Appellants Brief — Southland Corp. v. Keating

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Office Supreme Court, U.S.

E I. F. D

MAR 10 903

No. 82-500

STEVAS,

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

THE SOUTHLAND CORPORATION, et al.,

7 Appellants,

RICHARD D. KEATING, et al.,

Appellees.

On Appeal from the Supreme Court of California

BRIEF OF APPELLANTS

Of Counsel: Peter K. BLEAKLEY *

Mark J. SPOONER

— De Marc D. GuREN

9 1200 New Hampshire Ave., N. W.

Washington, D.C. 20036

(202) 872-6700

McKENNA, CONNER & CUNEO AARON M. PEcK

San Francisco, California MARTIN H. KRESSE

1920 Mills Tower

220 Bush Street

San Francisco, California 94104

(415) 433-0640

Attorneys for Appellants,

The Southland Corporation, et al.

March 1983 * Counsel of Record

WILSON - Eres Printing Co. Inc. - 7869-0096 - WASHINGTON. D.C. 20001

QUESTIONS PRESENTED

1. Whether a state statute violates the Supremacy

Clause of the United States Constitution when it invali-

dates arbitration agreements involving interstate com-

merce that are “valid, irrevocable, and enforceable” un-

der the terms of the Federal Arbitration Act.

2. Whether the federally protected right of arbitration

under the Federal Arbitration Act is unlawfully impaired

when a state court superimposes judicial class action pro-

cedures (including court-supervised discovery, briefing,

certification, notice and opt-out procedures, mandatory

preparation of transcripts, and ongoing judicial control)

on a private arbitration of a commercial dispute involving

interstate commerce.

(i)

PARTIES BELOW

This appeal involves eight cases that were consolidated

in the court below.* Plaintiffs, who are former franchised

operators of 7-Eleven® convenience stores in the State

of California, are Richard and Darla Keating, Edward

and Betty Gouveia, Harry Battersby, Patrick and Cathy

Cheng, Michael and Gloria Coy, Phillip and Joan Newell,

Thomas and Wanda Sampson, and Arthur and Jenny

Scovis. Some of the plaintiffs purport to represent a

class consisting of all current and former 7-Eleven fran-

chisees in California.

Defendants are The Southland Corporation, which owns

the 7-Eleven® service mark, and several of its current

and former officers, directors and employees: John P.

Thompson, Jere W. Thompson, Walton Grayson, III,

Joseph S. Hardin, R. G. Smith, Eugene Pender, S. R.

Dole, Terry De Bard, Gene Janssen, Curtis Pare, Ray

Berry, Paul Stevenson, Michael Wildman, Robert John-

son, Ernest Arzabal, Michael Drury, Keith Jenkins,

Robert Duncan, Fred Elwood, Joseph Galea, Dave Pava,

Tal Colson and Douglas Porter.

Defendant The Southland Corporation has no parent

corporation, subsidiaries (except wholly owned subsidi-

aries), or affiliates.

* One additional case, Garza v. Southland, was originally consoli-

dated with the others but has since been settled.

TABLE OF CONTENTS

QUESTIONS PRESENTED DPD ————

. ——

TABLE OF AUTHORITIES . —————

9 ů —— —

— : sinatressannsnessscssmansenenspssnsenssenenssenenasenenmonssees

CONSTITUTIONAL PROVISIONS AND STATUTES

INVOLVED

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

ARGUMENT

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ee ee eee ee eee eee ee eee eee ee ee ee eee

I. THE COURT HAS JURISDICTION OVER

— —— — —„—

II.

The Decision of the California Supreme

Court Constitutes a Reviewable Final De-

17G

1. The Ruling on the Nonarbitrability of

Claims Under the California Franchise

Investment Law Is Final

The Issues Presented in This Appeal Were

Raised and Litigated in the California

THE FEDERAL ARBITRATION ACT SUPER-

SEDES THE ANTI-ARBITRATION POLICY

OF THE CALIFORNIA FRANCHISE IN-

VESTMENT LAW

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TABLE OF CONTENTS—Continued

III. CLASS ACTIONS ARE INCONSISTENT

WITH ARBITRATION UNDER THE FED-

ERAL ARBITRATION ACT

A. The Essence of Arbitration Is Its Avoid-

ance of Judicial Procedures; Class Actions

Require Active Judicial Involvement

B. A Class Action Arbitration Would Violate

the Federal Arbitration Act by Destroying

the Parties’ Agreement To Arbitrate

— ———̃ —-—-— — 0

Page

TABLE OF AUTHORITIES

CASES Page

Abney v. United States, 431 U.S. 651 (1977)........ 13, 16

Alabama v. Blue Bird Body Co., 573 F.2d 309 (5th

D A XX. 35

Allison v. Medicab International, Inc., 92 Wash.

I 28

American Airlines, Inc. v. Louisville & Jefferson

County Air Board, 269 F.2d 811 (6th Cir.

ES aS eee ee eee Ee ee 24

American Almond Products Co. v. Consolidated

Pecan Sales Co., 144 F.2d 448 (2d Cir. 1944) 34

American Motorists Insurance Co. v. Starnes, 425

, ̃ . ( 17

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

F. Supp. 75 (E.D. Wis. 1982) 28

Baltimore Contractors, Inc. v. Bodinger, 348 U.S.

1 —— . lM aaniinaaisaaitinds 12

Bandini Petroleum Co. v. Superior Court, 284 U.S.

a eee 18

Barron v. Tastee Freez International, Inc., 482

F. Supp. 1213 (E.D. Wis. 1980) .......................... 28

Belcher v. Bassett Furniture Industries, Inc., 588

fF RC Cereere rene 35

Bernhardt v. Polygraphic Co. of America, 350 U.S.

Ic 33

Cavanaugh v. McDonnell & Co., 357 Mass. 452, 258

Fr xx 34

Chicago & N. W. Transp. Co. v. Kalo Brick & Tile

N ee 26

Cohen v. Beneficial Industrial Loan Corp., 337

Nee... 9, 13, 15

Collins Radio Co. v. Ex-Cell-O Corp., 467 F. 2d 995

G... 24

Colorado Anti- Discrimination Commission v. Con-

tinental Air Lines, Inc., 372 U.S. 714 (1963) 26

Commonwealth Edison Co. v. Gulf Oil Corp., 541

io Pf Of YY A 25

Coopers & Lybrand v. Livesay, 437 U.S. 463

a ae 13, 35, 36

TABLE OF AUTHORITIES—Continued

Page

Coz Broadcasting Corp. v. Cohn, 420 U.S. 469

Fr passim

Davies v. Krasna, 14 Cal. 3d 502, 121 Cal. Rptr.

705, 535 P.2d 1161 (1975) 14

De Sapio v. Kohlmeyer, 35 N. v. 2d 402. 362 N. v. 8.

2d 843, 321 N. E. 2d 770 (197õ)y)))/7̃ 34, 41

Dickinson v. Heinold Securities, Inc., 661 F.2d 638

r EER ER Ua nU DN aN 40

EEOC v. Korn Industries, Inc., 662 F.2d 256 (4th

Cir. 1981) ..... . 36

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974). 12, 35

Firestone Tire & Rubber Co. v. Risjord, 449 U.S.

I, i eal 13, 15

Fisher v. District Court, 424 U.S. 382 (1976) 18

General Telephone Co. v. Falcon, 457 U.S. 147, 102

r acceler 35, 36

Gillespie v. United States Steel Corp., 379 U.S.

r —0%õ CLP... 12

Gonzales v. Cassidy, 474 F. 2d 67 (5th Cir. 1973). 34, 36

Goodall-Sanford, Inc. v. United Textile Workers,

e renee 12

Greenfield v. Villager Industries, Inc., 483 F.2d

r apres ae ER PE ET Te 37

Grunin v. International House of Pancakes, 513

F.2d 114 (8th Cir.), cert. denied, 423 U.S. 864

r eee 37

Guerine Vv. J & W Investment, Inc., 544 F.2d 863

n 36

Gulf Oil Co. v. Bernard, 452 U.S. 89 (19817 36, 40

Hansberry v. Lee, 311 U.S. 32 (1940) 34

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, 450 N.Y.S.2d 482, 435 N.E.2d 1097

% A inane bce iiacesaea cadet a 38, 39

Harris v. Washington, 404 U.S. 55 (19717 16

Helstoski v. Meanor, 442 U.S. 500 (19799 16

Hines v. Davidowitz, 312 U.S. 52 (19417) 26

H. L. v. Matheson, 450 U.S. 398 (1981777 34, 36

vii

TABLE OF AUTHORITIES—Continued

Hudson Distributors, Inc. v. Eli Lilly & Co., 377

ENE UE S Seer

In re Fine Paper Antitrust Litigation, 617 F.2d

e artis

In re General Motors Corp. Engine Interchange

Litigation, 594 F.2d 1106 (7th Cir.), cert. de-

nied, 444 U.S. 870 (19799)

In re Griffiths, 413 U.S. 717 (1978) ............-.....2--+.

In re Transit Co. Tire Antitrust Litigation, 67

I BIND grictnrenennscesenmnensesinessoss

Indiana ex rel. Anderson v. Brand, 308 U.S. 95

TK-

Ingbar v. Drexel Burnham Lambert Inc., 683 F.2d

ö aac sca seen

International Brotherhood of Teamsters v. United

A en

King Mfg. Co. v. City Council, 277 US. 100

La Pietra v. Freed, 87 Cal. App. 3d 1025, 151 Cal.

rr.

Lathrop v. Donohue, 367 U.S. 820 (19617

Local No. 438 Construction & General Laborers’

Union v. Curry, 371 U.S. 542 (19683

Mandujano v. Basic Vegetable Products, Inc., 541

e ce

Maryland v. Louisiana, 451 U.S. 725 (19817

Mathews v. Eldridge, 424 U.S. 319 (197)

Mayer v. City of Chicago, 404 U.S. 189 (1971)......

Medical Development Corp. v. Industrial Molding

Corp., 479 F.2d 345 (10th Cir. 1973)

Mercantile National Bank v. Langdeau, 371 U.S.

/ ae

Merrill Lynch Pierce Fenner & Smith Inc. v.

Melamed, 405 So. 2d 790 (Fla. Dist. Ct. App.

% pee ae: Be Renner a co OS

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

Ware, 414 U.S. 117 (1973)

Miami Herald Publishing Co. v. Tornillo, 418 U. 8.

111?K—L—L— —

Page

13. 27

viii

TABLE OF AUTHORITIES—Continued

Page

Middle East Transcontinental, Inc. v. Onion Crock,

Inc., 144 Mich. App. 57 (1982))))) 27

Mills v. Alabama, 384 U.S. 214 (1966) 18, 20

Morrissey v. City and County of San Francisco,

75 Cal. App. 3d 903, 142 Cal. Rptr. 527 (1977),

hearing denied (Cal. Sup. Ct. 1978) ))) 17

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 51 U.S.L.W. 4156 (U.S. Feb.

141 passim

National Ass’n of Regional Medical Programs,

Inc. v. Mathews, 551 F.2d 340 (D.C. Cir. 1976),

cert. denied, 431 U.S. 954 (1977) ........................ 35

National Socialist Party of America v. Village of

eee 13

New York ex rel. Bryant v. Zimmerman, 278 U.S.

ccc 22

North Dakota State Board of Pharmacy v. Snyder's

Drug Stores, Inc., 414 U.S. 156 (1973 17

Officers for Justice v. Civil Service Commission,

688 F.2d 615 (9th Cir. 1982) 37

Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340

N 35

Orr v. Orr, 440 U.S. 268 (1979999: 22

Perez v. Campbell, 402 U.S. 637 (19717 — 26

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

, ea eilin 19, 34

PruneYard Shopping Center v. Robins, 447 U.S.

