Appendix — Southland Corp. v. Keating
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IN THE
CLERK
ALEXANDER L. STEVAS.
Supreme Court of the United
OCTOBER TERM, 1982
THE SOUTHLAND CORPORATION, ef ai.,
Appellants,
—V.—
RICHARD D. KEATING, ef al.,
Appellees.
ON APPEAL FROM THE SUPREME COURT OF CALIFORNIA
APPENDIX TO JURISDICTIONAL STATEMENT
Of Counsel: PETER K. BLEAKLEY*
ARNOLD & PORTER “me - nana
Washington, D.C. '
1200 New Hampshire Ave., N.W.
Washington, D.C. 20036
(202) 872-6700
MCKENNA, CONNER & CUNEO CHARLES G. MILLER
San Francisco, California MARTIN H. KRESSE
1920 Mills Tower
220 Bush Street
San Francisco, California 94104
(415) 433-0640
Attorneys for Appellants,
The Southland Corporation,
et al.
September 1982 *Counsel of Record
APPENDIX TABLE OF CONTENTS
. Opinion of the Supreme Court of the State of
California, June 10, 1982, reported at 31 Cal. 3d
584, 183 Cal. Rptr. 360, 645 P.2d 1192 (1982)....
. Opinion of the California Court of Appeals, First
District, August 28, 1980, reported at 109 Cal.
App. 3d 784, 167 Cal. Rptr. 481 (1980).........
. Order of the Superior Court of the State of
California in and for the County of Alameda re
petition for order to arbitrate, February 16, 1978
. Order of the Superior Court of the State of
California in and for the County of Alameda re
motions heard on April 26, 1978, May 5, 1978...
. Order of the Superior Court of the State of
California in and for the County of Alameda re
motions heard on July 19, 1978, July 31, 1978...
. Judgment and Decree of the Supreme Court of the
State of California, June 10, 1982 .............
. Notice of Appeal to the Supreme Court of the
United States, August 24, 1982................
. Order of the Supreme Court of the United States,
August 30, 1982, extending time to docket appeal
. Constitutional and Statutory Provisions Involved
1. The Supremacy Clause, U.S. CONST. art. VI,
TB edbacstce sais endueessesdteuenasieeds
PAGE
47a
Tla
73a
77a
8la
83a
PAGE
. The Due Process Clause, U.S. CONST. amend.
. The Federal Arbitration Act, 9 U.S.C. §§ 1-3
QIDTED cc ccccccevecoscesecussosccecsccees 87a
. The California Franchise Investment Law,
Cal. Corp. Code § 31512 (West 1977) ....... 88a
la
APPENDIX A
IN THE SUPREME COURT OF
THE STATE OF CALIFORNIA
S.F. 24242
(Superior Court No. 469216-2)
>
RICHARD D. KEATING et al.,
Petitioners,
—)—
THE SUPERIOR COURT OF ALAMEDA COUNTY,
Respondent;
SOUTHLAND CORPORATION et al.,
Real Parties in Interest.
EDWARD J. GOUVEIA et al.,
Plaintiffs and Respondents,
—_—V—
SOUTH! AND CORPORATION et al.,
Defendants and Appellants.
{And 7 other cases.]*
>
Filed June 10, 1982
SEE CONCURRING AND DISSENTING OPINION
° Cheng v. Southland Corporation (Super. Ct. No. 505162-3); Newell
v. Southland Corporation (Super. Ct. No. 505164-1); Sampson v. Southland
Corporation (Super. Ct. No. 505161-4); Battersby v. Southland Corporation
2a
These coordinated cases arise out of disputes between
Southland Corporation (Southland), owner and franchisor of
7-Eleven convenience food store operations 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 arbitra-
tion provision contained in its agreement with each franchisee.
The franchisees, who have sued Southland’ in both individual
and class actions on a variety 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
(Super. Ct. No. 390132); Keating v. Southland Corporation (Super. Ct. No.
$05159-9); Coy v. Southland Corporation (Super. Ct. No. 506120-6); and
Scovis v. Southland Corporation (Super. Ct. No. C-235779).
l The suits also named certain corporate officers as defendants, but as
the parties do not distinguish them with respect to the issues presented here,
we shall use the term Southland to include both the corporation and its
officers.
3a
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 advertis-
ing 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 provid-
ing, essentially, that “[aJny 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 franchi-
see 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 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 fed-
eral district court, and filed an answer and counterclaim to the
complaint. A few days later, it filed an amended answer
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asserting arbitration as a defense. When Keating was remanded
to the state courts, at franchisees’ request, Southland peti-
tioned 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 allega-
tions 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 fran-
chisees 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
ambit of the Federal Arbitration Act. (9 U.S.C. § 2.)° We shall,
2 Section 2 provides: “A written provision in any maritime transaction
or a contract evidencing a transaction involving commerce to settle by
arbitration a controversy thereafter arising out of such contract or trans-
action, or the refusal to perform the whole or any part thereof, or an
Sa
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 concern-
ing 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, quoting from Justice Tobriner’s
decision in Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d
690, 694.) It is undisputed that the franchise agreements in
question here are standardized in form, at least as regards the
agreement in writing to submit to arbitration an existing controversy arising
out of such a contract, transaction, or refusal, shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.”
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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 are in
need of special protection in dealing with franchisors. (Corp.
Code, § 31001, see generally Corp. Code, § 31000 et seq.)
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, or a “service of great inyportance to the
public” as contemplated in Tunk/ v. Regents of University of
California (1963) 60 Cal.2d 92, 99, it is now clear that those
factors are not prerequisite to a finding of adhesion. (Graham
v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 818, 820, fn. 18.)
It does not follow, however, that the contracts are unen-
forceable. “To describe a contract as adhesive in character is
not to indicate its legal effect. It is, rather, ‘the beginning and
not the end of the analysis insofar as enforceability of its terms
is concerned.” [Citation.]” (Graham v. Scissor-Tail, Inc., supra,
28 Cal.3d at p. 819.) “Thus, a contract of adhesion is fully
3 Corporations Code section 31001 provides, “The Legislature hereby
finds and declares that the widespread sale of franchises is a relatively new
form of business which has created numerous problems both from an
investment and a business point of view. . . . [4] It is the intent of this law
to provide each prospective franchisee with the information necessary to
make an intelligent decision regarding franchises being offered. Further, it is
the intent of this law . . . to protect the franchisor by providing a better
understanding of the relationship between the franchisor and franchisee with
regard to their business relationship.” (See Damon, Franchise Investment
Law (1971) 2 Pacific L.J. 27, 27-30, 35-36.) The need for such “special
protection” has been recognized in other states and by the federal govern-
ment who have enacted similar legislation. (15 U.S.C. § 45(a)(1) (1964); Fla.
Stat. Ann., § 817.416 (1971) and Rules Chap. 2-17 (1974); Hawaii Rev. Stat.,
§ 482 E-1 (1974); Ill. Rev. Stat., ch. 121-1/2, § 702 (1974); Ind. Code,
§ 23-2-2.5-47 (1975); Mich. Stat. Ann., § 19.854(1) (1974); Minn. Stat.,
§ 800.01 (1973); Ore. Rev. Stat., § 650.007, rule 40-050 (1975); R.I. Gen.
Laws, § 19-28-2 (1973); Va. Code, § 13.1-558 (1972); Wash. Rev. Code,
§ 19.100.010 (1972); and Wis. Stat., § $53.01 (1972) Admin. Code, § 31.01.)
7a
enforceable according to its terms [citations] unless certain
other factors are present which, under established legal rules—
legislative or judicial—operate to render it otherwise.” (Id., at
pp. 819-820.) “Generally speaking, there are two judicially
imposed limitations on the enforcement of adhesion contracts
or provisions thereof. The first is that such a contract or
provision which does not fall within the reasonable expecta-
tions of the weaker or ‘adhering’ party will not be enforced
against him. [Citations.] The second—a principle of equity
applicable to all contracts generally—is that a contract or
provision, even if consistent with the reasonable expectations
of the parties, will be denied enforcement if, considered in its
context, it is unduly oppressive or ‘unconscionable.’ ” (Id., at
p. 820.)
Arbitration in the setting of a contract of adhesion does pose
special problems, both because arbitration necessarily entails
relinquishment of the constitutional right to trial by jury and
because it is susceptible of being structured, or utilized, in such
a way as to gain unfair advantage to the party with superior
bargaining power. Graham vy. Scissor-Tail, Inc., supra, 28
Cal.3d 807, in which the agreement called for arbitration by a
presumptively partial tribunal, provides an example of that
sert of unfairness (see also, Hope v. Superior Court (1981) 122
Cal.App.3d 147). As we shall discuss later in this opinion,
reliance upon individual arbitration agreements to insulate the
stronger party from otherwise appropriate class actions may
also be inequitable depending upon the circumstances.
In the absence of some special element of unfair adwantage,
however, arbitration is generally considered to be a Mutually
advantageous process, providing for resolution of disputes in a
presumptively less costly, more expeditious, and more private
manner by an impartial person or persons typically selected by
the parties themselves. (See Madden v. Kaiser Foundation
Hospitals, supra, 17 Cal.3d 699.) For these reasons, the fact
that provision for arbitration is contained in a contract f
adhesion will not, of itself, render the provision unenforceable.
(Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 819-820.)
8a
Moreover, provision for arbitration in a commercial context
is quite common, and reasonably to be anticipated. Indeed,
Keating’s declaration itself makes clear that he was aware of
the provision, and of the American Arbitration Association
pamphlet making reference to the applicable rules. In such a
setting neither he nor the other franchisees are in a position to
claim that the arbitration provision itself, or the fact that it
would entail waiver of jury trial, lack of formal discovery, or
certain costs, did not “fall within [their] reasonable expecta-
tions.” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p.
820.)
For these reasons, we conclude that the arbitration provi-
sions of the franchise agreement were, in general, binding and
enforceable. We proceed now to consider the remaining issues
Il. ARBITRABILITY OF FRANCHISE INVESTMENT LAW CLAIMS.
We next consider Southland’s appeal from the trial court’s
denial of its petitions to compel arbitration concerning certain
claims made against it pursuant to the Franchise Investment
Law (Corp. Code, § 31000 et seq.). These claims assert, among
other things, that Southland systematically violated section
31202* of the Corporations Code by willfully making untrue
Statements of material fact, and by willfully omitting to state
material facts which are required to be stated in statements
required to be disclosed under section 31101.‘ The trial court
was apparently of the view that these claims were not subject
to arbitration as a matter of contract interpretation and also as
a consequence of Corporations Code section 31512, part of the
Franchise Investment Law, which provides: “Any condition,
Stipulation or provision purporting to bind any person ac-
4 Section 31202 provides: “lt is unlawful for any person willfully to
make any untrue statement of a material fact in any statement required to be
disclosed in writing pursuant to Section 31101, or willfully to omit to state in
any such statement any material fact which is required to be stated therein.”
5 Section 31101, subdivision (c) listed some 15 items of information to
be disclosed.
9a
quiring any franchise to waive compliance with any provision
of this law or any rule or order hereunder is void.” Since we
agree with the latter conclusion we find it unnecessary to
consider the former.
In Wilko v. Swan (1953) 346 U.S. 427, the United States
Supreme Court interpreted nearly identical language in section
14 of the Securities Act of 1933 (15 U.S.C. § 77n)* to permit
suit by a customer against a securities brokerage firm for
alleged misrepresentation in the sale of securities, notwith-
standing a provision for arbitration contained in the margin
agreement. The arbitration clause, the court decided, consti-
tuted a ‘‘stipulation,’’ and the right to select the judicial forum
the kind of ‘‘provision’’ that could not be waived in advance
under section 14. (346 U.S. at pp. 434-435.) In arriving at this
conclusion, the court observed that section 12(2) of the act
‘*created a special right to recover for misrepresentation which
differs substantially from the common-law action in that the
seller is made to assume the burden of proving lack of
scienter’’ (346 U.S. at p. 431), and that this ‘‘special right’’
was enforceable in any court of competent jurisdiction, with a
wide choice of venue (ibid.). The court placed primary empha-
sis, however, upon the proposition that the effectiveness of the
statute ‘‘is lessened in arbitration as compared to judicial
proceedings’’ (id., at p. 435), in part because of the limited
nature of judicial review (id., at p. 436). ‘‘As the protective
provisions of the Securities Act require the exercise of judicial
direction to fairly assure their effectiveness, it seems to us that
Congress must have intended [the waiver provision] to apply to
waiver of judicial trial and review (id., at p. 437).
6 That language reads: *‘Any condition, stipulation, or provision bind-
ing any Person acquiring any security to waive compliance with any provision
of this subchapter or of the rules and regulations of the Commission «all be
7 Im Seherk v. Alberto-Culver Co. (1974) 417 U.S. 506, the Supreme
Court declined to apply the Wilko rule to a suit under section 10(b) of the
Securities Exchange Act of 1934 and rule 10b-5 thereunder, for rescission of
a purchase agreement by which Alberto-Culver Co.. an American corpora-
10a
The evidence is persuasive that in drafting the Franchise
Investment Law California legislators looked to the Securities
Act of 1933 as their model. Not only do the two statutes have
the same purpose of protecting investors through preinvest-
ment disclosure statements, but their parallel provisions are
often expressed in identical language." Corporations Code
section 31301 contains substantially the same provision relating
tion, purchased the trademarks and stock of two foreign corporations. In
reaching this conclusion, the court relied primarily on the international
character of the transaction, reasoning that ‘‘[a] parochial refusal by the
courts of one country to enforce an international arbitration agreement
would not only frustrate [policies of certainty and predictability], but would
invite unseemly and mutually destructive jockeying by the parties to secure
tactical litigation advantages."* (Id., at pp. $16-517.) While the court made
reference to the fact that the Securities Exchange Act did not contain the
liberal venue provisions of the Securities Act, and suggested that a ‘‘colora-
ble argument’’ could be made for distinguishing Wi/ko on that ground (id.,
at p. $13), subsequent cases have continued uniformly to apply the Wilko v.
Swan rule to actions brought by customers against brokerage houses under
the Securities Exchange Act, limiting Scherk to the arena of international
securities transactions. (Merrill Lynch, Pierce, Fenner & Smith v. Moore
(10th Cir. 1978) $90 F.2d 823; accord, Mansbach v. Prescott, Ball & Turben
(6th Cir. 1979) $98 F.2d 1017; Weissbuch v. Merrill Lynch, Pierce, Fenner &
Smith, Inc. (7th Cir. 1977) $58 F.2d 831; Sibley v. Tandy Corp. (Sth Cir.
1977) $43 F.2d $40; Ayres v. Merrill Lynch, Pierce, Fenner & Smith (3d Cir.
1976) $38 F.2d $32.) The Second Circuit has suggested that the relatively
equal bargaining status of the parties in Scherk was also a distinguishing
factor. (Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith Inc., supra, $58
F.2d at p. 835; see generally, Gruenbaum, Avoiding the Protections of the
Federal Securities Laws: The Anti-Waiver Provisions (1980) 20 Santa Clara
L.Rev. 49.)
8 Compare the definition of *‘sale’’ under section 2 of the Securities Act
(1S U.S.C. § 77(b2)) with that in Corporations Code section 31018; the
definition of “‘misrepresentations by omission’ in section 17(2) of the
Securities Act (1§ U.S.C. § 7742)) with Corporations Code section 31201;
the burden of proving due diligence of section 12 of the Securities Act (15
U.S.C. § 77k(bK3)) with Corporations Code section 31301; the provision for
injunction actions in section 20 of the Securities Act (15 U.S.C. § 77t(a)) with
Corporations Code section 31400; and the liability of control persons of
section 15 of the Securities Act (1§ U.S.C. § 770) with Corporations Code
section 31302.
lla
to scienter as the United States Supreme Court relied upon in
Wilko.” And, as we have observed, the waiver language of the
two statutes is virtually identical.
