Appendix — Southland Corp. v. Superior Court of the County of Alameda

BF. 746 ©

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

THE SOUTHLAND CORPORATION, RAY BERRY, TAL COLSON,

KEITH JENKINS, ROBERT DUNCAN, JOHN P. THOMPSON,

JERE W. THOMPSON, WAITON GRAYSON III, JOSEPH

S. HARDIN, R G SMITH, EUGENE PENDER, S.R. DOLE,

and TERRY DE Barb, ae

m etitioners,

RICHARD D. and DARLA J. KEATING, MICHAEL M. and

GLORIA G. Coy, and HARRY BATTERSBY on behalf of

themselves and all other persons similarly situated,

Respondents.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

TO THE SUPERIOR COURT OF THE

COUNTY OF ALAMEDA, CALIFORNIA

PETER K. BLEAKLEY

MARK J. SPOONER *

ROBERT N. WEINER

SHELLEY R. SLADE

ARNOLD & PORTER

1200 New Hampshire Ave., N.W.

Washington, D.C. 20036

(202) 872-6700

CHARLES G. MILLER

BARTKO, WELSH, TARRANT

& MILLER

One Maritime Bldg., Ste. 1440

San Francisco, CA 94111

(415) 956-1900

Attorneys for Petitioners

The Southland Corporation, et al.

April 1988 * Counsel of Record

WILSON - Eres Printing Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

APPENDIX

TABLE OF CONTENTS

Page

. Market Franchise Cases, Judicial Council Coordi-

nation Proceeding No. 387 (California Superior

Court, County of Alameda, June 26, 1987) Order

Se TES OE TI whine ice la

. Keating, et al. v. The Southland Corp., et al., Ju-

dicial Council Coordination Proceeding No. 387,

Docket No. A039472 (California Court of Appeal,

First Appellate District, December 16, 1987) Order

PI PI iii cc hc ccancniannctankeuakdendeenasinaiexarmerbaaviees 16a

The Southland Corp., et al. v. Superior Court, Ju-

dicial Council Coordination Proceeding No. 387,

Docket No. A039337 (California Court of Appeal,

First Appellate District, December 16, 1987) Order

Denying Petition for Writ of Mandamus or Prohibi-

=P Ra IRR ce resp Re y= MORIA AU Ad AER or OE an Cp CRO 17a

The Southland Corp., et al. v. Superior Court, Ju-

dicial Council Coordination Proceeding No. 387,

Docket Nos. A039337, S003635 (California Supreme

Court December 30, 1987) Order granting Applica-

I I ar aes gedeenanasckblisschionns 18a

The Southland Corp., et al. v. Superior Court, Ju-

dicial Council Coordination Proceeding No. 387,

Docket Nos. A039337, S003635 (California Supreme

Court February 25, 1988) Order denying Petition

AMER Cd ey UN ee MA eC UNCR a 19a

. Market Franchise Cases, Judicial Council Coordina-

tion Proceeding No. 387 (California Superior Court,

County of Alameda, March 29, 1988) Order

granting Motion for Stay (until April 20, 1988) ...... 20a

Keating v. Superior Court, 31 Cal. 3d 584, 183 Cal.

Rptr. 360, 645 P.2d 1192 (1962).................................. 24a

. Southland Corp. v. Keating, 465 U.S. 1 (1984).......... 75a

la

SUPERIOR COURT OF CALIFORNIA

COUNTY OF ALAMEDA

Judicial Council Coordination Proceeding No. 387

Coordination Proceeding

Special Title (Rule 1550 (b) )

MARKET FRANCHISE CASES

[Filed June 26, 1987]

ORDER RE MOTION FOR

CLASS CERTIFICATION

The motion of Michael M. Coy and Gloria G. Coy,

Harry Battersby, and Richard D. Keating and Darla J.

Keating (‘‘the class representatives”), for class certifica-

tion having duly come on for hearing before this court

on September 22, 1986, John F. Wells and Lise A. Pearl-

man of the law firm of Stark, Stewart, Wells & Robinson

appearing on behalf of the franchisees, Peter Bleakley,

Mark J. Spooner and Shelley Slade of the law firm of

Arnold & Porter and Charles G. Miller of the law firm

of Bartko, Welsh, Tarrant & Miller appearing on behalf

of The Southland Corporation, et al. The court having

considered the arguments of counsel and all the papers

and briefs filed by the parties, and good cause appearing

therefor,

2a

IT IS HEREBY ORDERED that:

1. The class representatives’ motion for class certifi-

cation is granted as to the class described and all claims

set forth in the amended and supplemental complaints

filed herein on April 18, 1986, except for the claims with

respect to misrepresentation of the average earnings of

7-Eleven franchises contained in Counts Four, Five and

Six of each of the amended and supplemental complaints.

2. Southland shall have ten (10) days from the date

of this order to so notify this court if it wishes to with-

draw its motion to compel arbitration and proceed with a

class action in this court.

8 Southland shall identify class members and their

last known addresses from its records at its expense and

provide a list of the same to counsel for the franchisees

within thirty (30) days of this order. If Southland does

not withdraw its motion to compel arbitration, as pro-

vided above, counsel for the class within 30 days of re-

ceipt of the list shall mail notice by first class mail, post-

age prepaid, in the attached form to all members of the

class identified by Southland. The notice shall be modi-

fied to include the name(s) of the arbitrator (s) selected

by the parties as required in paragraph 7 below and a

brief description of the arbitrator (s)’ background and

qualifications. The notice shall be printed and shall be

given to Southland’s counsel for comments at least ten

(10) days prior to the proposed mailing. The notice shall

be sent on the court’s stationery and in the court’s enve-

lopes. Class members shall be given a period of sixty

(60) days after the mailing of notice to opt out of the

class arbitration proceedings. If Southland withdraws its

motion to compel arbitration, the attached form shall be

modified to refiect the change of forum and with such

modification, class notice shall proceed as otherwise set

forth herein.

8a

4. Within fifteen (15) days after mailing of notice to

the class, counsel for the class shall file with the court

the mailing list of all persons to whom the class notice

was sent. The clerk of this court will make available to

counsel for plaintiffs any notices that are returned un-

delivered by the post office. Counsel for plaintiffs will

provide defendants with a list of any such returned no-

tices at which point the court will consider the necessity

and any proposals for substituted notice and/or an ex-

tension of the period of time for opting out of the class.

5. Until the expiration of the period of time for class

members to opt out of the class, Southland, its agents,

employees, and counsel, and the named plaintiffs and their

counsel, shall not discuss this case with members of the

class, or attempt to influence any current or former 7-

Eleven franchisee to opt out of the class, to join the class,

or to become a named plaintiff in this dispute. South-

land, its agents and employees are also prohibited from

taking any action at any time to punish any franchisees

for joining the class.

The court’s order does not affect Southland’s right to

communicate with franchisees in the ordinary course of

business unrelated to class claims. lt also does not affect

the right of plaintiffs’ attorney to communicate with any

franchisee or the attorney for any franchisee, who has,

on his or her own initiative, consulted with plaintiffs’

attorney.

After the expiration of the time for opting out, the

above prohibition will remain in effect against Southland,

its agents, employees, and counsel during the pendency

of these proceedings. No prohibition will apply to plain-

tiffs’ counsel with respect to communications with the

class after expiration of the time for opting out.

6. Within thirty (30) days of this order, provided

Southland elects to remain in arbitration, the parties

shall select one or more arbitrators to arbitrate the claims

4a

certified for class arbitration. Following class notifica-

tion and an opportunity to opt out of the class, classwide

arbitration shall thereafter commence in accordance with

the decision of the California Supreme Court and the

United States Supreme Court in this case, this order, the

accompanying Statement of Decision and the terms of the

parties’ arbitration agreement. If Southland elects to

withdraw its motion to compel arbitration, the class ac-

tion shall proceed in this court.

7. As previously included in the Order of J udge Kron-

inger filed July 31, 1978, if the action proceeds in arbi-

tration, Southland and the other defendants shall either

abstain from the use of any discovery that they have had

in any of the actions, or stipulate to discovery of at least

an equally extensive nature by the franchisees.

8. Arbitration of the coordinated Gouveia, Sampson,

Newell, Cheng and Mount cases is stayed pending the

expiration of the time for class members to opt out of

the class.

9. A stenographic record shall be made of all class

proceedings before the arbitrator(s) as provided for in

Section 22 of the American Arbitration Association Rules.

The court reserves jurisdiction to amend, rescind or

modify this order; to consider approval of any settlement

proposal; to supervise notices to the class; and to con-

sider any application for attorneys’ fees and the award

of costs out of any recovery that may be obtained for the

class.

Dated: June 26, 1987

/s/ Raymond L. Marsh

Judge of the Superior Court

5a

SUPERIOR COURT OF CALIFORNIA

COUNTY OF ALAMEDA

Judicial Council Coordination Proceeding No. 387

Coordination Proceeding

Special Title (Rule 1550 (b) )

MARKET FRANCHISE CASES

[Filed June 26, 1987]

STATEMENT OF DECISION

This statement of decision follows the order of this

court dated November 10, 1986, granting plaintiffs’ mo-

tion to certify for classwide arbitration the causes of

action of the amended and supplemental complaints filed

by Harry Battersby, Richard and Darla Keating and

Michael and Gloria G. Coy on April 18, 1986.

This case comes before this court on remand from the

California Supreme Court to consider whether classwide

arbitration proceedings are appropriate in accordance

with the guidelines set forth in the opinion of thatecourt

in Keating v. Superior Court (1982) 31 Cal.3d 584. This

court has determined that such proceedings are appro-

priate and in the interests of justice.

Southland has argued to this court that the permis-

sibility of class arbitration is governed by the Federal

Arbitration Act. The court declines to consider this ar-

gument because the doctrines of invited error and law

of the case preclude Southland from raising such argu-

6a

ment at this point in these proceedings. This court has

therefore determined the propriety of class arbitration

under state law.

TRADITIONAL CONSIDERATIONS APPLICABLE

TO ALL CLASS ACTIONS

In deciding a motion for class certification under Code

of Civil Procedure section 382, the California Supreme

Court has directed the trial courts of this state to look

to Civil Code section 1781 (consumer class actions) and

Rule 23 of the Federal Rules of Civil Procedure, for

guidance. (Richmond v. Dart Industries (1981) 29 Cal.3d

462 at 469, 470 n.7 [174 Cal.Rptr. 515, 629 P.2d 23];

San Jose v. Superior Court (1974) 12 Cal.3d 447, 453

[115 Cal.Rptr. 797, 525 P.2d 701].) Civil Code section

1781 provides:

“(b) The court shall permit the suit to be main-

tained on behalf of all members of the represented

class if all of the following conditions exist:

(1) It is impracticable to bring all members of

the class before the court.

(2) The questions of law or fact common to the

class are substantially similar and predominate over

the questions affecting the individual members.

(3) The claims or defenses of the representative

plaintiffs are typical of the claims or defenses of the

class.

(4) The representative plaintiffs will fairly and

adequately protect the interests of the class.”

Pursuant to the directive of the California Supreme

Court on remand, this court makes the following deter-

minations with respect to class certification:

1. The class defined by each of the franchisees’ claims

is sufficiently numerous that it is impracticable to bring

Ta

all members of the class before the court in one proceed-

ing. (Vasquez v. Superior Court (1971) 4 Cal.3d 800.)

2. The class representatives’ claims are typical of the

claims of the class members; the class representatives

will fairly and adequately protect and represent the in-

terests of the class on each of the claims; the attorneys

are qualified, experienced, and generally able to conduct

the proposed class proceedings; the named plaintiffs are

not involved in a collusive suit nor do they have interests

antagonistic to those of the remainder of the class.

(Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d

462; LaSala v. American Savings & Loan Association

(1971) 5 Cal.3d 864, 871.)

3. On the class claims for breach of contract and

breach of fiduciary duty for alleged systematic interest

overcharges, the class consists of all persons who owned

California franchises at any time from and after May 24,

1973.

(a) On the contract claim, common issues of inter-

pretation of the standardized adhesion contract and

whether Southland’s accounting practices breached it

predominate. There are no individual issues of liability.

Evidence of individualized knowledge on the part of

franchisees is irrelevant to prove the meaning of the

contract because the standardized adhesion contract must

be interpreted to mean what a reasonable franchisee

would expect it to mean. Each form of the standardized

franchise agreement will mean the same thing for each

franchisee who signed it. (Gray v. Zurich Insurance Co.

(1966) 55 Cal.App.2d 263, 269-71; LaSala v. American

Savings & Loan Assn. (1971) 5 Cal.3d 864; McGhee v.

Bank of America (1976) 60 Cal.App.3d 442, 444-50;

Keating v. Superior Court (1982) 21 Cal.3d 584.)

(b) On the claim for breach of fiduciary duty, common

issues, including whether a fiduciary relationship existed

between the franchisees and Southland, and, if so,

8a

whether Southland breached it, predominate. There are

no individual issues on liability.

4. On the claims for violation of section 31300 of the

Franchise Investment Law, the class consists of all per-

sons who became California franchisees on or after May

24, 1973.

(a) On the section 31300 claim for failure to comply

with the requirements for exemption from registration

set forth in Corporations Code sections 31110 and 31101,

common issues of interpretation of the statutes and in-

terpretation of Southland’s uniform disclosure documents

predominate over any individual issues that may arise

including issues in connection with affirmative defenses

based upon individual franchisee’s knowledge. (Corp.

Code §§ 31300, 31303.) Reliance is not an element of this

claim.

(b) On the section 31300 claim that Southland sold

franchises in violation of section 31202, common issues as

to whether Southland wilfully misrepresented or omitted

material facts required t be set forth in its disclosure

documents predominate over any individual issues that

may arise including issues in connection with affirmative

defenses based upon individual franchisee’s knowledge.

(Corp. Code $§ 31300, 31303.) Reliance is not an element

of this claim.

5. On the claim that Southland is liable under section

31301 of the Franchise Investment Law for selling

franchises in violation of section 31201, the class con-

sists of all persons who became California franchisees

on or after May 24, 1975. Common issues include

whether Southland made misrepresentations or om‘ssions

in its uniform disclosure documents used in the sale of

franchises, and the materiality of any misrepresentations

or omissions. These common issues predominate over any

individual issues that may arise including issues in con-

nection with affirmative defenses based upon individual

9a

franchisee’s knowledge (Corp. Code §§ 31301, 31304),

and rebuttal evidence offered by Southland on the issue

of reliance. Reliance on the part of all of the class

members may be presumed upon a finding that any mis-

representations or omissions in the disclosure documents

were material. Individualized evidence of reliance by

class members is not necessary. (Affiliated Ute Citizens

v. United States (1972) 406 U.S. 154.)