D/ OR ork eee Sencenenee 22

Rescue Army V. Municipal Court, 331 U.S. 549

/ / So a RR 18

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

strument Co., 7 Kan. App. 2d 363, 642 P.2d 127

——— disci aiasinielamiiailiis 28

Robertson v. National Basketball Ass’n, 556 F.2d

1 34

Romnes v. Bache & Co., 439 F. Supp. 833 (W. D.

r ee 27

Sam Fox Publishing Co. v. United States, 366 U.S.

. ?ͤü»—ꝛ̃ 34

TABLE OF AUTHORITIES—Continued

Page

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

Shanferoke Coal & Supply Corp. v. Westchester

Service Corp., 293 U.S. 449 (1935))))) 12,13

Social Services Union, Local 585 v. County of

Santa Clara, 609 F.2d 944 (9th Cir. 1979)........ 36

Sommers v. Abraham Lincoln Federal Savings &

Loan Ass’n, 66 F.R.D. 581 (E.D. Pa. 1975) 35

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

598 F.2d 186 (4th Cir. 1979) ................................ 25

Susman v. Lincoln American Corp., 561 F.2d 86

, .. —— 35

United States v. MacDonald, 435 U.S. 850 (1978) 16

United Steelworkers v. Enterprise Wheel & Car

Corp., 968 U.S. GOB (1000 33

University Life Ins. Co. of America v. Unimare

Ltd., 1982-83 (CCH) Trade Cas. 65,139 (7th

r ay So SNARES ES EUR 13

Wilko v. Swan, 346 U.S. 427 (1953) 15, 27

Williams v. Bruffy, 96 U.S. 176 (1877) 23

World Brilliance Corp. v. Bethlehem Steel Co., 342

I ic caeriati 24

CONSTITUTIONAL PROVISIONS

Supremacy Clause of the United States Constitu-

I eel passim

STATUTES

Cal. Code Civ. Proc. § 906 (West 1980) 000000000... 17,18

Cal. Code Civ. Proc. § 1064 (West 1980) 18

Cal. Code Civ. Proc. § 1110 (West 19800) 18

Cal. Code Civ. Proc. § 1294 (a) (West 1982) 6,17

California Franchise Investment Law, Cal. Corp.

Code §§ 31000-31516 (West 1977 & 1982

SES =. passim

Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1976) ..passim

11K Ee passim

28 U.S.C. § 1282 (a) (17600) ———— 13

TABLE OF AUTHORITIES—Continued

Pub. L. No. 97-247, Sec. 17 (b), 96 Stat. 322 (1982)

(to be codified at 35 U.S.C. § 293)

Pub. L. No. 96-190, 94 Stat. 17 (1980) (codified

at 28 U.S.C. app. §§ 1-10 (Supp. V 1981) ) ..........

RULES

III

III ccccccceccncctcccttsesitinnaisinintaniiiin

II Qa

LEGISLATIVE MATERIALS

Arbitration of Interstate Commercial Disputes:

Joint Hearings on S. 1005 and H.R. 646 Before

the Subcomms. of the Comms. on the Judiciary,

68th Cong., Ist Sess. (192)))))ʒůõ⸗

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

S. Rep. No. 536, 68th Cong., Ist Sess. (1924)

H.R. Rep. No. 1654 (Part 1), 95th Cong., 2d Sess.

H.R. Rep. No. 542, 97th Cong., 2d Sess. (1982),

reprinted in 1982 U.S. Code Cong. & Ad. News

—U—A see

MISCELLANEOUS

Administrative Office of the United States Courts,

1980 Annual Report of the Director (1980)........

Administrative Office of the United States Courts,

1981 Annual Report of the Director (prelim. ed.

| RR ee SESE ee

Administrative Office of the United States Courts,

1982 Annual Report of the Director (prelim. ed.

1091... TQ—2— Q

American Arbitration Association, Commercial

Arbitration Rules (1982)

Burger, Isn't There a Better Way, 68 A. B. A. J. 274

M. Domke, The Law & Practice of Commercial

Arbitration (1988)))))J) :

Page

SEs

TABLE OF AUTHORITIES—Continued

Dyk, Appealability of Interlocutory Orders En-

joining or Refusing to Enjoin Commercial Ar-

bit ration, 69 Ky. L. J. 827 (1980-81)

Judicial Conference for the District of Columbia

Circuit, 89 F. R. D. 169 (1980)0)

Kirkham, Problems of Complex Civil Litigation,

, .

Note, Restraining Effects of the Final Judgment

Rule on the Arbitration Process, 66 Vale L. J.

F .

Note, Interlocutory Appeal of Orders Granting or

Denying Stays of Arbitration, 80 Mich. L. Rev.

r 71!

Rehnquist, A Jurist’s View of Arbitration, 32 Arb.

EE 7.

Report of the Pound Conference Follow-Up Task

Force, 74 F. R. D. 159 (1970)

A. Widiss, Arbitration: Commercial Disputes, In-

surance, & Tort Claims (PLI 19799

7A C. Wright & A. Miller, Federal Practice & Pro-

cedure §§ 1791, 1798 (197)

Page

13, 14

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

No. 82-500

THE SOUTHLAND CORPORATION, et al.,

Appellants,

RICHARD D. KEATING, et al.,

Appellees.

On Appeal from the Supreme Court of California

BRIEF OF APPELLANTS

Appellants, The Southland Corporation and several of

its current and former officers, directors and employees

(hereinafter collectively referred to as Southland“, ap-

peal from a decision of the Supreme Court of California.

Supreme Court are reported at 31 Cal. 3d 584, 183 Cal.

Rptr. 360, 645 P.2d 1192 (1982), and are reprinted in

the

(1980), and is reprinted at J.S. App. 47a-70a. The

orders of the Superior Court of Alameda County (J.S.

App. 7la-80a) are unreported.

JURISDICTION

The judgment of the Supreme Court of California was

entered on June 10, 1982, and a timely notice of appeal

was filed by Southland. (J.S. App. 83a-84a.) After re-

ceiving an extension of time to docket its appeal (J.S.

App. 85a), Southland filed its Jurisdictional Statement

on September 22, 1982 pursuant to 28 U.S.C. 1257 (2

On January 10, 1983 the Court ordered that “[f]urther

consideration of the question of jurisdiction is postponed

to the hearing of the case on the merits.” 103 S. Ct. 721

(1983). (Joint Appendix at 36 [hereinafter J. A.“ J.)

The grounds upon which this Court’s jurisdiction is in-

voked are discussed in greater detail at pages 11-23,

below.

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

The following constitutional and statutory provisions

are involved in this appeal:

28 U.S.C. § 1257 (1976). State courts; appeal; certiorari

Final judgments or decrees rendered by the high-

est court of a State in which a decision could be had,

vee be reviewed by the Supreme Court as follows:

(2) ** appeal, where is drawn in question the

validity of a statute of any state on the ground

of its being repugnant to the Constitution, trea-

ties or laws of the United States, and the deci-

sion is in favor of its validity.

US. Const. art. VI, cl. 2 (the Supremacy Clause)

This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

. Shall be the supreme Law of the Land; and the

Judges in every State shall be bound thereby, any

Thing in the Constitution or Laws of any State to the

Contrary notwithstanding.

Section 2 of the Federal Arbitration Act (9 U.S.C. §2

(1976) )

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusal to perform the whole or any part thereof, or

an agreement in writing to submit to arbitration an

existing controversy arising out of such a contract,

transaction, or refusal, shall be valid, irrevocable,

and enforceable, save upon such grounds as exist at

law or in equity for the revocation of any contract.

California Franchise Investment Law, Cal. Corp. Code

31512 (West 1977)

Any condition, stipulation or provision purporting

to bind any person acquiring any franchise to waive

compliance with any provision of this law or any

rule or order hereunder is void.

STATEMENT OF THE CASE

This appeal concerns a decision of the California Su-

preme Court, holding that the California legislature is

free to carve out exceptions to the Federal Arbitration

Act, 9 U.S.C. §§ 1-14 (1976). This appeal also challenges

the California Supreme Court’s decision that a party to

an arbitration agreement governed by the Federal Arbi-

tration Act is entitled to petition a court to direct his

arbitration claim to proceed on a “class action” basis.

The court rejected Southland’s argument that the state

statute and class action procedures are inconsistent with

the goals and procedures of arbitration under the Federal

Arbitration Act, and therefore are preempted by the fed-

eral law.

The litigation began in May 1977 with the filing of an

action by Richard and Darla Keating in the Superior

Court for Santa Clara County, California. Plaintiffs were

franchised operators of a 7-Eleven® convenience store.

They alleged that their franchisor, Southland, had utilized

an accounting system in preparing financial statements

for their store that was unfair and inaccurate, and that

representatives of Southland had made certain fraudulent

representations concerning the accounting systeru. South-

land’s conduct was alleged to give rise to several related

causes of action, including common law fraud, breach of

contract, breach of fiduciary duty, and a violation of the

California Franchise Investment Law.' Plaintiffs pur-

ported to represent a class of all current and former

7-Eleven franchisees in California.“ Thereafter, several

other 7-Eleven franchisees who had previously filed law-

suits against Southland in various California state courts

amended their complaints to conform to the allegations

in Keating, and they successfully petitioned the state

Judicial Council to coordinate all of the cases in one trial

court.

Southland filed a motion to compel arbitration in Keat-

ing pursuant to an arbitration clause in the franchise

agreement, which provided that the parties would arbi-

trate “any controversy or claim arising out of or relating

The California Franchise Investment Law requires franchisors

to make certain disclosures to prospective franchisees, and prohibits

franchisors from making fraudulent or misleading statements to

those prospective franchisees. Cal. Corp. Code §§ 31000-31516 (West

1977 & 1982 Supp.). In essence, it establishes a specific statutory

cause of action for certain fraudulent conduct. Plaintiffs’ claim

under this statute is based on the same facts as, and is largely

duplicative of, plaintiffs’ various common law causes of action.

2 Plaintiffs’ original complaint alleged a class consisting of all

current and former 7-Eleven franchisees in the United States, but

the scope of the purported class was narrowed to California fran-

chisees in an amended complaint filed in January 1978. Plaintiffs

alleged that there were in excess of 800 persons in this amended

“class.” (J.A. at 15.)

to this Agreement or the breach hereof . . . in accord-

ance with the Rules of the American Arbitration Associa-

tion.. Southland promptly filed similar motions in

the other consolidated cases after piaintiffs in those ac-

tions amended their pleadings to assert the complex

accounting issues that had been raised in the Keating

complaint.“

Plaintiffs in each case resisted arbitration on a variety

of grounds. Among their contentions was that claims

based on the California Franchise Investment Law are

nonarbitrable by virtue of a statutory provision that

renders void any contract clause requiring a franchisee

to “waive” his rights under that law. Cal. Corp. Code

31512 (West 1977) (reprinted supra at p. 3.) As a

fallback position, plaintiffs suggested that if their claims

were arbitrable, the court should create a procedure

whereby the arbitration would be conducted as a class

action.

The Superior Court held that plaintiffs were required

to arbitrate their claims of common law fraud, breach of

contract and breach of fiduciary duty, but not their claims

under the Franchise Investment Law. (See J.S. App.

7Za, 74a, 79a.)* The court did not reach the issue

whether the arbitration should proceed as a class action.

The original pleadings in the cases filed prior to Keating had

primarily alleged oral misrepresentations by various employees of

Southland concerning the prospective sales, profitability, etc. of the

plaintiffs’ stores. The California Supreme Court noted that the

amended complaints substantially changed the focus of plaintiffs’

claims, and it rejected plaintiffs’ contention that Southland had

waived its right to demand arbitration in these cases. (J.S. App.