‘**This court has long recognized the principle of statutory
construction that ‘[w]hen legislation has been judicially con-
strued and a subsequent statute on the same or an analogous
subject is framed in the identical language, it will ordinarily be
presumed that the Legislature intended that the language as
used in the later enactment would be given a like interpreta-
tion. This rule is applicable to state statutes which are pat-
terned after the federal statutes. [Citations.]’’’ (Belridge
Farms v. Agricultural Labor Relations Bd. (1978) 21 Cal.3d
551, 557.)
The presumption established by that principle of statutory
construction is reinforced by the language and history of the
recently adopted California Franchise Relations Act (Bus. &
Prof. Code, § 20000 et seq.), regulating the grounds and
procedure for termination and nonrenewal of franchises. That
statute stemmed from hearings conducted in late 1977 by a
subcommittee of the state Assembly Committee on Finance,
Insurance, and Commerce, chaired by Assemblyman Bruce
Young. A preliminary report prepared by that committee prior
to hearings refers to the Franchise Investment Law as a
‘*pre-purchase disclosure law patterned after the Securities Act
of 1933,’’ discusses various proposals for extending regulation
of franchise relationships, and poses various rhetorical ques-
tions in that regard, among them the following: ‘‘Present law
provides for the resolution of franchisee/franchisor disputes
through the judicial system. Should the law be modified to
provide for other means of resolution such as compulsory
9 Section 31301 provides: ‘‘Any person who violates Section 31201 shall
be liable to any person (not knowing or having cause to believe that such
statement was false or misleading) who, while relying upon such statement
shall have purchased a franchise, for damages, unless the defendant proves
that the plaintiff knew the facts concerning the untruth or omission or that
the defendant exercised reasonable care and did not know, (jor if he had
exercised reasonable care would not have known) of the untruth or omis-
l2a
arbitration and/or a Board of Franchising?’’’ The Franchise
Relations Act as ultimately adopted by the Legislature contains
both a nonwaiver provision nearly identical to Corporations
Code section 31512 and the following provision authorizing
limited arbitrability of disputes under that statute: ‘‘Nothing
contained in this chapter shall limit the right of a franchisor
and franchisee to agree before or after a dispute has arisen to
binding arbitration of claims under this chapter, provided that:
(a) The standards applied in such arbitration are not less than
the requirements specified in this chapter; and (b) The arbitra-
tor or arbitrators employed in such arbitration are chosen from
a list of impartial arbitrators supplied by the American Arbi-
tration Association or other impartial person.’’ (Bus. & Prof.
Code, § 20040.) The inference is strong, if not inescapable,
that the Legislature understood the anti-waiver provision of
the Franchise Investment Law to be subject to the Wilko (346
U.S. 427) interpretation, and that it intended to establish a
different rule for the Franchise Relations Act.'' While we have
no evidence as to the policy reasons underlying that distinc-
tion, it may be that the Legislature considered arbitration more
acceptable in the context of franchise relationships already
10 Assembly Committee on Finance, Insurance, and Commerce, Ad Hoc
Subcommittee on Franchising, An Evaluation of the Regulation of Franchis-
ing in California and Prospective Legislative Revisions—Background Notes
for Interim Study, page 6.
11 This inference is supported by the following legislative history. As-
semblyman Young, who was the author of the bill which became the
Franchise Relations Act, sponsored an earlier bill (Assem. Bill No. 944 (1977
Reg. Sess.)) which provided for similar restrictions upon termination of
franchises through addition of a new chapter (§ 31220 et seq.) to the
Corporations Code. That bill contained a section providing for a similar
nonwaiver provision which read as follows: ‘'31224: (a) Except as provided
in subdivision (b) of this section, any condition, stipulation, provision, or
term of any franchise agreement waiving any rights granted under the
chapter or relieving any person from liability imposed by this chapter shall be
void and unenforceable.’’ (Emphasis added.) Subdivision (b) permitted
agreements for ‘‘binding arbitration of disputes’’ subject to the restrictions
presently contained in the new law.
l3a
established, presumably on the basis of proper disclosure, or
that it considered the more detailed provisions in the Franchise
Investment Law for civil liability (Corp. Code, § 31300), ad-
ministrative regulation (Corp. Code, § 31400) and criminal
liability (Corp. Code, § 31410 et seq.), to require access to the
courts and ‘“‘the exercise of judicial direction to fairly assure
their effectiveness.’’ (Wilko v. Swan, supra, 346 U.S. at p.
437.)
Having determined that the California Legislature intended
the nonwaiver provision of the California Franchise Act to be
interpreted in accord with Wilko v. Swan,” we turn to
Southland’s contention that the statute as so construed may
not constitutionally be applied to a ‘‘contract evidencing a
transaction involving commerce’’ within the meaning of the
Federal Arbitration Act (FAA). The argument is that the FAA,
in mandating that a provision for arbitration in such a contract
**shall be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any
contract’’ (FAA, § 2), establishes a general principle of arbi-
trability which preempts any state law or policy restrictive of
arbitration, whatever the basis for that law or policy might be,
and whether or not federal jurisdiction over the underlying
controversy exists. We consider that argument overly broad.
The starting point for analysis is Prima Paint v. Flood &
Conklin (1967) 388 U.S. 395, in which the Supreme Court held
that in a federal court diversity action involving a contract
subject to the FAA, a claim of fraud in the inducement of the
contract (as distinguished from a claim of fraud in the induce-
ment of the arbitration clause), is a question for the arbitrator,
and not the court, to decide; and that this rule applies even
though the law of the state in which the contract was to be
performed might have a different rule.
The Supreme Court in Prima Paint rejected the contention
that it was “constitutionally impermissible” to apply the FAA
12 As in Wilko, the agreement here was to arbitrate such disputes as
might arise in the future. We express no view as to the enforceability of an
agreement to arbitrate a pending dispute under the Franchise Investment
Law.
l4a
because the case was in the federal court solely by reason of
diversity of citizenship. “[T]he question,” the court said, “is
not whether Congress may fashion federal substantive rules to
govern questions arising in simple diversity cases ... [but]
whether Congress may prescribe how /federa/ courts are to
conduct themselves with respect to subject matter over which
Congress plainly has power to legislate.” (Id., at p. 405;
emphasis added.) The opinion thus left open the question
whether or under what circumstances sfafe courts are constitu-
tionally obligated to apply the substantive principles inherent
in the federal statute.
Shortly after Prima Paint was decided, the New York Court
of Appeals indicated it would apply FAA principles to a
maritime transaction “even if such a result is not constitu-
tionally mandated by the decision in Prima Paint,” in order to
discourage forum shopping between state and federal courts.
(A/S J. Ludwig Mowinckels R. v. Dow Chem. Co. (1970) 307
N.Y.S.2d 660, 666.) Since then a number of courts, both
federal and state, have adopted the view that while the FAA is
not itself a source of federal jurisdiction, the statute contains
certain principles of “substantive federal law” which must be
applied, regardless of forum, where federal jurisdiction exists.
(E.g., In re Mercury Const. Corp. (4th Cir. 1981) 656 F.2d 933,
938; E. C. Ernst, Inc. v. Manhattan Const. Co. of Texas (Sth
Cir. 1977) 551 F.2d 1026, 1040; Pathman Const. Co. v. Knox
County Hospital Ass’n (1975) 326 N.E.2d 844, 851; Episcopal
Housing Corp. v. Federal Ins. Co. (1977) 239 S.E.2d 647;
Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67
Cal.App.3d 19, 24-25.)
While the federal district court in this case, by its remand,
determined that federal jurisdiction over the franchisees’ law-
suit did not exist, the likely explanation for that determination
is the presence in the case of defendants whose citizenship
precludes requisite diversity. Accordingly, we do not decide the
preemption issue on that narrow ground (see In re Mercury
Const. Corp., supra, 656 F.2d at p. 942).
Rather, we confront squarely the underlying issue of statu-
tory interpretation: whether the principles of “substantive
lSa
federal law” embodied in the FAA, preclude a state from
protecting its franchise investors through a system of statutory
regulation including nonwaivable judicial remedies. While
there is authority for an affirmative answer (Allison v. Medi-
cab Intern., Inc. (1979) 597 P.2d 380, 383; Barron v. Tastee
Freez Intern., Inc. (E.D. Wis. 1980) 482 F.Supp. 1213), we
respectfully disagree.
The FAA was adopted in 1925 (43 Stat. 883), against a
background of judicial hostility to arbitration generally. (See
Kulukundis Shipping Co. v. Amtorg Trading Corp. (2d Cir.
1942) 126 F.2d 978, 984; Sayre, Development of Commercial
Arbitration Law (1927) 37 Yale L.J. 595.) The apparent pur-
pose of the statute was to remove that hostility, and so “make
the benefits of arbitration generally available to the business
world.” (Robert Lawrence Company v. Devonshire Fabrics,
Inc. (2d Cir. 1959) 271 F.2d 402, 407.) While there is nothing in
the legislative history of the statute to suggest that Congress
considered its application to state courts (see, Sturges and
Murphy, Some Confusing Matters Relating to Arbitration
Under the United States Arbitration Act (1952) 17 Law &
Contemp. Prob. 580, passim), we assume that Congress in-
tended to insulate interstate contracts from judicial hostility
regardless of forum (see Fite & Warmath Const. Co., Inc. v.
MYS Corp. (Ky. 1977) 559 S.W.2d 729), and to establish for
such contracts certain uniform rules of interpretation (see
Guinness-Harp Corp. v. Jos. Schlitz Brewing (2d Cir. 1980)
613 F.2d 468, 472.)
In these respects, California law is entirely in accord. Two
years after the FAA was enacted, this state adopted its first
modern arbitration statute (Stats. 1927, ch. 225), declaring
arbitration agreements to be irrevocable and enforceable in
terms identical to those used in section 2 of the federal act, and
since that time California courts and its Legislature have
“consistently reflected a friendly policy toward the arbitration
process.” (Kagel, A Study Relating to Arbitration, in Cal.
Law. Revision Com. Recommendations and Study Relating to
Arbitration (1960) p. G-28.) That policy was expanded and
clarified in the current arbitration statute which was adopted in
16a
1961 (Stats. 1961, ch. 461, § 2 et seq.), and it continues to be
the policy of this state (e.g., Doers v. Golden Gate Bridge etc.
Dist. (1979) 23 Cal.3d 180, 189).
Adoption of an affirmative policy toward enforcement of
arbitration agreements has never implied, however, that all
types of disputes are subject to arbitration. In New York, for
example, one of the earliest states to encourage arbitration
through statute, certain categories of disputes are insulated
from arbitration as a matter of public policy. (See Associated
Teachers, etc. v. Bd. of Ed. (1979) 33 N.Y.2d 229 [351
N.Y.S.2d 670].) Among these are disputes under state antitrust
laws, on the ground that “through the use of economic power
and contracts of adhesion, containing broad arbitration
clauses, antitrust violators may be able to insulate their trans-
gressions of the antitrust law from judicial scrutiny.” (Aimcee
Wholesale Corp. v. Tomar Products (1968) 21 N.Y.2d 621, 629
[289 N.Y.S.2d 968, 973-974].) The same is true of matters
involving the liquidation of insolvent insurance companies
(Knickerbocker Agency v. Holz (1958) 4 N.Y.2d 245 [173
N.Y.S.2d 602, 607-610]), or the usurious character of a pur-
ported sales agreement (Durst v. Abrash (1964) 253 N.Y.S.2d
351, 353).
Such exceptions to the general principle of arbitrability, like
those expressed in California’s Franchise Investment Law, do
not reflect hostility toward arbitration, nor do they constitute
an obstacle to the general enforcement of arbitration agree-
ments in a manner consistent with federal law. Rather, such
exceptions are narrowly confined to rights and remedies
created by state regulatory statutes, and represent a determina-
tion that the public interest is best served by maintaining access
to the remedies which the Legislature has provided. That
Congress intended, through the FAA, to override state policies
of that nature seems highly improbable.
The question in this case might be more debatable were it
not for the fact that California’s policy of protecting judicial
remedies for this state’s franchise investors was patterned after,
and is consistent with, federal policy in the analogous area of
17a
securities investment.'' There is no suggestion that Congress
has preempted the field of franchise investor regulation as it
has, for example, the field of labor relations (cf. Teamsters
Union v. Oliver (1959) 358 U.S. 283), or that the FAA
embodies substantive principles intrinsic to a federally regu-
lated field (cf. Textile Workers v. Lincoln Mills (1957) 353 U.S.
448). Having left states with power to enact laws in this area, it
is hardly likely that Congress intended to preclude them from
adopting policies which Congress itself has found to be appro-
priate."
Preemption principles were recently summarized by the
United States Supreme Court in Merrill Lynch, Pierce, Fenner
& Smith v. Ware (1973) 414 U.S. 117, holding that California’s
statutory policy excluding wage claims from arbitration (Lab.
Code, § 229) was not preempted by rules promulgated by the
New York Stock Exchange pursuant to federal law: “ ‘The
principle to be derived from our decisions is that federal
regulation of a field of commerce should not be deemed
preemptive of state regulatory power in the absence of per-
suasive reasons—either that the nature of the regulated subject
matter permits no other conclusion, or that the Congress has
unmistakably so ordained.’ [Citation.] [€] In other contexts,
pre-emption has been measured by whether the state statute
frustrates any part of the purpose of the federal legislation.
[Citations.] And . . . while prior cases on pre-emption ‘are not
precise guidelines,’ because each case turns on the peculiarities
and special features of the federal regulatory scheme in ques-
13 We observe that California’s Corporate Securities Law contains a
substantially identical nonwaiver provision (Corp. Code, § 25701).
Southland’s argument would preclude its application to interstate trans-
actions as well.
14 Southland observes that two federal statutes which regulate fran-
chise relationships (Petroleum Marketing Practices Act (15 U.S.C. § 2801 et
seq.) and Automobile Dealer Suits Against Manufacturers (15 U.S.C. § 1221
et seq.) do not contain provisions similar to 15 United States Code section
77n. Neither of these statutes impose analogous disclosure requirements
however, nor has the issue of arbitrability of disputes under them been
litigated in reported cases.
18a
tion, it is where there is in existence a pervasive and compre-
hensive scheme of federal regulation that pre-emption follows
in order to fulfill the federal statutory purposes. [Citations.]
[€] In the area of regulation that we are considering here,
Califoinia has manifested a strong policy of protecting its
wage earners from what it regards as undesirable economic
pressures affecting the employment relationship. This policy
prevails in the absence of interference with the federal regula-
tory scheme. We find no such interference... .” (414 U.S. at
p. 139-140.)
The court in Ware did not consider the applicability of the
FAA, and the holding in the case is consequently not control-
ling here, but the principles which the court announced
strongly support rejection of Southland’s argument. Not only
has California “manifested a strong policy of protecting its
[franchise investors] from what it regards as undesirable
economic pressures affecting the [franchise] relationship”
(ibid.), it has done so through a regulatory scheme containing
remedies which it has deemed appropriate to protect against
waiver, and in accordance with policies compatible with the
pattern of federal regulation.
The United States Supreme Court has “repeatedly warned
against the dangers of an approach to statutory construction
which confines itself to the bare words of a statute, [citations],
for ‘literalness may strangle meaning.’ [Citation].” (Lynch v.
Overholser (1962) 369 U.S. 705, 710.) We accept that the FAA
contains certain principles of substantive federal law which
must be applied, regardless of forum, where federal jurisdic-
tion exists; on that point we are fully in accord with our
dissenting colleagues. We simply reject Southland’s argument
that those principles are so unyielding as to require enforce-
ment of an agreement to arbitrate a dispute over the applica-
tion of a regulatory statute which a state legislature, in
conformity with analogous federal policy, has decided should
be left to judicial enforcement."