6. On the fraud claim for alleged systematic interest

overcharges, the class consists of all persons who became

California franchisees on or after May 24, 1974. Com-

mon issues include whether Southland made material

misrepresentations or suppressed material facts in its

uniform disclosure documents; and, if so, whether South-

land acted with the requisite scienter. These issues pre-

dominate over any individual issues that may arise in-

cluding issues with respect to rebuttal evidence relating

to individual franchisee’s reliance. Reliance on the part

of all of the class members may be presumed from a

finding of the materiality of any misrepresentations or

omissions. Individualized evidence of reliance by class

members is not necessary. (Vasquez v. Superior Court

(1971) 4 Cal.3d 800.)

7. On the usury claims, the class consists of all Cali-

fornia franchisees who paid interest to Southland on or

after May 24, 1975. On the claim for recovery of in-

terest payments in excess of the legal maximum, the

common issue which predominates is whether usurious

interest resulted from Southland’s accounting practices.

On the claim based upon the compounding of interest,

the common issues which predominate are whether South-

land compounded interest and, if so, whether such prac-

tice was clearly disclosed in writing. The effective rate

of interest for each franchisee will have to be calculated

on an individual basis.

8. On the claims for breach of contract and breach of

fiduciary duty for systematic inventory overcharges, the

10a

class consists of all persons who owned California fran-

chises at any time from May 24, 1973, through December

31, 1978.

(a) On the contract claim, common issues of the in-

terpretation of the standardized franchise agreement and

whether Southland breached it by charging more than

its average cost for franchisees’ initial inventory and in-

ventory shortages predominate. There are no individual

issues of liability. Evidence of individualized knowledge

_on the part of franchisees is irrelevant to prove the

meaning of the contract because the standardized ad-

hesion contract must be interpreted to mean what a

reasonable franchisee would expect it to mean. Each

form of the standardized franchise agreement will mean

the same thing for each franchisee who signed it. (Gray

v. Zurich Insurance Co. (1966) 55 Cal.App.2d 263, 269-

71; LaSala v. American Savings & Loan Assn. (1971)

5 Cal.8d 864; McGhee v. Bank of America (1976) 60

Cal.App.3d 442, 444-50; Keating v. Superior Court

(1982) 21 Cal.3d 584.)

(b) On the breach of fiduciary duty claim, common

issues which predominate include whether a fiduciary

relationship exists between Southland and the franchisees,

and, if so, whether Southland violated such fiduciary

duty. There are no individual issues on liability.

9. On the claims for alleged violation of section 31300

due to inventory overcharges, the class consists of all

persons who became California franchisees between May

24, 1973, and December 31, 1978, inclusive.

(a) On the claim for failure to comply with require-

ments for exemption from registration, common issues

which predominate include the interpretation of the stat-

utory requirements for exemption and whether South-

land’s uniform disclosure documents complied with the

ear: statutory requirements. The common issues predominate

over any individual issues that may arise including issues

lla

in connection with affirmative defenses based upon in-

dividual franchisee’s knowledge. Reliance is not an

element of this claim.

(b) On the section 31300 claim for the alleged sale

of franchises in violation of section 31202, common is-

sues of the interpretation of the section 31100 disclosure

requirements and whether Southland’s uniform disclosure

documents misrepresented or omitted material facts re-

quired to be set forth predominate over any individual

issues that may arise from affirmative defenses based

upon individual franchisee’s knowledge. (Corp. Code

§§ 31300, 31303.) Reliance is not an element of this

claim.

10. On the claim for violation of section 31301 of the

Franchise Investment Law due to inventory overcharges,

the class consists of all persons wno became California

franchisees between May 24, 1975, and December 31,

1978, inclusive. The common issues include whether

written misrepresentations or omissions were made to

the class with respect to the cost of inventory, and, if

so, whether such misrepresentations or omissions were

material. Such common issues predominate over any

individual issues that may arise including issues in con-

nection with affirmative defenses based upon individual

franchisee’s knowledge. (Corp. Code §§ 31301, 31304.)

Reliance may be presumed from a finding of the mater-

iality of any misrepresentations or omissions. Individ-

ualized evidence of reliance by class members is not

necessary. (Affiliated Ute Citizens v. United States,

supra, 406 U.S. 154.)

11. On the franchisees’ claim for fraud based upon

alleged inventory overcharges, the class is composed of

all persons who became California franchisees between

May 24, 1974, and December 31, 1978, inclusive. Com-

mon issues include whether Southland misrepresented

12a

or omitted material facts respecting the cost of inventory

in its uniform disclosure documents, whether any mis-

representation or omission was material, whether any

misrepresentation or omission was made with the requi-

site scienter. Such common issues predominate over any

individual issues that may arise including issues with

respect to rebuttal evidence on reliance. Reliance may

be presumed from a finding of materiality. Individual-

ized evidence of reliance by class members is not neces-

sary. (Vasquez v. Superior Court, supra, 4 Cal.3d 800.)

12. It appears that damages on all of the class claims

may be estimated by mathematical formulae applied to

information derived from Southland’s records. In the

event the class prevails on the breach of fiduciary duty

claims, classwide relief will also be available in the form

of an accounting and constructive trust. Punitive dam-

ages also may be awarded to the class on the breach of

fiduciary duty claims, the claims for violation of the

Franchise Investment Law, and the common law fraud

claims should the arbitrators determine that there is a

basis therefor under Civil Code section 3294. The issues

whether Southland acted with fraud, malice or oppression

present common issues for the class.

13. It appears that a significant number of class

members executed releases upon termination of their

franchise relationship with Southland. Southland raises

such releases as a defense to all of the class claims as-

serted on behalf of those persons who have executed

releases. Common issues predominate on this defense.

Such common issues are whether the language of the

release form includes the claims made on behalf of the

class; whether the releases were procured by contin-

uing classwide misrepresentations and/or concealment;

whether the releases are invalid under Civil Code section

1542; whether the releases are invalid under the anti-

waiver provisions of the Franchise Investment Law; and

13a

whether releases signed after the first of these class

actions was filed on May 24, 1977, should be invalidated

because they constitute opt-outs or settlements made

without court supervision and without sufficient safe-

guards to protect the class members’ rights. Plaintiffs

suggest that the issue whether releases constitute im-

proper opt-outs should be resolved by the court rather

than the arbitrators, since it is the court’s responsibility

to supervise class notice and opt-out procedures. The

court has decided to have this issue ascertained by the

arbitrators, however, in order to minimize judicial in-

trusion upon issues affecting the merits of the dispute.

SPECIAL CONSIDERATIONS APPLICABLE

TO CLASSWIDE ARBITRATION

In addition to the traditional considerations involved

in deciding whether to certify a class, the California Su-

preme Court has directed this court to consider the spe-

cial characteristics of arbitration including the impact

upon an arbitration of whatever court supervision might

be required, and the availability of consolidation as an

alternative means of assuring fairness. (Keating v. Su-

perior Court (1982) 31 Cal.3d 584, 613.) In accordance

therewith this court makes the following additional de-

terminations:

14. Classwide arbitration in this case will be manage-

able. The court notes that the franchise contract calls

for arbitration in accordance with the rules of the

American Arbitration Association. Section 22 of those

rules provides for a stenographie record of arbitration

proceedings. The maintenance of such a record is appro-

priate in this case. It would not unduly complicate the

proceedings, and would allow the court to safeguard the

rights of absent class members to adequate representa-

tion. Should any questions regarding the adequacy of

representation arise during the course of the arbitration,

14a

the parties may bring the transcript before this court for

its review.

15. No judicial intrusion upon the conduct of the pro-

ceedings themselves seems necessary. It will be the pro-

vince of the arbitrators to determine the merits of the

dispute and to refer to this court only matters which

relate to class certification. The court will have continu-

ing jurisdiction to amend, modify or rescind this order,

to supervise notices to the class, determine approval of

any settlement, and, in the event of any recovery for the

class, to rule on any request for an award of attorneys’

fees and costs out of the recovery. The impact of this

role upon the arbitration proceeding itself appears

minimal.

16. The court has considered consolidation as an al-

ternative to ¢'.ss arbitration, and has determined that

class certification would provide a better, more efficient

and fairer solution to the controversy. The alterative to

a class arbitration—requiring hundreds of individual

franchisees each to litigate with Southland in a sepa-

rate arbitration—would be entirely impractical. Due to

the relatively small size of the claims being made, in-

dividual arbitration of such claims appears economically

unfeasible for most class members. Refusal to certify a

class would result in gross unfairness because it would

effectively deny opportunity for relief to the vast ma-

jority of class members, a class proceeding being their

only practical recourse.

17. Class arbitration will not prejudice the legitimate

interests of Southland. If it committed classwide wrongs,

it should be held accountable. If it did not, it will be ex-

onerated in one proceeding binding all class members.

Moreover, if Southland considers that the arbitral forum

somehow handicaps it from presenting a proper defense,

it has the option of returning the entire action to court.

(Keating v. Superior Court (1982) 31 Cal.3d 584, 614.)

This is adequate protection for its legitimate interests.

15a

18. Southland is a large corporation of vastly superior

bargaining strength to that of class members, a portion

of whom are current franchisees. There is a danger that

potential class members may choose to opt out of the

class because of fear of adverse consequences in their on-

going relationship with Southland. The court, therefore,

will order that Southland is prohibited from discussing

this case or any of the class claims with any class mem-

ber, from attempting to influence any class member to

opt out of the class, or from taking any action to punish

a class member for choosing not to opt out. Southland

will not be prohibited from communicating with class

members in the ordinary course of business unrelated to

the class claims. (Cf. Kleiner v. First National Bank of

Atlanta (11th Cir. 1985) 751 F.2d 1193.)

Based on the papers on file and the arguments of coun-

sel, and for the foregoing reasons, the court has deter-

mined that class certification is in the interests of justice

and has directed the franchisees’ counsel to prepare a

proposed form of notice to the class for this court’s ap-

proval. The cost of providing the names and last known

addresses of class members to counsel for the class shall

be borne by Southland; the cost of mailing notice shall

be borne by the class. (Civil Service Employees Ins. Co.

v. Superior Court (1978) 22 Cal.3d 362, 378, n.9; 4

Witkin, Cal. Procedure (3d Ed. 1985) Pleading § 228,

p. 227.)

Dated: June 26, 1987 -

/s/ Raymond L. Marsh

Judge of the Superior Court

16a

IN THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

FOR THE FIRST APPELLATE DISTRICT

DIVISION THREE

A039472

RICHARD D. KEATING, et al.,

Plaintiffs and Respondents,

VS.

THE SOUTHLAND CORPORATION, et al.,

Defendants and Appellants.

Judicial Council Coordination Proceeding No. 387

BY THE COURT:

Respondents’ motion to dismiss appeal is granted.

(White, P.J., Barry-Deal, J. and Merrill, J. participated

in the decision). .

Dated Dec. 16, 1987

/s/ White

PJ.

17a

IN THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

FOR THE FIRST APPELLATE DISTRICT

DIVISION THREE

A039337

THE SOUTHLAND CORPORATION, et al.,

Petitioner,

Vs.

THE SUPERIOR COURT FOR THE COUNTY OF ALAMEDA,

Respondent ;

RICHARD D. KEATING, et al.,

Real Party in Interest.

Judicial Counci! Coordination Proceeding No. 387

BY THE COURT:

Petition for writ of mandate and/or prohibition is de-

nied. (White, P.J., Barry-Deal, J. and Merrill, J. partici-

pated in the decision).

Dated Dec. 16, 1987

/s/ White

Pia.

18a

IN THE SUPREME COURT

: OF THE STATE OF CALIFORNIA

IN BANK

No. 1/3 A039337, S003635

THE SOUTHLAND CORPORATION et al.,

Petitioners,

V.

SUPERIOR COURT OF THE COUNTY OF ALAMEDA,

Respondent ;

KEATING et al.,

Real Parties in Interest.

[Filed Dec. 30, 1987]

Pending final determination of the petition for review

filed herein, all proceedings in the Superior Court,

County of Alameda, in Judicial Council Coordination Pro-

ceeding No. 387, entitled Richard D. Keating et al. v. The

Southland Corporation et al., are hereby stayed.

/3/

Chief Justice

19a

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

IN BANK

ist District, Division 3, No. A039337, S003635

THE SOUTHLAND Corr? et al.,

Petitioners,

V.

SUPERIOR COURT OF THE COUNTY OF ALAMEDA,

Respondent;

KEATING et al.,

Real Parties in Interest.

[Filed Feb. 25, 1988]

ORDER DENYING REVIEW

AFTER JUDGMENT BY THE COURT OF APPEAL

Petitioners’ petition for review DENIED.

/g/

Chief Justice

20a

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF ALAMEDA

DEPT. 20

Date: March 29, 1988 Sara Dalleske, Deputy Clerk

HON. RAYMOND MARSH, Judge Lolita Moore, Reporter

Coordination Proceeding Special Title (Rule 1550(b) )

Judicial Council Coordination Proceeding No. 387

MARKET FRANCHISE CASES

Coordinated Actions:

Napa Superior Court No. 37402

(now Ala. 505159-9)

KEATING V. SOUTHLAND CORPORATION

Santa Clara Superior Court No. 361-187

(now Ala. 505161-4)

SAMPSON V. SOUTHLAND CORPORATION

Santa Clara Superior Court No. 366-559

(now Ala. 505164-1)

NEWELL V. SOUTHLAND CORPORATION

Santa Clara Superior Court No. 364-650

(now Ala. 505162-3)

CHENG V. SOUTHLAND CORPORATION

21a

Alameda Superior Court No. 469216-2

GOUVEIA V. SOUTHLAND CORPORATION

Alameda Superior Court No. 473-115-3

SOUTHLAND CORPORATION V. GOUVEIA

Alameda Superior Court No. 506120-6

Coy v. THE SOUTHLAND CORPORATION

Los Angeles Superior Court No. 0235779

THE SOUTHLAND CORPORATION V. SCOVIS

Santa Clara Superior Court No. 390-13

BATTERSBY V. THE SOUTHLAND CORPORATION

DEFENDANT SOUTHLAND’S MOTION FOR

STAY PENDING U.S. SUPREME COURT REVIEW

Avpearing for plaintiff’s Lise Pearlman, Esq., and David

Schuricht, Esq.

Appearing for defendant Southland Charles G. Miller,

Esq.

The above entitled action comes regularly on calendar for

hearing. The Court entertains argument. The matter is

submitted. The Court orders motion for stay granted for

thirty (30) days from March 21, 1988. whl

Parties on the attached mailing list are so notified on

March 30, 1988.

by /s/ Sara Dalleske

Deputy Clerk

22a

MAILING LIST

Judicial Council Coordination Proceeding No. 387:

MARKET FRANCHISE CASES

John F. Wells, Esq.

STARK, WELLS, RAHL, FIELD,

& SCHWARTZ

Lake Merritt Plaza

1999 Harrison Street, Ste. 1300

Oakland, CA 94612

Lise A. Pearlman, Esq.

MILLER, STAR & REGALIA

One Kaiser Plaza, Suite 1600

Oakland, CA 94612

Charles G. Miller, Esq.

