Southland Corp. v. Keating, 465 U.S. 1 (1984)

Southland Corp. v. Keating

No. 82-500

Argued October 4, 1984
Decided January 23, 1984
465 U.S. 1

APPEAL FROM THE SUPREME COURT OF CALIFORNIA

Syllabus

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 preempts § 31512 of the California statute. Cox Broadcasting Corp. v. Cohn, 420 U.S. 469. 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. 1. 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, 645 P.2d 1192, reversed in part and remanded.

BURGER, C.J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, BLACKMUN, and POWELL, JJ., joined. STEVENS, J., filed an opinion concurring in part and dissenting in part, post, p. 17. O’CONNOR, J., filed a dissenting opinion, in which REHNQUIST, J., joined, post, p. 21.