1S Southland urges that exclusion of Franchise Investment Law claims
from arbitration will lead to duplicative proceedings because franchisees’
19a
Ill. WAIVER.
Franchisees contend that Southland waived its right to arbi-
tration by delays in asserting it, and by pursuing legal actions
which were inconsistent with it. We will separately consider
waiver in connection with Keating, and with the individual
actions.
The law in this area is rather well defined. Arbitration is
strongly favored. Courts will closely scrutinize any claims of
waiver (Gavlik Const. Co. v. H. F. Campbell Co. (3d Cir.
1975) 526 F.2d 777, 783; Seidman & Seidman v. Wolfson (1975)
50 Cal.App.3d 826, 835; 9 U.S.C. § 3; Code Civ. Proc.,
§ 1281.2, subd. (a)), and “ ‘indulge every intendment to give
effect to such proceedings.’ (Pacific Inv. Co. v. Townsend
(1976) 58 Cal.App.3d 1, 9.)” (Doers v. Golden Gate Bridge etc.
Dist., supra, 23 Cal.3d 180, 189.) Moreover, the burden of
proof is “heavy” and rests on the party seeking to establish
waiver (Martin Marietta Aluminum, Inc. v. General Elec. Co.
(9th Cir. 1978) 586 F.2d 143, 146; General Guar. Ins. Co. v.
New Crleans General Agency, Inc. (Sth Cir. 1970) 427 F.2d 924,
929, fn. 5) which “is not to be lightly inferred.” (Gavlik Const.
Co. v. H. F. Campbell Co., supra, 526 F.2d at p. 783; Davis v.
Blue Cross of Northern California (1979) 25 Cal.3d 418, 426.)
The trial court here found no waiver. Because the question
of waiver is one of fact, we have noted that the “determination
of this question, if supported by substantial evidence, is bind-
ing on an appellate court. [Citation.] . . . [It is only] in cases
where the record before the trial court establishes a lack of
waiver as a matter of law, [that] the appellate court may
reverse a finding of waiver made by the trial court.” (Doers v.
Golden Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 185; see
Reid Burton Const. v. Carpenters Dist. Council, etc. (10th Cir.
common law claims of fraud and negligent misrepresentation involve the
“same constellation of facts.” Under federal law, such considerations may be
taken into account in determining the order of proceedings, and even in
determining whether common law claims should be decided in a judicial
forum. (Sibley v. Tandy Corp., supra, 543 F.2d 540, 543, cert. den. (1977)
434 U.S. 824; Miley v. Oppenheimer & Co., Inc. (1981) 637 F.2d 318.)
20a
1980) 614 F.2d 698, 703, cert. den. (1980) 449 U.S. 824
[adopting a “clearly erroneous” standard of review].)
We have recently acknowledged that while there is no “single
test” in establishing waiver, the relevant factors include
whether the party seeking arbitration (1) has “previously taken
steps inconsistent with an intent to invoke arbitration,” (2)
“has unreasonably delayed” in seeking arbitration, (3) or has
acted in “bad faith” or with “wilful misconduct.” (Davis v.
Blue Cross of Northern California, supra, 25 Cal.3d at pp.
425-426; see Germany v. River Terminal Railway Company
(6th Cir. 1973) 477 F.2d 546, 547.) We have stressed the
significance of the presence or absence of prejudice. Waiver
does not occur by mere participation in litigation; there must
be “judicial /itigation of the merits of arbitrable issues” (Doers
v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 188),
although “waiver could occur prior to a judgment on the
merits if prejudice could be demonstrated” (id., at p. 188, fn.
3). This result is fully consistent with federal cases which have
held that “as an abstract exercise in logic it may appear that it
is inconsistent for a party to participate in a lawsuit for breach
of a contract, and later to ask the court to stay that litigation
pending arbitration. Yet the law is clear that such participation,
standing alone, does not constitute a waiver [citations], for
there is an overriding federal policy favoring arbitration. . .
[MJere delay in seeking a stay of the proceedings without some
resultant prejudice to a party [citation], cannot carry the day.”
(Carcich v. Rederi A/B Nordie (2d Cir. 1968) 389 F.2d 692,
696; see Shinto Shipping Co. v. Fibrex & Shipping Co., Inc.
(9th Cir. 1978) $72 F.2d 1328, 1330.)
Tested by these principles, the record fully supports the trial
court’s conclusion that there was no waiver in Keating.
Southland had a legal right to petition for removal of the case
to the federal district court; it did so promptly, as the statute
requires (28 U.S.C. § 1446(b)); and in its amended pleading it
asserted the arbitration agreement as a defense. Prior to
remand, the only discovery which took place consisted of an
exchange of documents to franchisees’ benefit. Upon remand,
2la
Southland moved promptly to compel arbitration.” We discern
no impropriety on the part of Southland, or prejudice to
franchisees, in these brief transactions.
In the remaining four individual actions, namely, Gouveia,
Sampson, Cheng, and Newell, the trial court granted the
motions to arbitrate except as to the Franchise Investment Law
claims, and stayed the proceedings pending completion of
arbitration. In noting the coordination of the various actions
the court observed that “there are matters which would
otherwise be arbitrable which are raised for the first time in the
second amended complaint.” It believed that referring to arbi-
tration only some issues while retaining others might well
achieve inconsistent results and would serve no useful purpose.
The court also observed that in some cases, separately viewed,
“there more than likely would have been found to be a waiver.”
Franchisees interpret the foregoing trial court remarks as
constituting a holding of waiver. They also contend that the
trial court erred in misconstruing the coordination of the
proceedings as requiring complete consistency of result be-
tween the individual cases. We do not agree. Extensively
amended complaints have been filed in each case after the
actions had been coordinated at franchisees’ request. We can-
not say, as a matter of law, that the court erroneously consid-
ered the coordinated posture of the cases in finding a lack of
waiver of Southland’s right to arbitration. Franchisees them-
selves asserted in their motion for coordination that “[eJach of
the actions for which coordination is sought herein is at the
same relative stage of development.” Furthermore, the court
did not specify in which of the actions a waiver might have
appeared, and franchisees’ argument that the trial court found
a waiver in any individual case is purely speculative.
Moreover, assuming a waiver had occurred as to the charg-
ing allegations in the original complaints, such waiver would
not extend to issues newly raised. (Cf. Janmort Leas., Inc. v.
Econo-Car Intern. (E.D.N.Y. 1979) 475 F.Supp. 1282, 1290.)
16 It moved also for a change of venue, which was granted by
22a
In seeking coordination and amendment of their complaints,
franchisees considerably expanded the scope of their pleadings,
raising several new causes of action, injecting new factual
elements, and refocusing the direction of their claims. We do
not suggest that an amendment to a complaint will, per se,
nullify a previous, effective waiver of arbitration in every case.
Here, however, franchisees directed a newly concerted attack,
evidenced by the filing of amended complaints and the motion
to coordinate. This sufficiently changed the proceedings, when
viewed in their entirety, to permit the trial court to find a lack
of waiver of the right to arbitrate the closely interrelated and
interdependent claims.
We are unable to accept franchisees’ argument that any
waiver occurred because of Southland’s litigation-related ac-
tivities in Gouveia, Sampson, Cheng, and Newell. As with
similar arguments advanced with reference to the Keating
complaint, Southland’s delay in seeking arbitration of the
other complaints, its filing of counterclaims and actions for
unlawful detainer, and its participation in discovery did not
require a finding of waiver. (Doers v. Golden Gate Bridge etc.
Dist., supra, 23 Cal.3d at p. 188; Carcich v. Rederi A/B
Nordie, supra, 389 F.2d at p. 696.) Here, Southland raised
arbitration as an affirmative defense in its answers to each of
the original complaints except in Gouveia. As previously
noted, “it is the judicial /itigation of the merits of arbitrable
disputes which waives a party’s right to arbitration” (Doers v.
Golden Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 188), and
the burden is on franchisees to show that the trial court’s
determination was not supported by the facts. (See, e.g., Hart
v. Orion Insurance Company (10th Cir. 1971) 453 F.2d 1358,
1361.)
Because of the mandatory nature of Code of Civil Procedure
section 426.30 requiring that any related cause of action be
alleged, no wai.er arose by reason of the filing of the cross-
complaints. As to the unlawful detainer causes of action, the
agreements themselves specifically provide that a demand for
arbitration “shall not operate to stay. . . the right of 7-Eleven
to take possession of the Lease Property in accordance with the
23a
Agreement.” The contract contemplated that arbitration and
litigation of the right to possession would proceed simulta-
neously.
Again, we find most significance in the lack of any prejudice
demonstrated by franchisees in Gouveia, Sampson, Cheng,
and Newell. While Southland participated in discovery in the
individual actions before demanding arbitration, the trial court
expressly conditioned its order to compel arbitration on
Southland’s agreement either to abstain from the use of
further discovery or to extend equally extensive discovery to
franchisees. Moreover, the discovery was reciprocal; for exam-
ple, franchisees’ petition for coordination indicated that evi-
dence of Southland’s bookkeeping practices had already been
obtained and was relevant to all of the individual actions.
Neither side had completed its discovery, and Southland
asserted, without refutation, that the filing of the new com-
plaints significantly raised new issues requiring further discov-
ery should the cases go to trial. The condition imposed by the
trial court on its order for arbitration, however, prevented
Southland from taking advantage of any previously discovered
information.
Our function is to determine whether the trial court’s finding
of no waiver is supported by substantial evidence. Franchisees
have not made specific claims of prejudice. Nor have we been
supplied with any record of the discovery proceedings already
undertaken by which we could independently assess such
claims if made.
Accordingly, we cannot conclude that the trial court erred in
finding no waiver and in ordering arbitration.
IV. CLASS ARBITRATION.
The trial court, in ordering arbitration, did not expressly
rule upon the motions in Keating and Battersby for class
certification. Franchisees contend that if arbitration is to
proceed the trial court should be instructed to determine the
preliminary issues regarding class certification so that it may
proceed on a classwide basis. This contention requires us to
24a
examine the special problems of unfair advantage which may
appear in an adhesion setting when individual arbitration
agreements are invoked to block an otherwise appropriate class
action.”
This court has repeatedly emphasized the importance of the
class action device for vindicating rights asserted by large
groups of persons. We have observed that the class suit “both
eliminates the possibility of repetitious litigation and provides
small claimants with a method of obtaining redress for claims
which would otherwise be too small to warrant individual
litigation. [Citation.]” (Richmond v. Dart Industries, Inc.
(1981) 29 Cal.3d 462, 469.) Denial of a class action in cases
where it is appropriate may have the effect of allowing an
unscrupulous wrongdoer to “retain[{] the benefits of its wrong-
ful conduct.” (Vasquez v. Superior Court (1971) 4 Cal.3d 800,
808.)'"" And, as we noted in LaSala vy. American Sav. & Loan
Assn. (1971) 5 Cal.3d 864, 877: “Controversies involving
widely used contracts of adhesion present ideal cases for class
adjudication; the contracts are uniform, the same principles of
interpretation apply to each contract, and all members of the
class will share a common interest in the interpretation of an
agreement to which each is a party.”
If the right to a classwide proceeding could be automatically
eliminated in relationships governed by adhesion contracts
through the inclusion of a provision for arbitration, the poten-
tial for undercutting these class action principles, and for
chilling the effective protection of interests common to a
17 We assume, for purposes of this analysis, that Keating and Battersby
would be maintainable as class actions under established principles, but we
intimate no opinion as to whether that is, in fact, the case. That will be an
issue for the trial court upon remand.
18 Federal law is in accord. (See, e.g., Weeks v. Bareco Oil Co. (7th
Cir. 1941) 125 F.2d 84, 90 (“To permit the defendants to contest liability with
each claimant in a single, separate suit, would, in many cases give defendants
an advantage which would be almost equivalent to closing the door of justice
to all small claimants”); Moscarelli v. Stamm (E.D.N.Y. 1968) 288 F.Supp.
453, 461.)
25a
group, would be substantial. Arbitration proceedings may well
provide certain offsetting advantages through savings of time
and expense; but, depending upon the nature of the issues and
the evidence to be presented, it is at least doubtful that such
advantages could compensate for the unfairness inherent in
forcing hundreds or perhaps thousands, of individuals assert-
ing claims involving common issues of fact and law to litigate
them in separate proceedings against a party with vastly supe-
rior resources. Because the principles of res judicata and
collateral estoppel do not apply in arbitration proceedings, any
issue resolved against a party such as Southland in one arbitra-
tion proceeding would have to be decided anew in a subsequent
arbitration, resulting in needless duplication and the potential
for inconsistent awards. And while arbitration ideally takes
place outside the judicial arena, it would be naive to assume, in
such a situation, that courts would not be called upon to
determine issues ancillary to the arbitration proceedings. The
effect would be to place upon the parties, and upon the courts,
many of the burdens which the class action device was designed
to avoid.
It is common knowledge that arbitration clauses frequently
appea’ in standardized contracts of adhesion. A primary con-
sideration which has led courts to uphold such clauses, despite
the adhesive nature of the contract, is the belief that arbitra-
tion is not oppressive and does not defeat the reasonable
expectations of the parties. (Madden v. Kaiser Foundation
Hospitals, supra, 17 Cal.3d 699, 710, 712.) If, however, an
arbitration clause may be used to insulate the drafter of an
adhesive contract from any form of class proceeding, effec-
tively foreclosing many individual claims, it may well be
oppressive and may defeat the expectations of the nondrafting
party.
One possible solution to this dilemma would be to hold that
arbitration agreements contained in contracts of adhesion may
not operate to stay properly maintainable class actions. (See
Harris v. Shearson Hayden Stone, Inc. (1981) 441 N.Y.S.2d 70,
76-79 (dis. opns.); cf. Frame v. Merrill Lynch, Pierce, Fenner
& Smith, Inc. (1971) 20 Cal.App.3d 668, 672; Vernon v. Drexel
26a
Burnham & Co. (1975) 52 Cal.App.3d 706.) The statutes and
public policy supportive of arbitration require, however, that
this result be avoided if means are available to give expression
to the basic arbitration commitment of the parties. (Graham v.
Scissor-Tail, Inc., supra, 28 Cal.3d 807, 831.) We turn our
attention, therefore, to the solution offered by franchisees:
that the arbitration itself proceed on a classwide basis.
There is, as the parties acknowledge, an absence of direct
authority either supporting or rejecting such a procedure.
Analogous authority exists, however, with respect to the con-
solidation of arbitration proceedings involving a dispute which
concerns several parties each of whom has an agreement with
one or more of the others to arbitrate the dispute. “Although
the [Federal Arbitration] Act does not specifically provide for
consolidated arbitrations, courts have frequently ordered con-
solidated arbitration proceedings when the ‘interests of justice’
sO require, either because the issues in dispute are substantially
the same and/or because a substantial right might be preju-
diced if separate arbitration proceedings are conducted.” (Mat-
ter of Czarnikow-Rionda Co., Inc. (S.D.N.Y. 1981) 512
F.Supp. 1308, 1309.) Indeed, the Second Circuit has opined
that “the liberal purposes of the Federal Arbitration Act
clearly require that this act be interpreted so as to permit and
even encourage the consolidation of arbitration proceedings in
proper cases.” (Compania Espanola de Pet., S.A. v. Nereus
Ship. (2d Cir. 1975) 527 F.2d 966, 975, cert. den. (1976) 426
U.S. 936; see also, Marine Trading Ltd. v. Ore International
Corp. (S.D.N.Y. 1977) 432 F.Supp. 683; Robinson v. Warner
(D.C.R.1. 1974) 370 F.Supp. 828.)
