civil Procedure were inapplicable, and that requiring arbitrations to proceed as class actions "could well violate the [federal] constitutional guaranty of procedural due process."2 Southland did not claim in the Court of Appeal that if State law required class action procedures, it would conflict with the federal Act and thus violate the Supremacy Clause.
In the California Supreme Court, Southland argued that California law applied but that neither the contract to arbitrate nor State law authorized class action procedures to govern arbitrations. Southland also contended that the Federal Rules were inapplicable in State proceedings. Southland pointed out that although California law provided a basis for class action procedures, the Judicial Council of California acknowledged "the incompatibility of class actions and arbitration." Petition for Hearing at 23. It does not appear that Southland opposed class procedures on federal grounds in the California Supreme Court.3 Nor does the record show that the California Supreme Court passed upon the question whether superimposing class action procedures on a contract arbitration was contrary to the federal Act.4
Since it does not affirmatively appear that the validity of the State statute was "drawn in question" on federal grounds by Southland, this Court is without jurisdiction to resolve this question as a matter of federal law under 28 U.S.C. § 1257(2). See Bailey v. Anderson, 326 U.S. 203, 207, 66 S.Ct. 66, 68, 90 L.Ed. 3 (1945).
The California Franchise Investment Law provides:
"Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void." Cal.Corp.Code § 31512 (West 1977).
The California Supreme Court interpreted this statute to require judicial consideration of claims brought under the State statute and accordingly refused to enforce the parties' contract to arbitrate such claims. So interpreted the California Franchise Investment Law directly conflicts with § 2 of the Federal Arbitration Act and violates the Supremacy Clause.
"A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (1976).
We discern only two limitations on the enforceability of arbitration provisions governed by the Federal Arbitration Act: they must be part of a written maritime contract or a contract "evidencing a transaction involving commerce"5 and such clauses may be revoked upon "grounds as exist at law or in equity for the revocation of any contract." We see nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under State law.
The Federal Arbitration Act rests on the authority of Congress to enact substantive rules under the Commerce Clause. In Prima Paint Corp. v. Flood & Conklin Manufacturing Corp., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the Court examined the legislative history of the Act and concluded that the statute "is based upon . . . the incontestable federal foundations of 'control over interstate commerce and over admiralty.' " Id., at 405, 87 S.Ct., at 1806 (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess. 1 (1924)). The contract in Prima Paint, as here, contained an arbitration clause. One party in that case alleged that the other had committed fraud in the inducement of the contract, although not of arbitration clause in particular, and sought to have the claim of fraud adjudicated in federal court. The Court held that, notwithstanding a contrary state rule, consideration of a claim of fraud in the inducement of a contract "is for the arbitrators and not for the courts," id., at 400, 87 S.Ct., at 1804. The Court relied for this holding on Congress' broad power to fashion substantive rules under the Commerce Clause.6
At least since 1824 Congress' authority under the Commerce Clause has been held plenary. Gibbons v. Ogden, 22 U.S. 1, 196, 9 Wheat. 1, 196, 6 L.Ed. 23 (1824). In the words of Chief Justice Marshall, the authority of Congress is "the power to regulate; that is, to prescribe the rule by which commerce is to be governed." Ibid. The statements of the Court in Prima Paint that the Arbitration Act was an exercise of the Commerce Clause power clearly implied that the substantive rules of the Act were to apply in state as well as federal courts. As Justice Black observed in his dissent, when Congress exercises its authority to enact substantive federal law under the Commerce Clause, it normally creates rules that are enforceable in state as well as federal courts. Prima Paint, 388 U.S., at 420, 87 S.Ct., at 1814 (Black, J., dissenting).
In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S., at ----, ---- n. 32, 103 S.Ct., at 942 n. 32, we reaffirmed our view that the Arbitration Act "creates a body of federal substantive law" and expressly stated what was implicit in Prima Paint, i.e., the substantive law the Act created was applicable in state and federal court. Moses H. Cone began with a petition for an order to compel arbitration. The District Court stayed the action pending resolution of a concurrent state court suit. In holding that the District Court had abused its discretion, we found no showing of exceptional circumstances justifying the stay and recognized "the presence of federal-law issues" under the federal Act as "a major consideration weighing against surrender [of federal jurisdiction]." Id., at ----, 103 S.Ct., at 942. We thus read the underlying issue of arbitrability to be a question of substantive federal law: "Federal law in the terms of the Arbitration Act governs that issue in either state or federal court." Id., at ----, 103 S.Ct., at 941.
Although the legislative history is not without ambiguities, there are strong indications that Congress had in mind something more than m