Southland Corporation v. Keating
| Citation | 79 L.Ed.2d 1,465 U.S. 1,104 S.Ct. 852 |
| Decision Date | 23 January 1984 |
| Docket Number | No. 82-500,82-500 |
| Parties | SOUTHLAND CORPORATION, et al., Appellants v. Richard D. KEATING et al |
| Court | United States Supreme Court |
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.
Held:
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.
(b) If Congress, in enacting the Arbitration Act, had intended to create a procedural rule applicable only in federal courts it would not have limited the Act to contracts "involving commerce." Section 2's "involving commerce" requirement is not to be viewed as an inexplicable limitation on the power of the federal courts but as a necessary qualification on a statute intended to apply in state as well as federal courts. Pp. 14-15.
(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.
In May 1977, appellee Keating filed a class action against Southland on behalf of a class that assertedly includes approximately 800 California franchisees. Keating's principal claims were substantially the same as those asserted by the other franchisees. After the various actions were consolidated, Southland petitioned to compel arbitration of the claims in all cases, and appellees moved for class certification.
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 Cali- fornia 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 co...
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