Federal courts, in ordering consolidation of arbitration pro-
ceedings in these cases, have relied upon rule 81(a)(3) of the
Federal Rules of Civil Procedure, which states that the federal
rules apply to certain statutes, including the FAA, “only to the
extent that matters of procedure are not provided for in those
statutes.” Thus, rule 42(a), which provides for consolidation of
related proceedings, is deemed to apply. Analogous reasoning
would support reliance on rule 23, the class action rule, as a
27a
basis for ordering classwide arbitrations when the interests of
justice so require.
A number of state courts also support consolidation of
arbitration proceedings, even in the absence of express statu-
tory authority. New York courts take the position that “juris-
diction to enforce contracts to arbitrate imports power to
regulate the method of enforcement.” (Chariot Textiles Corp.
v. Wannalancit Textile Co. (1964) 250 N.Y.S.2d 493, 495 (dis.
opn.), revd. on dis. opn. (1966) 275 N.Y.S.2d 382 [221 N.E.2d
913]; see also In re Vigo Steamship Corporation (1970) 257
N.E.2d 624, cert. den. sub nom., Frederick Snare Corp. v.
Vigo Steamship Corp. (1970) 400 U.S. 819; accord: Grover-Di-
mond Assoc. v. American Arbitration Ass’n (Minn. 1973) 211
N.W.2d 787; see also, Exber, Inc. v. Sletten Construction
Company (Nev. 1976) 558 P.2d 517; James Stewart Polshek,
etc. v. Bergen Iron Wks. (N.J. 1976) 362 A.2d 63; Episcopal
Housing Corp. v. Federal Ins. Co. (S.C. 1979) 255 S.E.2d 451;
contra: Stop & Shop Companies, Inc. v. Gi'bane Building Co.
(Mass. 1973) 304 N.E.2d 429; J. Brodie & Son, Inc. v. George
A. Fuller Company (Mich. 1969) 167 N.W.2d 886; see gener-
ally, Annot., Consolidation of Arbitration Proceedings, 64
A.L.R.3d 528, 529.) In California, consolidation in certain
cases is expressly authorized by statute. (Code Civ. Proc.,
§ 1281.3.)"
Consolidated arbitration often involves a tripartite relation-
ship in which the parties in dispute each have a contract with a
third party, but not with each other. Each contract may provide
19 Section 1281.3 was added in 1978 (Stats. 1978, ch. 260, § 2),
apparently in response to a Court of Appeal decision holding that courts of
this state lacked authority to order consolidation of arbitration proceedings.
(Atlas Plastering, Inc. v. Superior Court (1977) 72 Cal.App.3d 63.) The
section permits consolidation of separate arbitration proceedings when “(1)
Separate arbitration agreements or proceedings exist between the same
parties; or one party is a party to a separate arbitration agreement or
proceeding with a third party; and (2) The disputes arise from the same
transactions or series of related transactions; and (3) There is common issue
or issues of law or fact creating the possibility of conflicting rulings by more
than one arbitrator or panel of arbitrators.”
28a
a different procedure for arbitration, or a different method of
selecting the arbitrator. Federal courts have held that a court
“can mold the method of selection and the number of arbitra-
tors to implement the consolidated proceedings.” (Matter of
Czarnikow-Rionda Co., Inc., supra, 512 F.Supp. at p. 1309.)
Similarly, Code of Civil Procedure section 1281.3 provides that
consolidated arbitration proceedings may be ordered inter alia,
where “one party is a party to a separate arbitration agreement
or proceeding with a third party,” and that if the agreements do
not mesh in their description of procedure, a court has author-
ity to appoint an arbitrator, and to “resolve [conflicts among
the agreements] and determine the rights and duties of the
various parties to achieve substantial justice under all the
circumstances.” Thus, a party may be forced into a coordi-
nated arbitration proceeding in a dispute with a party with
whom he has no agreement, before an arbitrator he had no
voice in selecting and by a procedure he did not agree to.
In these respects, an order for classwide arbitration in an
adhesion context would call for considerably less intrusion
upon the contractual aspects of the relationship. The members
of a class subject to classwide arburation would all be parties
to an agreement with the party against whom their claim is
asserted; each of those agreements would contain substantially
the same arbitration provision; and if any of the members of
the class were dissatisfied with the class representative, or with
the choice of arbitrator, or for any other reason would prefer
to arbitrate on their own, they would be free to opt out and do
so. Moreover, the interests of justice that would be served by
ordering classwide arbitration are likely to be even more
substantial in some cases than the interests that are thought to
justify consolidation. It is unlikely that the state Legislature in
adopting the amendment to the Arbitration Act authorizing
consolidation of arbitration proceedings, intended to preclude
a court from ordering classwide arbitration in an appropriate
case. We conclude that a court is not without authority to do
so.
Without doubt a judicially ordered classwide arbitration
would entail a greater degree of judicial involvement than is
29a
normally associated with arbitration, ideally “a complete pro-
ceeding, without resort to court facilities.” (East San Bernar-
dino County Water Dist. v. City of San Bernardino (1973) 33
Cal.App.3d 942, 950.) The court would have to make initial
determinations regarding certification and notice to the class,
and if classwide arbitration proceeds it may be called upon to
exercise a measure of external supervision in order to safe-
guard the rights of absent class members to adequate represen-
tation and in the event of dismissal or settlement. A good deal
of care, and ingenuity, would be required to avoid judicial
intrusion upon the merits of the dispute, or upon the conduct
of the proceedings themselves and to minimize complexity,
costs, or delay. (See Class Wide Arbitration: Efficient Adjudi-
cation or Procedural Quagmire? (1981) 67 Va.L.Rev. 789.)
An adhesion contract is not a normal arbitration setting,
however, and what is at stake is not some abstract institutional
interest but the interests of the affected parties. Classwide
arbitration, as Sir Winston Churchill said of democracy, must
be evaluated, not in relation to some ideal but in relation to its
alternatives. If the alternative in a case of this sort is to force
hundreds of individual franchisees each to litigate its cause
with Southland in a separate arbitral forum, then the prospect
of classwide arbitration, for all its difficulties, may offer a
better, more efficient, and fairer solution. Where that is so,
and gross unfairness would result from the denial of opportu-
nity to proceed on a classwide basis, then an order structuring
arbitration on that basis would be justified.
Whether such an order would be justified in a case of this
sort is a question appropriately left to the discretion of the trial
court. In making that determination, the trial court would be
called upon to consider, not only the factors normally relevant
to class certification, but the special characteristics of arbitra-
tion as well, including the impact upon an arbitration proceed-
ing of whatever court supervision might be required, and the
availability of consolidation as an alternative means of as-
suring fairness. Whether classwide proceedings would preju-
dice the legitimate interests of the party which drafted the
adhesion agreement must also be considered, and that party
30a
should be given the option of remaining in court rather than
submitting to classwide arbitration.
In this case, the trial court did not consider the franchisees’
request for classwide arbitration at all, and a fortiori did not
consider the facts which we have found to be relevant. Since
we are unable to make the determination on this record as a
matter of law, the case will be remanded to the trial court on
this issue.
The order of the trial court is reversed and the cause is
remanded for further proceedings consistent with the opinion
herein. In light of our opinion, the petition for writ of
prohibition or mandate is denied. Each party to bear their own
costs.
*GRODIN, J.
WE CONCUR:
BIRD, C.J.
NEWMAN, J.
REYNOSO, J.
a
CONCURRING AND DISSENTING OPINION
BY RICHARDSON, J.
I concur with the majority’s conclusions that the arbitration
agreement is enforceable and that Southland did not waive its
right to arbitration. I respectfully dissent, however, from the
majority’s further holdings that the Franchise Investment Law
claims are not subject to arbitration and that class action
arbitration is an available valid remedy.
* Assigned by the Chairperson of the Judicial Council.
3la
A. ARBITRABILITY OF THE FRANCHISE INVESTMENT LAW
CLAIMS
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 Securi-
ties Act, a statute regulating franchise investments.
The United States Supreme Court in Wilko v. Swan (1953)
346 U.S. 427, 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, fn. omitted); and (2) the
Securities Act’s purpose to protect investors by requiring “full
and fair disclosure . . . and to prevent fraud.” (/bid.) 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.” (/d., at p. 435.) In measuring the force of the
two policies, the Wi/ko 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, in which the high court declined to
invalidate an arbitration clause in a controversy between for-
eign 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
32a
forum” in contrast to section 77v, upon which the court “in
particular” relied in Wilko v. Swan. (/d., at p. 514, fn.
omitted.)
In contrast, the case before us concerns a sfate statute which
is contrary to the federal law. The Wilko reasoning in balanc-
ing 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 nor 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, stip-
ulation 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 ac-
cording to the principles of Wilko v. Swan, the section none-
theless impermissibly conflicts with the Federal Arbitration
Act. Section 31512 is therefore void under the supremacy
clause (U.S. Const., art. VI, § 2) to the extent that it purports
te 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 | 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 Arbitra-
tion Act to create a new body of federal substantive law
affecting the validity and interpretation of arbitration agree-
ments.” (Robert Lawrence Company v. Devonshire Fabrics,
33a
Inc. (2d Cir. 1959) 271 F.2d 402, 406, cert. dism. (1960) 364
U.S. 801, 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 com-
merce or maritime affairs are ‘valid, irrevocable, and enforce-
able’ 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 it-
self—is for the arbitrators and not for the courts... .”
(Prima Paint v. Flood & Conklin (1967) 388 U.S. 396, 399-
400.) The high tribunal then affirmed the decision below,
“albeit for somewhat different reasons.” (/bid.) Thus the
Supreme Court has never rejected the long standing doctrine
that the Arbitration Act created national substantive law appli-
cable 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 A. Cone Memorial Hospital v. Mercury Const. Corp.
(1982) _. U.S. __ [102 S.Ct. 1426]) (three questions were
presented in the petition for certiorari; none specifically con-
cerns 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
34a
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 con-
troversy 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 indepen-
dent 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 (Sth 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).” (/d., 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 [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
3Sa
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 Arbitra-
tion 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 exis-
tence 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.” (636 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 (Wash. 1979) 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
36a
gave to the state courts jurisdiction for causes of action based
on violations of the state act. Finding that interstate commerce
was involved, the Aillison court rejected the argument that
Wilko v. Swan, supra, applied to a conflict between a state
franchising act and the Federal Arbitration Act. The A/lison
court instead adopted the weight of authority rule applying the
federal act in the face of a contrary state law (id., at p. 382),
concluding that “the supremacy clause of the federal constitu-
tion must prevail and thus the Federal Arbitration Act requires
enforcement of the arbitration clause in the franchise agree-
ment despite the judicial remedies afforded by the Franchise
Investment Protection Act.” (597 P.2d 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 empow-
ered to stay state proceedings “when the dispute in question
has been found by the court to be subject to the arbitration
provisions of 9 U.S.C. § 2.” (/d., at p. 172, see also Main v.
Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67
Cal.App.3d 19, 23-25, and cases cited therein [“ ‘The Federal
Arbitration Act, declaring arbitration agreement affecting [in-
terstate] commerce or maritime affairs to be valid, enforce-
able, 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.Wisc.
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 Arbi-
tration Act “to render void any effort made by a state to
protect the remedies of the franchise investors” contrary to the
Va
federal act in cases in which the transactions related to inter-
state commerce. (/d., 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. | 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 regula-
tion, but rather the clear language of the federal act and the
subsequent state and federal court interpretations which con-
sistently 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
(Sth 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, p. 4a.) The
conclusion that the federal act must prevail is logical, consis-
tent 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.
B. CLASS ACTION ARBITRATION
The majority also concludes that class action arbitration
may be an appropriate procedure and has remanded the case
for determination by the trial court. In the absence of either
Statutory or contractual authority, I disagree with its holding.
38a
Arbitration is a matter of agreement. It is consensual, being
an integral part of the contract. In such situations we have said
that the parties “may freely delineate the area of its applica-
tion.” (O'Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 490;
see Reid Burton Const. v. Carpenters Dist. Council, etc. (10th
Cir. 1980) 614 F.2d 698, 702, cert. den. _. U.S. __, 101 S.Ct.
85.) As a general principle, in considering contract enforce-
ment, “there is perhaps no higher public policy than to uphold
and give effect to contracts validly entered into and legally
permissible in subject matter.” (Vernon v. Drexel Burnham &
Co. (1975) §2 Cal.App.3d 706, 716.)
In the present case, the contracts of the parties do not
provide for class arbitration, nor have the parties subsequently
agreed thereto. No statute authorizes a court to order arbitra-
tion on a class-wide basis. Nonetheless, the majority concludes
that such a procedure is possible in order to prevent repetitive
arbitration and to avoid “effectively foreclosing individual
claims” in instances where the arbitration contract “may be
used to insulate the drafter of an adhesion contract from any
form of class proceeding.” (Ante, p. 25a.)
A recent New York case examined the propriety of the class
action device used in arbitration. Harris v. Shearson Hayden
Stone, Inc. (N.Y.App. 1981) 441 N.Y.S.2d 70, weighed the
policies favoring class actions and arbitration and concluded
that the filing of a class action alleging a broker’s breach of
fiduciary duty would not permit avoidance of an agreement to
arbitrate. The agreement was contained in a “customer’s agree-
ment” which the brokerage firm required all customers to sign.
Citing the consistent holdings of our Courts of Appeal in
Vernon v. Drexel Burnham & Co., supra, 52 Cal.App.3d 706,
716, and Frame v. Merrill Lynch, Pierce, Fenner & Smith
(1971) 20 Cal.App.3d 668, 672, the New York court held that
“maintenance of a class action here by assertion of a claim for
which a forum is provided elsewhere, would defeat the aim of
arbitration, and undercut an avowed purpose of the class
action itself—the ‘conservation of judicial effort.’” (441
N.Y.S.2d at p. 76.)
39a
In dissent, Justice Bloom urged that the conflict should be
resolved in favor of the class action. Even he, however,
expressly rejected the idea of a “class arbitration” saying,
“Nor is it an answer to assert that the dispute between
plaintiffs and Shearson may be proceeded with as a ‘class
arbitration.’ Arbitration does not lend itself to the many
subsidiary proceedings incident to an ongoing class action, e.g.
determination of whether class action status should be granted,
definition of the class, determination of the nature and kind of
notice and by whom it should be sent, provision for opting
out, etc. In sum, if the matter is to proceed in arbitration it
must proceed as an individual claim.” (/d., at p. 79; cf.
Coleman v. National Movie-Dine, Inc. (E.D.Pa. 1978) 449
F.Supp. 945, 948 [“Arbitration should not be foreclosed simply
by adding persons to a civil action who are not parties to the
arbitration agreement because such an inclusion would thwart
the federal policy in favor of arbitrations. (Citations.)”].) Thus
in weighing the policies behind class actions and arbitration,
other courts have found that class actions will not prevail
where there is an individual arbitration agreement.
In addition to the concerns mentioned by Justice Bloom,
other factors belie franchisees’ assertion that class certification
would be only a “preliminary” issue. For example, a court, in
determining whether class proceedings are appropriate, must
be satisfied that there is a “community of interest”; i.e., that
common issues predominate over individual issues. (See Code
Civ. Proc., § 382; City of San Jose v. Superior Court (1974) 12
Cal.3d 447, 459-460; Fed. Rules Civ. Proc., rule 23, 28 U.S.C.)
In determining whether a “community of interest” exists, a
court must carefully evaluate the nature of the proof that will
be presented by the parties (City of San Jose, supra, at p. 460;
Abercrombie v. Lum’s Inc. (S.D.Fla. 1972) 345 F.Supp. 387,
390), and the parties are likely to devote extensive resources to
developing the facts and arguments fully in regard to the
usually complex certification issues. (See, e.g., Chance v.
Superior Court (1962) 58 Cal.2d 275, 282-287; Blackie v.
