Motion to Dismiss or Affirm — Southland Corp. v. Keating

No. 82-500

In the Supreme Court —

OF THE

United States

Octoser Term, 1982

Tue SovTHLaND CorPoRATION, et al.,

Appellants,

vs.

Ricuarp D. Keatine, et al.,

Appellees.

ON APPEAL FROM THE

SUPREME COURT OF CALIFORNIA

MOTION TO DISMISS

Of Counsel: Joun F. Wetts

COUNSEL OF RECORD

Srark, Stewart, Wetis & Lise A. PearLMan

Rosinson Fonpa Karewirz

Oakland, CA Fidelity Plaza, 14th Floor

180 Grand Avenue

Oakland, CA 94612

Telephone: (415) 834-2200

Brown & Fixyey Rosert M. Brown

San Francisco, CA Suite 1220

1 Maritime Plaza

San Francisco, CA 94111

Telephone : (415) 421-0400

Attorneys for Appellees

Richard D. Keating,

et al.

November 1982

BOWNE OF SAN FRANCISCO INC + 'SO NINTH ST + SF CA 84103 + (415) 664-2900

QUESTIONS PRESENTED

Pursuant to Rule 16 of this Court, the appellees move

to dismiss the appeal now pending before this Court for

the following reasons:

1. As to the class arbitration issue, none of the essen-

tial requisites to this Court’s jurisdiction are present. The

decision which Southland attempts to appeal from is not

a final judgment on this issue. Nor was any federal ques-

tion properly raised in the courts below. Even if those

two jurisdictional prerequisites were present, no appeal

would lie but only a petition for certiorari, which should

be denied for lack of a substantial federal question.

2. The second issue likewise presents no substantial

federal question. This issue is whether a California statu-

tory scheme concerning arbitration is preempted by the

Federal Arbitration Act (9 U.S.C. 41 et seq.). The Califor-

nia statutory scheme contains both a modern arbitration

statute (Cal. Code Civ. Proc. § 1280 et seq.) substantially

identical to the federal act and an exception identical to

and modeled after a federal exception to arbitration. The

decision below is in accordance with other state and federal

decisions. No substantial federal question is involved.

ii

TABLE OF CONTENTS

I aia. lai ohbencnlisinsigetiieeaiaiamentas

EE COI i ccterinnterecestpmnmetpumetinpaninieneiiateensiliinhdes

Southiand has failed to show that this court has juris-

ITI Siicacteliclesdesiceenitaddetneniineabhbienbaperhtininsenaiandanclbditiaiadinides 4

A. There is no appellate jurisdiction on the class

IE CIE -sccticecenectenensstrinenntmnedaaianiens 5

1. The question of whether the Federal Arbi-

tration Act bars a class arbitration was not

raised below .... scala latencies 5

2. There is no final judgment before this Court

on the issue of class arbitration ..................... 6

3. Assuming this Court would otherwise have

jurisdiction, the class arbitration issue is

properly one for certiorari rather than ap-

SETIEEE saneseenbmensnnesdiansviehiinbebitubesatiiadiiniietaiimmmpenmines 8

B. Southland has failed to demonstrate that there

are any substantial federal issues ........................ 8

1. The Federal Arbitration Act does not dis-

place local rules of procedure 10

2. The preemption issue does not present a

substantial Federal question 14

I Ci i 26

iii

TABLE OF AUTHORITIES CITED

Cases

Addington v. Texas, 441 U.S. 418 (1979) -.00000

A. & E. Plastik Pak Co. v. Monsanto Company, 396

oe 2 18

Aimcee Wholesale Corp. v. Tomar Products Inc., 21

N.Y.2d 621, 237 N.E.2d 223 (1968) ....2.2............-c-ececeoees 18

Allegaert v. Perot, 548 F.2d 432 (2d Cir.) cert. denied,

I ITI iii scceenetiieumnttepenincrabdamenassiditatenniintinanians 17

Allison v. Medicab International, Inc., 92 Wash.2d 199,

gg ee 16, 19, 20

American Airlines, Inc. v. Louisville & Jefferson

C.A.B., 269 F.2d 811 (6th Cir. 1959) —......0.0............ 21, 22

American Safety Equipment Corp. v. J. P. Maguire &

Co., 301 F.2d G21 (2d Cir. 1968) ...n..........ec.escccecceesees 17

Applied Digital Technology, Inc. v. Continental Cas-

ualty Co., 576 F.2d 116 (7th Cir. 1978) 00... 18

Ayres v. Merrill Lynch, Pierce, Fenner & Smith, 538

F.2d 532 (3d Cir. 1976) ................ 17

Bache Halsey Stuart Shields, Inc. v. Moebius, 531 F.

Supp. 75 (E.D. Wisc. 1982) ........ 16

Barron v. Tastee Freez Intern., Inc., 482 F. oa. 1213

SEE MINED UU NIEED: cicaciitiiiiesegantiagncininsecensenienipeeneenniincniocens 16

Bernhardt v. Polygraphic Co., 350 U.S. 198 (1956) ......16, 19

Boynton v. Carswell, 238 Ga. 417, 233 S.E.2d 185 (1977) 13

Briskin v. Glickman, 267 F.Supp. 600 (S.D.N.Y. 1967) 12

Callaway v. Carswell, 240 Ga. 579, 242 S.E.2d 103

(1978) 13

Cardinale v. Louisiana, 394 U.S. 437 (1969) 0... 5

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) . 6,7

Deposit Guaranty National Bank v. Roper, 445 U.S.

326 (1980) 12

Dickstein v. DuPont, 443 F.2d 783 (1st Cir. 1971) 0. 23

iv

TasB_Le or AuTHorITIEs CITED

Cases

~~

Duplan Corp., ete. v. W.B. Davis Hosiery Mills, 442

F.Supp. 86 (S.D.N.Y. 1977) siideaieaneicenmains 22

Durst v. Abrash, 22 A.D.2d 39, 253 N.Y.S.2d 351 (1964) 18

Fidelity Federal Savings & Loan Assn. v. de la Cuesta,

soda US. .....-, 103 S.Ct. 3014 (19GB) ..............ccccccreese-eee 31

Flynt v. Ohio, 451 U.S. 619 (1981) ...................scsc-sesseenee 7

General Trading Co. v. State Tax Comm., 322 U.S. 335

(1944) eiauscnanasieqoniieiathtianmmennnectaainianmeie 16

Hamilton v. Home Ins. Co., 137 U.S. 370 (1890) ............ 10

Harris v. Shearson Hayden Stone, Inc., 82 A.D.2d 87,

441 N.Y.S.2d 70 (1981), aff’d mem., 56 N.Y.2d 627,

OP ASS fo Uf) ee oe 13

Kiehne v. Purdy, ...... Minn. ...... , 309 N.W.2d 60

CED iccnnnaigiemaiiiad ..15, 18

Kristiansen v. John Mullins & Sons, Inc., 59 F.R.D. 99,

ok Sg A eee 12

Kulko v. California Superior Court, 436 U.S. 84, 90

CHEE sscssicinsdicnentatciitempincaciilnniinianmiiaainiesig 8

LaSala v. American Sav. & Loan Assn., 5 Cal.3d 864,

GEE GE cisteceinctmestincnbitiantinitentinatcinis 13

Lathrop v. Donohue, 367 U.S. 820 (1961) 8

Lee v. Ply Gem Industries, Inc., 593 F.2d 1266 (D. 0.