BARTKO, WELSH, TARRANT &

MILLER

One Maritime Plaza, Suite 1440

San Francisco, CA 94111

Mark J. Spooner, Esq.

ARNOLD & PORTER

1200 New Hampshire Avenue, N.W.

Washington, D.C. 20036

Chairperson, Judicial Council of

California

Administrative Office of the Court

Attn: Coordination Attorney

350 McAllister Street, Room 3154

San Francisco, CA 94102

René C. Davidson,

County Clerk Alameda County

1225 Fallon Street

Oakland, CA 94612

Grace K. Kamakawa, County

Clerk and Executive Officer

Santa Clara County

191 First Street

San Jose, CA 951123

Frank S. Zolin, Executive

Officer and County Clerk

Los Angeles County

P.O. Box 151

Los Angeles, CA 90053

Janice F. Norton, County

Clerk, Napa County

P.O. Box 880

Napa, CA 94550

23a

SUPERIOR COURT OF CALIFORNIA

COUNTY OF ALAMEDA

Judicial Council Coordination Proceeding No. 387

Coordination Proceeding

Special Title (Rule 1550(b) )

MARKET FRANCHISE CASES

[Filed Mar. 29, 1988]

ORDER GRANTING DEFENDANTS’

MOTION FOR A STAY PENDING

U.S. SUPREME COURT REVIEW

Upon motion of The Southland Corporation and sev-

eral of its officers, directors and employees, defendants in

the above-entitled cause (hereinafter collectively referred

to as “Southland’’) for a stay of enforcement of the June

26, 1987 Order of this Court (“the Order’) to enable

Southland to apply for and obtain a writ of certiorari

from the Supreme Court of the United States, and good

cause therefor being shown,

IT IS ORDERED that the enforcement of the June 26,

1987 Order be, and it hereby is, stayed for a period of

30 days, commencing on March 21, 1988.

Dated: 3/29/88

/s/ Raymond L. Marsh

Judge of the Superior Court

24a

SUPREME COURT OF CALIFORNIA

IN BANK

S.F. 24242

RICHARD D. KEATING, et ai.,

ms Petitioners,

THE SUPERIOR COURT OF ALAMEDA COUNTY,

Respondent.

SOUTHLAND CORPORATION et al.,

Real Parties in Interest.

EpWARD J. GouveEIA et al.,

Plaintiffs and Respondents,

Y.

SOUTHLAND CORPORATION et al.,

i Defendants and Appellants.

{And 7 other cases. ]*

June 10, 1982

*Cheng v. Southland Corporation (Super.Ct. No. 505162-3) ;

Newell v. Southland Corporation (Super.Ct. No. 505164-1) ; Samp-

son v. Southland Corporation (Super.Ct. No. 505161-4) ; Battersby

». Southland Corporation (Super.Ct. No. 390132) ; Keating v. South-

land Corporation (Super.Ct. No. 505159-9) ; Coy v. Southland Cor-

poration (Super.Ct. No. 506120-6) ; and Scovis v. Southland Corpo-

ration (Super.Ct. No. C-235779).

25a

McKenna, Conner & Cuneo, McKenna & Fitting, Aaron

M. Peck, Charles G. Miller, Martin H. Kresse, Susan L.

Carroll, Los Angeles, Arnold & Porter, Peter K. Bleak-

ley, Mark J. Spooner and Peter R. Maier, Washington,

D.C., for defendants and appellants and real parties in

interest.

Robert M. Brown, Brown & Finney, San Francisco,

Brown, Joseph & Finney, Linda R. Joseph, John F.

Banker, Banker & Linderman, Tiburon, John F. Wells,

Lise A. Pearlman, Fonda Karelitz, D. Barratt Irwin,

Stark, Stewart & Simon & Stark, Stewart, Simon &

Sparrowe, Oakland, for plaintiffs and respondents and

petitioners.

No appearance for respondent.

GRODIN, Justice.**

These coordinated cases arise out of disputes between

Southland Corporation (Southland), owner and fran-

chisor of 7-Eleven convenience food store operations

throughout the country, and persons who are, or were,

franchised operators of 7-Eleven stores ir California.

The issues before us do not concern the merits of those

disputes, but rather the forum and procedure for their

resolution. Southland contends that the disputes should

be submitted to arbitration on an individual (i.e., fran-

chisee-by-franchisee) basis, pursuant to an arbitration

provision contained in its agreement with each fran-

chisee. The franchisees, who have sued Southland! in

both individual and class actions on a variety of grounds,

and who are all represented by the same law firm, con-

tend alternatively that the arbitration provisions are not

enforceable on adhesion grounds; that insofar as the

** Assigned by the Chairperson of the Judicial Council.

1 The suits also named certain corporate officers as defendants,

but as the parties do not distinguish them with respect to the issues

presented here, we shall use the term Southland to include both the

corporation and its officers.

——

26a

disputes involve alleged violation by Southland of the

Franchise Investment Law they are not subject to arbi-

tration; and that Southland has waived its right to insist

upon arbitration in certain of the cases. Franchisees also

contend that if there is to be arbitration it should pro-

ceed on a classwide, rather than individual, basis. We

will hold that the adhesive nature of the franchise con-

tract is not itself a bar to enforcement of the arbitration

provision, but that the trial court properly excluded

claims based upon alleged violation of the Franchise In-

vestment Law. We will affirm the trial court’s holding

that there has been no waiver by Southland of its right

to insist upon arbitration; but we will remand to the

trial court for determination as to whether the interests

of justice require that the order to arbitrate be condi-

tioned upon Southland’s acceptance of classwide arbitra-

tion.

We first describe the factual and procedural back-

ground relevant to analysis. Under the terms of South-

land’s standard 7-Eleven franchise agreement (hereafter

the agreement(s}), Southland provides each franchisee

with a license to use certain nationally known and fed-

erally registered trademarks, a lease or sublease of cer-

tain convenience food stores owned or leased by South-

land, the financing of store inventories, and advertising

and merchandising assistance. The franchisees, in turn,

operate the stores, supply Southland with certain book-

keeping data, make bank deposits of receipts from the

operation of the stores, and pay Southland a fixed per-

centage of gross profits. Each of the agreements con-

tains an arbitration clause providing, essentially, that

‘“‘{a]ny controversy or claim arising out of or relating to

this Agreement or the breach thereof shall be settled by

arbitration in accordance with the Rules of the American

Arbitration Association . . . and judgment upon any

award rendered by the arbitrator may be entered in any

court having jurisdiction thereof.”

——

27a

Between September 1975 and January 1977, fran-

chisees Gouveia, Sampson, Cheng and Newell (and one

other franchisee whose claim has since been settled) filed

individual actions against Southland alleging, among

other things, fraud, oral misrepresentation, breach of

contract, breach of fiduciary duty, and violation of the

disclosure requirements of the Franchise Investment Law

(Corp. Code, § 31000 et seq.). In each of these actions

except Gouveia, Southland filed an answer in which the

failure to arbitrate was an affirmative defense, but it

took no further steps based on that defense at the time,

nor did it actively seek arbitration until after the Keat-

ing action was filed. In Gouveia, Newell and Sampson

it filed cross-complaints, and participated in discovery,

including taking the depositions of each of the named

plaintiffs.

In May 1977 franchisee Keating filed a class action on

behalf of an asserted class composed of approximately

800 Southland franchisees in California, alleging claims

substantially similar to those being claimed by the other

franchisees, and alleging also that Southland’s account-

ing procedures were unfair and inaccurate. Southland

promntly removed Keating to the federal district court,

and filed an answer and counterclaim to the complaint.

A few days later, it filed an amended answer asserting

arbitrewion as a defense. When Keating was remanded

to the state courts, at franchisees’ request, Southland pe-

titioned to compel arbitration in all of the pending cases,

but ruling on that petition was stayed pending deter-

mination of a motion by the franchisees for coordina-

tion of the actions. By this time, the list of actions in-

cluded a class action filed by franchisee Battersby, and

the parties stipulated that Battersby would be governed

by the rulings in Keating.

In November 1977, the motion to coordinate the var-

ious actions was granted by the Judicial Council, on con-

dition that franchisees file substantially amended com-

28a

plaints which would demonstrate the asserted similarities

among the actions. The amended complaints contain sub-

stantially comparable allegations including claims of

misrepresentations in connection with the sale of the fran-

chises and inaccurate information about fees, discounts,

and the overall performance of 7-Eleven stores.

Except for the claims based on the Franchise Invest-

ment Law, the trial court granted Southland’s motions to

compel arbitration in each of the coordinated actions,

without passing upon the franchisees’ request for class

certification. Southland then appealed from the order to

arbitrate insofar as it excluded claims based on the Fran-

chise Investment Law, and the franchisees filed a_peti-

tion for writ of mandate or prohibition seeking relief

from the order to arbitrate on the various grounds

stated above. We proceed to consider the issues presented

in the order most convenient for discussion. Initially,

we observe that since the franchise agreements were be-

tween a Texas corporation and California residents, en-

tailed the right to use federally registered trademarks,

and contemplated a continuing business relationship be-

tween the parties across state lines, they involve inter-

state commerce and fall within the ambit of the Federal

Arbitration Act. (9 U.S.C. §2.)- We shall, therefore,

take that statute into account in passing upon the issues

presented.

2 Section 2 provides: “A written provision in any maritime trans-

action or a contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out of such

contract or transaction, or the refusal to perform the whole or any

part thereof, or an agreement in writing to submit to arbitration

an existing controversy arising out of such 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.”

cael

29a

I. ADHESION.

In his declaration in opposition to Southland’s petition

to compel arbitration, Keating stated the franchise agree-

ment was presented to him by Southland representatives

on a take-it-or-leave-it basis, with no opportunity to

bargain or to negotiate; and that other than the informa-

tion set forth in the franchise agreement itself, and 2

pamphlet of the American Arbitration Association de-

seribing their procedures, he was “given no verbal or

written explanation of the meaning of arbitration, the

concept of an arbitration proceeding, the fact that it

involved [his] waiver of [his] constitutional rights to a

jury trial, a loss of the right to utilize the protection of

the courts in the discovery process, nor any information

with respect to what arbitration would cost in a pro-

cedure of this type.” He, and the other franchisees who,

in effect, adopt his declaration, contend that the declara-

tion raised questions of fact concerning the enforceability

of the arbitration clauses which should have been resolved

before arbitration was ordered. The trial court ordered

arbitration notwithstanding these contentions. On this

score, we find no error.

We accept franchisees’ characterization of the fran-

chise agreements, and hence the arbitration agreements,

as contracts of adhesion, “. . . ‘a standardized contract,

which, imposed and drafted by the party of superior

bargaining strength, relegates to the subscribing party

only the opportunity to adhere to the contract or reject

it.’” (Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d

807, 817, 171 Cal.Rptr. 604, 623 P.2d 165, quoting from

Justice Tobriner’s decision in Neal v. State Farm Ins.

Cos. (1961) 188 Cal.App.2d 690, 694, 10 Cal.Rptr. 781.)

It is undisputed that the franchise agreements in ques-

tion here are standardized in form, at least as regards

the arbitration provision; and that they are drafted and

imposed by defendant, a large corporation of vastly su-

perior bargaining strength, upon all parties desiring a

30a

7-Eleven franchise. The California Legislature has de-

termined that franchisees are in need of special protec-

iton in dealing with franchisors. (Corp. Code, § 31001,

see generally Corp. Code, § 31000 et seq.)* While the

franchisees were financially interested in establishing a

beneficial business relationship with Southland, and while

that interest may not constitute a “needed service” in the

sense envisaged in Madden v. Kaiser Foundation Hos-

mitals (1976) 17 Cal.3d 699, 711, 131 Cal.Rptr. 882, 552

P.2d 1178, or a “service of great importance to the

public” as contemplated in Tunkl v. Regents of Univer-

sity of California (1963) 60 Cal.2d 92, 99, 32 Cal.Rptr.

33, 383 P.2d 441, it is now clear that those factors are

not prerequisite to a finding of adhesion. (Graham v.

Scissor-Tail, Inc., supra, 28 Cal.2d at pp. 818, 820, fn.

18, 171 Cal.Rptr. 604, 623 P.2d 165.)

It does not follow, however, that the contracts are un-

enforceable. “To describe a contract as adhesive in char-

acter is not to indicate its legal effect. It is, rather, ‘the

3 Corporations Code section 31001 provides, “The Legislature

hereby finds and declares that the widespread sale of franchises is

a relatively new form of business which has created numerous

problems both from an investment and a business point of view....

[{] It is the intent of this law to provide each prospective fran-

chisee with the information neecssary to make an intelligent de-

cision regarding franchises being offered. Further, it is the intent

of this law . . . to protect the franchisor by providing a better

understanding of the relationship between the franchisor and

franchisee with regard to their business relationship.” (See Damon,

Franchise Investment Law (1971) (2 Pacific L.J. 27, 27-30, 35-36.)

The need for such “special protection” has been recognized in other

states and by the federal government who have enacted similar

legislation. (15 U.S.C. § 45(a)(1) (1964); Fla.Stat.Ann., § 817.416

(1971) and Rules Chap. 2-17 (1974); Hawaii Rev.Stat., § 482E-1

(1974); Ill.Rev.Stat., ch. 12112, § 702 (1974); Ind.Code, § 23-2-2.5-

47 (1975); Mich.Stat.Ann., §19.854(1) [M.C.L.A. § 445.1501]

(1974); Minn.Stat., § 80C.01 (1973); Ore.Rev.Stat., § 650.005, rule

40-050 (1975); R.I.Gen.Laws, § 19-28-2 (1973); Va. Code, § 13.1-558

(1972) ; Wash.Rev.Code, § 19.100.010 (1972) ; and Wis.Stat., § 553.01

(1972) Admin. Code, § 31.61.)

3la

beginning and not the end of the analysis insofar as en-

forceability of its terms is concerned.’ [Citation.]”’

(Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 819,

171 Cal.Rptr. 604, 623 P.2d 165.) ‘Thus, a contract of

adhesion is fully enforceable according to its terms [ci-

tations] unless certain other factors are present which,

under established legal rules—legislative or judicial—

operate to render it otherwise.” (Id., at pp. 819-820, 171

Cal.Rptr. 604, 623 P.2d 165.) “Generally speaking, there

are two judicially imposed limitations on the enforcement

of adhesion contracts or provisions thereof. The first is

that such a contract or provision which does not fall

within the reasonable expectations of the weaker or ‘ad-

hering’ party will not be enforced against him. [Cita-

tions.] The second—a principle of equity applicable to

all contracts generally—is that a contract or provision,

even if consistent with the reasonable expectations of the

parties, will be denied enforcement if, considered in its

context, it is unduly oppressive or ‘unconscionable.’ ”

(Id., at p. 820, 171 Cal.Rptr. 604, 623 P.2d 165.)

