Keating v. Superior Court, S.F. 24242

• Court: United States State Supreme Court (California)
• Writing for the Court: GRODIN; BIRD; RICHARDSON; MOSK
• Citation: 183 Cal.Rptr. 360,31 Cal.3d 584,645 P.2d 1192
• Decision Date: 10 June 1982
• Docket Number: S.F. 24242
• Parties: , 645 P.2d 1192 Richard D. KEATING et al., Petitioners, v. The SUPERIOR COURT OF ALAMEDA COUNTY, Respondent. SOUTHLAND CORPORATION et al., Real Parties in Interest. Edward J. GOUVEIA et al., Plaintiffs and Respondents, v. SOUTHLAND CORPORATION et al., Defendants and Appellants. *

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183 Cal.Rptr. 360 31 Cal.3d 584, 645 P.2d 1192 Richard D. KEATING et al., Petitioners,
v.
The SUPERIOR COURT OF ALAMEDA COUNTY, Respondent.
SOUTHLAND CORPORATION et al., Real Parties in Interest.
Edward J. GOUVEIA et al., Plaintiffs and Respondents,
v.
SOUTHLAND CORPORATION et al., Defendants and Appellants.
[And 7 other cases.] ^* S.F. 24242. Supreme Court of California,
In Bank. June 10, 1982.

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[31 Cal.3d 590] [645 P.2d 1194] McKenna, Conner & Cuneo, McKenna & Fitting, Aaron M. Peck, Charles G. Miller, Martin H. Kresse, Susan L. Carroll, Los Angeles, Arnold & Porter, Peter K. Bleakley, Mark J. Spooner and Peter R. Maier, Washington, D. C., for defendants and appellants and real parties in interest.

Robert M. Brown, Brown & Finney, San Francisco, Brown, Joseph & Finney, Linda R. Joseph, John F. Banker, Banker & Linderman, Tiburon, John F. Wells, Lise A. Pearlman, Fonda Karelitz, D. Barratt Irwin, Stark, Stewart & Simon & Stark, Stewart, Simon & Sparrowe, Oakland, for plaintiffs and respondents and petitioners.

No appearance for respondent.

GRODIN, Justice. ^**

These coordinated cases arise out of disputes between Southland Corporation (Southland), owner and franchisor of 7-Eleven convenience food store operations

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[645 P.2d 1195] throughout the country, and persons who are, or were, franchised operators of 7-Eleven stores in California. The issues before us do not concern the merits of those disputes, but rather the forum and procedure for their resolution. Southland contends that the disputes should be submitted to arbitration on an individual (i.e., franchisee-by-franchisee) basis, pursuant to an arbitration provision contained in its agreement with each franchisee. The franchisees, who have sued Southland ¹ in both individual and class actions on a variety[31 Cal.3d 591] of grounds, and who are all represented by the same law firm, contend alternatively that the arbitration provisions are not enforceable on adhesion grounds; that insofar as the disputes involve alleged violation by Southland of the Franchise Investment Law they are not subject to arbitration; and that Southland has waived its right to insist upon arbitration in certain of the cases. Franchisees also contend that if there is to be arbitration it should proceed on a classwide, rather than individual, basis. We will hold that the adhesive nature of the franchise contract is not itself a bar to enforcement of the arbitration provision, but that the trial court properly excluded claims based upon alleged violation of the Franchise Investment Law. We will affirm the trial court's holding that there has been no waiver by Southland of its right to insist upon arbitration; but we will remand to the trial court for determination as to whether the interests of justice require that the order to arbitrate be conditioned upon Southland's acceptance of classwide arbitration.

We first describe the factual and procedural background relevant to analysis. Under the terms of Southland's standard 7-Eleven franchise agreement (hereafter the agreement(s)), Southland provides each franchisee with a license to use certain nationally known and federally registered trademarks, a lease or sublease of certain convenience food stores owned or leased by Southland, the financing of store inventories, and advertising and merchandising assistance. The franchisees, in turn, operate the stores, supply Southland with certain bookkeeping data, make bank deposits of receipts from the operation of the stores, and pay Southland a fixed percentage of gross profits. Each of the agreements contains an arbitration clause providing, essentially, that "[a]ny 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."

