Opinion ID: 1231723
Heading Depth: 2
Heading Rank: 2

Heading: (4a) ARBITRABILITY OF FRANCHISE INVESTMENT LAW CLAIMS.

Text: We next consider Southland's appeal from the trial court's denial of its petitions to compel arbitration concerning certain claims made against it pursuant to the Franchise Investment Law (Corp. Code, § 31000 et seq.). These claims assert, among other things, that Southland systematically violated section 31202 [4] of the Corporations Code by wilfully making untrue statements of material fact, and by wilfully omitting to state material facts which are required to be stated in statements required to be disclosed under section 31101. [5] The trial court was apparently of the view that these claims were not subject to arbitration as a matter of contract interpretation and also as a consequence of Corporations Code section 31512, part of the Franchise Investment Law, which 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. Since we agree with the latter conclusion we find it unnecessary to consider the former. In Wilko v. Swan (1953) 346 U.S. 427 [98 L.Ed. 168, 74 S.Ct. 182], the United States Supreme Court interpreted nearly identical language in section 14 of the Securities Act of 1933 (15 U.S.C. § 77n) [6] to permit suit by a customer against a securities brokerage firm for alleged misrepresentation in the sale of securities, notwithstanding a provision for arbitration contained in the margin agreement. The arbitration clause, the court decided, constituted a stipulation, and the right to select the judicial forum the kind of provision that could not be waived in advance under section 14. (346 U.S. at pp. 434-435 [98 L.Ed. at p. 175].) In arriving at this conclusion, the court observed that section 12(2) of the act created a special right to recover for misrepresentation which differs substantially from the common-law action in that the seller is made to assume the burden of proving lack of scienter (346 U.S. at p. 431 [98 L.Ed. at p. 173]), and that this special right was enforceable in any court of competent jurisdiction, with a wide choice of venue ( ibid. ). The court placed primary emphasis, however, upon the proposition that the effectiveness of the statute is lessened in arbitration as compared to judicial proceedings ( id., at p. 435 [98 L.Ed. at p. 176]), in part because of the limited nature of judicial review ( id., at p. 436 [98 L.Ed. at p. 176]). As the protective provisions of the Securities Act require the exercise of judicial direction to fairly assure their effectiveness, it seems to us that Congress must have intended [the waiver provision] to apply to waiver of judicial trial and review ( id., at p. 437 [98 L.Ed. at pp. 176-177]). [7] The evidence is persuasive that in drafting the Franchise Investment Law California legislators looked to the Securities Act of 1933 as their model. Not only do the two statutes have the same purpose of protecting investors through preinvestment disclosure statements, but their parallel provisions are often expressed in identical language. [8] Corporations Code section 31301 contains substantially the same provision relating to scienter as the United States Supreme Court relied upon in Wilko. [9] And, as we have observed, the waiver language of the two statutes is virtually identical. (5) This court has long recognized the principle of statutory construction that `[w]hen legislation has been judicially construed and a subsequent statute on the same or an analogous subject is framed in the identical language, it will ordinarily be presumed that the Legislature intended that the language as used in the later enactment would be given a like interpretation. This rule is applicable to state statutes which are patterned after the federal statutes. [Citations.]' ( Belridge Farms v. Agricultural Labor Relations Bd. (1978) 21 Cal.3d 551, 557 [147 Cal. Rptr. 165, 580 P.2d 665].) (4b) The presumption established by that principle of statutory construction is reinforced by the language and history of the recently adopted California Franchise Relations Act (Bus. & Prof. Code, § 20000 et seq.), regulating the grounds and procedure for termination and nonrenewal of franchises. That statute stemmed from hearings conducted in late 1977 by a subcommittee of the state Assembly Committee on Finance, Insurance, and Commerce, chaired by Assemblyman Bruce Young. A preliminary report prepared by that committee prior to hearings refers to the Franchise Investment Law as a prepurchase disclosure law patterned after the Securities Act of 1933, discusses various proposals for extending regulation of franchise relationships, and poses various