21a-22a.

Plaintiffs in all of the coordinated cases were represented by the

same attorneys. However, rather than joining in the purported

class action in Keating, several of the plaintiffs chose to continue

the prosecution of their own cases.

*The Superior Court’s orders did not explain the reasons for

denying arbitration of the Franchise Investment Law claims.

Southland appealed from the court’s refusal to compel

arbitration of the Franchise Investment Law claims. The

franchisees, in turn, filed a petition for a writ of man-

damus or prohibition in which they argued, inter alia,

that the arbitration should proceed as a class action.

(See J.S. App. 48a.)

The California Court of Appeal rejected plaintiffs’

argument that the Franchise Investment Law invalidates

arbitration agreements. (J.S. App. 66a-68a.) It further

concluded that if the statute were interpreted to contain

such a provision, it would be invalid with respect to con-

tracts involving interstate commerce because the Federal

Arbitration Act provides that such arbitration agree-

ments are “valid, irrevocable, and enforceable.” (J.S.

App. 68a-70a.) The court therefore held that the Fran-

chise Investment Law claims were arbitrable along with

the remainder of plaintiffs’ causes of action. (J.S. App.

70a.) The Court of Appeals also ruled, however, that

there was no “insurmountable obstacle” to conducting an

arbitration on a classwide basis (J.S. App. 63a), and it

However, the trial judge later explained on the record (i) that in his

view, the arbitration clause in the 7-Eleven franchise agreement

was not broad enough to include these claims, and (ii) that he

therefore had not reached plaintiffs’ argument that Franchise In-

vestment Law claims were nonarbitrable. Transcript of Hearing of

July 19, 1978, at 20-24, Market Franchise Cases, Cal. Jud. Council

Coord. No. 387 (Cal. Super. Ct., Alameda Co.), reprinted in Re-

porter’s Transcript on Appeal to California Court of Appeal 86,

105-09. The Superior Court’s narrow construction of the contract

was reversed by the California Court of Appeal (J.S. App. 65a-

66a), and that ruling was not disturbed by the California Supreme

Court.

5 Under California law, a court’s refusal to compel arbitration is

treated as an appealable order, see Cal. Code Civ. Proc. § 1294(a)

(West 1982), but an order compelling arbitration is nonappealable

and is subject to immediate review only by a writ of prohibition

or mandamus. Z. g., La Pietra v. Freed, 87 Cal. App. 3d 1025,

1030-31, 151 Cal. Rptr. 554, 557 (1978).

issued a writ of mandate directing the trial court to

conduct class certification proceedings. (J.S. App. 64a.)

The California Supreme Court, by a divided vote of

4-2, reversed the Court of Appeal’s ruling that claims

asserted under the California Franchise Investment Law

are arbitrable. It concluded that the California legisla-

ture intended to render arbitration agreements unenforce-

able with respect to claims based on that statute, and it

held further that anti-arbitration statutes of this kind

do not contravene the federal substantive law embodied

in the Federal Arbitration Act. (J.S. App. 8a-18a.)

The California Supreme Court, again by a 4-2 major-

ity, affirmed the Court of Appeal’s ruling on the avail-

ability of a class action arbitration procedure. (J.S. App.

23a-30a.) Although it acknowledged that the Federal

Arbitration Act was applicable and controlling (J.S. App.

4a-5a), the court based its decision on a California pub-

lie policy favoring class actions. Consequently, the court

held that a class action arbitration could be imposed upon

the parties without their mutual consent.

The majority did not directly address Southland’s argu-

ment that a class action would be fundamentally incon-

sistent with arbitration, which is intended to be a simple,

quick, inexpensive and nonjudicial procedure. The court

acknowledged, however, that “[w]ithout doubt a judicially

ordered classwide arbitration would entail a greater de-

gree of judicial involvement than is normally associated

with arbitration,” including initial class certification and

“a measure” of ongoing judicial supervision “in order to

safeguard the rights of absent class members to adequate

representation and in the event of dismissal or settle-

ment.” (J.S. App. 28a-29a.) The court contemplated

that the trial court would authorize discovery and brief-

ing on the class action issue; determine whether a class

action was appropriate; supervise any notice and opt-out

procedures; oversee the arbitration proceedings them-

selves to ensure that the interests of the class were being

adequately represented by the named claimants and ade-

quately protected by the arbitrators; and review any

dismissal or settlement. (See J.S. App. 29a.) The major-

ity also acknowledged that the trial court would have to

exercise [a] good deal of care, and ingenuity” in order

to supervise the arbitration proceedings in these ways

while avoid ing] judicial intrusion upon the merits” and

“minimiz(ing] complexity, costs, or delay.” (J.S. App.

29a.)

The dissenting justices (Richardson and Mosk, J.J.)

disagreed with the majority on both issues. (J.S. App.

30a-45a.) First, with respect to the California Franchise

Investment Law question, they referred to the long line

of authority establishing that the Federal Arbitration Act

creates a body of federal substantive law that supersedes

any state policies seeking to invalidate arbitration agree-

ments involving interstate commerce. (J.S. App. 32a-

34a.) They disagreed with the majority’s view that the

states are free to carve out exceptions to the federal stat-

ute. (J.S. App. 37a.) Second, the dissenting justices

rejected the propriety of a class action arbitration, con-

cluding that it would be “fundamentally contrary to the

purpose of arbitration and to the public policy encourag-

ing arbitration.” (J.S. App. 44a.) They noted the ab-

sence of statutory or precedential authority for the pro-

cedure; catalogued ways in which courts inevitably would

supervise, review and interfere with arbitrators’ actions;

and then concluded that the majority’s newly-fashioned

procedure “would tend to make arbitration inefficient in-

stead of efficient, lengthy instead of expeditious, and pro-

cedural instead of informal.” (J.S. App. 41a.)

SUMMARY OF ARGUMENT

I. The Court has jurisdiction over this case pursuant

to 28 U.S.C. § 1257(2) because the decision of the Cali-

fornia Supreme Court constitutes a “final judgment”

regarding the validity of a state statute and procedures

that were “drawn into question” in the court below.

A. Under the principles established by this Court in

cases such as Cohen v. Beneficial Industrial Loan Corp.,

337 U.S. 541 (1949), and Cox Broadcasting Corp. v.

Cohn, 420 U.S. 469 (1975), the decision of the court

below is “final,” notwithstanding the fact that the Cali-

fornia court directed judicial proceedings to continue in

the trial court, because the decision deals with issues that

(i) have been finally adjudicated by the state court, (ii)

are collateral to the merits, (iii) are novel and important,

and (iv) cannot meaningfully be reviewed after the pro-

posed judicial proceedings have run their course. Appel-

lants’ right to avoid the delays and costs of litigation in

the courts must be determined now, or it will effectively

be lost forever. Additional factors favoring prompt ap-

pellate review are the facts (v) that the decision of the

California court would erode the strong public policy

favoring arbitration under the Federal Arbitration Act,

and (vi) that reversal by this Court of the California

court’s decision would terminate the court proceedings so

that the parties could proceed immediately to resolve their

disputes in a nonjudicial forum.

Furthermore, one of the two questions presented (the

class action arbitration issue) was adjudicated in a sepa-

rate proceeding brought by the appellees for a writ of

mandamus or prohibition. The final disposition of that

separate proceeding is an appealable final judgment.

B. The issues raised by this appeal were presented to,

and were ruled upon, by the California Supreme Court.

Appellees’ claim that appellants failed to litigate one of

the two issues (the class action issue) is erroneous.

II. Under the terms of the Federal Arbitration Act,

agreements to arbitrate commercial disputes involving

interstate commerce are “valid, irrevocable, and enforce-

able.” 9 U.S.C. §2. The Act provides that an interstate

arbitration agreement can only be struck down on the

basis of general contract principles that apply to all con-

tracts (e.g., duress, lack of legal capacity). The Act

creates “a body of federal substantive law of arbitra-

bility” that favors arbitration agreements, “notwithstand-

ing any state substantive or procedural policies to the

contrary.” Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 51 U.S.L.W. 4156, 4162 (U.S. Feb.

23, 1983). Thus, the Supremacy Clause of the United

States Constitution preempts state statutes that purport

to invalidate agreements that are made “valid, irrevoca-

ble, and enforceable” by the Federal Arbitration Act.

The California Franchise Investment Law attempts to

block the enforcement of arbitration agreements. This

anti-arbitration provision applies regardless of whether

the arbitration agreement was willingly executed by per-

sons having legal capacity, and regardless of whether the

agreement provides for a fair and impartial] resolution of

the parties’ dispute. The case at bar involves a contract

in interstate commerce. Accordingly, under the Supremacy

Clause, the California statute must give way to the strong

federal policy favoring arbitration.

III. The California Supreme Court has improperly

attempted to superimpose judicial class action procedures

onto private arbitrations of commercial disputes under

the Federal Arbitration Act. The mechanism created by

the court below would be enormously complex, expensive

and time-consuming, and would be conducted by a court

from start to finish. The state court’s unprecedented pro-

cedure is fundamentally at odds with the purposes and

procedures of arbitration, which is intended to be simple,

economical, quick and, most importantly, nonjudicial. Ac-

cordingly, as applied to interstate contracts, the decision

of the California Supreme Court is an improper, destruc-

tive interference with a federally protected right, and

should be invalidated by this Court.

ARGUMENT

I. THE COURT HAS JURISDICTION OVER THIS

CASE

This Court has jurisdiction pursuant to 28 U.S.C.

§ 1257(2) (1976), which confers appellate jurisdiction

over final judgments or decrees rendered by the highest

court of a state where the validity of a state statute is

drawn into question on the ground of its being repugnant

to federal law and the state court has upheld the chal-

lenged statute. In the case at bar, Southland drew into

question the validity of the California Franchise Invest-

ment Law and class action rules as applied to arbitration

proceedings governed by the Federal Arbitration Act.

The California Supreme Court’s decision regarding these

issues constitutes a “final judgment or decree” within the

meaning of Section 1257(2).

A. The Decision of the California Supreme Court

Constitutes a Reviewable Final Decision

1. The Ruling on the Nonarbitrability of Claims

Under the California Franchise Investment Law

Is Final

The highest court of California has held that arbitra-

tion agreements are unenforceable with respect to claims

asserted under the state’s Franchise Investment Law.

This ruling is not subject to further review in the state

courts, and it does not leave any discretion to the trial

judge to honor Southland’s demand for arbitration.

The California Supreme Court’s ruling does not termi-

4156, 4161 (U.S. Feb. 23, 1983). Thus, an appeal to this

Court after the completion of years of further judicial

proceedings could never restore the benefits of arbitration

or the protection of the federal statute. If there is to be

a meaningful appeal, it must occur now.

“Finality” does not depend on whether the judicial

proceedings in the trial court are at an end. See Hudson

Distributors, Inc. v. Eli Lilly & Co., 377 U.S. 386, 389

n.4 (1964). Rather, determinations of finality are based

on a balancing of “ ‘the inconvenience and costs of piece-

meal review on the one hand and the danger of denying

justice by delay on the other.“ Eisen v. Carlisle &

Jacquelin, 417 U.S. 156, 171 (1974) (citation omitted).

The Court thus employs an “intensely ‘practical’ approach

. . . When applying the finality requirements of. . 28

U.S.C. § 1257.” Mathews v. Eldridge, 424 U.S. 319, 331

n.11 (1976) (citations omitted). See also Gillespie v.

United States Steel Corp., 379 U.S. 148, 152-54 (1964).