Barrack (9th Cir. 1975) 524 F.2d 891, 900-901.)
40a
Moreover, class action procedures would interfere with the
expeditious resolution of the claims. After certification of a
class, the court must notify class members of the existence of
the suit so that they will have the opportunity to “opt out.”
(Fed. Rules Civ. Proc., rule 23(c), 28 U.S.C.) Because of the
due process safeguards required to keep class members ap-
prised of the course of the litigation, substantial judicial
involvement by the court will be required to monitor the
progress of the arbitration and potentially will undermine the
arbitrator’s discretion. In fact, the court’s due process respon-
sibilities include the duty to “undertake a stringent and con-
tinuing examination of the adequacy of representation by the
named class representative at all stages of the litigation.” (Nat.
Assn. of Reg. Med. Programs, Inc. v. Mathews (D.C.Cir.
1976) 551 F.2d 340, 344, cert. den. 431 U.S. 954.)
Yet another consideration arises from the fact that unlike
settlements reached through arbitration, which are ordinarily
not subject to court review on either procedural issues or the
merits (see Barrett v. Manuf. Ry. Co. (8th Cir. 1972) 453 F.2d
1305, 1307), a class action settlement normally does not be-
come final without court approval. (La Sala v. Am. S. & L.
Assn. (1971) 5 Cal.3d 864, 872; Fed. Rules Civ. Proc., rule
23(e), 28 U.S.C.; In re General Motors Corp. Engine Inter-
change Litig. (7th Cir. 1979) 594 F.2d 1106, 1124, cert. den. 444
U.S. 870.) The court must review the entire proceedings to
determine if the settlement was fair, reasonable, and adequate
in light of the strength of each party’s case (Marshall v.
Holiday Magic, Inc., (9th Cir. 1977) 550 F.2d 1173, 1178-1179),
and take evidence on any substantial objection to the proposed
settlement brought by any class member. (Mandujano v. Basic
Vegetable Products, Inc. (9th Cir. 1976) 541 F.2d 832, 835-836.)
Finally, the normally “informal” nature of arbitration re-
quires no transcripts. Arbitrators generally need not explain
the basis for their decision. (Bernhardt v. Polygraphic Co. of
America (1956) 350 U.S. 198, 203-204, and fn. 4.) The absence
of a record further complicates the use of class proceedings,
because without a record a court may have difficulty in
applying an arbitrator’s decision to all class members, since it
4la
could not determine whether the arbitrator’s judgment was
applicable to each member of the class, or based on equities
applicable only to the individual claimant. Similarly, objection
to settlements would be difficult to assess.
In addition, arbitrators, of course, are not necessarily either
lawyers or judges. Requiring the administration of complex
class procedures during arbitration may either make lay experts
unavailable as arbitrators as a practical matter, or result in
intrusive judicial participation and supervision.
In summary, class procedures would tend to make arbitra-
tion inefficient instead of efficient, lengthy instead of expedi-
tious, and procedural instead of informal. “ ‘An arbitration
proceeding is, except in specified particulars, outside the court
realm and jurisdiction—deliberately so taken out of the court
by choice and commitment of the parties. Arbitration is
subject to its own rules and practices at variance with court
proceedings. It is supposed to be a complete proceeding,
without resort to court facilities . . . . It would be generally
incompatible with the nature and scope of arbitration to allow
a shift to the court forum... .’ (Application of Katz, 3
App.Div.2d 238, . . .)” (East San Bernardino County Water
Dist. v. City of San Bernardino (1973) 33 Cal.App.3d 942,
950.)
In my view, because of the complications resulting from
continued judicial monitoring, the imposition of class action
procedures on the arbitration process would be self-defeating.
Nonetheless, by analogy to consolidated arbitration proceed-
ings, the majority insists that class arbitration is an available
remedy. However, several factors make this analogy less than
compelling. In Atlas Plastering, Inc. v. Superior Court (1977)
72 Cal.App.3d 63, Atlas, a general contractor, sought to
consolidate arbitration proceedings between itself and several
subcontractors, each of whom had entered into identical arbi-
tration agreements with Atlas. The Aé/as court held that,
because the parties had not agreed to consolidated proceedings
and because consolidation would deprive the individual sub-
contractors of their right to choose an arbitrator in the manner
set forth in the arbitration agreement, the court lacked the
42a
power to order consolidated proceedings. (Code Civ. Proc.,
§ 1281.6.) When Atlas was decided, no statute authorized a
court to order consolidation of arbitrations.
Following the decision in Atlas, the Legislature enacted
Code of Civil Procedure section 1281.3 which specifically
authorizes consolidated arbitration at the court’s discretion
under certain circumstances. This section was relied upon in
Conejo Valley Unified School Dist. v. William Blurock &
Partners, Inc. (1980) 111 Cal.App.3d 983, in which a party to
an arbitration agreement was compelled to arbitrate his claim
in consolidated proceedings despite the fact that the agree-
ments contained conflicting provisions for choosing an arbitra-
tor. The Conejo court held that section 1281.3 did not create
substantive rights, but was a procedural statute and that
therefore no constitutional bar to its retroactive application
existed.
Unlike the Conejo situation, there is no state statute which
permits a court to order arbitration proceedings on a class-
wide basis when the contractual arrangement of the parties
does not authorize it. The Legislature examined the specific
problems of related arbitration proceedings when it permitted
the consolidation of arbitration. After scrutinizing these prob-
lems the Legislature declined to provide for class arbitration.
Nor, as the majority concedes, is there any federal authority
for class arbitration. Although federal courts have ordered
consolidated arbitration under the authority of rule 42(a) of
the Federal Rules of Civil Procedure, the courts have at-
tempted to assure each party the right to select an arbitrator
and to express their individual views. (See, e.g., Compania
Espanola de Pet., S.A. v. Nereus Ship. (2d Cir. 1975) 527 F.2d
966, 974-975, cert. den. (1976) 426 U.S. 936; Marine Trading
Ltd. v. Ore Intern. Corp. (S.D.N.Y. 1977) 432 F.Supp. 683,
685; Robinson v. Warner (D.R.1. 1974) 370 F.Supp. 828, 829.)
In fact, the issue of the application of consolidation to arbitra-
tion proceedings is not a settled matter in the federal courts.
(See Gavlik Construction Co. v. H.F. Campbell Co. (W.D.Pa.
1975) 389 F.Supp. 551, $56, revd. on other grounds (3d Cir.)
$26 F.2d 777; see also Robinson v. Warner, supra, at p. 830.)
j
43a
In the absence of a statute authorizing class arbitration or
agreement of the parties, it is inappropriate in my view for us,
judicially, to superimpose such a procedure on the arbitration
process over objections of a party to the contract. (Compare,
Stevenson v. Com., Dept. of Revenue (Pa. 1980) 413 A.2d 667
[the Pennsylvania Board of Arbitration of Claims Act specifi-
cally incorporates procedures embodied in rules of Pennsylva-
nia civil procedure and class action is therefore available to
parties appearing before board].)
The majority is compelled to acknowledge that class-wide
arbitration “would entail a greater degree of judicial involve-
ment than is normally associated with arbitration ... .”
(Ante, p. 28a-29a.) Nonetheless, it argues that if the alternative
would be to require hundreds of individual arbitration pro-
ceedings, then such a procedure may be appropriate. | believe,
however, that the majority fails to accord proper deference to
the recognized principle that arbitration is a favored means of
dispute resolution because it permits a non-judicial, informal,
and speedy alternative to litigation. (See, e.g., Taylor v. Crane
(1979) 24 Cal.3d 442, 452; Doers v. Golden Gate Bridge etc.
Dist. (1979) 23 Cal.3d 180, 189; Aerojet-General Corp. v.
American Arbitration Assn. (9th Cir. 1973) 478 F.2d 248, 251.)
The injection of class action procedure into the arbitration
process in the absence of either statutory authority or contrac-
tual agreement conflicts with these settled principles as well as
with the specific contract terms to which the parties agreed. “It
is axiomatic that commercial arbitration is to be based on a
voluntary agreement of the parties[;] only then can the concept
of arbitration be well understood. In other words, nobody
should be bound to resort to arbitration unless he has pre-
viously agreed to that method of dispute settlement.” (Domke
on Commercial Arbitration (1968) § 1.02, p. 5.)
The franchisees here do not contend that they would be
unable to proceed individually in separate or consolidated
arbitration proceedings. We are not confronted with a situation
in which a plaintiff contends that it would be economically
unfeasible to mount a challenge in the absence of a class
44a
proceeding. In fact, not all of the actions before us have been
brought as class actions. It is very clear that the individual
franchisees have been fully able to proceed.
In a case where class proceedings provide the only economi-
cal method of presenting a claim, an alternative exists which
would protect both the contractual integrity of proper arbitra-
tion agreements and the interests of individual claimants. One
solution which has been suggested, and which the majority
rejects, “would be to hold that arbitration agreements con-
tained in contracts of adhesion may not operate to stay
properly maintainable class actions.” (Ante, p. 25a.) I agree
that as a general rule such a holding word be contrary to the
basic arbitration agreement of the par <s and to the policy
favoring arbitration. There is, however, another alternative.
Under settled principles of law, arbitration clauses in adhesion
contracts may be declared invalid where they are “beyond the
reasonable expectations of an ordinary person. . .” (Wheeler
v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 357) or bear
oppressively on the weaker party. (Madden v. Kaiser Founda-
tion Hospitals (1976) 17 Cal.3d 699, 710; Graham v. Scissor-
Tail, Inc. (1981) 28 Cal.3d 807, 820.) Thus, where an
arbitration clause in an adhesion contract would allow the
stronger party to evade responsibility for its acts, such a clause
may, under those facts, be found oppressive and the clause
invalidated. In instances where an arbitration clause would
effectively deny relief to the weaker party in an adhesion
contract, relief under settled principles of law would poten-
tially be available. As the majority concludes, there is no such
evasion of liability here, and consequently, there is no need for
an extraordinary remedy such as the one proposed by the
majority.
In summary, the majority, in the absence of any contractual,
Statutory, or judicial authority or any demonstrated need, has
seen fit to invent a procedure which is fundamentally contrary
to the purpose of arbitration and to the public policy encourag-
ing arbitration. Potentially, the majority’s holding will effec-
tively render arbitration clauses in all adhesion contracts
subject to class treatment, thus engrafting on an informal,
4Sa
speedy method of dispute resolution which often utilizes non-
legal arbitrators a complex legal procedure which will require
close court supervision and frequent intervention antithetical
to the essential informal and nonjudicial nature of the arbitra-
tion process.
CONCLUSION
From the foregoing, I conclude that the trial court erred in
holding tha’ ve Franchise Investment Law claims were not
arbitrable in .ie face of the clear national substantive law to
the contrary. I would reverse the trial court judgment to the
extent that it denies arbitration of these claims. In addition, |
conclude that in the absence of any statutory or contractual
agreement to the contrary, the strong policy reasons favoring
arbitration as a speedy, informal, and nonjudicial method of
dispute resolution militate against the remand of this case to
the trial court to permit it to determine whether class arbitra-
tion may be an appropriate procedure. I would affirm the trial
court’s order referring the individual cases to arbitration,
recognizing that consolidation of the individual arbitrations
might be proper.
RICHARDSON, J.
I CONCUR:
Mosk, J.
47a
APPENDIX B
Court of Appeal, First District, Division 2
Civ. 45162, Civ. 46123
Aug. 28, 1980
Rehearing Denied Sept. 26, 1980
+
RICHARD D. KEATING et al.,
Petitioners,
—_—Vi—
SUPERIOR COURT, ALAMEDA COUNTY,
Respondent,
THE SOUTHLAND CORPORATION et al.,
Real Parties in Interest.
—$§
PAULINO GARZA et al.,
Plaintiffs and Respondents,
—_—V.—
THE SOUTHLAND CORPORATION et al.,
Defendants and Appellants.
[And 8 other cases.]*
+
Cheng v. The Southland Corporation; Newell v. The Southland
Corporation; Sampson v. The Southland Corporation; Gouveia v. The
Southland Corporation; Battersby v. The Southland Corporation;
Keating v. The Southland Corporation; Coy v. The Southland Corpo-
ration; The Southland Corporation v. Scovis.
48a
FEINBERG, Associate Justice.
Pursuant to stipulation, we ordered these two cases consoli-
dated because both concern the trial court’s orders regarding
the propriety of arbitration vis-a-vis franchisors and franchi-
sees.
In Keating, et al. v. Superior Court, petitioners (franchi-
sees), seek a writ of prohibition or mandate to set aside the
trial court’s order to arbitrate pursuant to a contractual arbi-
tration provision. Petitioners claim that the trial court erred:
(1) by ruling that the contracts containing the arbitration
clauses were not contracts of adhesion and by denying peti-
tioners an evidentiary hearing concerning the validity of the
arbitration clauses before ordering arbitration; (2) by failing to
find that real parties had waived the right to compel arbitra-
tion; and (3) by failing to decide certain class action issues
before ordering arbitration so that any arbitration could be
conducted on a class-wide basis.
In Garza, et al. v. The Southland Corporation, et al.,
appellants (franchisors), claim that the trial court erred by
failing to order arbitration of certain claims based upon the
California Franchise Investment Law. They contend that, by
their terms, the arbitration clauses require this result and that
Corporations Code section 31512 does not invalidate contrac-
tual provisions calling for arbitration of claims arising under
the Franchise Investment Law.
KEATING, ETAL. v. SUPERIOR COURT
Petitioners are current and former franchise operators of
7-Eleven Stores in the Bay Area. Real parties are The
Southland Corporation (franchisors) and various current and
former employees of the corporation. This petition arises from
a group of cases which were coordinated under the title
“Market Franchise Cases” (Judicial Council Coordination
Proceeding No. 387).' Petitioners’ complaints included claims
1 The coordinated actions are:
Gouveia v. The Southland Corporation (Gouveia), filed Septem-
ber 1975;
49a
of fraud, misrepresentation and breach of contract, in addition
to allegations of violations of the Franchise Investment Law.
Real parties filed their first petition to compel arbitration on
September 28, 1977 in the Keating case. Ultimately, similar
petitions were filed in all of the cases, and those petitions were
granted with respect to all matters except the Franchise Invest-
ment Law claims.
1. The trial court did not err by denying petitioners an eviden-
tiary hearing concerning the validity of the arbitration
clauses before ordering arbitration.
All of the franchise agreements contained arbitration provi-
sions. Real parties assert that the clause contained in the
Keating contract is identical to or representative of the provi-
sions contained in the other contracts. That clause is repro-
duced in the margin.
Garza v. The Southland Corporation (Garza), filed September
, = v. The Southland Corporation (Sampson), filed Octo-
“hens v. The Southland Corporation (Cheng), filed December
a v. The Southland Corporation (Newell), filed January
oy v. The Southland Corporation (Keating), filed May 1977;
_~ = v. The Southland Corporation (Battersby), filed De-
cember 1977.
Two other actions have been coordinated which are not the subject of this
petition: Coy v. The Southland Corporation, filed March 1978, and Scovis v.
The Southland Corporation, filed April 1978.
2 Article 35. Arbitration.
(a) Unless prohibited by applicable law, any controversy or claim
arising out of or relating to this Agreement or the breach hereof
shall be settled by arbitration in accordance with the Rules of the
American Arbitration Association (the “Association”) and judg-
ment upon any award rendered by the arbitrator may be entered .>
any court having jurisdiction thereof.
(Footnote continued on following page)
50a
In his declaration in opposition to real parties’ petition to
compel arbitration, Richard D. Keating stated that:
“2) Other than the information that is set forth in an
American Arbitration Association pamphlet . . . and the
(b) Any demand for arbitration shall contain a statement setting
forth the nature of the dispute, the amount involved, if any, and the
remedy sought.
