Opinion ID: 1231723
Heading Depth: 2
Heading Rank: 1

Heading: arbitrability of the franchise investment law claims

Text: Contrary to the majority, I believe that the state cannot immunize certain civil actions from application of the Federal Arbitration Act merely by fashioning, after the Federal Securities Act, a statute regulating franchise investments. The United States Supreme Court in Wilko v. Swan (1953) 346 U.S. 427 [98 L.Ed. 168, 74 S.Ct. 182], held that an arbitration clause contained in a margin agreement was invalid as a forbidden stipulation under section 14 of the federal Securities Act of 1933. (15 U.S.C. § 77n.) In so holding, the court observed that two statutory policies were invoked: (1) the Federal Arbitration Act's emphasis on the need for avoiding the delay and expense of litigation ( id., at p. 431 [98 L.Ed. at p. 174], fn. omitted); and (2) the Securities Act's purpose to protect investors by requiring full and fair disclosure ... and to prevent fraud. ( Ibid. ) The high court stressed that [w]hen the security buyer, prior to any violation of the Securities Act, waives his right to sue in courts, he gives up more than would a participant in other business transactions. The security buyer has a wider choice of courts and venue. He thus surrenders one of the advantages the Act gives him and surrenders it at a time when he is less able to judge the weight of the handicap the Securities Act places upon his adversary. ( Id., at p. 435 [98 L.Ed. at pp. 175-176].) In measuring the force of the two policies, the Wilko court thus was required to balance two federal statutes, the Arbitration and the Securities Acts. The Wilko court identified one important factor in the weighing process, namely, the existence of 15 United States Code section 77v, which establishes an unusually liberal venue provision for Securities Act litigation. This emphasis on venue was subsequently repeated in Scherk v. Alberto-Culver Co. (1974) 417 U.S. 506 [41 L.Ed.2d 270, 94 S.Ct. 2449], in which the high court declined to invalidate an arbitration clause in a controversy between foreign and domestic parties concerning an alleged violation of the 1934 Securities Exchange Act. The Scherk court specifically emphasized that the 1934 act's venue provision (15 U.S.C. § 78aa) significantly restrict[s] the plaintiff's choice of forum in contrast to section 77v, upon which the court in particular relied in Wilko v. Swan . ( Id., at p. 514 [41 L.Ed.2d at p. 278], fn. omitted.) In contrast, the case before us concerns a state statute which is contrary to the federal law. The Wilko reasoning in balancing between two federal statutes of equal stature thus is not required here. Moreover, unlike the Securities Act of 1933, the state Franchise Investment Law at issue here does not contain a liberal venue provision comparable to that relied on in Wilko. Thus, under the California statute an investor who consents to arbitration, thereby waiving the right to sue, does not forego more than other similarly situated parties to routine business contracts or transactions. No different result is mandated by section 31512 of the Corporations Code, which provides that Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provisions of this law or any rule or order hereunder is void. Even if the Legislature had intended that this statute be interpreted according to the principles of Wilko v. Swan , the section nonetheless impermissibly conflicts with the Federal Arbitration Act. Section 31512 is therefore void under the supremacy clause (U.S. Const., art. VI, cl. 2) to the extent that it purports to restrict otherwise permissible arbitration in actions, as here, involving interstate commerce. In reaching its conclusion that application of the Federal Arbitration Act here is not required, the majority wholly ignores a substantial line of very respectable authority. These cases, as I now develop, hold that in enacting the Federal Arbitration Act, Congress created national substantive law, which is binding on state courts even in the absence of federal jurisdiction. In 1959, the United States Court of Appeals for the Second Circuit succinctly expressed the general principle. We think it is reasonably clear that the Congress intended by the Arbitration Act to create a new body of federal substantive law affecting the validity and interpretation of arbitration agreements. ( Robert Lawrence Company v. Devonshire Fabrics, Inc. (2d Cir.1959) 271 F.2d 402, 406, cert. dism. (1960) 364 U.S. 801 [5 L.Ed.2d 37, 81 S.Ct. 27], italics added.) The Lawrence court observed: To be sure much of the Act is purely procedural in character and is intended to be applicable only in the federal courts. But Section 2 declaring that arbitration agreements affecting commerce or maritime affairs are `valid, irrevocable, and enforceable' goes beyond this point and must mean that arbitration agreements of this character, previously held by state law to be invalid, revocable, or unenforceable are now made `valid, irrevocable, and enforceable.' This is a declaration of national law equally applicable in state or federal courts.  ( Id., at p. 407, italics added.) The United States Supreme Court has acknowledged the Lawrence holding only in one instance, where it merely noted that the court of appeals in the case it was then considering had relied upon the Lawrence notion of national substantive law to hold that a claim of fraud in the inducement of the contract generally  as opposed to the arbitration clause itself  is for the arbitrators and not for the courts.... ( Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 399-400 [18 L.Ed.2d 1270, 1275, 87 S.Ct. 1801].) The high tribunal then affirmed the decision below, albeit for somewhat different reasons. ( Ibid. ) Thus the Supreme Court has never rejected the long standing doctrine that the Arbitration Act created national substantive law applicable in appropriate circumstances in state courts. The great majority of lower federal and state courts has continued to adhere to the Lawrence holding. (See Annot. (1979) 95 A.L.R.3d 1145, 1151-1161.) A recent expression of this principle is contained in In re Mercury Const. Corp. (4th Cir.1981) 656 F.2d 933 (en banc) (cert. granted sub nom. Moses H. Cone Memorial Hospital v. Mercury Const. Corp. (1982) 455 U.S. 937 [71 L.Ed.2d 647, 102 S.Ct. 1426]) (three questions were presented in the petition for certiorari; none specifically concerns the scope of the Arbitration Act although one involves the district court's discretion to stay its proceedings pending resolution of identical issues in a state court action involving identical parties). In discussing the application of the Federal Arbitration Act to state and federal actions the Fourth Circuit noted: By its express language the Federal Act applies where there is `[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract....' 9 U.S.C. § 2. The constitutional validity of such an Act is found in the incontestable federal control over interstate commerce. Prima Paint v. Flood & Conklin, 388 U.S. 395, 405.... The Act, however, does not include language conferring independent federal jurisdiction over an action thereunder. In order for a plaintiff to assert rights under it in a federal forum, he must establish an independent jurisdictional basis, such as diversity. [Citations.] But if, assuming diversity of the parties, the action meets the jurisdictional requirements of the Act, that action is enforceable in the state courts as well as in federal courts but in either event it is governed by the federal substantive law developed in connection with the federal Act and not by state law. E.C. Ernst, Inc. v. Manhattan Const. Co., 551 F.2d 1026, 1040 (5th Cir.1977) (any questions under the Act are matters of `federal law'); Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra, 271 F.2d at 406; Pathman Const. Co. v. Knox County Hospital Ass'n., 164 Ind. App. 121, 326 N.E.2d 844, 851 (1975); Episcopal Housing Corp. v. Federal Ins. Co., 269 S.C. 631, 636, 239 S.E.2d 647 (1977). ( Id., 656 F.2d at p. 938, italics in original, fn. omitted.) As described in Lawrence, Congress in enacting the Arbitration Act sought to counteract the hostility of courts and judges to arbitration agreements and to make the benefits of arbitration generally available to the business world. (271 F.2d at pp. 406-407; see Prima Paint v. Flood & Conklin, supra, 388 U.S. at p. 405 [18 L.Ed.2d at p. 1278] [Congress plainly had power to legislate over arbitration].) Despite the majority's recognition of the large body of law holding that the act is applicable in state courts in appropriate cases, my colleagues seek to create, judicially, an exception for certain state regulatory practices based on some conclusion that Congress did not intend to preempt the area of franchise regulation. The majority, however, fails to acknowledge that Congress has indeed preempted the field of arbitration as applied to any contract in interstate commerce to the extent that title 9 of the United States Code applies. No one has urged before us that there is any basis other than the state regulatory statute upon which to deny application of the Federal Arbitration Act to the contract at issue. In addition to encouraging the enforcement of arbitration agreements, the Arbitration Act also restricts the benefits of the usually disfavored practice of forum shopping. As the majority recognizes, the likely explanation for the federal district court's remand of the action here was that complete diversity did not exist because of the presence of California defendants. Had those defendants not been named, which was, of course, well within a franchisee's power to choose, the answer would have been easy. The action could have been readily removed to the federal courts on the basis of diversity and the Arbitration Act unquestionably would have applied. It will thus be seen that the majority implicitly makes the existence or nonexistence of federal jurisdiction the determinative factor in the enforcement of the arbitration clause rather than the existence of a transaction involving commerce.... In so concluding, the majority ignores the critical distinction which exists in the Arbitration Act between the conferral of federal jurisdiction and the creation