rhetorical questions in that regard, among them the following: Present law provides for the resolution of franchisee/franchisor disputes through the judicial system. Should the law be modified to provide for other means of resolution such as compulsory arbitration and/or a Board of Franchising? [10] The Franchise Relations Act as ultimately adopted by the Legislature contains both a nonwaiver provision nearly identical to Corporations Code section 31512 and the following provision authorizing limited arbitrability of disputes under that statute: Nothing contained in this chapter shall limit the right of a franchisor and franchisee to agree before or after a dispute has arisen to binding arbitration of claims under this chapter, provided that: (a) The standards applied in such arbitration are not less than the requirements specified in this chapter; and (b) The arbitrator or arbitrators employed in such arbitration are chosen from a list of impartial arbitrators supplied by the American Arbitration Association or other impartial person. (Bus. & Prof. Code, § 20040.) The inference is strong, if not inescapable, that the Legislature understood the antiwaiver provision of the Franchise Investment Law to be subject to the Wilko (346 U.S. 427) interpretation, and that it intended to establish a different rule for the Franchise Relations Act. [11] While we have no evidence as to the policy reasons underlying that distinction, it may be that the Legislature considered arbitration more acceptable in the context of franchise relationships already established, presumably on the basis of proper disclosure, or that it considered the more detailed provisions in the Franchise Investment Law for civil liability (Corp. Code, § 31300), administrative regulation (Corp. Code, § 31400) and criminal liability (Corp. Code, § 31410 et seq.), to require access to the courts and the exercise of judicial direction to fairly assure their effectiveness. ( Wilko v. Swan, supra, 346 U.S. at p. 437 [98 L.Ed. at p. 176].) Having determined that the California Legislature intended the nonwaiver provision of the California Franchise Act to be interpreted in accord with Wilko v. Swan , [12] we turn to Southland's contention that the statute as so construed may not constitutionally be applied to a contract evidencing a transaction involving commerce within the meaning of the Federal Arbitration Act (FAA). The argument is that the FAA, in mandating that a provision for arbitration in such a contract shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract (FAA, § 2), establishes a general principle of arbitrability which preempts any state law or policy restrictive of arbitration, whatever the basis for that law or policy might be, and whether or not federal jurisdiction over the underlying controversy exists. We consider that argument overly broad. The starting point for analysis is Prima Paint v. Flood & Conklin (1967) 388 U.S. 395 [18 L.Ed.2d 1270, 87 S.Ct. 1801], in which the Supreme Court held that in a federal court diversity action involving a contract subject to the FAA, a claim of fraud in the inducement of the contract (as distinguished from a claim of fraud in the inducement of the arbitration clause), is a question for the arbitrator, and not the court, to decide; and that this rule applies even though the law of the state in which the contract was to be performed might have a different rule. The Supreme Court in Prima Paint rejected the contention that it was constitutionally impermissible to apply the FAA because the case was in the federal court solely by reason of diversity of citizenship. [T]he question, the court said, is not whether Congress may fashion federal substantive rules to govern questions arising in simple diversity cases ... [but] whether Congress may prescribe how federal courts are to conduct themselves with respect to subject matter over which Congress plainly has power to legislate. ( Id., at p. 405 [18 L.Ed.2d 1278]; italics added.) The opinion thus left open the question whether or under what circumstances state courts are constitutionally obligated to apply the substantive principles inherent in the federal statute. Shortly after Prima Paint was decided, the New York Court of Appeal indicated it would apply FAA principles to a maritime transaction even if such a result is not constitutionally mandated by the decision in Prima Paint, in order to discourage forum shopping between state and federal courts. ( A/S J. Ludwig Mowinckels R. v. Dow Chem. Co. (1970) 25 N.Y.2d 576 [307 N.Y.S.2d 660, 666, 255 N.E.2d 774].) Since then a number of courts, both federal and state, have adopted the view