This Court has ruled that an order denying a stay of

judicial proceedings pending arbitration should not rou-

tinely be treated as an appealable final judgment.“ The

Court has also recognized, however, that decisions regard-

ing arbitrability constitute final judgments in some cir-

cumstances,’ and that an immediate appeal is appropriate

if a decision meets the standards for reviewing a col-

lateral or separable order.“

* See Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 179

(1955); Shanferoke Coal & Supply Corp. v. Westchester Service

Corp., 293 U.S. 449, 451 (1935).

' Goodall-Sanford, Inc. v. United Textile Workers, 353 U.S. 550,

551-52 (1957).

* See Baltimore Contractors, Inc. v. Bodinger, 348 U.S. at 179 n.4.

The California court’s decree in the case at bar falls

within the well-recognized line of cases, epitomized by

Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541

(1949), and Cox Broadcasting Corp. v. Cohn, 420 U.S.

469 (1975), in which certain separate and collateral deci-

sions are treated as final judgments even though addi-

tional proceedings are anticipated in the courts. Cohen

permits review of a decision which “finally determines

claims of right separable from, and collateral to, rights

asserted in the action, too important to be denied review

and too independent of the cause itself to require that

appellate consideration be deferred until the whole case

is adjudicated.” *° Cox holds that a ruling by a state court

on a federal issue should be immediately appealable,

despite the expectation of additional state court proceed-

ings, if (i) the federal issue has been finally decided in

interlocutory appellate review is often available under 28 U.S.C.

§ 1292(a)(1) (1976). See, e.g., Shanferoke Coal & Supply Corp. v.

Westchester Service Corp., 293 U.S. at 451-52; Ingbar v. Drerel

Burnham Lambert Inc., 683 F.2d 603, 604 (Ist Cir. 1982). Second,

if one party files a lawsuit and the other party seeks to enforce the

arbitration agreement by filing a separate judicial action to compel

arbitration, the trial court’s decision in that separate action is ap-

pealable. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr.

Corp., 51 U.S.L.W. at 4157-59; University Life Ins. Co. of America

v. Unimare Ltd., 1982-83 (CCH) Trade Cas. © 65,139, at 71,459-61

(7th Cir. 1983).

For a general discussion of the principles applicable to appeals

from decisions regarding arbitrability, see Note, Interlocutory Ap-

peal of Orders Granting or Denying Stays of Arbitration, 80 Mich.

L. Rev. 153 (1981); Dyk, Appealability of Interlocutory Orders

Enjoining or Refusing to Enjoin Commercial Arbitration, 69 Ky.

L.J. 827 (1980-81); Note, Restraining Effects of the Final Judg-

ment Rule on the Arbitration Process, 66 Yale L.J. 293 (1956).

337 U.S. at 546-47. The Court has restated this rule on numer-

ous occasions. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury

Constr. Corp., 51 U.S.L.W. at 4158; Firestone Tire & Rubber Co. v.

Risjord, 449 U.S. 368, 374-75 (1981); Coopers & Lybrand v. Live-

say, 437 U.S. 463, 468 & n.10 (1978); Abney v. United States, 431

U.S. 651, 658-59 (1977). See also National Socialist Party of

America v. Village of Skokie, 432 U.S. 43, 44 (1977) (per curiam).

the state courts, (ii) reversal of the state court decision

would be preclusive of further litigation on the relevant

cause of action rather than merely controlling the nature

of the state proceedings, and (iii) refusal to review im-

mediately the state court decision might seriously erode

federal policy. 420 U.S. at 482-83.“

The California court’s resolution of the California

Franchise Investment Law issue satisfies these stand-

ards."' The court’s decision conclusively determined the

disputed question; is the state court’s final word on the

matter; will control future litigation; and cannot be

relitigated.** The issue is also completely separate from

the merits of the action. As recognized by the California

court, the “issues before [it did] not concern the merits

of those disputes, but rather the forum and procedure

for their resolution.” (J.S. App. 2a.) In addition, re-

versal by this Court of the state court’s decision would

terminate the pending judicial litigation, and the parties

could then proceed quickly to arbitration. See Cox Broad-

casting Corp. v. Cohn, 420 U.S. at 482-83.

0 The decisions cited in note 6, supra, largely predate the devel-

opment of these doctrines. Several commentators have suggested

that, in view of the strong public policy favoring arbitration, or-

ders denying arbitration should be appealable in all instances. See,

e. ., Notes, supra note 8; Dyk, supra note 8. However, irrespective

of whether refusals to enforce arbitration agreements should al-

ways be treated as final orders, the decision of the California Su-

preme Court in this case is appealable for the reasons stated herein.

1 Appellees have not challenged the finality of this issue for

purposes of appellate review by this Court. See Appellees’ Motion

to Dismiss, Nov. 23, 1982, at 5-7.

12 See, e.g., Davies v. Krasna, 14 Cal. 3d 502, 507, 121 Cal. Rptr.

705, 708, 535 P.2d 1161, 1164 (1975) (law of the case must be

adhered to in subsequent proceedings and a matter adjudicated on

a prior appeal will not be relitigated on a subsequent appeal in the

same case).

Moreover, if review is postponed until the end of the

litigation, “it will be too late effectively to review the

present order and the rights conferred by the statute...

will have been lost, probably irreparably.” Cohen v.

Beneficial Industrial Loan Corp., 337 U.S. at 546.“ Given

the fact that time-consuming judicial proceedings are the

very thing that the parties sought to avoid by agreeing

to arbitrate, an appeal after the conclusion of protracted

judicial litigation would be only an empty gesture. In-

deed, this Court has recently held that in view of the

federal statutory policy of “rapid and unobstructed en-

forcement of arbitration agreements,” Moses H. Cone

Mem. Hosp. v. Mercury Constr. Corp., 51 U.S.L.W. at

4161, the mere deferral by a trial court of a decision on a

motion to compel arbitration can satisfy the Cohen doc-

trine. Id. at 4158-59. A fortiori, the doctrine is satisfied

where, as here, the protection of the federal statute has

been conclusively denied by the highest court of the state,

and several more years of judicial proceedings are accord-

ingly in the offing.

The standards of Cohen and Cox are particularly ap-

plicable here because the issues presented are “too im-

portant to be denied review.” Cohen v. Beneficial Indus-

trial Loan Corp., 337 U.S. at 546. See Wilko v. Swan,

346 U.S. 427, 430 (1953). This is not a case in which the

state court has simply interpreted the agreement of the

parties or determined that the right to demand arbitra-

tion was waived in a particular case. The issues here

are much broader—namely, the power of the states to

enact categories of “exceptions” to the Federal Arbitra-

tion Act.

Moreover, denial of prompt review in this case “might

seriously erode federal policy.” Cox Broadcasting Corp.

Accord, Firestone Tire & Rubber Co. v. Risjord, 449 U.S. at

376 (quoting Mathews v. Eldridge, 424 U.S. at 331 n.11).

v. Cohn, 420 U.S. at 483. The decision of the California

Supreme Court has wide ramifications and opens the

door to the creation by California or other states of addi-

tional classes of nonarbitrable disputes. Much as in Local

No. 438 Construction & General Laborers’ Union v. Curry,

371 U.S. 542, 550 (1963), in which a state court had

enjoined picketing on the basis of a state law notwith-

standing the National Labor Relations Act and the exclu-

sive jurisdiction of the NLRB, “postponing review would

seriously erode the national . . . policy requiring the sub-

ject matter of respondents’ cause to be heard by the...

Board [arbitrator], not by the state courts.”

Finally, it is appropriate for this Court to consider the

important issues presented herein at this juncture be-

cause, if the case at bar is tried in the California state

court and Southland prevails, “there would remain in

effect the unreviewed decision of the State Supreme

Court” that states may choose to supersede the policies

of the Federal Arbitration Act. Cox Broadcasting Corp.

v. Cohn, 420 U.S. at 485. Accord, Miami Herald Pub-

lishing Co. v. Tornillo, 418 U.S. 241, 247 n.6 (1974).

This Court has reviewed appeals in a number of analo-

gous situations. For instance, the denial of a motion to

dismiss an indictment on the ground that retrial would

expose the defendant to double jeopardy has been held to

be an appealable decision. Abney v. United States, 431

U.S. 651 (1977); Harris v. Washington, 404 U.S. 55, 56

(1971) (per curiam). The Court recognized in these

cases that a second trial would irreparably injure he

defendant, irrespective of the ultimate outcome, since the

double jeopardy clause is designed to protect a person

from being subjected to a second judicial proceeding. As

this Court stated in United States v. MacDonald, 435

U.S. 850, 861 (1978), “a ‘right not to be tried“. . must

be upheld prior to trial if it is to be enjoyed at all.” The

same is true of arbitration. See also Helstoski v. Meanor,

442 U.S. 500, 506-08 (1979).

This case is also similar to Mercantile National Bank

v. Langdeau, 371 U.S. 555 (1963), in which the Court

reviewed as a final judgment a state court’s determina-

tion of venue, which determination implicated federal

law.“ The Court held that:

it serves the policy underlying the requirement of

finality in 28 U.S.C. § 1257 to determine now in

which state court appellants may be tried rather

than to subject them, and appellee, to long and com-

plex litigation which may all be for naught if con-

sideration of the preliminary question of venue is

postponed until the conclusion of the proceedings.

Id. at 558. As in Langdeau, this appeal raises important

issues of general applicability concerning the appropriate

forum for litigating the dispute.

While concern about unnecessary federal intrusion into

state affairs often militates against interlocutory review

of a state court decision,“ there is no such danger here.

Under California law, a denial of arbitration is an ap-

pealable order“ and, in fact, must be appealed immedi-

ately, if at all.” For this reason, the case at bar has

already been reviewed fully by both the California Court

of Appeal and Supreme Court. It would thus be wasteful

14 Accord, American Motorists Insurance Co. v. Starnes, 425 U.S.

637, 642 n.3 (1976).

15 See, e.g., North Dakota State Board of Pharmacy v. Snyder's

Drug Stores, Inc., 414 U.S. 156, 159 (1973).

16 See Cal. Code Civ. Proc. § 1294(a). This statute was the basis

for Southland’s appeals to the California Court of Appeal and Su-

preme Court.

17 “The law of this state does not allow, on appeal from a judg-

ment, a review of any decision or order from which an appeal might

previously have been taken Morrissey v. City and County of

San Francisco, 75 Cal. App. 3d 903, 906, 142 Cal. Rptr. 527, 529

(1977), hearing deniea (Cal. Sup. Ct. 1978) (citations omitted).

See Cal. Code Civ. Proc. § 906 (West 1980).

of judicial resources, and pointless, to require this case

to work its way through the state court system again

before this Court reviews the important issues presented.

Cf. Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp.,

51 U.S.L.W. at 4163. Such a procedure would “result in

a completely unnecessary waste of time and energy in

judicia] systems already troubled by delays due to con-

gested dockets.” Mills v. Alabama, 384 U.S. 214, 217-18

(1966).

2. The Ruling on the Class Action Issue Is Final

The California court’s decision on the class action arbi-

tration issue is independently appealable as a final judg-

ment. This issue was decided on a writ of prohibition,

obtained in a proceeding brought by the franchisees in the

California Court of Appeal. (See supra pp. 6-7.) It is set-

tled that a state court’s final disposition of such a writ is

a final judgment reviewable under Section 1257. See

Fisher v. District Court, 424 U.S. 382, 385 n.7 (1976)

(per curiam) (and cases cited therein)“

18 The appellee-franchisees initiated a proceeding in the Court of

Appeal seeking such a writ, arguing that the trial court had “acted

without or in excess of its jurisdiction” by, inter alia, denying them

a class arbitration. See [Plaintiffs“] Petition for Writs of Mandate

or Prohibition, Oct. 3, 1978, at 4-5. (See also J.S. App. 48a.) Par-

ticularly under California law, such a proceeding is a distinct suit

and the judgment finally disposing of it is a final judgment within

the meaning of [what is now Section 1257].” Bandini Petroleum

Co. v. Superior Court, 284 U.S. 8, 14 (1931). Accord, Rescue Army

v. Municipal Court, 331 U.S. 549, 565 (1947). The Court of Appeal

granted the writ (J.S. App. 64a), which constituted a final judg-

ment on the matter, see Cal. Code Civ. Proc. § 1064 (West 1980),

and, under California law, Southland was required immediately to

exercise its right of appeal if it wished to obtain any review of the

decision. See id. §§ 1110 (West 1980), 906; supra note 17. The

California Supreme Court affirmed the decision and therefore fi-

nally disposed of the writ.