Cir.), cert. denied 441 U.S. 967 (1979) .. 18

Main v. Merrill Lynch, Pierce, Fenner & Smith, 67 Cal.

Ra BE BD GOGO cccccernsvensessstavinncapinisasisiapeniiitipnitiialiiatinies 12

Mansbach v. Prescott Ball & Turben, 598 F.2d 1017

(6th Cir. 1979) 17

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Mel-

amed, 405 So. 2d 790 (Fla. [Dist. Ct. App.] 1981)... 19

Merrill Lynch, Pierce, Fenner & Smith v. Moore, 590

F.2d 823 (10th Cir. 1978) 17

Vv

Tasie or AutHorities CiTED

Cases

Page

Merrill Lynch, Pierce, Fenner & Smith v. Ware, 414

U.S. 117 (1973) ............. 15, 16, 21, 22, 23, 24, 25

Middle East Transcontinental, Inc. v. Onion Crock,

Inc., 144 Mich.App. 57, 318 N.W.2d 604 (1982) .......... 19

Muh v. Newburger, Loeb & Co., 540 F.2d 970 (9th Cir.

1976) intinsieitiadidlinuhientinrimnidicmeneectemacnennenmanasss 16, 23, 24

Pinkis v. Network Cinema Corporation, 9 Wash.App.

337, 512 P.2d 751 (1973) iptais nidaaeinintigneieennamnapans 16

Prima Paint v. Flood & Conklin, 388 U.S. 395 (1967)

SE es 11, 12,17

Ray v. Atlantic Richfield Co., 435 U.S. 151 (1978) .......... 20

Republic Natural Gas Co. v. Oklahoma, 334 U.S. 62

EES ae ea ee 5

R.J. Palmer Construction Co. v. Wichita Band Instru-

ment Co., 7 Kan.App. 363, 642 P.2d 127 (1982) ........ 18, 19

Robert Lawrence Co. v. Devonshire Fabrics, 271 F.2d

RS 11, 12, 23

Sandefer v. Reynolds Securities Inc., 618 P.2d 690

(Colo. App. 1980) 15, 18

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) ........ 17

Sibley v. Tandy Corp., 543 F.2d 540 (5th Cir. 1976) .. 17

State Ex. Rel. Geil v. Corcoran, 623 S.W.2d 557 (Mo.

a 15, 20

Stevenson v. Com. of Pennsylvania, Dept. of Revenue,

413 A.2d 667 (Pa. 1980) 22... .eceecneeceeeeee 13

Stokes v. Merrill Lynch, Pierce, Fenner & Smith, 523

F.2d 433 (6th Cir. 1975)

Supak & Sons Mfg. Co. v. Pervel Industries, Inc., 593

F.2d 135 (4th Cir. 1979)

Tenney Engineering, Inc. v. United Electrical Radio &

Machine Workers, 207 F.2d 450 (3d Cir. 1953) 0...

vi

TaBLe or AuTHorITIES CITED

Cases

Page

The Alanten, 252 U.S. 313 (1920) -...22.2...2......-ccceccecceeeeseees 10

United Nuclear Corp. v. General Atomic Co., 93 N.M.

105, 597 P.2d 290, cert. denied, 444 U.S. 911 (1979) ... 18

Vasquez v. Superior Court, 4 Cal.3d 800 (1971) —.......... 13

Vernon v. Drexel Burnham & Co., 52 Cal.App.3d 706

SESSA Reese PTE AE 7 aa a 12

Vigo Steamship Corp. v. Marship Om. 26 N.Y.2d 165,

309 N.Y.S.2d 165, cert. denied, 400 U.S. 819 (1970) . 12

Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith,

En 17

Wilko v. Swan, 346 U.S. 427 (1953) 0... 15, 16, 17, 19, 24

Wineland v. Marketex Intern. Inc., 28 Wash.App. 830,

nT a 20

Zahn v. International Paper Company, 414 U.S. 291

SEIDEN - ciiibetcscrsdnicomnicnsconciensiiaibelitietatendinnetmmnapsenmnbinaeptiiasiaetes 13

Constitution

United States Constitution, Article ITT —..0.0000 10

Rules

Federal Rules of Civil Procedure:

ee N 10

ITED cinssiienismsesiniieneunnatiiaiiemmntintereseantionmninnsis 10

Statutes

California Code of Civil Procedure:

EN i

ES ne ae “os ©

California Corporation Code :

Section 31500 et seq. 1

Section 31512 4, 15, 22, 24

vii

TaBLe or AuTHorities CITED

STaTuTEs

Page

Federal Arbitration Act, 9 U.S.C.:

EE ene ee a NTO. 17, 23

Se ae ON OO, cniinntintnintiatennnesintcsermememitinnaneininniatinits i

SS TD sn cnn nrrinapeemnniateibiaeeimiabineatiall 22, 24

RE | a 22

United States Code:

I iain tals anniceclinetes 15

EES ee aaa TES 22

TTL 5, 6

Te ae 8

Other Authorities

Cohen and Dayton, The New Federal Arbitration Law,

12 Va.L.Rev. 265, 275-276 (1926) —.........2.......----c0ee-0--- 10, 11

Committee on Commerce, Trade and Commercial Law,

The United States Arbitration Act and Its Applica-

tion, 11 A.B.A.J. 153, 154-155 (1925) 2... 11

Consumer Protection Act. 28 Wash.App. at ..... 627 P.

ne 20

Contracts of adhesion, e.g., Iowa Code Ann. § 697A.1

(West Supp. 1982) 19

H.R. Rep. No. 96, 68th Cong., Ist Sess. 1 (1924) 00000... 11

Tex. Rev. Civ. Stat. Ann. art. 224 (Vernon Supp.

1981) 18, 19

torts, eg., Ark. Stat. Ann. § 34-511 (Bobbs-Merrill

Supp. 1981) 19

Uninsured motorists, doctors and lawyers, e.g., 8.C.

Code § 15-48-10 (Lawyer Co-op Supp. 1981)... 19

1983-85 Pub. L. No. 97-247 (1982) 18

No. 82-500

In the Supreme Court

OF THE

United States

Octroser Term, 1982

Tae SovuTHianp CorporatTion, et al.,

Appellants,

vs.

Ricuarp D. Keatrne, et al.,

Appellees.

ON APPEAL FROM THE

SUPREME COURT OF CALIFORNIA

MOTION TO DISMISS

STATEMENT OF THE CASE

This case is before the Court solely on the basis of a

California decision on the pleadings. Because of the un-

developed posture of the case, the allegations in the plain-

tiffs-appellees’ (“plaintiffs”) complaints were deemed true

for purposes of decision by the California Supreme Court.

Those allegations are that the plaintiffs are either past

or present franchisees of the convenience food stores com-

monly known as “7-Eleven” Stores. There are approxi-

mately 800 such franchise stores in the state of California.