Arbitration in the setting of a contract of adhesion

does pose special problems, both because arbitration nec-

essarily entails relinquishment of the constitutional right

to trial by jury and because it is susceptible of being

structured, or utilized, in such a way as to gain unfair

advantage to the party with superior bargaining power.

Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d 807, 171

Cal.Rptr. 604, 623 P.2d 165, in which the agreement

called for arbitration by a presumptively partial tribu-

nal, provides an example of that sort of unfairness (see

also, Hope v. Superior Court (1981) 122 Cal.App.3d

147, 175 Cal.Rptr. 851). As we shall discuss later in

this opinion, reliance upon individual arbitration agree-

ments to insulate the stronger party from otherwise ap-

propriate class actions may also be inequitable depending

upon the circumstances.

32a

In the absence of some special element of unfair ad-

vantage, however, arbitration is generally considered to

be a mutually advantageous process, providing for reso-

lution of disputes in a presumptively less costly, more

expeditious, and more private manner by an impartial

person or persons typically selected by the parties them-

selves. (See Madden v. Kaiser Foundation Hospitals,

supra, 17 Cal.3d 699, 131 Cal.Rptr. 882, 552 P.2d 1178.)

For these reasons, the fact that provision for arbitration

is contained in a contract of adhesion will not, of itself,

render the provision unenforceable. (Graham v. Scissor-

Tail, Inc., supra, 28 Cal.3d at pp. 819-820, 171 Cal.Rptr.

604, 623 P.2d 165.)

Moreover, provision for arbitration in a commercial

context is quite common, and reasonably to be antici-

pated. Indeed, Keating’s declaration itself makes clear

that he was aware of the provision, and of the American

Arbitration Association pamphlet making reference to the

applicable rules. In such a setting neither he nor the

other franchisees are in a position to claim that the ar-

bitration provision itself, or the fact that it would entail

waiver of jury trial, lack of formal discovery, or certain

costs, did not “fall within [their] reasonable expecta-

tions.” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d

at p. 820, 171 Cal.Rptr. 604, 623 P.2d 165.)

For these reasons, we conclude that the arbitration

provisions of the franchise agreement were, in general,

binding and enforceable. We proceed now to consider the

remaining issues.

II. ARBITRABLITY OF FRANCHISE

INVESTMENT LAW CLAIMS.

We next consider Southland’s appeal from the trial

court’s denial of its petitions to compel arbitration con-

cerning certain claims made against it pursuant to the

Franchise Investment Law (Corp. Code, § 31000 et seq.).

These claims assert, among other things, that Southland

——7~eeeeeeeeee aaa. La

33a

—

systematically violated section 31202 * of the Corporations

Code by willfully making untrue statements of material

fact, and by willfully omitting to state material facts

which are required to be stated in statements required

to be disclosed under section 31101.° The trial court was

apparently of the view that these claims were not sub-

ject to arbitration as a matter of contract interpretation

and also as a consequence of Corporations Code section

31512, part of the Franchise Investment Law, which pro-

vides: “Any condition, stipulation or provision purport-

ing to bind any person acquiring any franchise to waive

compliance with any provision of this law or any rule or

order hereunder is void.” Since we agree with the latter

conclusion we find it unnecessary to consider the former.

In Wilko v. Swan (1953) 346 U.S. 427, 74 S.Ct. 182,

98 L.Ed. 168, the United States Supreme Court inter-

preted nearly identical language in section 14 of the Se-

curities Act of 1933 (15 15 U.S.C. § 77n)° to permit suit

by a customer against a securities brokerage firm for

alleged misrepresentation in the sale of securities, not-

withstanding a provision for arbitration contained in the

margin agreement. The arbitration clause, the court de-

cided, constituted a “stipulation,” and the right to select

the judicial forum the kind of “provision” that could not

be waived in advance under section 14. (346 U.S. at pp.

434-435, 74 S.Ct. at p. 186.) In arriving at this con-

* Section 31202 provides: “It is unlawful for any person willfully

to make any untrue statement of a material fact in any statement

required to be disclosed in writing pursuant to Section 31101, or

willfully to omit to state in any such statement any material fact

which is required to be stated therein.”

5 Section 31101, subdivision (c) listed some 15 items of informa-

tion to be disclosed.

® That language reads: “Any condition, stipulation, or provision

binding any person acquiring any security to waive compliance with

any provision of this subchapter or of the rules and rezulations of

the Commission shall be void.”

es

34a

clusion, the court observed that section 12(2) of the act

“ereated a special right to recover for misrepresentation

which differs substantially from the common-law action

in that the seller is made to assume the burden of prov-

ing lack of scienter” (346 U.S. at p. 431, 74 S.Ct. at

p. 184), and that this “special right” was enforceable in

any court of competent jurisdiction, with a wide choice

of venue (ibid.). The court placed primary emphasis,

however, upon the proposition that the effectiveness of the

statute “is lessened in arbitration as compared to judicial

proceedings” (id., at p. 485, 74 S.Ct. at p. 186), in part

because of the limited nature of judicial review (id., at

p. 436, 74 S.Ct. at p. 187). “As the protective provisions

of the Securities Act require the exercise of judicial di-

rection to fairly assure their effectiveness, it seems to us

that Congress must have intended [the waiver provi-

sion] to apply to waiver of judicial trial and review (id.,

at p. 437, 74 S.Ct. at p. 188).”

7In Scherk v. Alberto-Culver Co. (1974) 417 U.S. 506, 94 S.Ct.

2449, 41 L.Ed.2d 270, the Supreme Court declined to apply the

Wilko rule to a suit under section 10(b) of the Securities Exchange

Act of 1934 and rule 10b-5 thereunder, for rescission of a purchase

agreement by which Alberto-Culver Co., an American corporation,

purchased the trademarks and stock of two foreign corporations.

In reaching this conclusion, the court relied primarily on the inter-

national character of the tramsaction, reasoning that “[a] parochial

refusal by the courts of one country to enforce an international

arbitration agreement weuld not only frustrate [policies of cer-

tainty and predictability], but would invite unseemly and mutually

destructive jockeying by the parties to secure tactical litigation

advantages.” (Id., at pp. 516-517, 94 S.Ct. at pp. 2446-2447.) While

the court made reference to the fact that the Securities Exchange

Act did not contain the liberal venue provisions of the Securities

Act, and suggested that a “colorable argument” could be made for

distinguishing Wilko on that ground (id., 417 U.S. at p. 513, 94

S.Ct. at p. 2445), subsequent cases have continued uniformly to

apply the Wilko v. Swan rule to actions brought by customers

against brokerage houses under the Securities Exchange Act, limit-

ing Scherk to the arena of international securities transactions.

(Merrill Lynch, Pierce, Fenner & Smith v. Moore (10th Cir. 1978)

35a

The evidence is persuasive that in drafting the Fran-

chise Investment Law California legislators looked to the

Securities Act of 1933 as their model. Not only do the

two statutes have the same purpose of protecting in-

vestors through preinvestment disclosure statements, but

their parallel provisions are often expressed in identical

language.* Corporations Code section 31301 contains sub-

stantially the same provision relating to scienter as the

United States Supreme Court relied upon in Wilko.® And,

as we have observed, the waiver language of the two stat-

utes is virtually identical.

580 F.2d 823; accord, Mansbach v. Prescott, Ball & Turben (6th

Cir. 1979) 598 F.2d 1017; Weissbuch v. Merrill Lynch, Pierce,

Fenner & Smith, Inc. (7th Cir. 1977) 558 F.2d 831; Sibley v. Tandy

Corp. (5th Cir. 1977) 5483 F.2d 540; Ayres v. Merrill Lynch, Pierce,

Fenner & Smith (3d Cir. 1976) 538 F.2d 532.) The Second Circuit

has suggested that the relatively equal bargaining status of the

parties in Scherk was also a distinguishing factor. (Weissbuch v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 558 F.2d at

p. 835; see generally, Gruenbaum, Avoiding the Protections of the

Federal Securities Laws: The Anti-Waiver Provisions (1980) 20

Santa Clara L.Rev. 49.)

8 Compare the definition of “sale” under section 2 of the Securi-

ties Act (15 U.S.C. § 77b(3)) with that in Corporations Code sec-

tion 31018; the definition of “‘misrepresentations by omission” in

section 12(2) of the Securities Act (15 U.S.C. § 771(2)) with Cor-

porations Code section 31201; the burden of proving due diligence

of section 11 of the Securities Act (15 U.S.C. § 77k(b)(3)) with

Corporations Code section 31301; the provision for injunction ac-

tions in section 20 of the Securities Act (15 U.S.C. § 77t(a)) with

Corporations Code section 31400; and the liability of control per-

sons of section 15 of the Securities Act (15 U.S.C. § 770) with

Corporations Code section 31302.

® Section 31301 provides: “Any person who violates Section 31201

shall be liable to any person (not knowing or having cause to believe

that such statement was false or misleading) who, while relying

upon such statement shall have purchased a franchise, for damages,

unless the defe .dant proves that the plaintiff knew the facts con-

cerning the untruth or omission or that the defendant exercised

reasonable care and did not know, (or if he had exercised reasonable

care would not have known) of the untruth or omission.”

36a

“This court has long recognized the principle of statu-

tory construction that ‘[w]hen legislation has been ju-

dicially construed and a subsequent statute on the same

or an analogous subject is framed in the identical lan-

guage, it will ordinarily be presumed that the Legislature

intended that the language as used in the later enactment

would be given a like interpretation. This rule is ap-

plicable to state statutes which are patterned after the

federal statutes. [Citations.]’” (Belridge Farms v. Ag-

ricuitural Labor Relations Bd. (1978) 21 Cal.8d 551,

557, 147 Cal.Rptr. 165, 580 P.2d 665.)

The presumption established by that principle of stat-

utory construction is reinforced by the language and his-

tory of the recently adopted California Franchise Rela-

tions Act ‘Bus. & Prof. Code, § 20000 et seq.), regu-

lating the grounds and procedure for termination and

nonrenewal of franchises. That statute stemmed from

hearings conducted in late 1977 by a subcommittee of the

state Assembly Committee on Finance, Insurance, and

Commerce, chaired by Assemblyman Bruce Young. A

preliminary report prepared by that committee prior to

hearings refers to the Franchise Investment Law as a

“pre-purchase disclosure law patterned after the Securi-

ties Act of 1933,” discusses various proposals for extend-

ing regulation of franchise relationships, and poses var-

ious rhetorical questions in that regard, among them the

following: ‘Present law provides for the resolution of

franchisee franchisor disputes through the judicial sys-

tem. Should the law be modified to provide for other

means of resolution such as compulsory arbitration

and or a Board of Franchising?” '® The Franchise Re-

lations Act as ultimately adopted by the Legislature con-

tains both a nonwaiver provision nearly identical to Cor-

10 Assembly Committee on Finance, Insurance, and Commerce,

Ad Iloc Subcommittee on Franchising, An Evaluation of the Regula-

tion of Franchising in California and Prospective Legislative Revi-

sions—Background Notes for Interim Study, page 6.

37a

porations Code section 31512 and the following provision

authorizing limited arbitrability of disputes under that

statute: ‘Nothing contained in this chapter shall limit

the right of a franchisor and franchisee to agree before

or after a dispute has arisen to binding arbitration of

claims under this chapter, provided that: (a) The stand-

ards applied in such arbitration are not less than the

requirements specified in this chapter; and (b) The

arbitrator or arbitrators employed in such arbitration

are chosen from a list of impartial arbitrators supplied

by the American Arbitration Association or other im-

partial person.” (Bus. & Prof. Code, § 20040.) The in-

ference is strong, if not inescapable, that the Legislature

understood the anti-waiver provision of the Franchise

Investment Law to be subject to the Wilko (346 U.S. 427,

74 S.Ct. 182, 98 L.Ed.2d 168) interpretation, and that

it intended to establish a different rule for the Franchise

Relations Act.'' While we have no evidence as to the

policy reasons underlying that distinction, it may be

that the Legislature considered arbitration more accept-

able in the context of franchise relationships already

established, presumably on the basis of proper disclo-

sure, or that it considered the more detailed provisions

in the Franchise Investment Law for civil liability (Corp.

Code, § 31300), administrative regulation ‘Corp. Code,

11 This inference is supported by the following legislative history.

Assemblyman Young, who was the author of the bill which became

the Franchise Relations Act, sponsored an earlier bill (Assem. Bill

No. 944 (1977 Reg. Sess.) ) which provided for similar restrictions

upon termination of franchises through addition of a new chapter

($ 31220 et seq.) to the Corporations Code. That bill contained a

section providing for a similar nonwaiver provision which read as

follows: “31224: (a) Evcept as provided in subdivision (b) of this

section, any condition, stipulation, provision, or term of any fran-

chise agreement waiving any rights granted under the chapter or

relieving any person from liability imposed by this chapter shall be

void and unenforceable.” (lamphasis added.) Subdivision (bh) per-

mitted agreements for “binding arbitration of disputes” subject to

the restrictions presently contained in the new law.

— —aeOoereeoorrerereree

38a

§$ 31400) and criminal liability (Corp. Code, § 31410 et

seq.), to require access to the courts and “the exercise of

judicial direction to fairly assure their effectiveness.”

(Wilko v. Swan, supra, 346 U.S. at p. 437, 74 S.Ct. at p.

188.)

Having determined that the California Legislature in-

tended the nonwaiver provision of the California Fran-

chise Act to be interpreted in accord with Wilko v.

Swan," we turn to Southland’s contention that the stat-

ute as so construed may not constitutionally be applied

to a “contract evidencing a transaction involving com-

merce” within the meaning of the Federal Arbitration

Act (FAA). The argument is that the FAA, in man-

dating that a provision for arbitration in such a contract

“shall be valid, irrevocable, and enforceable, save upon

such grounds as exist at law or in equity for the revoca-

tion of any contract” (FAA, § 2), establishes a general

principle of arbitrability which preempts any state law

or policy restrictive of arbitration, whatever the basis

for that law or policy might be, and whether or not

federal jurisdiction over the underlying controversy ex-

ists. We consider that argument overly broad.

The starting point for analysis is Prima Paint v. Flood

& Conklin (1967) 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.

2d 1270, in which the Supreme Court held that in a

federal court diversity action involving a contract sub-

ject to the FAA, a claim of fraud in the inducement of

the contract (as distinguished from a claim of fraud in

the inducement of the arbitration clause), is a question

for the arbitrator, and not the court, to decide; and that

this rule applies even though the law of the state in

which the contract was to be performed might have a

different rule.

12 As in Wilko, the agreement here was to arbitrate such disputes

as might arise in the future. We express no view as to the enforce-

ability of an agreement to arbitrate a pending dispute under the

Franchise Investment Law.