In addition, the Cohen and Cox doctrines, discussed

above, are equally applicable to the class action arbitra-

tion question. The class action issue poses a collateral

matter, separate from the underlying merits of the case.

Moreover, a reversal by this Court of the state court’s

decision would not merely control the nature and char-

acter of the judicial proceedings, but would terminate

those proceedings so that the parties could proceed

promptly to the arbitration forum. Cox Broadcasting Co.

v. Cohn, 420 U.S. at 482-83. The California Supreme

Court’s creation of a class action arbitration procedure

poses important issues of first impression, and threatens

to erode the strong federal policy favoring nonjudicial

arbitration under the Federal Arbitration Act. (See the

discussion infra at pp. 30-42.)

In their motion to dismiss this appeal, at 6-7, appellees

argued that there is no final judgment since no class has

yet been certified and since Southland might be able to

persuade the trial court to refuse to certify a class. This

misses the point, for once a trial court initiates class

certification proceedings—including discovery, briefing

and a decision, a process bound to take many months—

Southland will irretrievably lose its right to be relieved

of the costs and delays associated with such judicial

proceedings. Regardless of whether the trial court even-

tually certifies a class, the parties will have been forced

to run the gauntlet of expensive and time-consuming pro-

cedures in direct contradiction to “the unmistakably clear

congressional purpose [in the Federal Arbitration Act]

that the arbitration procedure, when selected by the par-

ties to a contract, be speedy and not subject to delay and

obstruction in the courts.” Prima Paint Corp. v. Flood

& Conklin Mfg. Co., 388 U.S. 395, 404 (1967). Accord,

Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 51

U.S.L.W. at 4161 (clear intent of Act is “to move the

parties to an arbitrable dispute out of court and into

arbitration as quickly and easily as possible“)

Even if Southland prevails in the further proceedings,

“there would remain in effect the unreviewed decision of

the State Supreme Court” that class action arbitrations

may go forward. This time-consuming judicial procedure,

which could be used in a wide variety of situations, would

discourage arbitration and would increase the burdens on

the judicial system.”

Thus, applying the “pragmatic approach” by which this

Court determines finality for purposes of review, the

judgment of the California Supreme Court is a final

judgment under 28 U.S.C. § 1257(2).

B. The Issues Presented in This Appeal Were Raised

and Litigated in the California Courts

Appellees argued in their motion to dismiss this appeal,

at 5-6, that this Court lacks jurisdiction over one of the

questions presented (the class action arbitration issue)

because Southland allegedly failed to raise that issue in

the California courts.*' Appellees’ claim is without merit.

1 Cor Broadcasting Corp. v. Cohn, 420 U.S. at 485. Accord,

Miami Herald Publishing Co. v. Tornillo, 418 U.S. at 247 n.6.

Cf. Mills v. Alabama, 384 U.S. at 217-18; Moses H. Cone Mem.

Hosp. v. Mercury Constr. Corp., 51 U.S.L.W. at 4163.

21 The other issue presented by this appeal (i.e., the incompati-

bility of the Federal Arbitration Act and the anti-arbitration policy

in the state’s Franchise Investment Law) was raised by the ap-

pellees in the California Supreme Court. The California Court of

Appeal had ruled against the franchisee-plaintiffs on this issue

(see J.S. App. 66a-70a), and they asked the California Supreme

Court to overturn that decision. (See [Plaintiffs’] Answer to

[Southland's] Petition for Hearing, Oct. 17, 1980, at 31-38.) The

California Supreme Court’s decision directly addressed the question

whether individual states are free to enact statutes overriding the

Federal Arbitration Act. (See J.S. App. 13a-18a.)

In Southland’s petition for hearing in the California

Supreme Court, it framed the question presented as

[whether a court may enter an order compelling a pri-

vate commercial arbitration governed by the Federal Ar-

bitration Act and the rules of the American Arbitration

Association to proceed as a class action... .” (Pet. for

Hearing at 2.) Southland argued in its brief that “[u]n-

der both federal and California law” arbitration is highly

favored (id. at 6) ; arbitration is intended to operate out-

side the judicial system; a class action arbitration would

require intimate judicial involvement; and class action

procedures would effectively eliminate the benefits of ar-

bitration as a quick, inexpensive, informal alternative to

judicial proceedings. (Id. at 6-22.) Southland further con-

tended that a class action arbitration would deny absent

class members due process of law unless a court closely

supervised the arbitrator’s conduct, which control would

destroy arbitration as the nonjudicial remedy which it is

intended to be. (Id. at 10-19.) Approximately sixty fed-

eral court decisions were cited in Southland’s brief in

support of these propositions.

Appellees contend that Southland should be deemed to

have failed to raise the federal issue because it also relied

on state court decisions and on “general policies in favor

of arbitration” (Motion to Dismiss at 5-6), and did not

argue in the court below “that the Federal Arbitration

Act, as opposed to the California statute, barred the class

action. (Id. at 6 n.2 (emphasis supplied).) How-

ever, in view of the fact that this case was pending in

state court, it was obviously relevant to direct the court’s

attention to its own precedents, as well as to decisions

rendered by federal courts. Moreover, since Southland

and the appellee-franchisees had already agreed in the

lower courts that the Federal Arbitration Act governed

this case, it was unnecessary for Southland to argue at

length that the policies of the federal statute—as opposed

to the state arbitration law—would be affected by a class

action. Precedents from both federal and state courts

were thus germane to the issues presented before the

California court.

Where the record before this Court shows that, either

expressly or by clear intendment,” a claim as to the in-

validity of a state law was brought to the attention of a

state court, this Court will regard the claim “as having

been adequately presented.” PruneYard Shopping Center

v. Robins, 447 U.S. 74, 85 n.9 (1980) (quoting New York

ex rel. Bryant v. Zimmerman, 278 U.S. 63, 67 (1928)).

If the state court “actually entertains and decides [the]

question adversely to the federal right asserted,” or if

“the necessary effect of the judgment has been to deny

the [federal] claim,” then this Court’s appellate jurisdic-

tion is invoked.*

22 In the California Court of Appeal, the franchisee-plaintiffs

noted that they “have not challenged Southland’s contention that

. .. the Federal Arbitration Act is applicable.” (Petitioners’ Supp.

Mem. in re Arbitration in a Class Action, July 10, 1979, at 7.) The

Court of Appeal accordingly had no difficulty in concluding that

the federal Act governed the case. (J.S. App. 52a-53a.) Thus, in

Southland’s petition for hearing to the California Supreme Court,

it was only necessary to note briefly that “(t]he instant cases are

governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq., since

the dispute involves interstate commerce.” (Pet. for Hearing at 6

n.6.)

23 Appellees recognized in the courts below that it was appropriate

to rely upon state court decisions even though the class arbitration

issue arose under the Federal Arbitration Act. For example, in one

of their briefs to the California Court of Appeal, they stated:

We are willing to accept the proposition that if there were a

conflict between federal and state law, the federal law would

control. Actually, we have been unable to discover any sub-

stantive difference between the federal act and the California

statute, at least none that has any bearing on this case.

(Petitioners’ Supp. Mem. in re Arbitration in a Class Action, supra,

at 7.)

24 Orr v. Orr, 440 U.S. 268, 276-77 (1979) (quoting Indiana ex

rel. Anderson V. Brand, 303 U.S. 95, 98 (1938) ).

23 New York ez rel. Bryant v. Zimmerman, 278 U.S. at 67.

Southland brought the class action arbitration issue to

the attention of the California courts both “expressly

[and] by clear intendment.” Moreover, the California Su-

preme Court decided the issue in the context of the Fed-

eral Arbitration Act, which the court and the parties

recognized to be the governing law. This Court therefore

has appellate jurisdiction.”

II. THE FEDERAL ARBITRATION ACT SUPERSEDES

THE ANTI-ARBITRATION POLICY OF THE CALI-

FORNIA FRANCHISE INVESTMENT LAW

The Federal Arbitration Act was enacted in 1925 for

the specific purposes of (i) allowing parties to avoid the

costliness and delays of litigation and (ii) overruling

anti-arbitration policies of various jurisdictions, where

interstate commerce is involved.” In order to ensure that

parties to contracts would be able to resolve their dis-

putes in an informal, nonjudicial forum of their choice,

26 Appellees argued in their Motion to Dismiss, at 8, that this

Court does not have appellate jurisdiction over the class arbitration

issue since no state “statute” was challenged. This is incorrect, as

Southland challenged the applicability of the state class action rules

to an arbitration proceeding under the Federal Act, which is suffi-

cient to constitute a challenge to a statute. See Lathrop v. Donohue,

367 U.S. 820, 821, 824-27 (1961). Cf. In re Griffiths, 413 U.S. 717

(1973) ; Mayer v. City of Chicago, 404 U.S. 189 (1971). See also

King Mfg. Co. v. City Council, 277 U.S. 100, 103-04 (1928); Wil-

liams v. Bruffy, 96 U.S. 176, 183 (1877).

Regardless of whether a state “statute” was challenged, Section

1257(2) clearly applies to the other issue raised by this appeal

(federal preemption of the California Franchise Investment Law) ;

the Court therefore has jurisdiction over the entire case. Coz

Broadcasting Corp. v. Cohn, 420 U.S. at 487 n.14.

27 See S. Rep. No. 536, 68th Cong., Ist Sess. 2-3 (1924); Scherk

v. Alberto-Culver Co., 417 U.S. 506, 510-11 (1974). See also H.R.

Rep. No. 96, 68th Cong., Ist Sess. 1-2 (1924); Arbitration of Inter-

state Commercial Disputes: Joint Hearings on S. 1005 and H.R.

646 Before the Subcomms. of the Comms. on the Judiciary, 68th

Cong., Ist Sess. 34-35 (1924) (brief submitted by American Bar

Association)

Congress explicitly provided in Section 2 of the Act that

an arbitration agreement in any maritime transaction or

contract evidencing a transaction involving interstate

commerce “shall be valid, irrevocable, and enforceable,

save upon such grounds as exist at law or in equity for

the revocation of any contract.” 9 U.S.C. §2 (emphasis

supplied).

Section 2 establishes “a libera! federal policy favoring

arbitration agreements, notwithstanding any state sub-

stantive or procedural policies to the contrary.” Moses H.

Cone Mem. Hosp. v. Mercury Constr. Corp., 51 U.S.L.W.

at 4162. It creates a body of federal substantive law of

arbitrability” and is binding on “state courts, as [well]

as federal courts... .” Id.

The statute establishes only one exception to the rule

that arbitration agreements are “valid, irrevocable, and

enforceable,” namely, doctrines that exist at law or in

equity “for the revocation of any contract.” 9 U.S.C. § 2.

The plain meaning of these words is that arbitration

agreements can be invalidated only on the basis of gen-

eral principles of contract formation that are applicable

to any contract (e.g., fraud, duress, lack of legal capac-

ity), and not on the basis of restrictive laws or doctrines

that are aimed at arbitration agreements in particular.