The Southland Corporation (“Southland”) is the fran-

chisor for each of these stores. In selling the franchises,

Southland employs a standard form prospectus which pur-

ports to make the disclosures required by the California

Franchise Investment Law’ and a standard form of fran-

chise agreement. After a franchise is sold, the operation

of individual 7-Eleven stores is governed by a centralized

bookkeeping system created and maintained by Southland.

The plaintiffs all entered into nearly identical franchise

agreements with Southland. The lengthy printed contracts

were offered on a take-it-or-leave-it basis and, as the Cali-

fornia Supreme Court found, were adhesive in nature.

Each of these contracts contained the same arbitration

clause requiring that all disputes be subject to arbitra-

tion before the American Arbitration Association.

After becoming franchisees, the individual plaintiffs be-

came convinced that Southland was guilty of various acts

of wrongdoing. The eight coordinated lawsuits which are

now before this Court were each filed at different times.

The earliest action was filed by Edward and Betty Gouveia

in the Superior Court for Santa Clara County in 1975;

Thomas and Wanda Lee Sampson and Patrick and Cathy

Cheng filed their separate actions in 1976; Phillip and Joan

Newell filed their action in 1977. The case of Garza v.

*California Corporations Code, sections 31500 et seq.

2

Southland, which was later dismissed pursuant to a set-

tlement, was filed in Alameda County in 1976. In none of

these actions did Southland move to compel arbitration.

Thereafter, Richard D. and Darla Keating filed a class

action in May 1977. A similar class action was filed by

Harry M. Battersby in December 1977.

Because of the similarity of the individual and class

actions, the California Judicial Council ordered that all the

actions pending in superior courts of several counties be

controlled by one state court as a coordinated proceeding.

Other pending cases against Southland were coordinated

before the same court. (Coy v. Southland and Southland v.

Scovis.) As part of that coordinated proceeding, the plain-

tiffs amended their complaints to be more uniform.

In all the cases, the plaintiffs alleged that Southland vio-

lated the California Franchise Investment Law and sought

declaratory relief establishing the invalidity of the arbitra-

tion clause. Except in the Coy and Scovis cases, which are

limited to the statutory claims, the plaintiffs also alleged

common law claims of breach of contract, breach of fidu-

ciary duty, violation of the usury law and fraudulent and

negligent misrepresentation.

The principal allegations of classwide misconduct are

(1) that Southland systematically defrauded its franchisees

by making inadequate or misleading disclosures in connec-

tion with the sale of franchises; (2) that it failed to provide

accurate information on the expected overall performance

of 7-Eleven stores; and (3) that it systematically charged

the franchisees interest on invoices paid by the franchisor

to suppliers for periods of time preceding actual payment.

For two years, when the only pending actions were those

on behalf of a few scattered individuals, Southland did not

move to arbitrate those cases even though in some of the

actions it alleged arbitration as an affirmative defense.

Instead, it took full advantage of the judicial process by

cross-complaining in three of the actions and by engaging

3

in extensive discovery. For example, in Gouveia, the plain-

tiffs were deposed for five days. One of the plaintiffs in the

Garza action was deposed for five days and the other for

two days. Again, in the Sampson action, there was a three-

day deposition of a witness. In Cheng, the named plaintiff’s

deposition was begun although not concluded. Only when

the class action case of Keating was filed did Southland

assert its right to arbitrate the issues in each of the pend-

ing actions. In Southland’s view, the litigation did not

really begin until the filing of Keating, the first class action.

(Jurisdictional Statement (“J.S.”’) 3.)

Pursuant to Southland’s motion to arbitrate, the actions

were stayed in the trial court before class discovery had

commenced and before a motion for certification could be

made. The trial court ordered all common law issues

arbitrated on an individual basis, refusing to entertain a

prior motion for class certification. The plaintiffs sought a

writ of mandate from the California Court of Appeal to

reverse this part of the trial court’s order. The order to

arbitrate excluded any claims arising under the Franchise

Investment Law which the trial court ruled were triable

only in a judicial forum. Southland then appealed that

ruling pursuant to the California arbitration statute (Cal.

Code Civ. Proc. § 1294). By stipulation, the appeal and writ

were consolidated for hearing before the California appel-

late courts.

The matters before the California Supreme Court were

not the broad, sweeping issues which Southland portrays.

Rather, as to the class claims, the issue was whether, under

the narrow facts of the case, the competing policies under-

lying arbitration and class action, both of which are favored

in California, may be reconciled in a manner which pre-

serves the viability of each procedure. The court was fully

aware that one solution was to hold that arbitration agree-

ments contained in adhesion contracts may not operate to

stay class actions otherwise properly maintainable in court.

The court did not take this approach because, as it stated,

4

“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 com-

mitment of the parties.” (J.S.App., 26a.) Instead, it ap-

proved the class arbitration as accommodating and pre-

serving each procedure.

On the issue of whether the Franchise Investment Law

claims were arbitrable, the court made a two-step analysis

of the effect of Corporations Code section 31512. First, it

determined that the California Legislature intended that

the right of a franchise investor to a judicial forum could

not be waived by an arbitration clause. The court then

turned to the issue of preemption. Noting that California

law and federal law are the same with respect to favoring

arbitration, the court found that the Federal Arbitration

Act was not intended to prevent or invalidate statutes, such

as section 31512, based on a specific legislative policy to

protect a particular class of litigants. (J.S.App. 17a-18a.)

SOUTHLAND HAS FAILED TO SHOW THAT THIS

COURT HAS JURISDICTION

This case concerns a group of California franchisees

affected by a preliminary decision of the state supreme

court that its procedural law permits class arbitration of

common law claims and that its Legislature was entitled to

designate a judicial forum for statutory claims under the

Franchise Investment Law. No substantial federal question

is raised here. In today’s world “Mom and Pop” grocery

stores have in large part given way to franchises. The

corner grocery—locally run and catering to local customers

—is deemed to be involved in interstate commerce because

it bears a federally registered trademark (“7-Eleven”) and

the franchisor with whom it has to deal is located in an-

other state. Nonetheless, the franchisees’ substantive claims

in this litigation are governed entirely by the statutory and

common law of the state of California where the franchises

are operated.

5

To invoke this Court’s jurisdiction, Southland must af-

firmatively demonstrate that it has met the threshold

requirements of 28 U.S.C. § 1257. Republic Natural Gas

Co. v. Oklahoma, 334 U.S. 62, 70-71 (1948). It has failed to

do so. As to the issue of class arbitration it has not shown

(1) that there is a final judgment; (2) that the federal law

was drawn into question below; or (3) that a federal ques-

tion is presented. As to the issue of whether the Federal

Arbitration Act preempts state protective legislation paral-

leling federal protective legislation, the decision below is

clearly correct, and presents no substantial federal ques-

tion.

A. There Is No Appellate Jurisdiction on the Class Arbi-

tration Issue

1. The question of whether the Federal Arbitration

Act bars a class arbitration was not raised below

This Court has consistently refused to hear cases where

the federal question is first raised by a party when seek-

ing review in this tribunal. Cardinale v. Louisiana, 394 U.S.