39a

The Supreme Court in Prima Paint rejected the con-

tention that it was “constitutionally impermissible” to

apply the FAA because the case was in the federal court

solely by reason of diversity of citizenship. “[T]he ques-

tion,” the court said, “is not whether Congress may

fashion federal substantive rules to govern questions

arising in simple diversity cases ... [but] whether Con-

gress may prescribe how federal courts are to conduct

themselves. with respect to subject matter over which

Congress plainly has power to legislate.” (Id., at p. 405,

87 S.Ct. at p. 1806; emphasis added.) The opinion thus

left open the question whether or under what circum-

stances stafe courts are constitutionally obligated to apply

the substantive principles inherent in the federal statute.

Shortly after Prima Paint was decided, the New York

Court of Appeal indicated it would apply FAA princi-

ples to a maritime transaction ‘even if such a result is

not constitutionally mandated by the decision in Prima

Paint,” in order to discourage forum shopping between

state and federal courts. (A/S J. Ludwig Mowinckels R.

v. Dow Chem. Co. (1970) 25 N.Y.2d 576, 307 N.Y.S.2d

660, 666, 255 N.E.2d 774, 778.) Since then a number

of courts, both federal and state, have adopted the view

that while the FAA is not itself a source of federal juris-

diction, the statute contains certain principles of ‘“sub-

stantive federal law” which must be applied, regardless

of forum, where federal jurisdiction exists. (E.g., In re

Mercury Const. Corp. (4th Cir. 1981) 656 F.2d 933,

938; E. C. Ernst, Inc. v. Manhattan Const. Co. of Texas

(5th Cir. 1977) 551 F.2d 1026, 1040; Pathman Const.

Co. v. Knox County Hospital Ass’n (1975) 164 Ind.App.

121, 326 N.E.2d 844, 851; Episcopal Housing Corp. v.

Federal Ins. Co. (1977) 269 S.C. 631, 239 S.E.2d 647;

Main v. Merrill Lynch, Pierce, Fenner & Smith, Ine.

(1977) 67 Cal.App.3d 19, 24-25, 136 Cal.Rptr. 378.)

While the federal district court in this case, by its

remand, determined that federal jurisdiction over the

franchisees’ lawsuit did not exist, the likely explanation

40a

for that determination is the presence in the case of

defendants whose citizenship precludes requisite diversity.

Accordingly, we do not decide the preemption issue on

that narrow ground (see In re Mercury Const. Corp.,

supra, 656 F.2d at p. 942).

Rather, we confront squarely the underlying issue of

statutory interpretation: whether the principles of ‘“swb-

stantive federal law” embodied in the FAA, preclude a

state from protecting its franchise investors through a

system of statutory regulation including nonwaivable

judicial remedies. While there is authority for an affirm-

ative answer (Allison v. Medicab Intern., Inc. (1979)

92 Wash.2d 199, 597 P.2d 380, 383; Barron v. Tastee

Freez Intern., Inc. (E.D.Wis. 1980) 482 F.Supp. 1213),

we respectfully disagree.

The FAA was adopted in 1925 (48 Stat. 883), against

a background of judicial hostility to arbitration gener-

ally. (See Kulukundis Shipping Co. v. Amtorg Trading

Corp. (2d Cir. 1942) 126 F.2d 978, 984; Sayre, Develop-

ment of Commercial Arbitration Law (1927) 37 Yale

L.J. 595.) The apparent purpose of the statute was to

remove that hostility, and so “make the benefits of arbi-

tration generally available to the business world.” (Rob-

ert Lawrence Company v. Devonshire Fabrics, Inc. (2d

Cir. 1959) 271 F.2d 402, 407.) While there is nothing

in the legislative history of the statute to suggest that

Congress considered its application to state courts (see,

Sturges and Murphy, Some Confusing Matters Relating

to Arbitration Under the United States Arbitration Act

(1952) 17 Law & Contemp. Prob. 580, passim), we as-

sume that Congress intended to insulate interstate con-

tracts from judicial hostility regardless of forum (see

Fite & Warmath Const. Co., Inc. v. MYS Corp. (Ky.

1977) 559 S.W.2d 729), and to establish for such con-

tracts certain uniform rules of interpretation (see Guin-

ness-Harp Corp. v. Jos. Schlitz Brewing (2d Cir. 1980)

613 F.2d 468, 472.)

4la nm

In these respects, California law is entirely in accord.

Two years after the FAA was enacted, this state adopted

its first modern arbitration statute (Stats.1927, ch.

225), declaring arbitration agreements to be irrevocable

and enforceable in terms identical to those used in sec-

tion 2 of the federal act, and since that time California

courts and its Legislature have “consistently reflected a

friendly policy toward the arbitration process.” (Kagel,

A Study Relating to Arbitration, in Cal. Law Revision

Com. Recommendations and Study Relating to Arbitra-

tion (1960) p. G-28.) That policy was expanded and

clarified in the current arbitration statute which was

adopted in 1961 (Stats.1961, ch. 461, § 2 et seq.), and it

continues to be the policy of this state (e.g., Doers v.

Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 189,

151 Cal.Rptr. 837, 588 P.2d 1261).

Adoption of an affirmative policy toward enforcement

of arbitration agreements has never implied, however,

that all types of disputes are subject to arbitration. In

New York, for example, one of the earliest states to

encourage arbitration through statute, certain categories

of disputes are insulated from arbitration as a matter of

public policy. (See Associated Teachers, etc. v. Bd. of

Ed. (1979) 33 N.Y.2d 229 [351 N.Y.S.2d 670, 306 N.E.

2d 791|.) Among these are disputes under state anti-

trust laws, on the ground that “through the use of eco-

nomic power and contracts of adhesion, containing broad

arbitration clauses, antitrust violators may be able to

insulate their transgressions of the antitrust law from

judicial scrutiny.” (Aimcee Wholesale Corp. v. Tomar

Products (1968) 21 N.Y.2d 621, 629 [289 N.Y.S.2d 968,

973-974, 237 N.E.2d 223, 226-227].) The same is true

of matters involving the liquidation of insolvent insur-

ance companies (Knickerbocker Agency v. Holz (1958)

4 N.Y.2d 245 [173 N.Y.S.2d 602, 607-610, 149 N.E.2d

885, 889-891]), or the usurious character of a purported

42a

sales agreement (Durst v. Abrash (1964) 22 A.D.2d 39,

53 N.Y.S.2d 351, 353).

Such exceptions to the general principle of arbitrabil-

ity, like those expressed in California’s Franchise Invest-

ment Law, do not reflect hostility toward arbitration,

nor do they constitute an obstacle to the general enforce-

ment of arbitration agreements in a manner consistent

with federal law. Rather, such exceptions are narrowly

confined to rights and remedies created by state regu-

latory statutes, and represent a determination that the

public interest is best served by maintaining access to

the remedies which the Legislature has provided. That

Congress intended, through the FAA, to override state

policies of that nature seems highly improbable.

The question in this case might be more debatable were

it not for the fact that California’s policy of protecting

judicial remedies for this state’s franchise investors was

patterned after, and is consistent with, federal policy in

the analogous area of securities investment. There is

no suggestion that Congress has preempted the field of

franchise investor regulation as it has, for example, the

field of labor relations (ef. Teamsters Union v. Oliver

(1959) 358 U.S. 283, 79 S.Ct. 297, 3 L.Ed.2d 312). or

that the FAA embodies substantive principles intrinsic

to a federally regulated field (cf. Textile Workers v.

Linco’n Mills (1957) 353 U.S. 448, 77 S.Ct. 923. 1

L.Ed.2d 972). Having left states with power to enact

laws in this area, it is hardly likely that Congress in-

tended to preclude them from adopting policies which

Congress itself has found to be appropriate."

'S We observe that California’s Corporate Securities Law contains

a substantially identical nonwaiver provision (Corp. Code, § 25701).

Southland’s argument would preclude its application to interstate

transactions as well.

'* Southland observes that two federal statutes which regulate

franchise relationships Petroleum Marketing Practices Act (15

U.S.C. § 2801 et seq.) and Automobile Dealer Suits Against Manu-

43a

Preemption principles were recently summarized by

the United States Supreme Court in Merrill Lynch,

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

94 S.Ct. 383, 38 L.Ed.2d 348, holding that California’s

statutory policy excluding wage claims from arbitration

(Lab. Code, § 229) was not preempted by rules prom-

ulgated by the New York Stock Exchange pursuant to

federal law: “ ‘The principle to be derived from our

decisions is that federal regulation of a field of commerce

should not be deemed preemptive of state regulatory

power in the absence of persuasive reasons—either that

the nature of the regulated subject matter permits no

other conclusion, or that the Congress has unmistakably

so ordained.’ [Citation.] [{] In other contexts, pre-

emption has been measured by whether the state statute

frustrates any part of the purpose of the federal legisla-

tion. [Citations.]} And... while prior cases on pre-

emption ‘are not precise guidelines,’ because each case

turns on the peculiarities and special features of the

federal regulatory scheme in question, it is where there

is in existence a pervasive and comprehensive scheme of

federal regulation that pre-emption follows in order to

fulfill the federal statutory purposes. [Citations.] [%] In

the area of regulation that we are considering here, Cal-

ifornia has manifested a strong policy of protecting its

wage earners from what it regards as undesirable eco-

nomic pressures affecting the employment relationship.

This policy prevails in the absence of interference with

the federal regulatory scheme. We find no such inter-

ference... .” (414 U.S. at pp. 139-140, 94 S.Ct. at

pp. 395-396. )

facturers (15 U.S.C. § 1221 et seq.), do not contain provisions simi-

lar to 15 United States Code section 77n. Neither of these statutes

imposes analogous disclosure requirements, however, nor has the

issue of arbitrability of disputes under them been litigated in re-

ported cases.

i

44a

The court in Ware did not consider the applicability of

the FAA, and the holding in the case is consequently not

controlling here, but the principles which the court an-

nounced strongly support rejection of Southland’s argu-

ment. Not only has California “‘manifested a strong

policy of protecting its [franchise investors] from what

it regards as undesirable economic pressures affecting

the [franchise] relationship” (ibid.), it has done so

through a regulatory scheme containing remedies which

it has deemed appropriate to protect against waiver, and

in accordance with policies compatible with the pattern

of federal regulation.

The United States Supreme Court has “repeatedly

warned against the dangers of an approach to statutory

construction which confines itself to the bare words of

a statute, [citations], for ‘literalness may strangle mean-

ing.’ [Citation].” (Lynch v. Overholser (1962) 369

U.S. 705, 710, 82 S.Ct. 1063, 1067, 8 L.Ed.2d 211.! We

accept that the FAA contains certain principles of sub-

stantive federal law which must be applied, regardless of

forum, where federal jurisdiction exists; on that point

we are fully in accord with our dissenting colleagues.

We simply reject Southland’s argument that those princi-

ples are so unyielding as to require enforcement of an

agreement to arbitrate a dispute over the application of

a regulatory statute which a state legislature, in con-

formity with analogous federal policy, has decided should

be left to judicial enforcement."

15 Southland urges that exclusion of Franchise Investment Law

claims from arbitration will lead to duplicative proceedings because

franchisees’ common law claims of fraud and negligent misrepre-

sentation involve the “same constellation of facts.” Under federal

law, such considerations may be taken into account in determining

the order of proceedings, and even in determining whether common

law claims should be decided in a judicial forum. (Sibley v. Tandy

Corp., supra, 543 F.2d 540, 543, cert. den. (1977) 434 U.S. 824, 98

S.Ct. 71, 54 L.Ed.2d 82; Miley v. Oppenheimer & Co., Inc. (5th Cir.

1981) 637 F.2d 318.)

45a

III. WAIVER.

Franchisees contend that Southland waived its right

to arbitration by delays in asserting it, and by pursuing

legal actions which were inconsistent with it. We will

separately consider waiver in connection with Keating,

and with the individual actions.

The law in this aréa is rather well defined. Arbitra-

tion is strongly favored. Courts will closely scrutinize

any claims of waiver (Gavlik Const. Co. v. H. F. Camp-

bell Co. (3d Cir. 1975) 526 F.2d 777, 783; Seidman &

Seidman v. Wolfson (1975) 50 Cal. App.3d 826, 835, 123

Cal.Rptr. 873; 9 U.S.C. $3; Code Civ.Proc., § 1281.2,

subd. (a)), and “ ‘indulge every intendment to give ef-

fect to such proceedings.’ (Pacific Inv. Co. v. Townsend

(1976) 58 Cal.App.3d 1, 9 [129 Cal.Rptr. 489].)” (Doers

v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d 180,

189, 151 Cal.Rptr. 837, 588 P.2d 1261.) Moreover, the

burden of proof is “heavy” and rests on the party seek-

ing to establish waiver (Martin Marietta Aluminum,

Inc. v. General Elec. Co. (9th Cir. 1978) 586 F.2d 143,

146; General Guar. Ins. Co. v. New Orleans General

Agency, Inc. (5th Cir. 1970) 427 F.2d 924, 929, fn. 5)

which “is not to be lightly inferred.” (Gavlik Const. Co.

v. H. F. Campbell Co., supra, 526 F.2d at p. 783; Davis

v. Blue Cross of Northern California (1979) 25 Cal.3d

418, 426, 158 Cal.Rptr. 828, 600 P.2d 1060.)

The trial court here found no waiver. Because the

question of waiver is one of fact, we have noted that the

“determination of this question, if supported by substan-

tial evidence, is binding on an appellate court. [Cita-

tion.| . .. [it is only] in cases where the record before

the trial court establishes a lack of waiver as a matter of

law, [that] the appellate court may reverse a finding of

waiver made by the trial court.” (Doers v. Golden Gate

Bridge etc. D’st., supra, 23 Cal.3d at p. 185, 151 Cal.

Rptr. 837, 588 P.2d 1261; see Reid Burton Const. v.

Carpenters Dist. Council, ete. (10th Cir. 1980) 614 F.2d

46a

698, 703, cert. den. (1980) 449 U.S. 824, 101 S.Ct. 85,

66 L.Ed.2d 27 [adopting a “clearly erroneous” standard

of review }.)

We have recently acknowledged that while there is no

“single test” in establishing waiver, the relevant factors

include whether the party seeking arbitration (1) has

“previously taken steps inconsistent with an intent to

invoke arbitration,” (2) “has unreasonably delayed” in

seeking arbitration, (3) or has acted in “bad faith” or

with “wilful misconduct.” (Davis v. Blue Cross of North-

ern California, supra, 25 Cal.3d at pp. 425-426, 158 Cal.

Rptr. 828, 600 P.2d 1060; see Germany v. River Termi-

nal Railway Company (6th Cir. 1973) 477 F.2d 546,

547.) We have stressed the significance of the presence

or absence of prejudice. Waiver does not occur by mere

participation in litigation; there must be “judicial litiqa-

tion of the merits of arbitrable issues” (Doers v. Golden

Gate Bridge etc. Dist., supra, 23 Cal.3d at p. 188, 151

Cal.Rptr. 837, 588 P.2d 1261), although “waiver could

occur prior to a judgment on the merits if prejudice

could be demonstrated” (id., at p. 188, fn. 3, 151 Cal.