Section 2 has been so interpreted by the courts.““

28 F. g., American Airlines, Inc. v. Louisville & Jefferson County

Air Board, 269 F.2d 811, 816-17 (6th Cir. 1959) (holding that ex-

cept for “ordinary contract principles” such as “fraud, lack of con-

sideration or capacity or authority to contract,” Kentucky policies

relating to enforcement of arbitration agreements “must yield to

paramount Federal law” under Section 2 of the Act); World Bril-

liance Corp. v. Bethlehem Steel Co., 342 F.2d 362, 364 (2d Cir.

1965) (Section 2 of the Act only permits rescission “for reasons

such as fraud, duress, or undue influence”); Collins Radio Co. v.

Ez-Cell-O Corp., 467 F.2d 995, 997-98 (8th Cir. 1972) (“The plain

meaning of § 2 is that federal courts are no longer to apply state

statutes and decisions which limit arbitration agreements with

rules not applicable to other contracts.”); Medical Development

In the case at bar, the California Supreme Court held

that the state’s Franchise Investment Law renders arbi-

tration agreements unenforceable with respect to causes

of action brought by franchisees under that statute. A

section of that statute, Cal. Corp. Code § 31512, provides

that any contractual provision requiring a franchisee to

waive compliance with the Franchise Investment Law

shall be void. The court ruled that an arbitration agree-

ment constitutes a “waiver” of the right that otherwise

would exist to sue in court and, accordingly, that such

agreements should not be enforced. Under the court’s

decision, the arbitration agreement is invalid regardless

of whether it was entered into voluntarily by persons

with legal capacity, whether it satisfies all other requisites

for the making of a valid contract, or whether it provides

for an impartial decision under rules such as those of the

American Arbitration Association.” In other words, the

statute invalidates arbitration agreements between fran-

chisors and franchisees irrespective of whether the agree-

ments are valid under general principles of law and eq-

uity governing the revocation of contracts.

As applied to interstate contracts such as the ones in-

volved here, the California statute directly contravenes

Corp. v. Industrial Molding Corp., 479 F.2d 345, 348 (10th Cir.

1973) (same); Commonwealth Edison Co. v. Gulf Oil Corp., 541

F.2d 1263, 1269-70 (7th Cir. 1976) (same); Supak & Sons Mfg.

Co. v. Pervel Industries, Inc., 593 F.2d 135, 137 (4th Cir. 1979)

(“While we agree with. . . Collins Radio .. that § 2 is preemptive

of conflicting state laws which restrict the validity or enforceability

of arbitration agreements, § 2-207 [of the U. C. C.] is not such a law,

but is rather a general rule of contract formation.”’).

2° The California Supreme Court did not base its decision on any

finding that the 7-Eleven arbitration agreement is one-sided or that

it would give any unfair advantage to the franchisor. The arbitra-

tion clause in the 7-Eleven franchise agreement stipulates that the

rules of the American Arbitration Association shall be applied.

These established rules, which have been incorporated into tens of

thousands of commercial agreements across the country, provide,

inter alia, for the selection of neutral arbitrators. See American

Arbitration Association, Commercial Arbitration Rules (1982).

Section 2 of the Federal Arbitration Act. It is therefore

invalid under the Supremacy Clause of the Constitution

(art. VI, cl. 2). which preempts any state statute that is

in direct conmiet with federal law, . . . denies rights

granted by Congress, or . stands as an obstacle to the

full effectiveness of a federal statute.” Colorado Anti-

Discrimination Commission v. Continental Air Lines, Inc.,

372 U.S. 714, 722 (1963) (footnotes omitted).*° Under

this standard, the California Franchise Investment Law

must give way: it directly conflicts with Congress’ dec-

laration that interstate arbitration agreements shall be

“valid, irrevocable, and enforceable’; it denies a right

that is specifically granted by the federal legislation; and

it stands in the path of the accomplishment of the ob-

jectives of the federal statute—i.e., to invalidate anti-

arbitration policies and to place arbitration agreements

“upon the same footing as other contracts.” H.R. Rep.

No. 96, 68th Cong., Ist Sess. 1 (1924).

The California Supreme Court mistakenly relied upon

this Court’s decision in Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Ware, 414 U.S. 117 (1973), in support of

its conclusion that the California statute is not preempted.

(J.S. App. 17a-18a.) Ware simply held that the partic-

ular state statute at issue in that case was not pre-

empted by a particular federal statute because there was

no conflict between them. Ware is distinguishable from

the case at bar,“ and indeed, the preemption principles

3° See also Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Perez v.

Campbell, 402 U.S. 637, 649 (1971) ; Chicago & N. W. Transp. Co. v.

Kalo Brick & Tile Co., 450 U.S. 311, 317-18 (1981); Maryland v.

Louisiana, 451 U.S. 725, 746-47 (1981).

31 Ware involved an alleged conflict between a state labor code

provision exempting wage disputes from arbitration and a New

York Stock Exchange rule providing for compulsory arbitration of

wage disputes between members of the exchange and their employ-

ees. This Court found that there was no conflict between the policies

underlying the state statute and the policies underlying the fed-

eral securities laws (pursuant to which the stock exchange had

summarized in that case dictate the opposite conclusion

here. Unlike the situation in Ware, the California statute

at issue in this case “frustrates [a] part of the purpose

of the federal legislation.” 414 U.S. at 139.

The California Supreme Court attempted to justify its

decision by analogizing the state Franchise Investment

Law to the federal Securities Act of 1933, both of which

require disclosures to prospective investors. It reasoned

that since this Court had declared in Wilko v. Swan, 346

U.S. 427 (1953), that preexisting arbitration agreements

are nonbinding as to claims arising under the federal

statute, the same result should pertain to claims arising

under the analogous California statute.

The analogy to Wilko is invalid on several grounds.“

The most important is that Wilko did not involve a conflict

promulgated its compulsory arbitration rule), and accordingly held

that the state legislation was not preempted by the stock exchange

rule. Ware did not involve an alleged conflict between a state law and

the Federal Arbitration Act. Therefore, as the California Supreme

Court acknowledged, “the holding in the case is consequently not

controlling here. (J.S. App. 18a.)

* As the dissenting justices in the California Supreme Court

recognized, the 1953 decision in Wilko was based on this Court’s

conclusion that arbitration of a securities claim might cause a

claimant to waive the specific benefit of the unusually liberal venue

provision in the Securities Act of 1933. (See J.S. App. 3la-32a.)

This Court has suggested that Wilko may have been based on that

narrow ground. Scherk v. Alberto-Culver Co., 417 U.S. at 513-14.

The California Franchise Investment Law does not contain a broad

venue provision or any other unique benefit similar to the one con-

tained in the federal Securities Act.

Other courts have held that in view of the strong federal policy

favoring arbitration, the Wilko “analogy” should not be extended to

other situations. See Ingbar v. Drexel Burnham Lambert Inc., 683

F.2d at 605 (rationale of Wilko does not extend to claims under Com-

modities Exchange Act); Romnes v. Bache & Co., 439 F. Supp. 833,

838 (W.D. Wis. 1977) (same); Middle East Transcontinental, Inc.

v. Onion Crock, Inc., 144 Mich. App. 57 (1982) (Wilko rationale

inapplicable to claims under Michigan Franchise Investment Law).

between a federal statute regulating contracts in inter-

state commerce and a state law purporting to limit the

federal statute. Rather, Wilko involved two federal laws,

and the Court in that case was simply called upon to

determine whether a particular provision in the subse-

quently-enacted federal Securities Act of 1933 created an

exception to the Federal Arbitration Act of 1925. For

this reason, the Wilko “analogy” has been held to be in-

applicable to conflicts between the Federal Arbitration

Act and state laws. For example, in Allison v. Medicab

International, Inc., 92 Wash. 2d 199, 597 P.2d 380, 382-

83 (1979), which involved a state franchise disclosure

statute similar to California’s, the court stated:

Plaintiff cites Wilko v. Swan, . . where the Su-

preme Court refused to enforce an arbitration clause

when the dispute arose under the federal securities

act. However, this case involved two federal acts

and not as here the federal arbitration act and a

state W. act. .

We ‘hold that the supremacy clause of the federal

constitution must prevail and thus the federal arbi-

tration act requires enforcement of the arbitration

clause in the franchise agreement despite the judicial

remedies afforded by the [state] Franchise Invest-

ment Protection Act.“

Accord, Barron v. Tastee Freez International, Inc., 482 F.

Supp. 1213, 1216-17 (E.D. Wis. 1980) (Federal Arbitration Act

prevails over any anti-arbitration policy of the Wisconsin Franchise

Investment Act). In the instant case, the three-judge panel of the

California Court of Appeal, as well as the two dissenting justices

in the California Supreme Court, agreed that the federal policy

favoring arbitration supersedes any effort by California to prohibit

arbitration covered by the Federal Arbitration Act. (J.S. App. 3la-

a, 66a-70a.) See also, e.g., Bache Halsey Stuart Shieids, Inc. v.

Moebius, 531 F. Supp. 75 (E.D. Wis. 1982); R.J. Palmer Construc-

tion Co. v. Wichita Band Instrument Co., 7 Kan. App. 2d 363, 642

P.2d 127 (1982); Merrill Lynch Pierce Fenner & Smith Inc. v.

Melamed, 405 So. 2d 790 (Fla. Dist. Ct. App. 1981).

The California Supreme Court conceded that the Fed-

eral Arbitration Act overrides any state policy that might

be hostile “to arbitration generally” (J.S. App. 15a), but

it stated that the Act allows the states to adopt “excep-

tions” to the general principle of arbitrability. (J.S. App.

16a.) The California court made no effort to define the

subject areas or scope of the permissible “exceptions,”

and there is in fact no principled basis for its decision.

This year’s exception could be for franchisor-franchisee

disputes, next year’s could be for disputes between lenders

and borrowers or landlords and tenants, and the follow-

ing year the state might ban the arbitration of tort

claims. The state could easily identify a “public policy”

supporting a wide range of such “exceptions,” and could

thereby undermine the federal statute. More fundamen-

tally, the California Supreme Court’s rationale is con-

tradicted by the express language of Section 2 of the

Arbitration Act, which overrides “any state substantive

or procedural policies to the contrary.” Moses H. Cone

Mem. Hosp. v. Mercury Constr. Corp., 51 U.S.L.W. at

4162.

The California court’s decision would also impair arbi-

tration by inviting “unseemly and mutually destructive

jockeying by the parties to secure tactical litigation ad-

vantages.” Scherk v. Alberto-Culver Co., 417 U.S. at 516-

17. A party desiring to avoid arbitration could, through

artful pleading, structure his claims so as to fit within

one of the state-created “exceptions” to arbitration. This

This case offers a good example of the possibilities for such

maneuvering. The claim in this litigation is that Southland misled

the plaintiffs by misstating and failing to disclose material facts at

the time they franchised their 7-Eleven stores. Accordingly, the

primary allegation in plaintiffs’ original pleadings was that South-

land had engaged in intentional and negligent fraud in violation of

common law. However, after the trial court ruled that claime based

on the California Franchise Investment Law were nonarbitrable,

new complaints were filed in two of the consolidated cases (Coy and

Scovis); these pleadings contained a single count, based on the

Court should not countenance such results. Just as the

stability of international business transactions would be

undercut if one country were to refuse to enforce inter-

national arbitration agreements based on parochial con-

cerns, Scherk v. Alberto-Culver Co., 517 U.S. at 516-17,

orderliness and predictability in interstate commerce

would be impaired if individual states were free to create

“exceptions” to the arbitrability of disputes involving in-

terstate contracts.

It is also important to prevent the erosion of the Fed-

eral Arbitration Act because of the statute’s important

role in the administration of justice. Court congestion and

delay were among the primary reasons for enacting the

statute in 1925, and are now of far greater proportions.”