437, 438 (1969). In fact, the Court is without “jurisdiction

unless a federal question was raised and decided in the

state court below.” 394 U.S. at 438.

In its jurisdictional statement, Southland asks this Court

to consider the question of whether “arbitration under the

Federal Arbitration Act is unlawfully impaired” by an or-

der requiring the trial court merely to consider whether

class arbitration may be appropriate in this case. The

thrust of Southland’s argument is that because the Federal

Arbitration Act establishes a strong federal policy in favor

of arbitration, states cannot apply local procedures which

might impair the federal policy.

Before the California Supreme Court, however, South-

land did not argue that the federal act barred the class

procedure. Rather, Southland contended that class arbitra-

tion was precluded by general policies in favor of arbitra-

6

tion, citing California precedent supposedly to that effect,

and by the absence of state legislation authorizing a class

action within the arbitration process. The California Su-

preme Court, was thus faced only with a conflict between

state policies in favor of arbitration and state policies in

favor of class actions. (J.S.App. 23a-30a.)* As the question

now presented was neither raised nor decided below, South-

land has not met this threshold jurisdictional requirement

of 28 U.S.C. section 1257.

2. There is no final judgment before this Court on the

issue of class arbitration

The California Supreme Court decision which Southland

attempts to appeal is not a final judgment. As the court

itself stated: “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.” (J.S.App.24a, n.

17.)

In Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975),

this Court set forth four exceptions to the traditional final

judgment rule, based on a practical application of that rule

*Southland’s petition to the California Supreme Court phrased

the question as “[w]hether a court may enter an order compelling

a private commercial arbitration governed by the Federal Arbitra-

tion Act and rules of the American Arbitration Association to pro-

ceed as a class action even though the terms of the parties’ arbi-

tration agreement do not provide for such a procedure.” (South.

7

to state court decisions which anticipate further proceed-

ings in lower state courts. The only exception possibly

relevant here is the fourth and last category directed to

state decisions which “seriously erode” federal policy. In

these instances, the federal issue has been finally decided,

and reversal on the federal issue “will be preclusive of any

further litigation on the relevant cause of action rather

than merely controlling the nature and character of .. .

the state proceedings still to come.” 420 U.S. at 483. Review,

however, may be granted only if, in addition, the state de-

cision might “seriously erode” federal policy. 420 U.S. at

483.

The preliminary decision by the California Sy.reme

Court that the trial court should consider whether there

should be a class arbitration does not meet these criteria.

First, a reversal by this Court would not “be preclusive of

any further litigation on the cause of action” because the

decision merely sanctions a procedure in the continuing

litigation. Thus, it is expressly outside this exception.* Sec-

ond, the exception is to be narrowly construed. The recent

case of Flynt v. Ohio, 451 U.S. 619 (1981) noted that this

exception must be limited to cases which seriously erode

federal policy or else it would swallow the rule and every

federal issue decided on a state interlocutory appeal would

qualify for immediate review. Because the California de-

cision concerns a matter of state court procedure, this

criterion also is not met.

Accordingly, there can be no review at this time of the

class action issue because of the lack of a final judgment.

8

3. Assuming this Court would otherwise have juris-

diction, the class arbitration issue is properly one

for certiorari rather than appeal

Southland erroneously contends that the class arbitration

issue falls within this Court’s appellate jurisdiction under

28 U.S.C. §1257(2). (JS. 2.) That section, however,

authorizes an appeal only where a state statute was chal-

lenged below as repugnant to a federal law or the Consti-

tution and found valid. Southland has not met this require-

ment.

In the case beluw, Southland did not challenge the va-

lidity of a state statute. Nor does it here. It does not

frame the issue as a challenge to the validity of any par-

ticular state act which is “legislative in character,” Lathrop

v. Donohue, 367 U.S. 820, 824 (1961), but rather as a ques-

tion of whether the lower court’s decision theoretically

impairs a federally protected right. (J.S. i.) When a party

makes no challenge to the validity of a statute, but instead

challenges a court’s decision to take certain judicial action,

an appeal does not lie and review can be premised only

on this Court’s discretionary jurisdiction. Kulko v. Cali-

fornia Superior Court, 436 U.S. 84, 90 (1978). Thus, even

if Southland had drawn the federal issue into question

below and if there were a final judgment—and such have

not been shown—Southland would at best be entitled to

petition this Court for certiorari. Addington v. Texas, 441

U.S. 418, 422-423 (1979).

B. Southland Has Failed to Demonstrate That There Are

Any Substantial Federal Issues

Both of the federal questions which Southland has at-

tempted to frame are based on an overly broad reading

of the Federal Arbitration Act. Thus, Southland argues

that the California court’s approval of the concept of class-

wide arbitration as a matter of California procedural law

will somehow impair the application of the Federal Arbi-

tration Act in federal courts or other state courts. As to

9

the California Legislature’s intention to require a judicial

forum for resolution of claims under the Franchise Invest-

ment Law, Southland makes the sweeping assertion that

“state-created ‘exceptions’ ” would fly in the face of the

Federal Arbitration Act and “violate the intent of Con-

gress.” (J.S. 28.) Southland is wrong on both counts. The

California court’s decision does not in any way undermine

the Federal Arbitration Act or evince hostility toward ar-

bitration as a means of dispute resolution.

California, like most states, has a modern arbitration act

which it vigorously enforces.‘ It also applies the substan-

tive provisions of the Federal Arbitration Act in cases

involving interstate commerce. But the act does not govern

the procedure to be followed by the state. The issue as to

whether the arbitration can be handled on a class action

basis is purely a question of stave law. Thus, on this issue,

the California Supreme Court undertook to reconcile po-

tentially conflicting state policies favoring arbitration and

favoring class actions. The court concluded that state pol-

icy favoring arbitration did not prevent use of the pro-

cedural device of a class action.

The court faced a different issue on the statutory claims.

There, it had to reconcile the substantive provisions of the

Federal Arbitration Act with the narrow exception to ar-

bitrability embodied in the antiwaiver provision of Cali-

fornia’s Franchise Investment Law. The court concluded

that the Federal Arbitration Act did not preclude the state

legislature from specifying a judicial forum for enforce-

ment of its Franchise Investment Law.

10

1. The Federal Arbitration Act does not displace

local rules of procedure

The Federal Arbitration Act was intended to provide a

procedure limited to the federal courts. Neither Congress

nor this Court has ever determined that the scope of the

Act should extend into the state courts so as to override

their procedures, including class actions. Indeed, in the

hearing before the California Supreme Court, Southland

itself contended that under the Erie doctrine, the Cali-

fornia District Court of Appeal had erred by applying the

Federal Rules of Civil Procedure, Rules 81(a)(3) and

42(a), to a matter governed by California procedure.*

Prior to 1925, the federal courts, reflecting a traditional

hostility toward arbitration agreements, generally refused

to hold arbitration clauses specifically enforceable. The

Alanten, 252 U.S. 313 (1920); Hamilton v. Home Ins. Co.,

137 U.S. 370 (1890). Even if the federal courts were in-

clined to enforce the clauses, there was no procedure by

which they could do so. Cohen and Dayton, The New Fed-

eral Arbitration Law, 12 Va.L.Rev. 265, 275-276 (1926).