Rptr. 837, 588 P.2d 1261). This result is fully consistent

with federal cases which have held that “as an abstract

exercise in logic it may appear that it is inconsistent for a

party to participate in a lawsuit for breach of a contract,

and later to ask the court to stay that litigation pending

arbitration. Yet the law is clear that such participation,

standing alone, does not constitute a waiver [citations],

for there is an overriding federal policy favoring arbi-

tration. ... [MlJere delay in seeking a stay of the pro-

ceelings without some resultant prejudice to a_ party

[citation], cannot carry the day.” (Carcich v. Rederi

A/B Nordie (2d Cir. 1968) 389 F.2d 692, 696; see

Shinto Shipping Co, v. Fibrex & Shipping Co., Inc. (9th

Cir. 1978) 572 F.2d 1328, 1330.)

Tested by these principles, the record fully supports

the trial court’s conclusion that there was no waiver in

Keating. Southland had a legal right to petition for re-

47a

moval of the case to the federal district court; it did so

promptly, as the statute requires (28 U.S.C. § 1446(b));

and in its amended pleading it asserted the arbitration

agreement as a defense. Prior to remand, the only dis-

covery which took place consisted of an exchange of doc-

uments to franchisees’ benefit. Upon remand, Southland

moved promptly to compel arbitration.'* We discern no

impropriety on the part of Southland, or prejudice to

franchisees, in these brief transactions.

In the remaining four individual actions, namely,

Gouveia, Sampson, Cheng, and Newell, the trial court

granted the motions to arbitrate except as to the Fran-

chise Investment Law claims, and stayed the proceedings

pending completion of arbitration. In noting the co-

ordination of the various actions the court observed that

“there are matters which would otherwise be arbitrable

which are raised for the first time in the second amended

complaint.” It believed that referring to arbitration only

some issues while retaining others might well achieve in-

consistent results and would serve no useful purpose. The

court also observed that in some cases, separately viewed,

“there more than likely would have been found to be a

waiver.”

Franchisees interpret the foregoing trial court remarks

as constituting a holding of waiver. They also contend

that the trial court erred in misconstruing the coordina-

tion of the proceedings as requiring complete consistency

of result between the individual cases. We do not agree.

Extensively amended complaints have been filed in each

ease after the actions had been coordinated at fran-

chisees’ request. We cannot say, as a matter of law, that

the court erroneously considered the coordinated posture

of the cases in finding a lack of waiver of Southland’s

right to arbitration. Franchisees themselves asserted in

their motion for coordination that “[e]ach of the actions

16 Tt moved also for a change of venue, which was granted by

stipulation.

;

48a

for which coordination is sought herein is at the same‘

relative stage of development.” Furthermore, the court

did not specify in which of the actions a waiver might

have appeared, and franchisees’ argument that the trial

court found a waiver in any individual case is purely

speculative.

Moreover, assuming a waiver had occurred as to the

charging allegations in the original complaints, such

waiver would not extend to issues newly raised. (Cf.

Janmort Leas., Ine. v. Econo-Car Intern. (E.D.N.Y.

1979) 475 F. Supp. 1282, 1290.) In seeking coordination

and amendment of their complaints, franchisees consid-

erably expanded the scope of their pleadings, raising sev-

eral new causes of action, injecting new factual elements,

and refocusing the direction of their claims. We do not

suggest that an amendment to a complaint will, per se,

nullify a previous, effective waiver of arbitration in

every case. Here, however, franchisees directed a newly

concerted attack, evidenced by the filing of amended com-

plaints and the motion to coordinate. This sufficiently

changed the proceedings, when viewed in their entirety,

to permit the trial court to find a lack of waiver of the

right to arbitrate the closely interrelated and interde-

pendent claims.

We are unable to accept franchisees’ argument that

any waiver occurred because of Southland’s litigation-

related activities in Gouveia, Sampson, Cheng, and Newell.

As with similar arguments advanced with reference to

the Keating complaint, Southland’s delay in seeking ar-

bitration of the other complaints, its filing of counter-

claims and actions for unlawful detainer, and its partici-

pation in discovery did not require a finding of waiver.

(Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d

at p. 188, 151 Cal.Rptr. 837, 588 P.2d 1261; Carcich v.

Rederi A’B Nordie, supra, 389 F.2d at p. 696.) Here,

Southland raised arbitration as an affirmative defense in

its answers to each of the original complaints except in

anew taiititia

49a

Gouveia. As previously noted, “it is the judicial litiga-

tion of the merits of arbitrable disputes which waives a

party’s right to arbitration” (Doers v. Golden Gate

Bridge etc. Dist., supra, 23 Cal.3d at p. 188, 151 Cal.

Rptr. 837, 588 P.2d 1261), and the burden is on fran-

chisees to show that the trial court’s determination was

not supported by the facts. (See, e.g., Hart v. Orion In-

surance Company (10th Cir. 1971) 453 F.2d 1358, 1361.)

Because of the mandatory nature of Code of Civil Pro-

cedure section 426.30 requiring that any related cause of

action be alleged, no waiver arose by reason of the filing

of the cross-complaints. As to the unlawful detainer

causes of action, the agreements themselves specifically

provide that a demand for arbitration “shall not operate

to stay ... the right of 7-Eleven to take possession of

the Lease Property in accordance with the Agreement.”

The contract contemplated that arbitration and litigation

of the right to possession would proceed simultaneously.

Again, we find most significance in the lack of any

prejudice demonstrated by franchisees in Gouveia, Samp-

son, Cheng, and Newell. While Southland participated in

discovery in the individual actions before demanding ar-

bitration, the trial court expressly conditioned its order

to compel arbitration on Southland’s agreement either to

abstain from the use of further discovery or to extend

equally extensive discovery to franchisees. Moreover, the

discovery was reciprocal; for example, franchisees’ peti-

tion for coordination indicated that evidence of South-

land’s bookkeeping practices had already been obtained

and was relevant to all of the individual actions.

Neither side had completed its discovery, and South-

land asserted, without refutation, that the filing of the

new complaints significantly raised new issues requiring

further discovery should the eases go to trial. The con-

dition imposed by the trial court on its order for arbitra-

tion, however, prevented Southland from taking advan-

tage of any previously discovered information.

50a

Our function is to determine whether the trial court’s

finding of no waiver is supported by substantial evidence.

Franchisees have not made specific claims of prejudice.

Nor have we been supplied with any record of the dis-

covery proceedings already undertaken by which we could

independently assess such claims if made.

Accordingly, we cannot conclude that the trial court

erred in finding no waiver and in ordering arbitration.

IV. CLASS ARBITRATION.

The trial court, in ordering arbitration, did not ex-

pressly rule upon the motions in Keating and Battersby

for class certification. Franchisees contend that if arbi-

tration is to proceed the trial court should be instructed

to determine the preliminary issues regarding class cer-

tification so that it may proceed on a classwide basis.

This contention requires us to examine the special prob-

lems of unfair advantage which may appear in an ad-

hesion setting when individual arbitration agreements

are invoked to block an otherwise appropriate class ac-

tion."

This court has repeatedly emphasized the importance

of the class action device for vindicating rights asserted

by large groups of persons. We have observed that the

class suit “both eliminates the possibility of repetitious

litigation and provides small claimants with a method of

obtaining redress for claims which would otherwise be

too small to warrant individual litigation. [Citation.]”’

(Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d

462, 469, 174 Cal.Rptr. 515, 629 P.2d 28.) Denial of a

class action in cases where it is appropriate may have

the effect of allowing an unscrupulous wrongdoer to “re-

17 We assume, for purposes of this analysis, that Keating and

Battersby would be maintainable as class actions under established

principles, but we intimate no opinion as to whether that is, in

fact, the case. That will be an issue for the trial court upon

remand.

5la

tain[] the benefits of its wrungful conduct.” {Vasquez

v. Superior Court (1971) 4 Cal.3d 800, 808, 94 Cal.Rptr.

796, 484 P.2d 964.)'* And, as we noted in LaSala v.

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

97 Cal.Rptr. 849, 489 P.2d 1113: “Controversies involv-

ing widely used contracts of adhesion present ideal cases

for class adjudication; the contracts are uniform, the

same principles of interpretation apply to each contract,

and all members of the class will share a common inter-

est in the interpretation of an agreement to which each

is a party.”

If the right to a classwide proceeding could be auto-

matically eliminated in relationships governed by adhesion

contracts through the inclusion of a provision for arbi-

tration, the potential for undercutting these class action

principles, and for chilling the effective protection of in-

terests common-to a group, would be substantial. Arbi-

tration proceedings may well provide certain offsetting

advantages through savings of time and expense; but,

depending upon the nature of the issues and the evidence

to be presented, it is at least doubtful that such advan-

tages could compensate for the unfairness inherent in

forcing hundreds or perhaps thousands, of individuals

asserting claims involving common issues of fact and law

to litigate them in separate proceedings against a party

with vastly superior resources. Because the principles of

res judicata and collateral estoppel do not apply in arbi-

tration proceedings, any issue resolved against a party

such as Southland in one arbitration proceeding would

have to be decided anew in a subseque.t arbitration, re-

18 Federal law is in accord. (See, e.g., Weeks v. Bareco Oil Co.

(7th Cir. 1941) 125 F.2d 84, 90 (“To permit the defendants to

contest liability with each claimant in a single, separate suit,

would, in many cases give defendants an advantage which would

be almost equivalent to closing the door of justice to all small

claimants”); Moscarelli v. Stamm (E.D.N.Y. 1968) 288 F. Supp.

453, 461.)

52a

sulting in needless duplication and the potential for in-

consistent awards. And while arbitration ideally takes

place outside the judicial arena, it would be naive to as-

sume, in such a situation, that courts would not be called

upon to determine issues ancillarly to the arbitration pro-

ceedings. The effect would be to place upon the parties,

and upon the courts, many of the burdens which the class

action device was designed to avoid.

It is common knowledge that arbitration clauses fre-

quently appear in standardized contracts of adhesion.

A primary consideration which has led courts to uphold

such clauses, despite the adhesive nature of the contract,

is the belief that arbitration is not oppressive and does

not defeat the reasonable expectations of the parties.

(Madden v. Kaiser Foundation Hospitals, supra, 17 Cal.

3d 699, 710, 712, 131 Cal.Rptr. 882, 552 P.2d 1178.)

If, however, an arbitration clause may be used to insulate

the drafter of an adhesive contract from any form of

class proceeding, effectively foreclosing many individual

claims, it may well be oppressive and may defeat the ex-

pectations of the nondrafting party.

One possible solution to this dilemma would be to hold

that arbitration agreements contained in contracts of

adhesion may not operate to stay properly maintainable

class actions. (See Harris v. Shearson Hayden Stone,

Inc. (1981) 82 A.D.2d 87, 441 N.Y.S.2d 70, 76-79 (dis.

opns.); ef. Frame v. Merrill Lynch, Pierce, Fenner &

Smith, Inc. (1971) 20 Cal.App.3d 668, 672, 97 Cal. Rptr.

811; Vernon v. Drexel Burnham & Co. (1975) 52 Cal.

App.3d 706, 125 Cal.Rptr. 147.) The statutes and public

policy supportive of arbitration require, however, that

this result be avoided if means are available to give ex-

pression to the basic arbitration commitment of the

parties. (Graham v. Scissor-Tatl, Inc., supra, 28 Cal.3d

807, 831, 171 Cal.Rptr. 604, 623 P.2d 165.) We turn our

attention, therefore, to the solution offered by franchisees:

that the arbitration itself proceed on a classwide basis.

53a

There is, as the parties acknowledge, an absence of

direct authority either supporting or rejecting such a

procedure. Analogous authority exists, however, with re-

spect to the consolidation of arbitration proceedings in-

volving a dispute which concerns several parties each of

whom has an agreement with one or more of the others

to arbitrate the dispute. “Although the [Federal Arbi-

tration} Act does not specifically provide for consolidated

arbitrations, courts have frequently ordered consolidated

arbitration proceedings when the ‘interests of justice’

so require, either because the issues in dispute are sub-

stantially the same and/or because a substantial right

might be prejudiced if separate arbitration proceedings

are conducted.” (Matter of Czarnikow-Rionda Co., Inc.

(S.D.N.Y.1981) 512 F.Supp. 1308, 1309.) Indeed, the

Second Circuit has opined that “the liberal purposes of

the Federal Arbitration Act clearly require that this act

be interpreted so as to permit and even encourage the

consolidation of arbitration proceedings in proper cases.”

(Compania Espanola de Pet., S.A. v. Nereus Ship, (2d

Cir. 1975) 527 F.2d 966, 975, cert. den. (1976) 426

U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387; see also, Marine

Trading Ltd. v. Ore International Corp. (S.D.N.Y.1977)

432 F.Supp. 683; Robinson v. Warner (D.C.R.1.1974) 370

F.Supp. 828.)

Federal courts, in ordering consolidation of arbitration

proceedings in these cases, have relied upon rule 81 (a) (3)

of the Federal Rules of Civil Procedure, which states that

the federal rules apply to certain statutes, including the

FAA, “only to the extent that maiters of procedure are

not provided for in those statutes.” Thus, rule 42(a),

which provides for consolidation of related proceedings,

is deemed to apply. Analogous reasoning would support

reliance on rule 23, the class action rule, as a basis for

ordering classwide arbitrations when the interests of jus-

tice so require.

A number of state courts also support consolidation of

arbitration proceedings, even in the absence of express

54a

statutory authority. New York courts take the position

that “jurisdiction to enforce contracts to arbitrate im-

ports power to regulate the method of enforcement.”

(Chariot Textiles Corp. v. Wannalancit Textile Co.

(1964) 21 A.D.2d 762, 250 N.Y.S.2d 493, 495 (dis. opn.),

revd. on dis. opn. (1966) 18 N.Y.2d 793, 275 N.Y.S.2d

382, 221 N.E.2d 913 [221 N.E.2d 913]; see also Jn re

Vigo Steamship Corporation (1970) 26 N.Y.2d 157, 257

N.E.2d 624,, cert. den. sub nom., Frederick Snare Corp.

uv. Vigo Steamship Corp. (1970) 400 U.S. 819, 91 S.Ct.

36, 27 L.Ed.2d 46; accord: Grover-Dimond Assoc. v.

American Arbitration Ass’n (1973) 297 Minn. 324, 211

N.W.2d 787; see also, Exber, Inc. v. Sletten Construc-

tion Company (1976) 92 Nev. 721, 558 P.2d 517; James

Stewart Polshek, ete. v. Bergen Iron Wks. (1976) 142

N.J.Super. 516, 362 A.2d 63; Episcopal Housing Corp. v.

Federal Ins. Co. (1979) 273 S.C. 181, 255 S.E.2d 451;

contra: Stop & Shop Companies, Inc. v. Gilbane Building

Co. (1973) 364 Mass. 3825, 304 N.E.2d 429; J. Brodie &

Son, Inc. v. George A. Fuller Company (1969) 16 Mich.