of federal substantive law applicable in state courts. This promotes forum shopping. In a similar context, the court in In re Mercury Const. Corp., supra , specifically observed that, The addition of the Architect as a party defendant might prevent removal of the state action ... but it certainly could not frustrate Mercury's plain, indisputable right to an arbitration of its dispute with the Hospital. (656 F.2d at p. 942.) The Arbitration Act, construed as national substantive law binding on both federal and state courts, advances consistency. Finally, I find it significant that sister courts which have specifically considered state statutes analogous to the one before us have found that the Arbitration Act prevails over various state attempts to limit its reach. Thus, in Allison v. Medicab Intern., Inc. (1979) 92 Wn.2d 199 [597 P.2d 380], the Washington Supreme Court reviewed a claim that an arbitration clause in a franchise agreement was invalid under the state's franchise act which gave to the state courts jurisdiction for causes of action based on violations of the state act. Finding that interstate commerce was involved, the Allison court rejected the argument that Wilko v. Swan, supra, 346 U.S. 427, applied to a conflict between a state franchising act and the Federal Arbitration Act. The Allison court instead adopted the weight of authority rule applying the federal act in the face of a contrary state law (597 P.2d, at p. 382), concluding that the supremacy clause of the federal constitution must prevail and thus the federal arbitration act requires enforcement of the arbitration clause in the franchise agreement despite the judicial remedies afforded by the Franchise Investment Protection Act.  ( Id., at pp. 382-383, italics added.) In similar fashion, in Network Cinema Corporation v. Glassburn (S.D.N.Y. 1973) 357 F. Supp. 169, the federal district court granted an order staying proceedings in a Kansas state court pending arbitration of a dispute between franchisor and franchisee. The Kansas court had held that the arbitration clause signed by the parties was not enforceable under state law. The federal court nonetheless found that it was empowered to stay state proceedings when the dispute in question has been found by the federal court to be subject to the arbitration provisions of 9 U.S.C. § 2. ( Id., at p. 172; see also Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal. App.3d 19, 23-25 [136 Cal. Rptr. 378], and cases cited therein [`The Federal Arbitration Act, declaring arbitration agreement [ sic ] affecting [interstate] commerce or maritime affairs to be valid, enforceable, and irrevocable, is a declaration of national law equally applicable in state or federal courts']; Fite & Warmath Const. Co., Inc. v. MYS Corp. (Ky. 1977) 559 S.W.2d 729, 734-735.) Finally, in Barron v. Tastee-Freez Intern., Inc. (E.D.Wis. 1980) 482 F. Supp. 1213, the federal district court considered the enforcement of an arbitration clause in the face of a state statute analogous to section 31512, which it characterized as similar to 15 United States Code section 77n. (482 F. Supp. at pp. 1215-1216.) The court felt compelled by the Federal Arbitration Act to render void any effort made by a state to protect the remedies of the franchise investors contrary to the federal act in cases in which the transactions related to interstate commerce. ( Id., at p. 1217; see also Guinness-Harp Corp. v. Jos. Schlitz Brewing (2d Cir.1980) 613 F.2d 468, 472.) The policy embodied in Title 9 U.S.C.... does not depend for its enforceability on the residence of the parties to a contract but rather on the nature of the contract. ( Barron v. Tastee-Freez Intern., Inc., supra, 482 F. Supp. at p. 1217.) The majority attempts to remove a state regulatory statute from the purview of the Federal Arbitration Act in cases involving interstate commerce. In my opinion, its chances of surviving federal review are very dubious. I believe section 31512 is void insofar as it attempts to restrict application of the federal act. Contrary to the majority's assertion, the issue is not the preemption of the field of franchise investment regulation, but rather the clear language of the federal act and the subsequent state and federal court interpretations which consistently demonstrate that the Federal Arbitration Act applies to all claims arising out of transactions in interstate commerce. Because the United States Arbitration Act is a national substantive law that supplants state arbitration laws, a state court is bound to apply the act if the statutory requisites are present; ... ( Merrill Lynch, Pierce, Fenner, etc. v. Haydu (5th Cir.1981) 637 F.2d 391, 395, italics added.) As the majority first acknowledges and then ignores, The franchise agreements ... involve interstate commerce and fall within the ambit of the Federal Arbitration Act. ( Ante, pp. 592-593.) The conclusion that the federal act must prevail is logical, consistent and supported by case law, statutory language, and congressional history. California remains one of the United States, and national substantive law must be applied by us in appropriate cases.