The Federal Arbitration Act was drafted by the American

Bar Association’s Committee on Commerce, Trade and

Commercial Law to remedy this situation. It was enacted

by Congress in 1925 pursuant to its powers under the Com-

merce Clause, Admiralty and Article III of the Consti-

tution.

ll

A chief author of the Act, Julius Cohen, wrote at the

time,

[T}he statute as drawn establishes a procedure in the

Federal courts for the enforcement of certain arbitra-

tion agreements. It is no infringement upon the right

of each state to decide for itself what contracts shall

or shall not exist mnder its laws... . [W]hether or

not an arbitration agreement is to be enforced is a

question of the law of procedure and is determined

by the law of the jurisdiction wherein the remedy is

sought. Cohen & Dayton, The New Federal Arbitra-

tion Law, 12 Va.L.Rev., at 275-276 (italics supplied).

The drafting committee itself noted that the “statute pro-

viding for the enforcement of arbitration agreements does

relate solely to procedure of the Federal courts. It is no

infringement upon the right of each state to decide for

itself what contract shall or shall not exist.” Committee

on Commerce, Trade and Commercial Law, The United

States Arbitration Act and Its Application, 11 A.B.A.J.

153, 154-155 (1925) (italics supplied). “The bill declares

that such agreements shall be recognized and enforced

by the Courts of the United States.” H.R. Rep. No. 96, 68th

Cong., Ist Sess. 1 (1924) (italics supplied).

Indeed, this Court has deliberately declined to hold

that the Act applies in any respect in the state courts.

In Prima Paint v. Flood & Conklin, 388 U.S. 395 (1967),

a diversity action involving the application of the inter-

state commerce clause, the Federal Arbitration Act was

interpreted to require the arbitrator, not the federal dis-

trict court, to decide a claim of fraud in the inducement,

even in the face of a contrary state rule. The court in

Prima Paint was asked to hold, based on the reasoning of

Robert Lawrence Co. v. Devonshire Fabrics, 271 F.2d 402

(2d Cir. 1958), that the Federal Arbitration Act applies

in state courts and that it is a national substantive law.

The Court refused to do so stating, “the question is whether

12

Congress may prescribe how federal courts are to conduct

themselves with respect to subject matter over which Con-

gress plainly has power to legislate. The answer to that

can only be in the affirmative.” 388 U.S. at 405 (italics

supplied).

The Second Circuit itself in Robert Lawrence Company

v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir. 1959),

recognized that, “[t]o be sure much of the Act is purely

procedural in character and is intended to be applicable

only in the federal courts.” 271 F.2d at 407. Hence, in Main

v. Merrill Lynch, Pierce, Fenner & Smith, 67 Cal.App.3d

19 (1977), the court stated that the Federal Arbitration

Act was applicable, yet had no difficulty with the fact

that the detailed procedural provisions of the California

statute, with respect to notice, hearings, etc., had been

applied by the trial court. See also, Vigo Steamship Corp.

v. Marship Corp., 26 N.Y.2d 165, 309 N.Y.S.2d 165, cert.

denied, 400 U.S. 819 (1970) (applying New York law to

consolidate arbitration proceedings under Federal Arbitra-

tion Act).

By its exaggerated and unsupported interpretation of

the scope of the Federal Arbitration Act, Southland seeks

to transform issues of local California procedure into

far-ranging federal ones. Class arbitration, however, is a

procedural issue of concern in this case only to the Cali-

fornia courts. It raises no question under the Federal Ar-

bitration Act. A class action is a procedural device,

ancillary to the litigation of substantive claims. Vernon v.

Drexel Burnham € Co., 52 Cal.App.3d 706, 716 (1975);

Deposit Guaranty National Bank v. Roper, 445 U.S. 326,

336 (1980). Thus, so long as the forum court has authority

based on its own law to employ the class action, there is

no impediment to its so doing even when it is apply-

ing substantive law of another jurisdiction. See, K ristian-

sen v. John Mullins & Sons, Inc., 3 F.R.D. 99, 108-110

(E.D.N.Y. 1973); Briskin v. Glickman, 267 F.Supp. 600

(S.D.N.Y. 1967).

13

Where, as here, the substantive claims are based solely

on state law, the use of local procedure to enforce those

claims is clearly a matter of state, and not federal, con-

cern. California has consistently supported class actions

where a widespread practice injures large numbers of peo-

ple but “the amount of individual recovery would be in-

sufficient to justify bringing an individual action.” Vas-

quez v. Superior Court, 4 Cal.3d 800, 808 (1971).* It is

particularly suited to the special circumstances arising

where the contracts are uniform and the same provisions

and practices apply to each member of the class. LaSala

v. American Sav. € Loan Assn., 5 Cal.3d 864, 877 (1971).

The California Supreme Court rightly viewed the question

before it as whether, in the context of an arbitration

clause contained in an adhesion contract, it had inherent

authority to reconcile the competing state policies favoring

both arbitration and class actions. It concluded that it did.’

Thus, the issue was treated as solely one of state proce-

dure, presenting no federal question.

*These cases are of special importance to state courts since only

those class actions where each individual claim exceeds $10,000 are

within federal jurisdiction. Zahn v. International Paper Company,

414 U.S. 291 (1973). Moreover, since the Federal Arbitration Act

congestion issue raised by Southland is largely a matter of state

court dockets.

"Southland argues at length that a class action and arbitration are

(hypothetically ) incompatible. (J.S. 11-15.) This argument is irrel-

evant here, the question having been determined by the California

court as a matter of state law. Indeed, Southland’s only direct au-

thority rejecting a class arbitration, Harris 0. Shearson Hayden

Stone, Inc., 82 A.D.2d 87, 441 N.YS.2d 70 (1981), affd mem., 56

N.Y.2d 627, 450 N.Y.S.2d 482 ( 1982), likewise was decided on the

14

The court looked to the federal cases which allow con-

solidation merely as analogous, and not governing, author-

ity. (J.S.App. 26a-27a.) It also looked to cases from other

states which support consolidation of arbitration proceed-

ings, even in the absence of express statutory authority.

(J.S.App. at 27a.) It then concluded that the fact that

California’s arbitration statute contained express author-

ity allowing consolidation did not mean the California Leg-

islature intended to prevent the California courts from

ordering class arbitration in an appropriate case. (J.S.

App. 28a.)

As is apparent from the foregoing, the question before

the California Supreme Court and its resolution of that

question were solely a matter of state law. Southland pre-

sents no federal question for review by this Court.