App. 137, 167 N.W.2d 886; see generally, Annot., Con-

solidation of Arbitration Proceedings, 64 A.L.R.3d 528,

529.) In California, consolidation in certain cases is

expressly authorized by statute. (Code Civ.Proc.,

§ 1281.3.) *

19 Section 1281.3 was added in 1978 (Stats. 1978, ch. 260, § 2),

apparently in response to a Court of Appeal decision holding that

courts of this state lacked authority to order consolidation of arbi-

tration proceedings. (Atlas Plastering, Inc. v. Superior Court

(1977) 72 Cal.App.3d 63, 140 Cal.Rptr. 59.) The section permits

consolidation of separate arbitration proceedings when ‘(1) Sepa-

rate arbitration agreements or proceedings exist between the same

parties; or one party is a party to a separate arbitration agreement

or proceeding with a third party; and (2) The disputes arise from

the same transactions or series of related transactions; and (3)

There is common issue or issues of law or fact creating the possi-

bility of conflicting rulings by more than one arbitrator or panel of

arbitrators.”

55a

Consolidated arbitration often involves a tripartite re-

lationship in which the parties in dispute each have a

contract with a third party, but not with each other.

Each contract may provide a different procedure for ar-

bitration, or a different method of-selecting the arbitra-

tor. Federal courts have held that a court “can mold the

method of selection and the number of arbitrators to im-

plement the consolidated proceedings.” (Matter of Czar-

nikow-Rionda Co., Inc., supra, 512 F.Supp. at p. 1309.)

Similarly, Code of Civil Procedure section 1281.3 pro-

vides that consolidated arbitration proceedings may be

ordered inter alia, where “one party is a party to a sep-

arate arbitration agreement or proceeding with a third

party,” and that if the agreements do not mesh in their

description of procedure, a court has authority to appoint

an arbitrator, and to “resolve [conflicts among the agree-

ments] and determine the rights and duties of the various

parties to achieve substantial justice under all the cir-

cumstances.” Thus, a party may be forced into a coordi-

nated arbitration proceeding in a dispute with a party

with whom he has no agreement, before an arbitrator he

had no voice in selecting and by a procedure he did not

agree to.

In these respects, an order for classwide arbitration in

an adhesion context would call for considerably less in-

trusion upon the contractual aspects of the relationship.

The members of a class subject to classwide arbitration

would all be parties to an agreement with the party

against whom their claim is asserted; each of those agree-

ments would contain substantially the same arbitration

provision; and if any of the members of the class were

dissatisfied with the class representative, or with the

choice of arbitrator, or for any other reason would prefer

to arbitrate on their own, they would be free to opt out

_and do so. Moreover, the interests of justice that would

be served by ordering classwide arbitration are likely to

be even more substantial in some cases than the interests

that are thought to justify consolidation. It is unlikely

56a

that the state Legislature in adopting the amendment to

the Arbitration Act authorizing ecnsolidation of arbitra-

tion proceedings, intended to preciude a court from order-

ing classwide arbitration in an appropriate case. We

conclude that a court is not without authority to do so.

Without doubt a judicially ordered classwide arbitra-

tion would entail a greater degree of judicial involvement

than is normally associated with arbitration, ideally “a

complete proceeding, without resort to court facilities.”

(East San Bernardino County Water Dist. v. City of

San Bernardino (1973) 33 Cal.App.8d 942, 950, 109

Cal.Rptr. 510.) The court would have to make initial

determinations regarding certification and notice to the

class, and if classwide arbitration proceeds it may be

called upon to exercise a measure of external supervision

in order to safeguard the rights of absent class members

to adequate representation and in the event of dismissal

or settlement. A good deal of care, and ingenuity, would

be required to avoid judicial intrusion upon the merits of

the dispute, or upon the conduct of the proceedings them-

selves and to minimize complexity, costs, or delay. (See

Class Wide Arbitration: Efficient Adjudication or Pro-

cedural Quagmire? (1981) 67 Va.L.Rev. 789.)

An adhesion contract is not a normal arbitration set-

ting, however, and what is at stake is not some abstract

institutional interest but the interests of the affected

parties. Classwide arbitration, as Sir Winston Churchill

said of democracy, must be evaluated, not in relation to

some ideal but in relation to its alternatives. If the alter-

native in a case of this sort is to force hundreds of in-

dividual franchisees each to litigate its cause with South-

land in a separate arbitral forum, then the prospect of

ciasswide arbitration, for all its difficulties, may offer a

better, more efficient, and fairer solution. Where that is

so, and gross unfairness would result from the denial of

opportunity to proceed on a classwide basis, then an order

structuring arbitration on that basis would be justified.

57a

Whether such an order would be justified in a case of

this sort is a question appropriately left to the discretion

of the trial court. In making that determination, the trial

court would be called upon to consider, not only the fac-

tors normally relevant to class certification, but the spe-

cial characteristics of arbitration as well, including the

impact upon an arbitration proceeding of whatever court

supervision might be required, and the availability of

consolidation as an alternative means of assuring fair-

ness. Whether classwide proceedings would prejudice the

legitimate interests of the party which drafted the ad-

hesion agreement must also be considered, and that party

should be given the option of remaining in court rather

than submitting. to classwide arbitration.

In this case, the trial court did not consider the fran-

chisees’ request for classwide arbitration at all, and a

fortiori did not consider the factors which we have found

to be relevant. Since we are unable to make the determi-

nation on this record as a matter of law, the case will be

remanded to the trial court on this issue.

The order of the trial court is reversed and the cause

is remanded for further proceedings consistent with the

opinion herein. In light of our opinion, the petition for

writ of prohibition or mandate is denied. Each party to

bear their own costs.

BIRD, C. J.. and NEWMAN and REYNOSO, JJ.,

concur.

RICHARDSON, Justice, concurring and dissenting.

I concur with the majority’s conclusions that the ar-

bitration agreement is enforceable and that Southland

did not waive its right to arbitration. I respectfully dis-

sent, however, from the majority’s further holdings that

the Franchise Investment Law claims are not subject to

arbitration and that class action arbitration is an avail-

able valid remedy.

58a

A. ARBITRABILITY OF THE FRANCHISE

INVESTMENT LAW CLAIMS

Contrary to the majority, I believe that the state cannot

immunize certain civil actions from application of the

Federal Arbitration Act merely by fashioning, after the

Federal Securities Act, a statute regulating franchise

investments.

The United States Supreme Court in Wilko v. Swan

(1953) 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168, held

that an arbitration clause contained in a margin agrwe-

ment was invalid as a forbidden “stipulation” under sec-

tion 14 of the federal Securities Act of 1933. (15 U.S.C.

$ 77n.) In so holding, the court observed that two stat-

utory policies were invoked: (1) the Federal Arbitra-

tion Act’s emphasis on “the need for avoiding the delay

and expense of litigation” (id., at p. 431, 74 S.Ct. at p.

184, fn. omitted); and (2) the Securities Act’s purpose

to protect investors by requiring ‘full and fair disclo-

sure... and to prevent fraud.” (Jbid.) The high court

stressed that “|w]hen the security buyer, prior to any

violation of the Securities Act, waives his right to sue in

courts, he gives up more than would a participant in

other business transactions. The security buyer has a

wider choice of courts and venue. He thus surrenders

one of the advantages the Act gives him and surrenders it

at a time when he is less able to judge the weight of the

handicap the Securities Act places upon his adversary.”

(Id., at p. 435, 74 S.Ct. at p. 186.) In measuring the

force of the two policies, the Wilko court thus was re-

quired to balance two federal statutes, the Arbitration

and the Securities Acts.

The Wilko court identified one important factor in the

weighing process, namely, the existence of 15 United

States Code section 77v, which establishes an unusually

liberal venue provision for Securities Act litigation. This

emphasis on venue was subsequently repeated in Scherk v.

Alberto-Culver Co. (1974) 417 U.S. 506, 94 S.Ct. 2449,

59a

41 L.Ed.2d 270, in which the high court declined to in-

validate an arbitration clause in a controversy between

foreign and domestic parties concerning an alleged vio-

lation of the 1934 Securities Exchange Act. The Scherk

court specifically emphasized that the 1934 Act’s venue

provision (15 U.S.C. § 78aa) “significantly restrict[s|]

the plaintiff’s choice of forum” in contrast to section 77v,

upon which the court “in particular” relied in Wilko v.

Swan. (Id., 417 U.S. at p. 514, 94 S.Ct. at p. 2454, fn.

omitted. )

In contrast, the case before us concerns a state statute

which is contrary to the federal law. The Wilko reason-

ing in balancing between two federal statutes of equal

stature thus is not required here. Moreover, unlike the

Securities Act of 1933, the state Franchise Investment

Law at issue here does not contain a liberal venue pro-

vision comparable to that relied on in Wilko. Thus, under

the California statute an investor who consents to arbi-

tration, thereby waiving the right to sue, does not forgo_

more than other similarly situated parties to routine

business contracts or transactions.

No different result is mandated by section 31512 of the

Corporations Code, which provides that “Any condition,

stipulation or provision purporting to bind any person

acquiring any franchise to waive compliance with any

provisions of this law or any rule or order hereunder is

void.” Even if the Legislature had intended that this

statute be interpreted according to the principles of

Wilko v. Swan, the section nonetheless impermissibly

conflicts with the Federal Arbitration Act. Section 31512

is therefore void under the supremacy clause (U.S.Const.,

art. VI, $2) to the extent that it purports to restrict

otherwise permissible arbitration in actions, as here, in-

volving interstate commerce.

In reaching its conclusion that application of the Fed-

eral Arbitration Act here is not required, the majority

60a

wholly ignores a substantial line of very respectable au-

thority. These cases, as I now develop, hold that in enact-

ing the Federal Arbitration Act, Congress created na-

tional substantive law, which is binding on state courts

even in the absence of federal jurisdiction.

In 1959, the United States Court of Appeals for the

Second Circuit succinctly expressed the general principle.

“We think it is reasonably clear that the Congress in-

tended by the Arbitration Act to create a new body of

federal substantive law affecting the validity and inter-

pretation of arbitration agreements.” (Robert Lawrence

Company v. Devonshire Fabrics, Inc. (2d Cir. 1959)

271 F.2d 402, 406, cert. dism. (1960) 364 U.S. 801, 81

S.Ct. 27, 5 L.Ed.2d 37, italics added.) The Lawrence

court observed: “To be sure much of the Act is purely

procedural in character and is intended to be applicable

only in the federal courts. But Section 2 declaring that

arbitration agreements affecting commerce or maritime

affairs are ‘valid, irrevocable, and enforceable’ goes be-

yond this point and must mean that arbitration agree-

ments of this character, previously held by state law to

be invalid, revocable, or unenforceable are now made

‘valid, irrevocable, and enforceable.’ This is a declaration

of national law equally applicable in state or federal

courts.” (Id., at p. 407, italics added.)

The United States Supreme Court has aeknowledged

the Lawrence holding only in one instance, where it

merely note that the Court of Appeals in the case it

was then considering had relied upon the Lawrence no-

tion of “national substantive law” to hold that “a claim

of fraud in the inducement of the contract generally—

as opposed to the arbitration clause itself—is for the

arbitrators and not for the courts... .” (Prima Paint

v. Flood & Conklin (1967) 388 U.S. 395, 399-400, 87

S.Ct. 1801, 1803-1804, 18 L.Ed.2d 1270.) The high tri-

bunal then affirmed the decision below, “albeit for some-

what different reasons.” (Jbid.) Thus the Supreme

6la

Court has never rejected the long standing doctrine that

the Arbitration Act created national substantive law ap-

plicable in appropriate circumstances in state courts.

The great majority of lower federal and state courts

has continued to adhere to the Lawrence holding. (See

Annot. (1979) 95 A.L.R.3d 1145, 1151-1161.) A recent

expression of this principle is conteined in Jn re Mercury

Const. Corp. (4th Cir. 1981) 656 F.2d 933 (en banc)

(cert. granted sub nom. Moses A. Cone Memorial Hos-

pital v. Mercury Const. Corp. (1982) U.S.

(102 S.Ct. 1426, 71 L.Ed.2d 647]) (three questions were

presented in the petition for certiorari; none specifically

concerns the scope of the Arbitration Act although one

involves the district court’s discretion to stay its proceed-

ings pending resolution of identical issues in a state court

action involving identical parties). In discussing the ap-

plication of the Federal Arbitration Act to state and

federal actions the Fourth Circuit noted: “By its express

language the Federal Act applies where there is ‘[a]

written provision ... in a contract evidencing a trans-

action involving commerce to settle by arbitration a con-

troversy thereafter arising out of such contract... .”

9 U.S.C. § 2. The constitutional validity of such an Act

is found in the incontestable federal control over inter-

state commerce. Prima Paint v. Flood & Conklin, 388

U.S. 395, 405, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270....

The Act, however, does not include ianguage conferring

independent federal jurisdiction over an action there-

under. In order for a plaintiff to assert rights under it

in a federal forum, he must establish an independent

jurisdictional basis, such as diversity. |Citations.] But

if, assuming diversity of the parties, the action meets

the jurisdictional requirements of the Act, that action is

enforceable in the state courts as well as in federal courts

but in either event it is governed by the federal substan-

tive law developed in connection with the federal Act and

not by state law. E.C. Ernst, Inc. v. Manhattan Const.

62a

Co., 551 F.2d 1026, 1040 (5th Cir. 1977) (any questions

under the Act are matters of ‘federal law’); Robert Law-

rence Co. v. Devonshire Fabrics, Ine., supra, 271 F.2d

at 406; Pathman Const. Co. v. Knox County Hospital

Ass’n., 164 Ind.App. 121, 326 N.E.2d 844, 851 (1975);

Episcopal Housing Corp. v. Federal Ins. Co., 269 S.C.

631, 636, 239 S.E.2d 647 (1977).” (/d., at p. 938, italics

in original, fn. omitted.) As described in Lawrence,

Congress in enacting the arbitration act sought to coun-

teract the hostility of courts and judges to arbitration

agreements and to “make the benefits of arbitration gen-

erally available to the business world.” (271 F.2d at pp.

406-407; see Prima Paint v. Flood & Conklin, supra, 388

U.S. at p. 405, 87 S.Ct. at p. 1806 [Congress “plainly”

— had power to legislate over arbitration ].)

Despite the majority’s recognition of the large body of

law holding that the act is applicable in state courts in

appropriate cases, my colleagues seek to create, judicially,

an exception for certain state regulatory practices based

on some conclusion that Congress did not intend to pre-

empt the area of franchise regulation. The majority,

however, fails to acknowledge that Congress has indeed

preempted the field of arffitration as applied to any con-

tract in interstate commerce to the extent that title 9

of the United States Code applies. No one has urged be-

fore us that there is any basis other than the state regu-

latory statute upon which to deny application of the

Federal Arbitration Act to the contract at issue.