Franchise Investment Law. Plaintiffs’ counsel candidly conceded to

the trial court that they had phrased the claims as statutory viola-

tions, and not as common law causes of action, for the express pur-

pose of avoiding the contractual commitment to arbitrate the dis-

putes. See [Plaintiffs“] Memorandum of Points and Authorities in

Opposition to Petition to Compel Arbitration, July 17, 1978, at 3-4,

where plaintiffs’ attorneys stated to the trial court:

[M)ay these plaintiffs . . . avoid arbitration by limiting their

complaints to causes of action under the Franchise Investment

Law? The answer to this question is clearly: yes, of course

they can.... Having had the benefit of guidelines provided by

the Court, plaintiffs’ counsel have filed pleadings best calcu-

lated to both present the essential claims of the particular

plaintiffs involved, and to plead an effective class action

From 1940 to 1982, annual federal district court civil case fil-

ings increased from approximately 35,000 to 206,000. Federal civil

cases increased almost six times as fast as population, and despite

a significant increase in the number of federal district court judges,

the yearly civil filings per judgeship doubled between 1940 and 1982,

from approximately 180 to 400 cases. Class action cases are re-

sponsible for a significant degree of the burdens imposed upon

judges. See Administrative Office of the United States Courts, 1982

Annual Report of the Director 3 (prelim. ed. 1982) ; Administrative

Office of the United States Courts, 1981 Annual Report of the Di-

rector 3-4, 56-59, 82-83 (prelim. ed. 1981) ; Administrative Office of

the United States Courts, 1980 Annual Report of the Director 2-4,

Therefore, the courts have recognized that arbitration

should be encouraged and that the Federal Arbitration

Act should be applied in a liberal fashion in favor of

enforcing arbitration agreements. Moses H. Cone Mem.

Hosp. v. Mercury Constr. Corp., 51 U.S.L.W. at 4162,

4161 n.27.

Quite recently, Congress has explicitly reaffirmed the

desirability of arbitration as an alternative to costly,

time-consuming litigation in the courts. In the patent

and trademark appropriations bill for 1983-85, Pub. L.

No. 97-247, 96 Stat. 317 (1982), Congress overruled a

line of lower court decisions which had held that “public

policy” precluded arbitration of disputes concerning pat-

ent validity or infringement. Id. § 17(b), 96 Stat. 322

(to be codified at 35 U.S.C. § 294). In explaining this

provision, the House Report emphasized that arbitration

benefits not only the parties to a particular dispute but

also the public at large by reducing the burdens on the

courts:

The advantages of arbitration are many: it is usually

cheaper and faster than litigation; it can have sim-

pler procedural and evidentiary rules; it normally

minimizes hostility and is less disruptive of ongoing

and future business dealings among the parties; it is

often more flexible in regard to scheduling of times

and places of hearings and discovery devices; and,

arbitrators are frequently better versed than judges

and juries in the area of trade customs and the

technologies involved in these disputes.

The enforcement of voluntary arbitration would

serve the public in two ways. First, . . [it] will

enhance the patent system... Secondly, arbitration

54-58 (1980); Burger, Isn't There a Better Way, 68 A.B.A.J. 274,

275 (1982) (address to ABA). See also Kirkham, Problems of

Complex Civil Litigation, 83 F. R. D. 497, 499-501 (1979) (conges-

tion in courts). The congestion is not confined to the federal courts.

See, e.g., Judicial Conference for the District of Columbia Circuit,

89 F.R.D. 169, 175 (1980) (remarks of Burger, C.J.).

could relieve some of the burdens on the overworked

Federal courts. Chief Justice Burger in his speech to

the American Bar Association on January 24, 1982,

generally endorsed the use of arbitration to reduce

the judicial backlog.™

In sum, state-created “exceptions” to the Federal Ar-

bitration Act would fly in the face of the language of

Section 2 of the federal statute; frustrate Congress’ in-

tent to establish a national policy favoring arbitration of

interstate commercial disputes; encourage parties to end-

run their arbitration agreements and engage in forum

shopping; and add to the burdens of crowded court dock-

ets. For all of these reasons, this Court should reverse

the decision of the California Supreme Court.

III. CLASS ACTIONS ARE INCONSISTENT WITH AR-

BITRATION UNDER THE FEDERAL ARBITRA-

TION ACT

The procedures of arbitration and class actions are

fundamentally incompatible. The proceeding authorized

by the court below would be an arbitration in name only

and would deprive the parties of the informal, nonjudicial

procedure protected by the Federal Arbitration Act.

A. The Essence of Arbitration Is Its Avoidance of

Judicial Procedures; Class Actions Require Active

Judicial Involvement

Arbitration is a contractual method of dispute resolu-

tion that is intended to take place outside of the judicial

system, without interference by the courts and without

% H.R. Rep. No. 542, 97th Cong., 2d Sess. 13 (1982), reprinted in

1982 U.S. Code Cong. & Ad. News 765, 777. Another recent statute

in which Congress has stressed the need for developing viable alter-

natives to litigation in the courts is the Dispute Resolution Act,

Pub. L. No. 96-190, 94 Stat. 17 (1980) (codified at 28 U.S.C. app.

§§ 1-10 (Supp. V 1981)). See also H.R. Rep. No. 1654 (Part 1),

95th Cong., 2d Sess. 7-11 (1978); Report of the Pound Conference

Follow-Up Task Force, 74 F.R.D. 159, 169, 179-81 (1976) (discuss-

ing the advantages of arbitration and recommending its increased

use).

adherence to conventional judicial procedures. By choos-

ing arbitration, parties agree to forego full judicial pro-

cedures and instead elect to have one or more umpires of

their choosing, often experts in the subject matter of the

dispute, hold an informal hearing and reach a prompt

decision. The arbitrators enjoy wide latitude in conduct-

ing the proceedings. Judicial machinery—such as pre-

trial discovery, the rules of evidence, the automatic right

to appeal, a written transcript, and the necessity of ren-

dering carefully articulated written decisions—are not

applicable. Parties frequently conclude that lawyers are

unnecessary in this informal setting. Moreover, arbitra-

tors—unlike courts—need not consider the impact of their

decision as precedent that may be applicable to nonparties

to the controversy; arbitration thereby facilitates prompt

decisions and discourages parties from overlitigating a

dispute because of concerns that an adverse decision may

extend beyond the particular facts at issue.“

Waiver of judicial procedures goes to the heart of ar-

bitration. Arbitration “isn’t ‘just like the courts.’ In

fact, its strongest points lie in those areas where it most

widely differs from the courts.” M. Domke, The Law ck

Practice of Commercial Arbitration § 1.01, at 2. Thus, it

has repeatedly been held that arbitration should not be

encumbered with procedures that might delay or compli-

cate the proceedings, or require judicial intervention when

37 See, e.g., Bewnhardt v. Polygraphic Co. of America, 350 U.S. 198,

203 & n.4 (1956); United Steelworkers v. Enterprise Wheel & Car

Corp., 363 U.S. 593, 598 (1960). For a discussion of the informality

of arbitration and its differences from judicial litigation, see gener-

ally A. Widiss, Arbitration: Commercial Disputes, Insurance, & Tort

Claims 6-7, 339 (PLI 1979); M. Domke, The Law & Practice of

Commercial Arbitration § 24.02 at 235-39, § 24.07 at 252, § 25.01

at 255-56, § 26.01 at 265-66, § 27.01 at 271-72, § 29.06 at 286-89,

and pp. 312-13 (1968); Rehnquist, A Jurist’s View of Arbitration,

32 Arb. J. 1, 5-7 (1977).

the arbitration is in progress.“ As Judge Learned Hand

stated in American Almond Products Co. v. Consolidated

Pecan Sales Co., 144 F. 2d 448, 451 (2d Cir. 1944):

Arbitration may or may not be a desirable substitute

for trials in courts; as to that the parties must decide

in each instance. But when they have adopted it,

they must be content with its informalities; they may

not hedge it about with those procedural limitations

which it is precisely its purpose to avoid.

The court below has not only “hedged” the arbitration

with judicial procedures; it has created a mechanism that

would be conducted by the judiciary from start to finish.

Class actions are the paradigm example of large, time-

consuming, rigorously-regulated, difficult-to-manage judi-

cial proceedings. They require more judicial supervision

than do other court proceedings, and more rigid adher-

ence to formalities. Because they bind the rights of per-

sons who have not sued or personally appeared and who

do not control the lawsuit, class actions pose delicate con-

stitutional issues. They satisfy federal due process stand-

ards only if, and to the extent that, the named plaintiff’s

claim is typical of those of other class members, the best

practicable notice is given to the class, and the named

plaintiff and his counsel fully and adequately represent

the interests of the elass.“

38 See, e. g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

U.S. at 404; Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp.,

51 U.S.L.W. at 4161; Cavanaugh v. McDonnell & Co., 357 Mass.

452, 457, 258 N.E.2d 561, 564 (1970); De Sapio v. Kohimeyer, 35

N.Y.2d 402, 406, 362 N.Y.S.2d 843, 847, 321 N.E.2d 770, 773

(1974).

See, e. g., Hansberry v. Lee, 311 U.S. 32, 42-43, 45 (1940);

Sam Foz Publishing Co. v. United States, 366 U.S. 683, 691 (1961) ;

H. L. v. Matheson, 450 U.S. 398, 432 n.9 (1981) (Marshall, J., dis-

senting); Robertson v. National Basketball Ass 'n, 556 F. 2d 682,

685-86 (2d Cir. 1977); Gonzales v. Cassidy, 474 F.2d 67, 74 (5th

Cir. 1978).

Absent class members cannot constitutionally be bound

by the result of the proceeding unless there has been ac-

tive judicial participation in all aspects of the litigation.

For example, discovery, briefing and a hearing are usu-

ally required before the court decides whether to certify

a elass.“ The court must carefully define the class, de-

termine the best practicable form of notice to the class,

and approve the content of the notice.“ Class members

then must be allowed to opt out of the litigation.“

After completion of these preliminary proceedings,

which normally consume many months,** the court must

continue to supervise all phases of the litigation to ensure

that the named plaintiff’s interests are compatible with

those of the class and that plaintiff is a vigorous and

effective class representative.“ If, at any time, the initial

class certification appears to have been erroneous, the class

4% See General Telephone Co. v. Falcon, 457 U.S. 147, 102 S. Ct.

2364, 2372 (1982) (often necessary to “probe behind the pleadings”

to decide class issues); Coopers & Lybrand v. Livesay, 437 U.S. at

469 & n.12 (class certification issues usually ‘enmeshed in the

factual and legal issues comprising the plaintiff's cause of ac-

tion '); Alabama v. Blue Bird Body Co., 573 F.2d 309, 312, 322-24

(5th Cir. 1978); Belcher v. Bassett Furniture Industries, Inc., 588

F.2d 904, 906 (4th Cir. 1978).

41 Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 357 n.24

(1978) ; Eisen v. Carlisle & Jacquelin, 417 U.S. at 173-74.

42 Fed. R. Civ. P. 23(c). (See also the decision of the California

Supreme Court at J.S. App. 28a.)

43 Frequently, a year or more will be consumed in class action

discovery, briefing and hearings alone. See, e.g., In re Transit Co.

Tire Antitrust Litigation, 67 F.R.D. 59, 63, 72 (W. D. Mo. 1975);

Sommers v. Abraham Lincoln Federal Savings & Loan Ass'n, 66

F.R.D. 581, 585 (E.D. Pa. 1975).