2. The preemption issue does not present a substan-

tial Federal question

When this case was before the California Supreme Court,

preemption was only a back-up argument which Southland

did not expect the court to reach. (Reply Brief to Answer

to Petition for Hearing, p. 12.) In seeking to compel ar-

bitration, Southland relied primarily on the California

arbitration statute. Thus, it argued that the antiwaiver pro-

vision of the Franchise Investment Law did not bar arbi-

tration:

Title 9 of the California Code of Civil Procedure

(§ 1280 et seq.) establishes a comprehensive arbitra-

tion statute, and Section 1281 of that Code declares

that written arbitration agreements are “valid, en-

forceable and irrevocable, save upon such grounds as

exist for the revocation of any contract.” Arbitration

under this statute is highly favored by the law, and

the courts have repeatedly held that in cases of doubt,

every intendment should be in favor of upholding the

agreement to arbitrate. This policy applies to tort

claims generally, and to fraud and misrepresentation

15

claims in particular. If the California Legislature had

intended to overrule this long-standing policy in the

case of disputes between franchisors and franchisees,

it could and would have done so directly. In the absence

of a clear legislative directive, this Court should not

overturn the well-established policy by implication.

(Reply Brief to Answer to Petition for Hearing, pp.

6-7.)

Southland’s argument that the \egislavure did not intend

to bar arbitration was rejected. The Franchise Investment

Law is a prepurchase disclosure law modeled after the

1933 Securities Act. (J.S.App. 10a) Section 31512 is vir-

tually identical to section 14 of the Securities Act of 1933,

15 U.S.C. § 77n. The California Supreme Court concluded

that the choice of such language evidenced a clear legis-

lative intent that section 31512 be interpreted in accord-

ance with the interpretation given section 14 in Wilko.* The

court’s conclusion was buttressed by the legislative history

of a different franchise law, the Franchise Relations Act,

which explicitly recognized that the earlier law was mod-

eled after the federal securities law and did not permit

arbitration. (J.S.App. 1la-13a.) The question whether the

court properly interpreted the intent of the California Leg-

islature is purely one of state law and beyond the scope of

review by this Court. Merrill Lynch, Pierce, Fenner &

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Smith v. Ware, 414 U.S. 117, 133 (1973), General Trading

Co. v. State Tax Comm., 322 U.S. 335, 337 (1944).°

After reaching this conclusion, the California court was

faced with the issue of possible preemption by the Federal

Arbitration Act. As discussed above, the application of the

Federal Arbitration Act in state court has never been

mandated by Congress or this Court. Nonethless, the Cali-

fornia Supreme Court, as well as a majority of state courts

which have considered the question, recognizes that “the

statute contains certain principles of ‘substantive federal

law’ which must be applied regardless of forum, where fed-

eral jurisdiction exists.” (J.S. App. 14a.)*

*Southland makes much of the fact that the State of Washington

in Allison v. Medicab International, Inc., 92 Wash.2d 199, 597 P.2d

380 (1979), has interpreted its own franchise investment law dif-

ferently, but that is of no import in determining the intent of the

California Legislature. Indeed, in Allison the Washington court ap-

pears to have mistakenly discussed Wilko in terms of its impact on

preemption, not as an aid in interpreting the intent of the Washing-

ton Legislature in passing that state’s franchising statutes. 92 Wash.

2d at _., 597 P.2d at 382. In neither Allison, nor the case upon

which it relied—Pinkis v. Network Cinema Corporation, 9 Wash.

App. 337, 512 P.2d 751 (1973)—was there a discussion of the poli-

cies and purposes behind the federal arbitration law or the Wash-

ington franchising statutes.

Indeed, in Barron o. Tastee Freez Intern., Inc., 482 F.Supp.

1213 (E.D. Wisc. 1980) and Bache Halsey Stuart Shields, Inc. ov.

17

The California Supreme Court thus determined that the

franchise agreements were within tli¢ broad reach of the

Commerce Clause and therefore governed by the substan-

tive provisions of the Federal Arbitration Act. Contrary to

Southland’s position, this does not end any inquiry as to

the enforceability of the instant arbitration clauses. It

begins the inquiry.

The first question is the scope of the Federal Arbitration

Act under federal law. This Court itself has noted that

“categories of contracts otherwise within the Arbitration

Act but in which one of the parties characteristically has

little bargaining power are expressly excluded [under 9

U.S.C. §1] from the reach of the Act.” Prima Paint Corp.

v. Flood & Conklin, 388 U.S. 395, 402 n. 9 (1967). This

Court has also recognized the inapplicability of the Federal

Arbitration Act to other categories of disputes where the

congressional schemes require judicial supervision to pro-

tect individuals from falling victim to the other party’s

superior bargaining power. Wilko v. Swan, 346 U.S. 427

(1953). Similarly, the circuit courts have held that claims

under the Securities Exchange Act of 1934," and the fed-

eral antitrust and bankruptcy laws are not arbitrable be-

cause the nature of the statutory schemes and the vital

public interest involved necessitate judicial scrutiny.”

“Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) is not au-

thority to the contrary. It has been uniformly interpreted to create

a narrow exception to Wilko due to overriding policy considera-

tions in the area of international securities transactions negotiated

between parties of relatively equal bargaining power. Accord,

Mansbach v. Prescott Ball G Turben, 598 F.2d 1017 (6th Cir.

1979); Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, 558

F.2d 831 (7th Cir. 1977); Sibley v. Tandy Corp., 543 F.2d 540 (5th

Cir. 1976); Ayres 0. Merrill Lynch, Pierce, Fenner & Smith, 538

F.2d 532 (3d Cir. 1976).

"See, e.g., Merrill Lynch, Pierce, Fenner & Smith v. Moore, 590

F.2d 823 (10th Cir. 1978); Allegaert v. Perot, 548 F.2d 432 (2d

Cir.), cert. denied, 432 U.S. 910 (1977); American Safety Equip-

ment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968);

18

In interpreting their own state statutory schemes, the

state courts have followed the lead of the federal courts and

carved exceptions to the enforceability of arbitration

clauses when necessary to effectuate other vital state

policies.* In most cases, no conflict exists between the

modern state arbitration laws and the Federal Arbitration

Act. When a question does arise regarding a possible

conflict between the application of the Federal Arbitration

Act and the state arbitration laws, state courts have

engaged in a responsible weighing process which balances

the state’s interest in enforcing its policy against the fed-

eral policy."* Thus, in R.J. Palmer Construction Co. v.

accord, A. & E. Plastik Pak Co. v. Monsanto Company, 396 F.2d

710 (9th Cir. 1968); Lee v. Ply Gem Industries, Inc., 593 F.2d 1266

(D.C. Cir.), cert. denied, 441 U.S. 967 (1979); Applied Digital

Technology, Inc. v. Continenial Casualty Co., 576 F.2d 116 (7th

Cir, 1978). Until recently, courts had also interpreted the patent

and trademark laws as requiring judicial enforcement—a practice

which was consistent with prior law but which has now been su-

perseded by congressional directive in enacting the patent and

trademark appropriations bill for 1983-85 Pub. L. No. 97-247

(1982). Significantly, Congress has left untouched the judicial con-

struction of its intent in the area of securities litigation, bankruptcy

and antitrust.

