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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Motion to Dismiss or Affirm
- **Published:** January 1, 1984
- **Citation:** 465 U.S. 1

## Text

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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16

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0843%3A04. Public record. Not legal advice.