(c) Any demand for arbitration which may be based in whole or in
part on wrongful Termination shall be filed within ten days after a
30 day or longer notice of Termination is issued and prior to any
other notice of Termination becoming effective.
(d) Any other demand for arbitration may be filed with the
Association and served on the other party at any time during the
term of this Agreement or within the period provided by the
applicable statute of limitations.
(e) Arbitration shall not proceed until any protest of arbitrability is
resolved by an appropriate court, if necessary.
(f) A demand for arbitration or proceedings in arbitration shall not
operate to stay, postpone, prohibit or rescind any Expiration or
Termination or the right of 7-ELEVEN to take possession of the
Leased Property in accordance with this Agreement (unless
otherwise provided by applicable law), and the parties will be
relegated to their remedy in damages, as determined by the arbitra-
tor, for Expiration or Termination found by the arbitrator to be
wrongful.
(g) The arbitrator shall have authority to assess damages sustained
by reason of any breach of this Agreement.
(h) The arbitrator shall not extend, modify or suspend any of the
terms of this Agreement or the reasonable standards of business
performance set by 7-ELEVEN in good faith.
(i) The decision of the arbitrator within the scope of the submission
(as provided in this Article 35) shall be final and binding on all
parties, and any right to judicial action on any matter subject to
arbitration hereunder is hereby waived (unless otherwise provided
by applicable law), except suit to enforce the arbitration award or in
the event arbitration is not available for any reason other than for
the time periods provided herein.
(j) The parties shall share equally all expenses of the arbitrator and
the Association, and each party shall bear his own expenses incident
to the arbitration.
(k) If the rules of the Association differ from this Article 35, the
provisions herein shall control.
Sla
information that is set forth in the Southland Store
Agreement within the arbitration paragraphs . . . and
what was set forth on page SA-78 . . . , I was given no
verbal or written explanation of the meaning of arbitra-
tion, the concept of an arbitration proceeding, the fact
that it involved my waiver of my 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;
“3) The Southland agreements were presented to me by
Southland representatives on a take it or leave it basis. I
was given no opportunity to bargain or to negotiate with
respect to any paragraph or clause within the said agree-
ments. I was advised in effect, that the only way I could
obtain the 7-11 franchise was to acquiesce to the entire
printed agreement that was presented to me by the
Southland representatives.
“4) There was nothing presented to me in writing or
verbally that bore on the subject of the scope or limits of
the subject matter to which the arbitration paragraphs
purportly [sic] apply;
“5S) The first time that I was aware of any aspect of
what the arbitration clause might conceivingly [sic] be
interpreted as meaning and the effect that said clause
would have on my right to a jury and discovery and the
possible impact on me as to the cost of such arbitration,
occurred after I first contacted my attorneys in this case.”
The American Arbitration Association pamphlet to which
the declaration refers includes a reproduction of a sample
commercial arbitration clause and general information about
the association and its services. The association’s tribunals
were described as follows: “Important arbitration tribunals of
AAA are: Commercial, Accident Claims, Labor and Interna-
tional. Each tribunal is administered under Rules which govern
conduct of parties, arbitrators and the administrative agency.
Members of the Association and non-members are treated
equally. Arbitrations conducted in this way result in awards
S2a
that are enforceable under law. The Association cooperates
closely with lawyers and trade associations.” The other infor-
mation to which the Keating declaration refers is the following
statement which appeared in very large print by itself under an
even larger caption, “ARBITRATION.”
“SHOULD A DISPUTE ARISE BETWEEN YOU AND
7-ELEVEN, THE DISAGREEMENT WILL BE SET-
TLED BY THE AMERICAN ARBITRATION ASSO-
CIATION.”
The trial court found that the contracts were not adhesion
contracts, as a matter of law.
Petitioners contend that Keating’s affidavit raised a triable
issue of fact concerning the validity of the arbitration clauses
which should have been resolved before arbitration was or-
dered. They argue that, not only did the affidavit establish that
the clauses were part of adhesion contracts about which peti-
tioners were unable to bargain or negotiate, but also that the
affidavit demonstrated real parties’ failure to inform peti-
tioners that agreeing to arbitration would result in waiving
their rights to jury trial, discovery and punitive damages as a
remedy for fraud nor were they informed of the costs of
arbitration in an “unusual” or “complex” case such as this
one.
Initially, it should be noted that since the franchise agree-
ments were between a Texas corporation and California resi-
dents, 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 ambit of the Federal Arbitration Act.’
3 Section 2 of the act provides that: “A written provision in... a
contract evidencing a transaction involving commerce to settle by arbitration
a controversy thereafter arising out of such contract or transaction, or the
refusal to perform the whole or any part thereof, or an agreement in writing
to submit to arbitration an existing controversy arising out of such contract,
transaction, or refusal, shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of any
contract.” (9 U.S.C., § 2.) “Commerce” is defined, in part, as “commerce
among the several States.” (9 U.S.C., § 1.)
S3a
However, we find it unnecessary to address the subject of
preemption at this juncture because we have concluded that
both federal and state law require us to reject petitioners’
adhesion contract theory.
Since petitioners were neither consumers nor persons who
would have had to accept the agreements at issue or forego
necessary goods or services, the franchise agreements were not
made in the setting in which the courts are most concerned
with the doctrine of adhesion contracts. (Madden v. Kaiser
Foundation Hospitals (1976) 17 Cal.3d 699, 711, 131 Cal.Rptr.
882, 552 P.2d 1178.) Petitioners were persons interested in
establishing a beneficial business relationship with Southland
Corporation, who, no doubt, could have gone elsewhere if
they were dissatisfied with the proffered arrangement. Never-
theless, it cannot be said that the parties possessed absolute
parity of bargaining power. Southland drafted the contracts,
and Keating claimed that they were present [sic] on a “take it
or leave it” basis, a fact which is relevant to the determination
of whether a contract is one of adhesion. (/d., at pp. 710-711,
131 Cal.Rptr. 882, 552 P.2d 1178; Rust v. Drexel Firestone Inc.
(S.D.N.Y. 1972) 352 F.Supp. 715, 717.)
However, the critical question under both the federal and
California standards does not appear to be whether an agree-
ment is an adhesion contract but, rather, whether the arbitra-
tion clause itself is oppressive or defeats the reasonable
expectations of the parties. (Arkoosh v. Dean Witter & Co.,
Inc. (D.Neb. 1976) 415 F.Supp. 535, 543; Madden v. Kaiser
Foundation Hospitals, supra, 17 Cal.3d at pp. 710, 712, 131
Cal.Rptr. 882, 552 P2d 1178.) There is no indication that the
franchisees and the franchisors were not equally affected by
the arbitration clause.
Despite the importance of the constitutional right to a jury
trial in a civil case (U.S.Const., 7th Amend.; Cal. Const., art.
1, § 16), the failure to include an express waiver of this right in
an arbitration agreement does not render the agreement unen-
forceable. (Madden v. Kaiser Hospitals, supra, 17 Cal.3d at p.
714, 131 Cal.Rptr. 882, 552 P.2d 1178.) Given this proposition,
a fortiori, such an express waiver was not required respecting
S4a
petitioners’ rights to discovery and punitive damages nor were
real parties required to give petitioners the aforementioned
information regarding costs in order for the arbitration provi-
sion to be enforceable.
Petitioners rely upon Main v. Merrill Lynch, Pierce, Fenner
& Smith, Inc. (1977) 67 Cal.App.3d 19, 24, 136 Cal.Rptr. 378,
380, in which Justice Molinari stated that: “The [Federal]
Arbitration Act provides for a ‘trial,’ by jury if requested, of
the issue of whether a valid agreement to arbitrate the subject
dispute is existent [citation]; the issue to be resolved does not
concern ‘the merits of the controversy as to which arbitration
is sought.’ [Citation.] The issue ‘ “ ‘should not be determined
on affidavits, but rather a full trial should be had.’”’ (A/S
Custodia v. Lessin International, Inc. (2d Cir. 1974) 503 F.2d
318, 320; El Hoss Engineer. & Transport Co. v. American Ind.
Oil Co. (2d Cir. 1961) 289 F.2d 346, 351 [cert. den., 368 U.S.
837, [82 S.Ct. 51, 7 L.Ed.2d 38]. . . ].)” However, the federal
cases upon which Justice Molinari relied did not raise the issue
presented here. Furthermoré, Main is distinguishable from the
instant case because petitioners have not alleged that real
parties’ conduct constituted fraud which permeated the entire
agreement or induced the arbitration clause itself, as did the
plaintiff in Main. (67 Cal.App.3d at pp. 27, 33, 136 Cal. Rptr.
378.)
Petitioners also rely upon Wheeler v. St. Joseph Hospital
(1976) 63 Cal.App.3d 345, 361, 133 Cal.Rptr. 775, 786, in
which the court concluded “that in order to be binding, an
arbitration clause incorporated in a hospital’s ‘CONDITIONS
OF ADMISSION’ form should be called to patient’s attention
and he should be given a reasonable explanation of its meaning
and effect, including an explanation of any options available
to the patient.” Not only is Wheeler distinguishable given the
circumstances peculiar to the hospital admission situation (id.,
at pp. 357-358, 133 Cal.Rptr. 775), Keating’s affidavit showed
that he was aware of the clause’s existence, and demonstrated
that he should have been aware what the clause meant, namely,
if arbitration were sought, he would be compelled to forego his
right to a judicial forum. In Wheeler the court wrote that “The
SSa
hospital’s admission clerk need only direct the patient’s atten-
tion to the arbitration provision, request him to read it, and
give him a simple explanation of its purpose and effect,
including the available options. Compliance will not require
the presence of the hospital’s house counsel in the admission
office.” (Id., at p. 361, 133 Cal.Rptr. at p. 786, fn. omitted.)
Given the propriety of such a “simple explanation” in the
medical services context, we do not believe that Wheeler
supports the kind of explanation to which petitioners claim
they were entitled.
The trial court did not err by refusing to conduct an
evidentiary hearing concerning the validity of the arbitration
clause under the principles of adhesion contracts before order-
ing arbitration.
Il. Real parties did not waive their contractual right to compel
arbitration.
In rejecting petitioners’ waiver argument, the trial court
reasoned that although it probably would have concluded that
there had been a waiver of the right to compel arbitration in
some of the cases, such a ruling was not appropriate because
(1) the second amended complaint raised certain issues, exclu-
sive of the Franchise Investment Law claims, which would
otherwise be arbitrable and “it would serve no one’s purpose to
order that those newly added matters of the second amended
complaint should be submitted to arbitration, and other mat-
ters not . . .” and (2) it would detract from the achievement of
consistency in the coordinated cases. The trial court also added
the following condition to its order: “To the extent that this
order grants Southland’s petitions for order to compel arbitra-
tion, said petitions are granted on the condition that Southland
either abstain from the use of any discovery that it has had in
any of the above actions, or that Southland stipulate to
discovery of at least an equally extensive nature on behalf of
the plaintiffs in these actions.”
Once again, there is a question of whether this issue is
governed by federal or state law. However, it appears that
petitioners’ contention fails in either case.
S6a
The right to seek arbitration may be waived (9 U.S.C.
section 3; Code Civ. Proc. section 1281.2, subd. (a)). It
appears that when a claim of waiver is based upon actions
taken before a court, the federal rule directs that the issue be
resolved by the court rather than by the arbitrator. (Weight
Watch. of Quebec Lid. v. Weight W. Int., Inc. (E.D.N.Y. 1975)
398 F.Supp. 1057, 1059.) The California rule also assigns this
question to the courts. (Code Civ.Proc., section 1281.2, subd.
(a); also see, Butchers Union v. Farmers Markets (1977) 67
Cal.App.3d 905, 913, 136 Cal.Rptr. 894.)
The federal courts have held that where a party asserts
arbitration in*its answer as an affirmative defense, there is a
heavy burden on the party seeking to establish waiver. (Martin
Marietta Aluminum, Inc. v. General Elec. Co. (9th Cir. 1978)
586 F.2d 143, 146; Hilti, Inc. v. Oldach (Ast Cir. 1968) 392 F.2d
368, 371.) Furthermore, “[clourts have specifically held that
this factor alone is sufficient to defeat a claim of waiver.
[Citations.]” (Michael v. SS Thenasis (N.D. Cal. 1970) 311
F.Supp. 170, 181.) Real parties’ answers included such asser-
tions with the exception of the one which they filed in the
Gouveia case.
While federal law requires the courts to consider several
factors in determining whether there has been a waiver of the
right to demand arbitration, including the dilatory conduct of
the party seeking arbitration and any other actions taken by
the moving party which are inconsistent with seeking arbitra-
tion, a crucial inquiry is whether the conduct cited in support
of this claim has resulted in prejudice to the party asserting
waiver. If the element of prejudice is absent, waiver usually will
not be found. (Shinto Shipping Co. v. Fibrex & Shipping Co.,
Inc. (9th Cir. 1978) 572 F.2d 1328, 1330; Erving v. Virginia
Squires Basketball Club (2d Cir. 1972) 468 F.2d 1064, 1068;
Weight Watch. of Quebec Lid. v. Weight W. Int., Inc., supra,
398 F.Supp. 1057, 1059.) While “[sjufficient prejudice to infer
waiver might be found, for example, if the party seeking the
stay (00k advantage of judicial discovery procedures not avail-
able in arbitration. [Citations.]” (Carcich v. Rederi A/B Nor
die (2d Cir. 1968) 389 F.2d 692, 696, fn. 7, emphasis added.),
57a
the condition which the trial court included in its order compel-
ling arbitration would appear to have disspelled any prejudice
which might have resulted from any inequality in discovery.
Moreover, it is not clear that real parties’ conduct can be
characterized as dilatory. They moved to compel arbitration
approximately four months after the complaint was filed in the
Keating case and, apparently, filed similar petitions in the
individual cases within a month of the filing of amended
complaints.‘ Not only did those amended complaints raise
complex bookkeeping and accounting issues, but, as the trial
judge noted, they were otherwise arbitrable.
Petitioners note that in the Gouveia, Newell, Sampson and
Keating cases real parties either cross-complained or counter-
claimed before seeking arbitration, and argue that by “irrevo-
cably. . . [locking] litigious horns . . . [citation],” (Hilti, Inc.
v. Oldach, supra, 392 F.2d 368, 371) waived their right to
demand arbitration. In Gouveia, real parties also filed a
separate action for a receivership and, in Keating, they at-
tempted to remove the case to federal court and filed an
unlawful detainer action for default under the franchise con-
tract before seeking arbitration. While such conduct would
appear to be inconsistent with an intent to seek arbitration, it
does not amount to prejudice. “As an abstract exercise in logic
it may appear that it is inconsistent for a party to participate in
a lawsuit for breach of contract, and later to ask the court to
stay that litigation pending arbitration. Yet the law is clear that
such participation, standing alone, does not constitute a
waiver, [citations], for there is an overriding federal policy
favoring arbitration.” (Carcich v. Rederi A/B Nordie, supra,
389 F.2d at p. 696.)
Petitioners rely upon Barber & Ross Company v. Corneil &
Company (D.D.C. 1965) 242 F.Supp. 825, aff'd in (D.C.Cir.
1966) 360 F.2d 512, in which the court declined to order
arbitration where the party seeking arbitration had filed a
4 When the trial court heard the petitions in the individual cases, the
parties stipulated that a similar petition be deemed to have been made in the
Battersby class action.
58a
motion for a change in venue, an answer, and a counterclaim,
and had begun taking a deposition before it made its request
for arbitration. However, we are persuaded that the inclusion
of arbitration as an affirmative defense in all but one of real
parties’ answers, and trial court’s equalization of any disparity
in discovery, and the amendment to petitioners’ pleadings
distinguish this case from Barber.