See, e.g., Kiehne v. Purdy, .. Minn. . ., 309 N.W.2d 60 (1981)

(state securities law claims not arbitrable), Sandefer v. Reynolds

Securities Inc., 618 P.2d 690 (Colo. App. 1980) (same); United

Nuclear Corp. v. General Atomic Co., 93 N.M. 105, 597 P.2d 290,

cert. denied, 444 U.S. 911 (1979) (state antitrust law claim not ar-

bitrable), Aimcee Wholesale Corp., v. Tomar Products Inc., 21

N.Y.2d 621, 237 N.E.2d 223 (1968) (same); Durst v. Abrash, 22

A.D.2d 39, 253 N.Y.S.2d 351 (1964) (issue of whether transaction

was disguised usurious loan not arbitrable ).

“As of January 1, 1982, 42 states and the District of Columbia

have adopted modern arbitration statutes, i.e., statutes enforcing

agreements to arbitrate existing controversies and those arising in

the future. Twenty-five states and the District of Columbia have

adopted the Uniform Arbitration Act although a number of them

have modified the Act to exclude certain categories of disputes.

Variations include statutory exclusions as to employer-employee

disputes, e.g., Tex. Rev. Civ. Stat. Ann. art. 224 (Vernon Supp.

19

Wichita Band Instrument Co., 7 Kan.App. 363, 642 P.2d 127

(1982), the state court held that its statutory policy against

arbitration of any tort claim was outweighed by the federal

policy in favor of arbitration.” In Merrill Lynch, Pierce,

Fenner & Smith Inc. v. Melamed, 405 So. 2d 790 (Fla. [ Dist.

Ct. App.] 1981), the state appellate court upheld a New

York arbitration provision in a contract on the ground that

the Federal Arbitration Act prevailed over a state statute

generally outlawing out-of-state arbitration provisions.

Narrowly drawn categories of exemption from arbitra-

tion require closer analysis of the legislative intent and the

preemption question. In Allison v. Medicab International,

Inc., 92 Wash.2d 199, 597 P.2d 380 (1979), cited by South-

land, the court found insufficient evidence of a legislative

intent to bar arbitration under Washington’s franchising

law. It used the possibility of preemption as a further rea-

son to infer that the legislature did not intend to bar

arbitration.’* Southland mistakenly relies on this decision

1981); torts, e.g., Ark. Stat. Ann. § 34-511 (Bobbs-Merrill Supp.

1981); uninsured motorists, doctors and lawyers, e.g., S.C. Code

§ 15-48-10 (Lawyer Co-op Supp. 1981); and contracts of adhesion,

e.g., lowa Code Ann. § 697A.1 (West Supp. 1982).

**Southland’s hypothesis (J.S. 26) that if franchisor-franchisee

disputes are not arbitrable under California law, the arbitration of

interstate tort claims would soon be banned, is erroneous. As South-

land is aware, California law is consistent with federal law in con-

sidering tort claims arbitrable. Kansas appears to be the only state

to face the issue posed by Southland and has given overriding force

to the Federal Arbitration Act.

In Middle East Transcontinental, Inc. v. Onion Crock, Inc., 144

Mich.App. 57, 318 N.W.2d 604 (1982), the court likewise found

no legislative intent to reserve franchise claims for the judicial

forum and did not reach the issue of preemption. In attempting to

analyze the Wilko decision, the court relied on the wider choice of

venue in federal court as the governing rationale. Southland does

likewise. (J.§. 22 n. 34.) The Wilko decision, however, is not so lim-

ited. See discussion in Wilko v. Swan, 346 U.S. 427, 435-438 ( 1953);

see also Bernhardt v. Polygraphic Co., 350 U.S. 198, 202-203 ( 1956).

20

as evincing a belief that the Federal Arbitration Act is

national substantive law preventing state law exceptions to

arbitration. This is not true. Where a Washington appellate

court did find a strong anti-arbitration policy in its Con-

sumer Protection Act, the court proceeded to uphold such

legislation in the face of a claim that it was preempted by

the Federal Arbitration Act. Wineland v. Marketex Intern.

Inc., 28 Wash.App. 830, 627 P.2d 967 (1981).

Considering the purpose of the Consumer Protection

Act, its close similarity to the federal antitrust laws,

and the clear exception to the operation of the arbitra-

tion act covering antitrust laws, we conclude that the

policy of the arbitration act favoring arbitration should

give way to the stronger policy behind the Consumer

Protection Act. 28 Wash.App. at ....... 627 P.2d at 970,

distinguishing Allison v. Medicab International, Inc.,

92 Wash.2d 199, 597 P.2d 380.

The Missouri Court of Appeals has likewise refused to

order arbitration requested under both federal and state

arbitration acts where violations of state securities law

were alleged because of Missouri’s “very strong policy in

favor of providing a judicial forum for the claims of inves-

tors under the blue sky laws.” State Ex. Rel. Geil v. Cor-

coran, 623 S.W.2d 557, 559 (Mo.App. 1981).

The California Supreme Court undertook a similar bal-

ancing test in reaching its conclusion that the Franchise

Investment Law was not preempted by the Federal Arbi-

tration Act. A close analysis of the preemption issue

demonstrates the correctness of the court’s decision.

“(When a State's exercise of police power is challenged

under the Supremacy Clause, ‘[this court] start[s] with

the assumption that the historie police powers of the

to be superseded by [federal statutes]

unless that was the clear and manifest purpose of Con-

21

gress.’ [Citations.]” Ray v. Atlantic Richfield Co., 435 U.S.

151, 157 (1978) (italics supplied).

As this Court has noted in an analogous context:

“(F Jederal regulation of a field of commerce should

not be deemed preemptive of state regulatory power

in the absence of persuasive reasons—either that the

nature of the regulated subject matter permits no other

conclusion, or that the Congress has unmistakably so

ordained.” ... [B]Jecause “each case turns on the pecu-

liarities and special features of the federal regulatory

scheme in question,” it is where there is in existence

a pervasive and comprehensive scheme of federal regu-

lation that pre-emption follows. Merrill Lynch, Pierce,

Fenner € Smith v. Ware, 414 U.S. 117, 139 (1973.)

See also, Fidelity Federal Savings ¢ Loan Assn. v. de la

Cuesta, ...... USS. ......, 102 S.Ct. 3014 (1982).

In American Airlines, Inc. v. Louisville € Jefferson

C.A.B., 269 F.2d 811 (6th Cir. 1959), the Sixth Circuit an-

alyzed the precise preemption issue involved here in hold-

ing that the district court properly looked to the law of

Kentucky in finding that it was beyond the authority of

the Air Board to enter into an arbitration agreement. The

court succinctly stated the issue as follows:

Federal power to pre-empt being clear, it remains to

inquire just how much of the field the Congress in-

tended to and did occupy [citation omitted]. Section 2

of the Federal arbitration statute, as qualified by § 1,

determines the particular controversies to which $43

and 4 of the statute may be applicable. [Citations.]

While the language [of 42] might plausibly be read

to support a broader construction, consideration of the

Legislative history reveals that what the Congress in-

tended was merely to overrule by legislation long-

standing judicial precedent, which declared agree-

22

ments to submit judicable controversies to arbitration

contrary to public policy, on the ground that enforce-

ment of such agreement would oust the courts of their

jurisdiction ....