F. g., In re Fine Paper Antitrust Litigation, 617 F.2d 22, 27

(3d Cir. 1980); Susman v. Lincoln American Corp., 561 F.2d 86,

89-90 (7th Cir. 1977); National Ass’n of Regional Medical Pro-

grams, Inc. v. Mathews, 551 F.2d 340, 344-46 (D.C. Cir. 1976),

cert. denied, 481 U.S. 954 (1977).

must be realigned or decertified.“ And if the claims are

amended, or if other significant events occur, the court

may require or authorize supplemental notices to the

class.** If either the plaintiff or the defendant wishes to

communicate with class members, the court may need to

act to prevent misrepresentations or other abuses.*’

The court’s supervisory duties in a class action also ex-

tend to the actual hearing of the case and to any proceed-

ings that occur thereafter. The court must ensure that

the named plaintiff’s evidence is “common,” class-wide

evidence.** Transcripts of the proceedings must be pre-

pared, and the court must render written decisions, so

that other courts can ascertain the scope of the class and

of the judgment. Moreover, even if the court’s decision

has been clearly delineated, a class member can appeal

from an adverse verdict, or attempt to avoid the res

judicata effects thereof, by contending that the evidence

was not common“ and/or chat he was not adequately

represented; if these requirements were not satisfied, the

verdict cannot be binding on him.“ In a class action, the

General Telephone Co. v. Falcon, 102 S. Ct. at 2372; Coopers &

Lybrand v. Livesay, 437 U.S. at 469 & n.11; H.L. v. Matheson, 450

U.S. at 432 n.11 (Marshall, J., dissenting) ; Social Services Union,

Local 535 v. County of Santa Clara, 609 F.2d 944, 948-49 (9th Cir.

1979); Guerine v. J & W Investment, Inc., 544 F.2d 863, 864 (5th

Cir. 1977).

% See, e. g., Fed. R. Civ. P. 23 (d) (2); 7A C. Wright & A. Miller,

Federal Practice & Procedure § 1791 at 193-94, § 1793 at 201, 207

11 (1972).

* Gulf Oil Co. v. Bernard, 452 U.S. 89, 100 (1981).

48 See General Telephone Co. v. Falcom, 102 8. Ct. at 2372. After

trial of the “common” issues, there may be hundreds of additional

hearings on “individual” issues, such as damages. N51

tional Brotherhood of Teamsters v. United States, 481 U.S. 324,

361 (1977); EBOC v. Korn Industries, Inc., 662 F.2d 256, 260-61

(4th Cir. 1961).

.., Gn v. Cassidy, 474 F.2d 67 (Sth Cir. 1978).

parties cannot even settle their dispute without judicial

review and approval.“

In short, class actions require intimate, ongoing judicial

management at every stage.

The California Supreme Court recognized that these

essential class action procedures, which arise from due

process considerations, cannot properly be performed by

arbitrators. It therefore acknowledged that in a pur-

ported class action arbitration, the court would conduct

the certification proceedings, monitor the adequacy of rep-

resentation, review any proposed settlements, and so forth.

(J.S. App. 28a-29a. See also the decision of the Court of

Appeal at J.S. App. 64a.) The court attempted to down-

play the extent to which a judge would be involved but

conceded that the judiciary would be required to partici-

pate actively throughout the arbitration.

B. A Class Action Arbitration Would Violate the Fed-

eral Arbitration Act by Destroying the Parties’

Agreement To Arbitrate

It is difficult to imagine a procedure more alien to the

spirit of arbitration. The mechanism contemplated by the

court below would seriously affect the viability of the

rights guaranteed by the Federal Arbitration Act in many

ways. For example:

—a procedure designed to operate outside the judicial

system would require careful and continuous judicial

participation ;

—a procedure designed to simplify the litigation would

become more complex than if the litigation had re-

mained in court in the first place; the parties would

litigate their dispute in two forums rather than one,

and there would be substantial overlaps between the

roles of the judge and arbitrator;

—a mechanism intended to be quick and inexpensive

would become protracted and expensive;

—a procedure designed to permit parties to resolve a

dispute privately, and without disrupting ongoing

contractual relationships, would become a highly pub-

licized, high-stakes lawsuit;

—a procedure designed to facilitate compromise would

inhibit settlements by burdening them with costly

and time-consuming procedural hurdles; and

—parties would be less willing to enter into arbitration

agreements since the risks associated with arbitra-

tion would be significantly increased while its effi-

ciency and privacy would be diminished.

Class actions and arbitrations are each a useful proce-

dural tool for resolving disputes. This Court need not

decide that one is good and the other bad. But the two

are like oil and water and cannot be mixed; the use of

both at the same time would not be true to the objectives

or procedures of either. One emphasizes speed, simplicity,

informality and privacy, while the other requires caution,

complexity, strict adherence to established procedures, and

(1981), aff'd mem., 86 N. T. 2d 627, 450 N.Y.S.2d 492, 485 N.B.2d

The California Supreme Court ignored this incompati-

bility and justified its decision by erroneously assuming

that individual, small claims might be “effectively fore-

clos{ed]” unless claimants are able to aggregate their

resources by bringing class actions. (J.S. App. 25a.) The

court overlooked the fact that the objectives of class ac-

tions (relieving burdens on the courts, reducing the cost

of prosecuting individual claims) are served by arbitra-

tion in another way. Arbitration assists the administra-

tion of justice by consensually removing cases from the

often tortuous route of the judicial system and by provid-

ing a quick, informal, inexpensive remedy to facilitate

the prosecution of claims—particularly small claims. In

other words, arbitration satisfies the principal goals that

led to the creation of class actions without the delay, bur-

den and expense which accompanies that judicial proce-

dure. Cf. Harris v. Shearson Hayden Stone, Inc., 441

N.Y.S.2d at 76.*

The California Supreme Court was unrealistic when it

suggested that hundreds of individual, duplicative arbi-

trations would occur unless it created an unprecedented

class action procedure. (See J.S. App. 25a, 29a.) The

court cited no evidence that this sort of wasteful practice

has occurred, and we believe that none exists for several

reasons. First, the typical case involves only one or a few

1097 (1982), the court held that a party should not be permitted

to avoid arbitration of his individual claim by filing a class action

in court. A dissenting justice felt that the policy favoring class

actions should prevail over the policy favoring arbitration, but even

he recognized that a class action necessarily is a judicial procedure,

unsuited to the arbitration setting. 441 N.Y.S.2d at 79.

52 Our research has not revealed any studies or commentary sup-

porting the proposition that individual arbitration has tended to

thwart the prosecution of individual claims. Nor, prior to the deci-

sions of the California courts in this case, was there any support for

that proposition in case law. Moreover, in the court below, the

plaintiff-franchisees did not allege that it would be impossible or

impractical to prosecute individual claims. Indeed, all of the plain-

tiffs are represented by the same attorneys and yet they filed some

of the cases individually and some as purported class actions.

claims, not hundreds or thousands. Class actions stir up

litigation to some extent by creating claimants who have

not previously felt aggrieved and who are not affirma-

tively interested in filing suit.“ Thus, the true alterna-

tive to a class action in the instant litigation—and most

others—is arbitration with a few claimants, not hun-

dreds. Second, even if hundreds of claims were asserted,

it is wrong to assume that it would be necessary to dupli-

cate the expense of individually arbitrating each one.

Substantial economies could be achieved by retaining the

same attorneys (as plaintiffs have done here), hiring the

same expert witnesses, and so forth. Third, if a number

of arbitrations were decided in favor of one side or the

other, the parties would likely conform their conduct to

the results of those arbitrations, or the arbitrators would

give precedential weight to the outcome of prior cases.

Fourth, in positing that the “alternatives” were a single

class action or hundreds of individual hearings, the court

below overlooked the fact that a class action arbitration

would not eliminate the need for individual trials on

“non-common” issues such as damages, affirmative de-

fenses and counterclaims.

In any event, the Federal Arbitration Act does not au-

thorize the courts to interfere with arbitration on the

ground that some other procedure would be more “effi-

cient.” See Moses H. Cone Mem. Hosp. v. Mercury

Constr. Corp., 51 U.S.L.W. at 4161. An agreement to

arbitrate is, in effect, “a specialized kind of forum-

selection clause that posits not only the situs of the suit

but also the procedure to be used in resolving the dis-

pute.” Scherk v. Alberto-Culver Co., 417 U.S. at 519 (em-

phasis supplied). And, as the court stated in Dickinson

v. Heinold Securities, Inc., 661 F.2d 638, 646 (7th Cir.

1981):

[T]he Arbitration Act requires that we enforce the

bargain of the parties as to dispute resolution and

58 Cf. Gulf Oil Co. v. Bernard, 452 U.S. at 100 nn.11 & 12 (poten-

tial of class action for “stirring up” litigation).

not substitute our own views of economy and effi-

ciency. There is no room in the language of the Act,

the decisions of the Supreme Court or the decisions

of this court for an ad hoe approach, based on specu-

lative considerations of efficiency toward enforcement

of arbitration agreements.

The Federal Arbitration Act must be enforced by state

courts, and it prevails over “any state substantive or

procedural policies to to the contrary.” Moses H. Cone

Mem. Hosp. v. Mercury Constr. Corp., 51 U.S.L.W. at

4162 (emphasis supplied). Thus, appellees’ contention

that the states are free to encumber interstate arbitra-

tions with judicial paraphernalia so long as they do so

with “procedural” devices is without merit. (See Motion

to Dismiss at 10-14.)

The California Supreme Court recognized that its class

action device would be radically different than a normal

arbitration and accordingly held that a party “should be

given the option of remaining in court rather than sub-

mitting to classwide arbitration.” (J.S. App. 30a.) A per-

son presented with this Hobson’s choice would almost

surely elect the judicial forum. While parties to contracts

are often willing to forego their rights of appeal, discov-

ery, and adherence to rules of evidence in the context of

an informal arbitration, waiver of these protections would

involved decidedly different considerations in the context

of a massive class action involving hundreds of litigants.

Moreover, a class action arbitration would necessarily in-

volve overlapping responsibility between two tribunals

and would be even more complex, protracted and uncer-

tain than a judicial class action. Thus, in the end, there

likely would not be any arbitration at all: the parties

would opt for the “simpler” judicial class action, and the

agreement to arbitrate would be circumvented as a direct

result of the judicially-imposed class action procedures.

54 See also, e.g., De Sapio v. Kohlmeyer, 35 N.Y.2d at 406, 362

N. V. S. ad at 847, 821 N.E.2d at 773.

The decision of the court below would also have an ad-

verse impact on the availability of qualified arbitrators.

An arbitrator would have very little independence in the

kind of two-ring proceeding contemplated by the Califor-

nia Supreme Court since he or she would be second-

guessed by a judge at every stage. Skilled accountants,

architects, contractors and other potential arbitrators

would be deterred by the legalisms, complexities and judi-

cial controls of a class action; and the prospect of presid-

ing over hundreds of individual damage hearings after

the hearing on the “common” issues would further reduce

the parties’ ability to obtain qualified arbitrators.

In sum, a class-action arbitration would seriously im-

pair, if not destroy, the parties’ federally protected agree-

ment to arbitrate.

CONCLUSION

For all of the reasons stated above, the decision of the

California Supreme Court should be reversed, and the

cases should be remanded with the instruction that the

parties should proceed to arbitrate their disputes on an

individual basis.

Respectfully submitted,

Of Counsel: Peter K. BLEAKLEY *

PORTER MARK J. SPOONER

— D.C. Marc D. GUREN

1200 New Hampshire Ave., N.W.

McKENNA, CONNER & CUNEO AARON M. PEcK

San Francisco, California MARTIN H. KRESSE

San Francisco, California 94104

(415) 483-0640

Attorneys for Appellants,

The Southland Corporation, et al.

March 1983 * Counsel of Record

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