As we noted above, California law also requires us to
conclude that the trial court did not err in rejecting petitioners’
claim of waiver. Since arbitration is a favored means of settling
disputes, “the courts have been admonished to ‘closely scruti-
nize any allegation of waiver of such favored right’ [citation]
and to ‘indulge every intendment to give effect to such pro-
ceedings’ [citations].” (Doers v. Golden Gate Bridge Etc. Dist.
(1979) 23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 842, 588 P2d
1261, 1266.) Nevertheless, the right to compel arbitration may
be waived. “[({] Waiver of a contractual right to arbitration is
ordinarily a question of fact and determination of this ques-
tion, if supported by substantial evidence, is binding on an
appellate court. [Citation.]” (/d., at p. 185, 151 Cal.Rptr. at p.
839, 588 P.2d at p. 1263.)
Our Supreme Court has recently indicated that there is no
single test for determining whether the right to demand arbitra-
tion has been waived. (Davis v. Blue Cross of Northern
California (1979) 25 Cal.3d 418, 426, 158 Cal.Rptr. 828, 600
P.2d 1060.) “California courts have found a waiver of the right
to demand arbitration in a variety of contexts, ranging from
situations in which the party seeking to compel arbitration has
previously taken steps inconsistent with an intent to invoke
arbitration [citations] to instances in which the petitioning
party has unreasonably delayed in undertaking the procedure.
[Citations.] The decisions likewise hold that the ‘bad faith’ or
‘wilful misconduct’ of a party may constitute a waiver and thus
justify a refusal to compel arbitration. [Citation.]” (/d., at pp.
425-426, 158 Cal.Rptr. at p. 832, 600 P.2d at p. 1064.) While
the “mere filing of a lawsuit does not constitute a waiver of the
right to arbitrate”, the “judicial /itigation of the merits of
arbitrable issues ... waives a party’s right to arbitration.”
59a
(Doers v. Golden Gate Bridge Etc. Dist., supra, 23 Cal.3d 180,
183, 188, 151 Cal.Rptr. 837, 841, 588 P.2d 1261, 1265.) A party
who includes arbitration as an affirmative defense in his
answer may be able to avoid a finding of waiver. (Cf. Butchers
Union v. Farmers Markets, supra, 67 Cal.App.3d 905, 913,
136 Cal.Rptr. 894.) Finally, while the concept of prejudice is
not as significant as it is in federal law, it is relevant to the
question of waiver. (Doers v. Golden Gate Bridge Etc. Dist.,
supra, 23 Cal.3d 180, 188, 151 Cal.Rptr. 837, 588 P.2d 1261.) A
consideration of the facts which lead us to conclude that there
was no waiver under federal law also leads us to conclude that
there was substantial evidence to support the trial court’s
finding of no waiver under California law.
The facts which distinguish this case from Barber also
distinguish it from Gunderson v. Superior Court (1975) 46
Cal.App.3d 138, 120 Cal.Rptr. 35, disapproved in Doers v.
Golden Gate Bridge Etc. Dist., supra, 23 Cal.3d 180, 188, 151
Cal.Rptr. 837, 588 P.2d 1261. Similarly, we have concluded that
petitioners’ reliance upon McConnell v. Merrill Lynch, Pierce,
Fenner & Smith, Inc. (1980) 105 Cal.App.3d 946, 164
Cal.Rptr. 751 is misplaced. In addition to the factual discrep-
ancies alluded to in the discussion of Barber and Gunderson,
there were no pretrial proceedings in this case which could be
analogized to the five “lengthy” hearings regarding class certi-
fication which were conducted in McConnell before arbitration
was sought.
In light of our discussion, we find it unnecessary to address
petitioners’ argument that the trial court abused its discretion
by relying upon the fact that the various cases had been
coordinated in ordering arbitration.
Ill. The trial court should have determined the class actions
issues.
In the Keating and Battersby cases, the named plaintiffs seek
to represent some 800 persons who are California 7-Eleven
franchisees who have entered into identical agreements with
Southland Corporation during a four-year period. Petitioners
contend that if arbitration is appropriate, the trial court should
60a
be instructed to determine the preliminary issues regarding
class certification before the cases are resolved on their merits.
The issue presented appears to be one of first impression.
Our review of the record indicates that while petitioners
argued this point in the context of real parties’ petitions to
compel arbitration, no motion to certify the class was made,
and the trial court did not expressly rule on the matter. In
Phelan v. Superior Court (1950) 35 Cal.2d 363, 372, 217 P.2d
951, 956 the Supreme Court wrote that “Before seeking man-
date in an appellate court to compel action by a trial court, a
party should first request the lower court to act. If such request
has not been made the writ ordinarily will not issue unless it
appears that the demand would have been futile. [Citations.]”
However, while petitioners did not focus upon this issue by
means of a specific motion, the question clearly was raised
before the trial court. Furthermore, given that petitioners
argued that arbitration should not be ordered until the prelimi-
nary class action questions were determined, the trial judge
implicitly rejected petitioners’ argument by ordering arbitra-
tion. Thus, making a more formal demand would have been
futile.
It appears that no federal decision had dealt with this
question; however, there is some authority which indicates that
the class action and arbitration procedures could be joined in
an appropriate case. Under Federal Rule of Civil Procedure
81(a)(3) which provides that the federal rules apply to proceed-
ings under the Federal Arbitration Act to the extent that the
act does not provide for procedural matters, the courts have
held that consolidation of arbitrations is permissible pursuant
to Federal Rule of Civil Procedure 42. (Compania Espanola de
Pet., S.A. v. Nereus Ship. (2d Cir. 1975) 527 F.2d 966, 975,
cert. den. 426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387; Marine
Trading Ltd. v. Ore Intern. Corp. (S.D.N.Y. 1977) 432 F.Supp.
683, 684; Robinson v. Warner (D.R.1. 1974) 370 F.Supp. 828,
829-830.) Applying rule 23 of the Federal Rules of Civil
Procedure to arbitration proceedings would appear to be a
logical extension of the theory employed in the consolidation
cases.
6la
Real parties respond that Rule 81(a)(3) only applies to
judicial proceedings, and, therefore, cannot serve as a means
for applying rule 23 to arbitrations. (Great Scott Supermkts.,
Inc. v. Local U. No. 337, Teamsters (E.D. Mich., S.D. 1973)
363 F.Supp. 1351, 1354.) However, given the fact that issues
such as those involved in the certification of the class would be
dealt with by the court before the matter was sent to the
arbitrator, petitioners appear to be correct in arguing that real
parties’ claim misses the mark. (Cf. Robinson v. Warner,
supra, 370 F.Supp. 828, 830.)
Real parties also argue that imposing the class action format
upon arbitrations would result in unnecessary interference by
the courts in and undue delay of the arbitration process. The
most forceful claim made in this regard concerns the require-
ment that the courts oversee the adequacy of representation by
the named plaintiffs of the interests of absent class members.
(In re General Motors Corp. Engine Interchange Lit. (7th Cir.
1979) 594 F.2d 1106, 1124, cert. den. 444 U.S. 870, 100 S.Ct.
146, 62 L.Ed.2d 95; Guerine v. J. & W. Inv., Inc. (Sth Cir.
1977) 544 F.2d 863, 864; Gonzales v. Cassidy (Sth Cir. 1973)
474 F.2d 67, 75.) In this connection, real parties also note that
court approval must be obtained in order to dismiss or settle a
class action. (Fed.R.Civ.P. 23(e).)
Turning to California law, the two California decisions
which have considered the relationship between arbitration and
the class action procedure do not appear to be dispositive. In
Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20
Cal.App.3d 668, 672, 97 Cal.Rptr. 811, 818 the court rejected
respondent’s argument that arbitration should not be required
because respondent had brought his action on behalf of the
class of persons affected by the contract at issue. “But if all
employees similarly situated have signed the same arbitration
agreement as that which respondent challenges, all are equally
bound. If the agreement is valid, it is valid as to all members of
the class. It would be inappropriate to allow respondent and
the other members of the class he claims to represent to evade
the terms of the agreement simply by bringing their action
together as a ‘class’ rather than as individuals.”
62a
In Vernon v. Drexel Burnham & Co. (1975) $2 Cal.App.3d
706, 125 Cal.Rptr. 147, the court reversed the trial court’s
denial of the defendant’s petition to compel arbitration. The
court concluded that the trial court had relied upon a faulty
premise and held that “if VERNON did proceed alone to
arbitration it would not mechanically render him unfit to
represent a class or subclass of customers of DREXEL
BURNHAM similarly situated. The determination whether or
not VERNON can fairly and adequately protect that class rests
in the sound discretion of the trial court [citation], although,
of course, VERNON may be disqualified to act as a represen-
tative plaintiff to subclasses of customers of DREXEL
BURNHAM, if any, where the arbitration clause is not a
factor. [Citation.]” (52 Cal.App.3d at p. 715, fn. 4, 125
Cal.Rptr. at p. 152.) The court also held that “in the instant
case, the policy of law favoring arbitration prevails over the
policy of the law pertaining to class actions . . . .” (/d., at
p. 715, 125 Cal.Rptr. at p. 152.) The court reasoned that: (1)
“arbitration is a recognized and favored means by which
parties expeditiously and efficiently may settle disputes which
might otherwise take years to resolve. [Citations.]”; (2) “[4]
. . there is perhaps no higher public policy than to uphold
and give effect to contracts validly entered into and legally
permissible in subject matter. . . .”; and (3) "[4] . . . the
substantive law of contractual agreement takes precedence over
the class action, which is merely a procedural device for
consolidating matters properly before the court.” (/d., at
pp. 715-716, 125 Cal.Rptr. at p. 153.)
Real parties argue that Vernon is controlling because, given
the procedural context in which it was decided, the court
rejected the very order which petitioners seek here—a post-
ponement of the determination of the arbitration petition
pending certification of the class. However, not only is it
unclear that the trial court’s order in Vernon amounted to a
postponement of the determination of the arbitration petition
pending certification of the class because such certification
would require the resolution of other issues such as the ade-
quacy of named representatives, but Vernon also appears to be
62a
factually distinguishable in at least two important respects.
First, as petitioners note, it was not clear that the case involved
class-wide issues regarding arbitration because “neither
VERNON nor DREXEL BURNHAM .. . [had] alleged or
proved that the other purported members of the class repre-
sented by VERNON entered into or were subject to the same
or similar agreements; . . .” (/d. at p. 711, 125 Cal.Rptr. at
p. 180.) More importantly, it appears that the plaintiff in
Vernon effectively argued that the existence of the class action
vitiated his agreement to arbitrate, and the court specifically
concluded that the trial court's order denying arbitration was
based upon the incorrect premise discussed above. It should be
noted that given this conclusion, the court's “holding” regard-
ing what it perceived to be conflicting policy considerations
was dicta.
Petitioners contend that since Code of Civil Procedure
section 382 is silent on the question of class-wide arbitration,
we should look to rule 23 of the Federal Rules of Civil
Procedure for guidance. (La Sala v. American Sav. & Loan
Assn. (1971) § Cal.3d 864, 872, 97 Cal.Rptr. 849, 489 P2d
1113.) Real parties respond that the policy considerations
discussed above concerning unnecessary judicial interference in
and undue delay of arbitrations apply with equal force to
California law. (Sapp v. Barenfeld (1949) 34 Cal.2d $15, 520,
212 P.2d 233; East San Bernardino County Water Dist. v. City
of San Bernardino (1973) 33 Cal.App.3d 942, 949-950, 109
Cal.Rptr. $10; McRae v. Superior Court (1963) 221 Cal.
App.2d 166, 171, 34 Cal.Rptr. 346.) They also argue that while
consolidation is permissible in California, it cannot be equated
with class-wide arbitration because the former procedure is of
a limited nature and all parties are present. Real parties further
note that in California Rule of Court 1600.5, subdivision (b),
the Judicial Council exempted class actions from compulsory
judicial arbitration, and argue that this action indicated that
the Council was of the opinion that class actions were not
amenable to arbitration.
We have concluded that there is no insurmountable obstacle
to conducting an arbitration on a class-wide basis. In an
64a
appropriate case, such a procedure undoubtedly would be the
fairest and most efficient way of resolving the parties’ dispute.
The initial determinations regarding certification and notice
will not unduly burden the arbitration because those matters
must be resolved by the trial court before arbitration begins.
We wish to stress that we have formed no opinion upon the
question of whether this case should proceed as a class action.
However, if the trial court answers this question affirmatively,
it will be necessary to devise methods to safeguard the rights of
absent class members to adequate representation and in the
event of dismissal or settlement. Since these matters may be
purely academic and have not been thoroughly explored by the
parties here, we shall leave their determination to the trial
court.
Let the peremptory writ of mandate issue directing the trial
court to determine the preliminary class action issues, includ-
ing the suitability of the action as a class suit, the composition
of the class, and the appropriate notice procedure, in accord-
ance with the guidelines established in Federal Rule of Civil
Procedure 23. Insofar as the petition seeks a writ to compel the
trial court to set aside its order compelling arbitration, it is
denied.
Each side is to bear its own costs for proceedings on the writ
petition.
GARZA, ETAL. v. THE SOUTHLAND
CORPORATION, ETAL.
The Southland Corporation and various employees and
former employees have appealed from the trial court’s denial
of their petitions to compel arbitration concerning certain
claims made against them pursuant to the Franchise Invest-
ment Law. (Corp. Code, § 31000 et seq.)
The claims which respondents cite as being typical of those
at issue here relate to appellants’ failure to disclose informa-
tion at least 48 hours prior to the execution of the franchise
agreements and certain wilful misrepresentations and omis-
sions in the disclosure statements which appellants did make.
The parties agree that although the trial judge relied primarily
6Sa
upon his interpretation of the contractual arbitration provi-
sions as being too narrow to include respondents’ claims, he
also believed that the Legislature did not intend that claims
pursuant to the Franchise Investment Law should be subject to
arbitration.
1. The arbitration clauses, by their terms, require arbitration
of these claims.
The arbitration clauses state, in pertinent part: “any con-
troversy or claim arising out of or relating to this Agreement or
the breach hereof shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association
. . ..” (Emphasis added.) Looking to the language of the
clauses as a principal source from which to derive the contract-
ing parties’ intent (Healy Tibbets Construction Co. v. Employ-
ers’ Surplus Lines Ins. Co. (1977) 72 Cal.App.3d 741, 748, 140
Cal.Rptr. 375; Cal.Civ.Code, § 1638), the language empha-
sized above is broad enough to cover respondents’ claims
under the Franchise Investment Law.
Respondents’ arguments to the contrary are untenable. Not
only would it be unreasonable to require that an arbitration
clause specify the legal basis for a claim in order for the clause
to apply (Weinrott v. Carp (1973) 32 N.Y.2d 190, 344 N.Y.S.2d
848, 853-854, 298 N.E.2d 42), but it would also be unreason-
able to assume that the violations at issue did not “arise out
of” or “relate to” the franchise agreements, especially in light
of the expressed legislative intent of the Franchise Investment
Law.’
$ Corporations Code section 31001 provides in pertinent part:
It is the intent of this law to provide each prospective franchisee
with the information necessary to make an intelligent decision
regarding franchises being offered. Further, it is the intent of this
law to prohibit the sale of franchises where such sale would lead to
fraud or a likelihood that the franchisor’s promises would not be
fulfilled, and to protect the franchisor by providing a better
understanding of the relationship between the franchisor and fran-
chisee with regard to their business relationship.