that while the FAA is not itself a source of federal jurisdiction, the statute contains certain principles of substantive federal law which must be applied, regardless of forum, where federal jurisdiction exists. (E.g., In re Mercury Const. Corp. (4th Cir.1981) 656 F.2d 933, 938; E.C. Ernst, Inc. v. Manhattan Const. Co. of Texas (5th Cir.1977) 551 F.2d 1026, 1040; Pathman Const. Co. v. Knox County Hospital Ass'n (1975) 164 Ind. App. 121 [326 N.E.2d 844, 851]; Episcopal Housing Corp. v. Federal Ins. Co. (1977) 269 S.C. 631 [239 S.E.2d 647]; Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal. App.3d 19, 24-25 [136 Cal. Rptr. 378].) While the federal district court in this case, by its remand, determined that federal jurisdiction over the franchisees' lawsuit did not exist, the likely explanation for that determination is the presence in the case of defendants whose citizenship precludes requisite diversity. Accordingly, we do not decide the preemption issue on that narrow ground (see In re Mercury Const. Corp., supra, 656 F.2d at p. 942). Rather, we confront squarely the underlying issue of statutory interpretation: whether the principles of substantive federal law embodied in the FAA, preclude a state from protecting its franchise investors through a system of statutory regulation including nonwaivable judicial remedies. While there is authority for an affirmative answer ( Allison v. Medicab Intern., Inc. (1979) 92 Wn.2d 199 [597 P.2d 380, 383]; Barron v. Tastee Freez Intern., Inc. (E.D. Wis. 1980) 482 F. Supp. 1213), we respectfully disagree. The FAA was adopted in 1925 (43 Stat. 883), against a background of judicial hostility to arbitration generally. (See Kulukundis Shipping Co. v. Amtorg Trading Corp. (2d Cir.1942) 126 F.2d 978, 984; Sayre, Development of Commercial Arbitration Law (1927) 37 Yale L.J. 595.) The apparent purpose of the statute was to remove that hostility, and so make the benefits of arbitration generally available to the business world. ( Robert Lawrence Company v. Devonshire Fabrics, Inc. (2d Cir.1959) 271 F.2d 402, 407.) While there is nothing in the legislative history of the statute to suggest that Congress considered its application to state courts (see, Sturges & Murphy, Some Confusing Matters Relating to Arbitration Under the United States Arbitration Act (1952) 17 Law & Contemp. Prob. 580, passim ), we assume that Congress intended to insulate interstate contracts from judicial hostility regardless of forum (see Fite & Warmath Const. Co., Inc. v. MYS Corp. (Ky. 1977) 559 S.W.2d 729), and to establish for such contracts certain uniform rules of interpretation (see Guinness-Harp Corp. v. Jos. Schlitz Brewing (2d Cir.1980) 613 F.2d 468, 472.) In these respects, California law is entirely in accord. Two years after the FAA was enacted, this state adopted its first modern arbitration statute (Stats. 1927, ch. 225), declaring arbitration agreements to be irrevocable and enforceable in terms identical to those used in section 2 of the federal act, and since that time California courts and its Legislature have consistently reflected a friendly policy toward the arbitration process. (Kagel, A Study Relating to Arbitration, in Cal. Law. Revision Com. Recommendations and Study Relating to Arbitration (1960) p. G-28.) That policy was expanded and clarified in the current arbitration statute which was adopted in 1961 (Stats. 1961, ch. 461, § 2 et seq.), and it continues to be the policy of this state (e.g., Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189 [151 Cal. Rptr. 837, 588 P.2d 1261]). Adoption of an affirmative policy toward enforcement of arbitration agreements has never implied, however, that all types of disputes are subject to arbitration. In New York, for example, one of the earliest states to encourage arbitration through statute, certain categories of disputes are insulated from arbitration as a matter of public policy. (See Associated Teachers, etc. v. Bd. of Ed. (1979) 33 N.Y.2d 229 [351 N.Y.S.2d 670, 306 N.E.2d 791].) Among these are disputes under state antitrust laws, on the ground that through the use of economic power and contracts of adhesion, containing broad arbitration clauses, antitrust violators may be able to insulate their transgressions of the antitrust law from judicial scrutiny. ( Aimcee Wholesale Corp. v. Tomar Products (1968) 21 N.Y.2d 621, 629 [289 N.Y.S.2d 968, 973-974, 237 N.E.2d 233].) The same is true of matters involving the liquidation of insolvent insurance companies ( Knickerbocker Agency v. Holz (1958) 4 N.Y.2d 245 [173 N.Y.S.2d 602, 607-610, 149 N.E.2d 885]), or the usurious character of a purported sales agreement ( Durst v. Abrash (1964) 22 App.Div.2d 39 [253 N.Y.S.2d 351, 353]). Such exceptions to the general principle of arbitrability, like those expressed in California's Franchise Investment Law, do not reflect hostility toward arbitration, nor do they constitute an obstacle to the general enforcement of arbitration agreements in a manner consistent with federal law. Rather, such exceptions are narrowly confined to rights and remedies created by state regulatory statutes, and represent a determination that the public interest is best served by maintaining access to the remedies which the Legislature has provided. That Congress intended, through the FAA, to override state policies of that nature seems highly improbable. The question in this case might be more debatable were it not for the fact that California's policy of protecting judicial remedies for this state's franchise investors was patterned after, and is consistent with, federal policy in the analogous area of securities investment. [13] There is no suggestion that Congress has preempted the field of franchise investor regulation as it has, for example, the field of labor relations (cf. Teamsters Union v. Oliver (1959) 358 U.S. 283 [3 L.Ed.2d 312, 79 S.Ct. 297]), or that the FAA embodies substantive principles intrinsic to a federally regulated field (cf. Textile Workers v. Lincoln Mills (1957) 353 U.S. 448 [1 L.Ed.2d 972, 77 S.Ct. 912]). Having left states with power to enact laws in this area, it is hardly likely that Congress intended to preclude them from adopting policies which Congress itself has found to be appropriate. [14] Preemption principles were recently summarized by the United States Supreme Court in Merrill Lynch, Pierce, Fenner & Smith v. Ware (1973) 414 U.S. 117 [38 L.Ed.2d 348, 94 S.Ct. 383], holding that California's statutory policy excluding wage claims from arbitration (Lab. Code, § 229) was not preempted by rules promulgated by the New York Stock Exchange pursuant to federal law: `The principle to be derived from our decisions is that federal regulation of a field of commerce should not be deemed preemptive of state regulatory power in the absence of persuasive reasons  either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained.' [Citation.] [¶] In other contexts, pre-emption has been measured by whether the state statute frustrates any part of the purpose of the federal legislation. [Citations.] And ... while prior cases on pre-emption `are not precise guidelines,' because each case turns on the peculiarities and special features of the federal regulatory scheme in question, it is where there is in existence a pervasive and comprehensive scheme of federal regulation that pre-emption follows in order to fulfill the federal statutory purposes. [Citations.] [¶] In the area of regulation that we are considering here, California has manifested a strong policy of protecting its wage earners from what it regards as undesirable economic pressures affecting the employment relationship. This policy prevails in the absence of interference with the federal regulatory scheme. We find no such interference.... (414 U.S. at pp. 139-140 [38 L.Ed.2d at p. 366].) The court in Ware did not consider the applicability of the FAA, and the holding in the case is consequently not controlling here, but the principles which the court announced strongly support rejection of Southland's argument. Not only has California manifested a strong policy of protecting its [franchise investors] from what it regards as undesirable economic pressures affecting the [franchise] relationship ( ibid. ), it has done so through a regulatory scheme containing remedies which it has deemed appropriate to protect against waiver, and in accordance with policies compatible with the pattern of federal regulation. The United States Supreme Court has repeatedly warned against the dangers of an approach to statutory construction which confines itself to the bare words of a statute, [citations], for `literalness may strangle meaning.' [Citation]. ( Lynch v. Overholser (1962) 369 U.S. 705, 710 [8 L.Ed.2d 211, 215, 82 S.Ct. 1063].) We accept that the FAA contains certain principles of substantive federal law which must be applied, regardless of forum, where federal jurisdiction exists; on that point we are fully in accord with our dissenting colleagues. We simply reject Southland's argument that those principles are so unyielding as to require enforcement of an agreement to arbitrate a dispute over the application of a regulatory statute which a state legislature, in conformity with analogous federal policy, has decided should be left to judicial enforcement. [15]