[T]he Federal arbitration statute was intended to de-

clare no more than the agreements to arbitrate “in-

volving commerce,” [9 U.S.C. §§1 and 2] previously

held invalid or revocable or unenforceable for policy

reasons apposite to arbitration in particular, such as

ousting the courts of jurisdiction, are by virtue of the

[Act] valid and enforceable, unless by other Federal

law or State law such agreements are for other rea-

sons to be held invalid or revocable or unenforceable.

American Airlines, Inc. v. Louisville @ Jefferson

C.A.B., 269 F.2d 811, 816 (6th Cir. 1959)*"

The California court correctly recognized that the Fed-

eral Arbitration Act does not supplant all state law re-

garding the enforcement of arbitration clauses. It then

analyzed the policies advanced by Corporations Code sec-

tion 31512 to determine whether they were irreconcilable

with the federal law. For this purpose, the California court

looked to this Court's opinion in Merrill Lynch, Pierce,

Fenner & Smith v. Ware, 414 U.S. 117 (1973). In Ware, a

class action for collection of trust fund benefits, this Court

considered an alleged conflict between arbitration mandated

by the New York Stock Exchange rules adopted under the

self-governing provisions of section 6 of the Securities

Exchange Act, 15 U.S.C. 4 78f, and California Labor Code

section 229 (invalidating any private agreement to arbi-

trate a wage dispute). The unanimous opinion concluded

that the exchange rules did not preempt the state Labor

7§ee also Duplan Corp. etc. v. W.B. Davis Hosiery Mills, 442

F.Supp. 86 (S.D.N.Y. 1977) and Supak & Sons Mfg. Co. v. Pervel

Industries, Inc., 593 F.2d 135 (4th Cir. 1979), which both con-

cluded that state laws incorporating U.C.C. § 2-207(2)(b) were

not preempted by the Federal Arbitration Act.

23

Code because California “manifested a strong policy of

protecting its wage earners from what it regards as un-

desirable economic pressures affecting the employment re-

lationship.” 414 U.S. at 140 (Stewart, J., not participat-

ing).

In its brief, Merrill Lynch relied on Robert Lawrence,

discussed supra at p. 11, in arguing that the Federal Arbi-

tration Act applied to its dispute with the alleged class

represented by Ware. Nonetheless, the effect of the Fed-

eral Arbitration Act was not discussed in the Ware opin-

ion. Southland asserts that a likely reason is that Ware

involved a contract of employment exempted from arbi-

tration under section 1 of the Act. (J.S. 25 n. 35.) Al-

though that argument was made to the Ware court, it had

no support in the case law. Federal courts facing the issue

had long since held that account executives, such as Ware,

were not “employees” within the meaning of section 1;

and that the exception was limited to employees engaged

in the actual movement of interstate goods. Dickstein v.

DuPont, 443 F.2d 783, 785 (1st Cir. 1971); Tenney Engi-

neering, Inc. v. United Electrical Radio & Machine Work-

ers, 207 F.2d 450, 452-453 (3d Cir. 1953). It is doubtful

that the Ware court would have overruled such cases sub

silentio, and it has never been so interpreted. See, e.g.,

Stokes v. Merrill Lynch, Pierce, Fenner € Smith, 523 F.2d

433, 436 (6th Cir. 1975). Rather, the federal courts con-

tinue to include account executives within the ambit of

the Federal Arbitration Act. 523 F.2d at 436; Muh v. New-

burger, Loeb & Co., 540 F.2d 970 (9th Cir. 1976).

Thus, Southland’s attempt to distinguish Ware from the

case at bar is in error. Subsequent case law suggests two

other explanations for the Ware opinion’s silence as to the

impact of the Federal Arbitration Act—as an indication

that the Act did not apply in state court’ or that appli-

*See Stokes v. Merrill Lynch, Pierce, Fenner & Smith, 523 F.2d

433, 436 (6th Cir. 1975).

24

cation of the Federal Arbitration Act does not affect the

preemption analysis.** The California Supreme Court’s de-

cision reflects the latter view.

The Ware court gave effect to California’s strong con-

cern for the protection of wage earners. In the case at

bar, California has manifested another strong concern: the

protection of investors in franchise operations from mis-

representations by franchisors. California has determined

that franchise investors, as a class, are in need of the same

protection as that provided by Congress to investors in

securities markets “requir{ing] the exercise of judicial

direction to fairly assure [the] effectiveness” of the leg-

islation. Wilko v. Swan, supra, 346 U.S. 427 at 437.

In this situation, as in Ware, there is no persuasive

reason why the federal policy favoring arbitration should

be deemed to preempt section 31512. The interpretation

of the Act urged by Southland in this case will leave

states powerless to enforce laws modeled after the federal

antitrust and securities laws whenever arbitration clauses

are inserted by the party with superior bargaining power.”

The Federal Arbitration Act does not apply to similar

federal claims. It would be anomalous indeed if it were

interpreted absolutely to prohibit parallel state legislation :

"See Muh v. Newburger, Loeb & Co., 540 F.2d 970, 973 (9th

Cir. 1976), where the court assumed the Ware preemption analysis

applied in a similar case governed by the Federal Arbitration Act,

but ruled that Labor Code section 229 was unavailable as a bar

because the plaintiff did not have a true wage claim.

*°Southland’s argument that the state laws could still validly bar

arbitration in intrastate disputes is practically meaningless. The

broad scope presently given the commerce clause, together with the

reality of today’s business operations renders almost all entrepre-

neurs participants in interstate commerce. The “Mom and Pop” gro-

cers who comprise the plaintiffs in this action are but one ex-

ample. It is hard to imagine any franchise subject to the California

Franchise Investment Law that would not have some involvement

in interstate commerce.

“When respective federal and state sovereignties are jux-

taposed, ‘the proper approach is to reconcile “the opera-

tion of both statutory schemes with one another rather

than holding one completely ousted.”’” Merrill Lynch,

Pierce, Fenner & Smith v. Ware, 414 U.S. 117, 127 (1973).

Since the California statutory scheme is compatible with

the federal scheme, this case presents no question for re-

view before this Court.

26

CONCLUSION

The procedural history of this case, and in fact many of

the arguments advanced before this Court, demonstrate

that Southland’s true intent is not to preserve the asserted

inviolability of arbitration but to escape responsibility for

its acts. In seeking arbitration, Southland relied on the

parallel provisions of the California arbitration statute and

the Federal Arbitration Act. It considered the California

statute to govern both the procedural issue of class arbitra-

tion and the Franchise Investment Law claim. It relied on

the federal act only as a back-up on the latter issue. Not

until after the California Supreme Court ruled that South-

land could not thwart a class by mere invocation of its

arbitration clause did Southland abandon its reliance on

the California statute.

Southland’s posturing notwithstanding, there are no sub-

stantial federal questions here. The California Supreme

Court’s determination as to how this action should proceed

is a matter of state concern presenting no issue for review

by this Court. Accordingly, appellees respectfully submit

that Southland’s appeal be dismissed and its alternative

petition for certiorari be denied.

Respectfully submitted,

Jous F. Wats

Attorney for Appellee

Stank, Stewart, Weis &

Rostxsow

Brows & Fiswer

Of Counsel.