LOCATION: Men’s Central Jail
DOCKET NO.: 82-500
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: Supreme Court of California
CITATION: 465 US 1 (1984)
ARGUED: Oct 04, 1983
DECIDED: Jan 23, 1984
John F. Wells - on behalf of the Appellees
Mark J. Spooner - on behalf of the Appellants
Facts of the case
This case caused the review of the regulations of the California Franchise Investment Act (FIA), and the conflict whether it had jurisdiction to deny some kind of arbitration contracts because of prescriptions of the Federal Arbitration Act (FAC), infringed the Supremacy Clause. And whether the arbitrary prosecution in the definition of this legal act was violated when a class-action form was applied by the courts in states.
The appellant was Southland Corp. that was also owner and franchisor of 7-Eleven corner stores. The company`s franchise agreement entitled franchisee with a permit for using some trademarks, a lease/sublease of the shop possessed or rented out by the plaintiff, rights on inventory financing and aid in the advertisement. The contract also contained the terms regarding the resolving of disputes by the arbitral trial.
From 1975 till 1977 few appellants appealed against Southland in the Superior Court of California claiming the trickery, incorrect representation, infringement of the contracts and fiduciary obligation and non-adherence of the disclosure prescriptions of the FIA. The respondent answered, but one lawsuit consisted of the affirmatory defense of decline to arbitrate.
In 1977 Keating brought the suit against Southland on the side of the class that combined near 800 franchisees, arguing for almost the similar claims. The respondent appealed to conduct arbitration of all claims then the plaintiffs passed for obtaining of certificate of class. The Superior Court empowered Southland`s with the right to resolve all complaints except those initiated under the FIA in the arbitral trial. Southland filed an appellation on this order as it did not include suits grounded on the FIA.
The plaintiffs applied for a writ mandamus before the Court of Appeal claiming that the arbitrary litigation should be handled as a class action. The judges revised the trial ruling and established the obligation to compel all suits that were under the exception in arbitration proceedings. The judgment considered that if the FIA considered the arbitration treaties including commerce invalid, therefore it would contradict with the FAC and the Supremacy Clause. The judicial order defined that there was no significant reason not to proceed arbitration on the background of the general rules and endorsed a writ of mandate.
The Supreme Court of California changed the rules that the complaints filed under the FIA were arbitral. The judges confirmed that this legislative act to establish the requirement of review of complaints applied accordingly to the California statue and defined that this legislative document did not contradict with FAC. The Southland corp. v. Keating was returned to the district court for revising of plaintiffs` claim for classwide arbitral trial.
Media for Southland Corporation v. Keating
Audio Transcription for Oral Argument - October 04, 1983 in Southland Corporation v. Keating
Warren E. Burger:
Mark J. Spooner:
Mr. Chief Justice, and may it please the Court:
This case presents two important issues of interpretation under the Federal Arbitration Act.
A preliminary question regarding the Court's jurisdiction to hear the case has also been raised, and I will address that point at the outset of my argument.
On the merits the two issues are first whether the states are free to enact statutory exceptions to the Federal Arbitration Act thereby striking down arbitration agreements that would otherwise be valid, irrevocable and enforceable under the specific terms of Section 2 of the federal statute.
The second issue is whether the states are free to engraft their judicial class action procedures onto private arbitrations involving interstate commerce being conducted pursuant to the Federal Arbitration Act.
The issues in this case arose in the following way: The Plaintiff Appellees are former franchisees of 7-Eleven convenient stores in the State of California.
They alleged that their franchisor, the Southland Corporation, violated the terms of the franchise agreement with respect to certain of its bookkeeping procedures and also that it did not fully disclose to them at the time they became franchisees the types of procedures that it would use in preparing financial statements for their stores.
They claimed that Southland's actions and inactions constituted a breach of contract, a breach of a fiduciary duty, a common law fraud, and a violation of the state's franchise investment law which requires franchisors to make certain types of disclosures to their respective franchisees.
These cases were filed in court notwithstanding a broad forum arbitration clause in the franchise agreement, and the Plaintiffs have resisted arbitration.
This effort has been successful so far because they have convinced the California Supreme Court that it is contrary to the public policy of the state's franchise invesment law to require franchisees to arbitrate claims that they base on that statute.
They have also convinced the California Supreme Court with respect to the clearly arbitrable claims, the common law, breach of contract and fraud claims, to remand the cases not to an arbitrator but back to the trial court so that the court can conduct class certification proceedings and thereafter to supervise any arbitration which is held to be appropriate for class-wide adjudication.
We have brought this case here under Section 1257 of the judicial code.
The Plaintiffs have argued that jurisdiction is lacking because the decision below allegedly does not constitute a final judgment.
They base this argument on the fact that the California Supreme Court contemplates that extensive judicial proceedings are yet to come in the trial court.
I submit if it may please the Court that that is precisely the point that the parties agreed to arbitrate this case in a nonjudicial forum and that is where we ought to be.
The evil, if I may use that term, of the California Supreme Court's decision is precisely that it is compelling extensive judicial proceedings to occur in the trial court.
Under the practical tests that this Court uses to determine finality we think that the decision is clearly final because it decides important issues under a federal statute in a definitive way.
These issues are collateral to the merits of the case and in addition the decision is final in the sense that if this Court reverses the decision of the Court below the judicial proceedings clearly will be at an end.
The class arbitration issue was certainly not clearly raised below was it?
Mark J. Spooner:
Your Honor, it was raised below.
We stated the issue in the California Supreme Court as follows: Whether a court may enter an order compelling the private commercial arbitration governed by the Federal Arbitration Act and the rules of the American Arbitration Association to proceed as a class action.
The Plaintiffs have argued strenuously in their brief in this Court that we did not litigate this issue as a federal question, but I submit that that claim is a red herring.
What happened was that the parties all stipulated in the court below that this case involved interstate commerce and thus the federal Act applied.
Our argument was that arbitration and class actions were fundamentally incompatible with one another and, therefore, if you superimposed class action procedures which would necessarily involve extensive judicial involvement onto a private arbitration you would in essence be destroying the arbitration proceeding as the nonjudicial procedure it was itended to be.
Mr. Spooner, do you think that Congress intended the Federal Arbitration Act to govern procedings in state courts?
Mark J. Spooner:
--It did not intend the Federal Arbitration Act to govern procedures in state court relating to arbitration.
Do you think it intended the Federal Arbitration Act to apply to state courts at all?