Between September 1975 and January 1977, franchisees Gouveia, Sampson, Cheng and Newell (and one other franchisee whose claim has since been settled) filed individual actions against Southland alleging, among other things, fraud, oral misrepresentation, breach of contract, breach of fiduciary duty, and violation of the disclosure requirements of the Franchise Investment Law (Corp. Code, § 31000 et seq.). In each of these actions except Gouveia, Southland filed an answer in which the [31 Cal.3d 592] failure to arbitrate was an affirmative defense, but it took no further steps based on that defense at the time, nor did it actively seek arbitration until after the Keating action was filed. In Gouveia, Newell and Sampson it filed cross-complaints, and participated in discovery, including taking the depositions of each of the named plaintiffs.

In May 1977 franchisee Keating filed a class action on behalf of an asserted class composed of approximately 800 Southland franchisees in California, alleging claims substantially similar to those being claimed by the other franchisees, and alleging also that Southland's accounting procedures were unfair and inaccurate. Southland promptly removed Keating to the federal district court, and filed an answer and counterclaim to the complaint. A few days later, it filed an amended answer asserting

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[645 P.2d 1196] arbitration as a defense. When Keating was remanded to the state courts, at franchisees' request, Southland petitioned to compel arbitration in all of the pending cases, but ruling on that petition was stayed pending determination of a motion by the franchisees for coordination of the actions. By this time, the list of actions included a class action filed by franchisee Battersby, and the parties stipulated that Battersby would be governed by the rulings in Keating.

In November 1977, the motion to coordinate the various actions was granted by the Judicial Council, on condition that franchisees file substantially amended complaints which would demonstrate the asserted similarities among the actions. The amended complaints contain substantially comparable allegations including claims of misrepresentations in connection with the sale of the franchises and inaccurate information about fees, discounts, and the overall performance of 7-Eleven stores.

Except for the claims based on the Franchise Investment Law, the trial court granted Southland's motions to compel arbitration in each of the coordinated actions, without passing upon the franchisees' request for class certification. Southland then appealed from the order to arbitrate insofar as it excluded claims based on the Franchise Investment Law, and the franchisees filed a petition for writ of mandate or prohibition seeking relief from the order to arbitrate on the various grounds stated above. We proceed to consider the issues presented in the order most convenient for discussion. Initially, we observe that since the franchise agreements were between a Texas corporation and California residents, entailed the right to use federally registered trademarks, and contemplated a continuing business relationship between the parties across state lines, they involve interstate commerce and fall within the [31 Cal.3d 593] ambit of the Federal Arbitration Act. (9 U.S.C. § 2.) ² We shall, therefore, take that statute into account in passing upon the issues presented.

I. ADHESION.

In his declaration in opposition to Southland's petition to compel arbitration, Keating stated the franchise agreement was presented to him by Southland representatives on a take-it-or-leave-it basis, with no opportunity to bargain or to negotiate; and that other than the information set forth in the franchise agreement itself, and a pamphlet of the American Arbitration Association describing their procedures, he was "given no verbal or written explanation of the meaning of arbitration, the concept of an arbitration proceeding, the fact that it involved [his] waiver of [his] constitutional rights to a jury trial, a loss of the right to utilize the protection of the courts in the discovery process, nor any information with respect to what arbitration would cost in a procedure of this type." He, and the other franchisees who, in effect, adopt his declaration, contend that the declaration raised questions of fact concerning the enforceability of the arbitration clauses which should have been resolved before arbitration was ordered. The trial court ordered arbitration notwithstanding these contentions. On this score, we find no error.

We accept franchisees' characterization of the franchise agreements, and hence the arbitration agreements, as contracts of adhesion, "... 'a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.' " (Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817, 171 Cal.Rptr. 604, 623 P.2d 165, quoting from Justice Tobriner's decision in Neal v. State Farm Ins. Cos. (1961)

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[645 P.2d 1197] 188 Cal.App.2d 690, 694, 10 Cal.Rptr. 781.) It is undisputed that the franchise agreements in question here are standardized in form, at least as regards the arbitration provision; and that they are drafted and imposed by defendant, a large corporation of vastly superior bargaining strength, upon all parties desiring a 7-Eleven franchise. The California Legislature has determined that franchisees [31 Cal.3d 594] are in need of special protection in dealing with franchisors. (Corp. Code, § 31001, see generally Corp. Code, § 31000 et seq.) ³ While the franchisees were financially interested in establishing a beneficial business relationship with Southland, and while that interest may not constitute a "needed service" in the sense envisaged in Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 711, 131 Cal.Rptr. 882, 552 P.2d 1178, or a "service of great importance to...