66a
Appellants rely upon various cases in which the courts have
held that arbitration clauses which were similar to the ones at
issue were broad enough to encompass tort as well as contract
claims. (Berman v. Dean Witter & Co., Inc. (1975) 44
Cal.App.3d 999, 1003, 119 Cal.Rptr. 130; Lewsadder v. Mit-
chum, Jones & Templeton, Inc. (1973) 36 Cal.App.3d 255,
259, 111 Cal.Rptr. 405; Acevedo Maldonado v. PPG Indus-
tries, Inc. (ist Cir. 1975) 514 F.2d 614, 616.) While respondents
may be correct in asserting that the torts at issue in these cases
had occurred after the execution of the contracts, their attempt
to distinguish this case is artificial. Although the “roots” of
respondents’ claims may be in the Franchise Investment Law,
in a technical sense, their source is the creation of the fran ise
relationship. Furthermore, as appellants note, the United
States Supreme Court has held that an arbitration clause such
as the one at issue may extend to a claim that the creation of
the contract was induced by fraud. (Prima Paint Corp. v.
Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 403-404, 87
S.Ct. 1801, 1805-1806, 18 L.Ed.2d 1270.)
Il. Corporations Code section 31512 does not operate to
invalidate contractual provisions insofar as they require
that claims under the Franchwse Investment Law be submit-
ted to arbitration, and, even if it did, the statute would be
superseded by federal law.
Appellants contend that the Legislature did not intend Cor-
porations Code section 31512 to be interpreted according to
the doctrine established by the Supreme Court in Wilko v.
Swan (1953) 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168.° They
claim that the statute was designed to invalidate contractual
provisions purporting to require that a franchisee surrender a
right under the Franchise Investment Law and that the arbitra-
tion clause at issue does not come within that proscription.
6 Corporations Code section 31512 provides:
Any condition, stipulation or provision purporting to bind any
person acquiring any franchise to waive compliance with any
provision of this law or any rule or order hereunder is void.
67a
“In proceeding with the task of interpretation ... we are
aided by certain general principles of statutory construction.
As stated by this court in Moyer v. Workmen’s Comp. Appeals
Bd. (1973) 10 Cal.3d 222. . ., at page 230 [110 Cal.Rptr. 144,
514 P.2d 1224]: ‘We begin with the fundamental rule that a
court “should ascertain the intent of the Legislature so as to
effectuate the purpose of the law.” [Citation.] In determining
such intent “[t}he court turns first to the words themselves for
the answer.” [Citation.] We are required to give effect to
Statutes “according to the usual, ordinary import of the lan-
guage employed in framing them.” [Citations.]’” (Palos
Verdes Faculty Assn. v. Palos Verdes Peninsula Unified Sch.
Dist. (1978) 21 Cal.3d 650, 658-659, 147 Cal.Rptr. 359, 363,
580 P2d 1155, 1159.) Applying these principles to section
31512, we agree that the Legislature does not appear to have
intended that the section preclude arbitration of all claims
brought under the Franchise Investment Law.
However, as appellants concede, to the extent that the
statutory language can be argued to be ambiguous, another
rule of statutory construction is relevant. That rule has been
expressed by our Supreme Court as follows: “This court has
long recognized the principle of statutory construction that
‘{[wjhen legislation has been judicially construed and a subse-
quent statute on the same or an analogous subject is framed in
the identical language, it will ordinarily be presumed that the
Legislature intended that the language as used in the later
enactment would be given a like interpretation. This rule is
applicable to state statutes which are patterned after federal
statutes. [Citations.]’ [Citations.]” (Belridge Farms v. Agri-
cultural Labor Relations Bd. (1978) 21 Cal.3d 551, 557, 147
Cal.Rptr. 165, 169, 580 P.2d 665, 669.)
In Wilko v. Swan, supra, 346 U.S. 427, 74 S.Ct. 182, 98
L.Ed. 168, the arbitration agreement at issue was subject to the
provisions of the Federal Arbitration Act. The court concluded
that “The words of § 14... void any ‘Stipulation’ waiving
compliance with any ‘provision’ of the Securities Act [of
1933]. This arrangement to arbitrate is a ‘stipulation,’ and we
think the right to select the judicial forum is the kind of
68a
‘provision’ that cannot be waived under § 14 of the Securities
Act.” (346 U.S. at pp. 434-435, 74 S.Ct. at p. 186.)
Although the language of the two statutes is parallel and the
Statutory schemes containing them may have shared similar
policy concerns, respondents have cited no authority which
indicates that section 31512 was patterned after section 14.
Moreover, unlike Wilko, which involved competing federal
Statutes, this case presents a conflict between a federal statute
and a state statute. (A/lison v. Medicab Intern., Inc. (1979), 92
Wash.2d 199, 597 P.2d 380, 382.)
Appellants argue that if section 31512 were interpreted
according to the doctrine of Wi/ko v. Swan, the statute would
conflict with the Federal Arbitration Act and would be void
pursuant to the Supremacy Clause. (U.S.Const., Art. III, § 2.)
We agree. If the doctrine were applied, section 31512 would
conflict with the language in section 2 of the Federal Arbitra-
tion Act which makes provisions to arbitrate in contracts
pertaining to transactions in interstate commerce “valid, irrev-
ocable, and enforceable.” Furthermore, the application of the
rule in Wilko v. Swan does not fit within the exception in
section 2 for “such grounds as exist at law or in equity for the
revocation of any contract” because that exception appears to
be directed toward tenets of general contract law.
In Allison v. Medicab Intern., Inc., supra, 597 P.2d 380,
plaintiffs and defendants had entered into a franchise agree-
ment for the transportation of the physically handicapped
which contained an arbitration clause. Plaintiffs brought an
action which included alleged violations of Washington’s Fran-
chise Investment Protection Act. Defendants’ demand for
arbitration was denied. On appeal, plaintiffs contended that
“because the statute gives jurisdiction of such matters to state
courts (RCW 19.100.-160), the arbitration clause does not
7 Section 14 of the Securities Act provides:
“Any condition, stipulation, or provision binding any person ac-
quiring any security to waive compliance with any provision of this
subchapter or of the rules and regulations of the Commission shall
be void.” (15 U.S.C., § 77n.)
69a
apply.” (/d., at p. 381.) The Supreme Court of Washington
reversed. Having concluded the Federal Arbitration Act was
controlling, the court said “[t}he majority rule . . . appears to
be that the act does apply and requires a state court to enforce
an arbitration clause despite a contrary state law or policy.
[Citations.]” (/d., at p. 382.) Applying this rule, the court
rejected the claim that defendants’ failure to register pursuant
to the Franchise Investment Protection Act vitiated the arbitra-
tion clause. While the court did not specifically refer to the
anti-waiver provision in the Franchise Investment Protection
Act (RCW 19.100.220), the court distinguished Wi/ko v. Swan
as follows: “. . . this case involved two federal acts and not as
here the federal arbitration act and a state franchising act.
[Citation.]” (/d., at p. 382.)
In the recent case of Barron v. Tastee Freeze Intern., Inc.,
(E.D.Wis. 1980) 482 F.Supp. 1213, the court denied the plain-
tiffs’ motion to permanently enjoin a pending arbitration.
Plaintiffs’ claims included violations of the Wisconsin and
Illinois franchise investment acts. In rejecting an argument
analogous to the one which respondents make here, the court
said that “Except in a few areas of law, however, notably the
Federal Securities Act of 1933 and the federal antitrust statutes
{citations}, federal policy strongly favors the enforcement of
arbitration clauses under Title 9 U.S.C.” (/d., at p. 1216; see
Romnes v. Bache & Co., Incorporated (W.D.Wis. 1977) 439
F.Supp. 833.) The court concluded that: “. . . the effect of my
holding with respect to this argument of the plaintiffs is to
render void any effort made by a state to protect the remedies
of franchise investors whose arguments encompass trans-
actions in interstate commerce, even when the contracting
parties are both residents of the state which passes the protec-
tive laws, see Allison v. Medicab International, Inc. 92
Wash.2d 199, 597 P.2d 380, 383 (1979), but that result is
compelled by the language of 9 U.S.C. § 2 and by the author-
ity of Congress under the Interstate Commerce and Supremacy
Clauses of the United States Constitution to regulate interstate
commercial transactions in the manner it sees fit and to
70a
preempt state regulatory efforts which conflict with the federal
scheme. (482 F.Supp. at p. 1217.)
Respondents’ reliance upon American Airlines, Inc. v.
Louisville & Jefferson C.A.B. (6th Cir. 1959) 269 F.2d 811 is
misplaced. Not only did the court take a restrictive view of the
scope of the Federal Arbitration Act (id., at pp. 816-817), but
the argument made against enforcing the contract concerning
the capacity of one of the parties appears to fit within the
exception in section 2 of the Federal Arbitration Act for “such
grounds as exist at law or in equity for the revocation of any
contract.”
The judgment is reversed and the trial court is directed to
enter its order granting arbitration. Appellants are to receive
costs on this appeal.
aoe
WHITE, P. J., and ScorrT, J., concur.
Tla
APPENDIX C
IN THE SUPERIOR COURT OF THE
STATE OF CALIFORNIA
IN AND FOR THE COUNTY OF ALAMEDA
JUDICIAL COUNCIL COORDINATION PROCEEDING NO. 387
Napa Superior Court No. 37402
>
COORDINATION PROCEEDING SPECIAL TITLE (Rule 1550(b))
MARKET FRANCHISE CASES
Included action:
Keating v. Southland
——
ORDER RE PETITION FOR ORDER TO ARBITRATE
[Filed February 16, 1978]
The Petition of defendant The Southland Corporation for
Order to Arbitrate filed in the action entitled “Richard D.
Keating, et al. vs. The Southland Corporation, et al., Napa
County Superior Court, No. 37402,” having come on for
hearing the 30th day of January, 1978, before the Honorable
Robert H. Kroninger, Judge of the Superior Court and Coor-
dination Trial Judge, with Mark J. Spooner, Esq., of Arnold &
Porter, and Charles G. Miller, Esq., of McKenna & Fitting,
appearing on behalf of defendant The Southland Corporation,
and John F. Wells, Esq., of Stark, Stewart, Simon & Sparrowe,
Robert M. Brown, Esq., and John F. Banker, Esq., appearing
on behalf of plaintiffs and respondents Richard D. Keating
and Darla J. Keating, and the Court having considered the
argument of counsel and all of the papers, memoranda, and
briefs filed by the parties, and good cause appearing therefor;
72a
IT IS HEREBY ORDERED that the Petition for Order to
Arbitrate, originally filed on September 28, 1977, be, and the
same hereby is, GRANTED, with the exception of the subject
matter embracing line 19, page 5, through and including the
sentence ending on line 1, page 6 of said petition.
IT Is HEREBY FURTHER ORDERED that further proceedings
herein as to the Keating v. Southland action referred to above
be, and the same hereby are, STAYED pending the outcome of
such arbitration or until further order of this Court.
Presented and signed in open court this 16 day of February,
1978.
/S/ ROBERT H. KRONINGER
Judge of the Superior Court
73a
APPENDIX D
IN THE SUPERIOR COURT OF THE
STATE OF CALIFORNIA
IN AND FOR THE COUNTY OF ALAMEDA
Judicial Council Coordination Proceeding No. 387
Napa Superior Court No. 37276
Santa Clara Superior Court No. 390132
Alameda Superior Court No. 469216-2, No. 505160-5,
No. 505161-4, No. 505159-9, No. 505162-3, No. 505164-1
Added-On Cases
Alameda Superior Court No. 501580, No. 473115
Coordination Proceeding Special Title (Rule 1550(b))
MARKET FRANCHISE CASES
ORDER RE MOTIONS HEARD ON APRIL 26, 1978
[Filed May 5, 1978]
On April 26, 1978, the Petitions of Defendant The
Southland Corporation for Order to Arbitrate Disputes and
Motion for Stay of Proceedings Pending Arbitration in
Gouveia v. Southland (No. 469216-2), Garza v. Southland
(No. 505160-5), Sampson v. Southland (No. 505161-4) Cheng
v. Southland (No. 505162-3) and Newell v. Southland (No.
505164-1) came on for hearing before the Honorable Robert
H. Kroninger, Judge of the Superior Court and Coordination
Trial Judge. The parties have stipulated that the same Petition
and Motion shall be deemed to have been made in Battersby v.
The Southland Corporation (No. 390132) and the Court may
rule thereon at this time. Mark J. Spooner, Esq. of Arnold &
Porter, and Charles G. Miller, Esq. and Martin H. Kresse, Esq.
of McKenna & Fitting appeared on behalf of petitioner and
74a
defendant The Southland Corporation, and John F. Wells,
Esq. of Stark, Stewart, Simon & Sparrowe, Linda R. Joseph,
of the Law Offices of Robert M. Brown, and John F. Banker,
Esq. of Banker & Linderman, appeared on behalf of the
plaintiffs and respondents in those actions.
The court having considered the arguments of counsel and
all the papers, memoranda and briefs filed by the parties, and
good cause appearing therefor,
IT IS HEREBY ORDERED that the petitions for order to
arbitrate and motion for stay of proceedings in the above
referenced cases be, and the same hereby are, GRANTED, with
the exception of the claims based upon the California Fran-
chise Investment Law, which claims are contained in the First
Cause of Action of the Second Amended Complaints in the
Garza and Sampson cases, and the First Cause of Action in the
First Amended Complaint in the Gouveia, Cheng and Newell
cases and the Second Cause of Action of the Complaint in the
Battersby case. To the extent that this order grants Southland’s
petitions for order to compel arbitration, said petitions are
granted on the condition that Southland either abstain from
the use of any discovery that it has had in any of the above
actions, or that Southland stipulate to discovery of at least an
equally extensive nature on behalf of the plaintiffs in those
actions.
IT IS HEREBY FURTHER ORDERED that further proceedings
in the Gouveia, Garza, Sampson, Cheng, Newell, and Bat-
tersby cases, referred to above, be, and the same hereby are,
stayed pending the outcome of such arbitration or until further
order of this Court.
The plaintiffs in Keating v. Southland (No. 505159-9) have
moved to lift the stay previously issued in that case for
purposes of discovery; Southland has filed a notice of appeal
from this Court’s order denying its petition to compel arbitra-
tion of the Franchise Investment Law claims in Keating v.
Southland; the parties have agreed that because of the appeal
this Court probably lacks jurisdiction to rule on said motion,
and said motion was withdrawn.
75a
Plaintiffs in Garza v. Southland (No. 505160-5) have also
moved for an order to set a discovery schedule and trial date in
that case. The court having considered said motion, and
having made its rulings with respect to arbitration above, IT Is
HEREBY ORDERED that said motion be, and the same hereby is
DENIED.
The Southland Corporation has filed a demurrer to answer,
or, in the alternative, a motion to strike affirmative defenses in
Southland vy. Battersby (No. 501580-5). The Court having
considered the matter, and the arguments of counsel, and good
cause appearing therefor,
IT Is HEREBY ORDERED that the demurrer be, and the same
hereby is, SUSTAINED, and the motion to strike be, and the
same hereby is, GRANTED, as to the following portions of the
Answer to First Amended Complaint: 1) page 2, line 15
through and including page 3, line 18, save and except for the
last sentence in paragraph 5 at page 3 thereof; and 2) the First
Affirmative defense. In all other respects the demurrer is
overruled.
Defendant The Southland Corporation and certain other
defendants have also filed demurrers to the Second Amended
Complaints in the Garza and Sampson cases and to the First
Amended Complaints in the Gouveia, Cheng and Newell cases.
The court having considered these matters, and the arguments
of counsel, and good cause appearing,
IT IS HEREBY ORDERED that the demurrers be, and the same
hereby are, OVERRULED, and Southland and the demurring
individual defendants shall have up to and including 30 days
from the date of this Order in which to file answers to the
complaints which were the subject of the demurrers, notice of
said ruling having been waived.
Signed this Sth day of May, 1978, in open court.
/S/ ROBERT H. KRONINGER
Judge of the Superior Court and
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