In addition to encouraging the enforcement of arbitra-

tion agreements, the Arbitration Act also restricts the

benefits of the usually disfavored practice of forum shop-

ping. As the majority recognizes, the likely explanation

for the federal district court’s remand of the action here

was that complete diversity did not exist because of the

presence of California defendants. Had those defendants

not been named, which was, of course, well within a

franchisee’s power to choose, the answer would have been

|

63a

easy. The action could have been readily removed to the

federal courts on the basis of diversity and the Arbitra-

tion Act unquestionably would have applied. It will thus

be seen that the majority implicitly makes the existence

or nonexistence of federal jurisdiction the determinative

factor in the enforcement of the arbitration clause rather

than the existence of a “transaction involving commerce

..’ In so concluding, the majority ignores the critical

distinction which exists in the Arbitration Act between

the conferral of federal jurisdiction and the creation of

federal substantive law applicable in state courts. This

promotes forum shopping.

In a similar context, the court in Jn re Mercury Const.

Corp., supra, specifically observed that, “The addition of

the Architect as a party defendant might prevent re-

moval of the state action ... but it certainly could not

frustrate Mercury’s plain, indisputable right to an arbi-

tration of its dispute with the Hospital.” (636 F.2d at

p. 942.) The Arbitration Act, construed as national sub-

stantive law binding on both federal and state courts,

advances consistency.

Finally, I find it significant that sister courts which

have specifically considered state statutes analogous to

the one before us have found that the Arbitration Act

prevails over various state attempts to limit its reach.

Thus, in Allison v. Medicab (1979) 92 Wash.2d 199, 597

P.2d 380, the Washington Supreme Court reviewed a

claim that an arbitration clause in a franchise agreement

was invalid under the state’s franchise act which gave

to the state courts jurisdiction for causes of action based

on violations of the state act. Finding that interstate

commerce was involved, the Allison court rejected the

argument that Wilko v. Swan, supra, applied to a conflict

between a state franchising act and the Federal Arbitra-

tion Act. The Allison court instead adopted the weight

of authority rule applying the federal act in the face of

a contrary state law (id., 597 P.2d at p. 382), conclud-

ing that “the supremacy clause of the federal constitu-

64a

tion must prevail and thus the Federal Arbitration Act

requires enforcement of the arbitration clause in the

franchise agreement despite the judicial remedies af-

forded by the Franchise Investment Protection Act.”

(597 P.2d at pp. 382-383, italics added. )

In similar fashion, in Network Cinema Corporation v.

Glassburn (S.D.N.Y. 1973) 357 F. Supp. 169, the federal

district court granted an order staying proceedings in a

Kansas state court pending arbitration of a dispute be-

tween franchisor and franchisee. The Kansas court had

held that the arbitration clause signed by the parties was

not enforceable under state law. The federal court none-

theless found that it was empowered to stay state pro-

ceedings “when the dispute in question has been found

by the court to be subject to the arbitration provisions

of 9 U.S.C. $ 2.” (Id., at p. 172, see also Main v. Merrill

Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.

3d 19, 23-25. 136 Cal.Rptr. 378, and cases cited therein

[“‘The Federal Arbitration Act, declaring arbitration

agreement affecting [interstate] commerce or maritime

affairs to be valid, enforceable, and irrevocable, is a dec-

laration of national law equally applicable in state or

federal courts’”]; Fite & Warmath Const. Co., Inc. v.

MYS Corp. (Ky. 1977) 559 S.W.2d 729, 734-735.)

Finally, in Barron v. Tastee-Freez Intern., Inc. (E.D.

Wis. 1980) 482 F. Supp. 1213, the federal district court

considered the enforcement of an arbitration clause in

the face of a state statute analogous to section 31512,

which it characterized as similar to 15 United States

Code section 77n. (482 F. Supp. at pp. 1215-1216). The

court felt compelled by the Federal Arbitration Act ‘‘to

render void any effort made by a state to protect the

remedies of the franchise investors” contrary to the fed-

eral act in cases in which the transactions related to in-

terstate commerce. (/d., at p. 1217; see also Guinness-

Harp Corp. v. Jos. Schlitz Brewing (2d Cir. 1980) 613

F.2d 468, 472.) ‘“‘The policy embodied in Title 9 U.S.C.

65a

. . . does not depend for its enforceability on the resi-

dence of the parties to a contract but rather on the na-

ture of the contract.” (Barron v. Tastee-Freez Intern.,

Inc., supra, 482 F. Supp. at p. 1217.)

The majority attempts to remove a state regulatory

statute from the purview of the Federal Arbitration Act

in cases involving interstate commerce. In my opinion,

its chances of surviving federal review are very dubious.

I believe section 31512 is void insofar as it attempts to

restrict application of the federal act. Contrary to the

majority’s assertion, the issue is not the preemption of

the field of franchise investment regulation, but rather

the clear language of the federal act and the subsequent

state and federal court interpretations which consist-

ently demonstrate that the Federal Arbitration Act ap-

plies to all claims arising out of transactions in inter-

state commerce. ‘Because the United States Arbitration

Act is a national substantive law that supplants state ar-

bitration laws, a state court is bound to apply the act if

the statutory requisites are present;.. .” (Merrill Lynch,

Pierce, Fenner, etc. v. Haydu (5th Cir. 1981) 637 F.2d

391, 395, italics added.) As the majority first acknow]l-

edges and then ignores, “The Franchise Agreements .

involve interstate commerce and fall within the ambit of

the Federal Arbitration Act.” (Ante, at p. 364 of 183

Cal.Rptr., at p. 1196 of 645 P.2d.) The conclusion that

the federal act must prevail is logical, consistent and

supported by case law, statutory language, and congres-

sional history. California remains one of the United

States, and national substantive law must be applied by

us in appropriate cases.

B. CLASS ACTION ARBITRATION

The majority also concludes that class action arbitra-

tion may be an appropriate procedure and has remanded

the case for determination by the trial court. In the ab-

sence of either statutory or contractual authority, I dis-

agree with its holding.

a

66a

Arbitration is a matter of agreement. It is consensual,

being an integral part of the contract. In such situations

we have said that the parties “may freely delineate the

area of its application.” (O’Malley v. Wilshire Oil Co.

(1963) 59 Cal.2d 482, 490, 30 Cal.Rptr. 452, 381 P.2d

188; see Reid Burton Const. v. Carpenters Dist. Council,

ete. (10th Cir. 1980) 614 F.2d 698, 702, cert. den. 449

U.S. 824, 101 S.Ct. 85, 66 L.Ed.2d 27.) As a general

principle, in considering contract enforcement, “there is

perhaps no higher public policy than to uphold and give

effect to contracts validly entered into and legally per-

missible in subject matter.” (Vernon v. Drexel Burnham

& Co. (1975) 52 Cal.App.3d 706, 716, 125 Cal.Rptr.

147.) In the present case, the contracts of the parties do

not provide for class arbitration, nor have the parties

subsequently agreed thereto. No statute authorizes a

court to order arbitration on a class-wide basis. None-

theless, the majority concludes that such a procedure is

possible in order to prevent repetitive arbitration and to

avoid “effectively foreclosing individual claims” in in-

stances where the arbitration contract “may be used to

insulate the drafter of an adhesion contract from any

form of class proceeding.” (Ante, at p. 375 of 183 Cal.

Rptr., at 1207 of 645 P.2d.)

A recent New York case examined the propriety of the

class action device used in arbitration. Harris v. Shear-

son Hayden Stone, Inc. (1981) 82 A.D.2d 87, 441

N.Y.S.2d 70. weighed the policies favoring class actions

and arbitration and concluded that the filing of a class

action alleging a broker’s breach of fiduciary duty would

not permit avoidance of an agreement to arbitrate. The

agreement was contained in a “customer’s agreement”

which the brokerage firm required all customers to sign.

Citing the consistent holdings of our Courts of Appeal in

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

706, 716, 125 Cal.Rptr. 147, and Frame v. Merrill Lynch,

67a

Pierce, Fenner & Smith (1971) 20 Cal.App.3d 668, 672,

97 Cal.Rptr. 811, the New York court held that “main-

tenance of a class action here by assertion of a claim for

which a forum is provided elsewhere, would defeat the

aim of arbitration, and undercut an avowed purpose of

the class action itself—the ‘conservation of judicial ef-

fort.’ ” (441 N.Y.S.2d at p. 76.)

In dissent, Justice Bloom urged that the conflict should

be resolved in favor of the class action. Even he, how-

ever, expressly rejected the idea of a “class arbitration”

saying, “Nor is it an anwer to assert that the dispute

between plaintiffs and Shearson may be proceeded with

as a ‘class arbitration.’ Arbitration does not lend itself

to the many subsidiary proceedings incident to an on-

going class action, e.g. determination of whether class

action status should be granted, definition of the class,

determination of the nature and kind of notice and by

whom it should be sent, provision for opting out, etc. In

sum, if the matter is to proceed in arbitration it must

proceed as an individual claim.” (/d., at p. 79; cf. Cole-

man v. National Movie-Dine, Inc. (E.D.Pa. 1978) 449

F. Supp. 945, 948 [“Arbitration should not be foreclosed

simply by adding persons to a civil action who are not

parties to the arbitration agreement because such an

inclusion would thwart the federal policy in favor of

arbitrations. (Citations.)”].) Thus in weighing the pol-

icies behind class actions and arbitration, other courts

have found that class actions will not prevail where there

is an individual arbitration agreement.

In addition to the concerns mentioned by Justice

Bloom, other factors belie franchisees’ assertion that class

certification would be only a “preliminary” issue. For

example, a court, in determining whether class proceed-

ings are appropriate, must be satisfied that there is a

“community of interest”; i.e., that common issues pre-

dominate over individual issues. (See Code Civ. Proc.,

§ 382; City of San Jose v. Superior Court (1974) 12

eae |

68a

Cal.3d 447, 459-460, 115 Cal.Rptr. 797, 525 P.2d 701;

Fed. Rules Civ. Proe., rule 23, 28 U.S.C.) In determining

whether a “community of interest” exists, a court must

carefully evaluate the nature of the proof that will be

presented by the parties (City of San Jose, supra, at

p. 460, 115 Cal.Rptr. 797, 525 P.2d 701; Abercrombie v.

Lum’s Inc. (S.D.Fla. 1972) 345 F. Supp. 387, 390), and

the parties are likely to devote extensive resources to

developing the facts and arguments fully in regard to

the usually complex certification issues. (See, e.g., Chance

v. Superior Court (1962) 58 Cal.2d 275, 282-287, 23

Cal.Rptr. 761, 373 P.2d 489; Blackie v. Barrack (9th

Cir. 1975) 524 F.2d 891, 900-901.)

Moreover, class action procedures would interfere with

the expeditious resolution of the claims. After certifica-

tion of a class, the court must notify class members of

the existence of the suit so that they will have the op-

portunity to “opt out.” (Fed. Rules Civ. Proc., rule

23(c), 28 U.S.C.) Because of the due process safeguards

required to keep class members apprised of the course of

the litigation, substantia! judicial involvement by the

court will be required to monitor the progress of the

arbitration and potentially will undermine the arbitra-

tor’s discretion. In fact, the court’s due process responsi-

bilities include the duty to “undertake a stringent and

continuing examination of the adequacy of representa-

tion by the named class representative at all stages of

the litigation.” (Nat. Assn. of Reg. Med. Programs, Inc.

v. Mathews (D.C. Cir. 1976) 551 F.2d 340, 344, cert.

den. 431 U.S. 954, 97 S.Ct. 2674, 53 L.Ed.2d 270.)

Yet another consideration arises from the fact that un-

like settlements reached through arbitration, which are

ordinarily not subject to court review on either proce-

dural issues or the merits (see Barrett v. Manuf. Ry. Co.

(8th Cir. 1972) 453 F.2d 1305, 1307), a class action

settlement normally does not become final without court

approval. (La Sala Am. S. & L. Assn. (1971) 5 Cal.3d

69a

864, 872, 97 Cal.Rptr. 849, 489 P.2d 1113; Fed. Rules Civ.

Proc., rule 23(e), 28 U.S.C.; In re General Motors Corp.

Engine Interchange Litig. (7th Cir. 1979) 594 F.2d

1106, 1124, cert. den. 444 U.S. 870, 100 S.Ct. 146, 62

L.Ed.2d 95.) The court must review the entire proceed-

ings to determine if the settlement was fair, reasonable,

and adequate in light of the strength of each party’s case

(Marshall v. Holiday Magic, Inc. (9th Cir. 1977) 550

F.2d 1173, 1178-1179), and take evidence on any sub-

stantial objection to the proposed settlement brought by

any class member. (Mandujano v. Basic Vegetable Prod-

ucts, Inc. (9th Cir. 1976) 541 F.2d 832, 835-836.)

Finally, the normally “informal” nature of arbitra-

tion requires no transcripts. Arbitrators generally need

not explain the basis for their decision. (Bernhardt v.

Polygraphic Co. ef America (1956) 350 U.S. 198, 203-

204, and fn. 4, 76 S.Ct. 273, 276, and fn. 4, 100 L.Ed.

199.) The absence of a record further complicates the

use of class proceedings, because without a record a court

may have difficulty in applying an arbitrator’s decision

to all class members, since it could not determine whether

the arbitrator’s judgment was applicable to each member

of the class, or based on equities applicable only to the

individual claimant. Similarly, objection to settlements

would be difficult to assess.

In addition, arbitrators, of course, are not necessarily

either lawyers or judges. Requiring the administration

of complex class procedures during arbitration may ei-

ther make lay experts unavailable as arbitrators as a

practical matter, or result in intrusive judicial participa-

tion and supervision.

In summary, class procedures would tend to make

arbitration inefficient instead of efficient, lengthy instead

of expeditious, and procedural instead of informal. “ ‘An

arbitration proceeding is, except in specified particulars,

outside the court realm and jurisdiction—deliberately so

79a

taken out of the court by choice and commitment of the

parties. Arbitration is subject to its own rules and prac-

tices at variance with court proceedings. It is supposed

to be a complete proceeding, without resort to court fa-

cilities .... It would be generally incompatible with

the nature and scope of arbitration to allow a shift to

the court forum... .’ (Application of Katz, 3 App.

Div.2d 238, 160 N.Y.S.2d 159, ...)” (Hast San Ber-

nardino County Water Dist. v. City of San Bernardino

(1973) 33 Cal.App.3d 942, 950, 109 Cal.Rptr. 510.)

In my view, because of the complications resulting

from continued judicial monitoring, the imposition of

class action procedures on the arbitration process would

be self-defeating.

Nonetheless, by analogy to consolidated arbitration

proceedings, the majority insists that class arbitration

is an available remedy. However, several factors make

this analogy less than compelling. In Atlas Plastering,

Inc. v. Superior Court (1977) 72 Cal.App.3d 63, 140

Cal.Rptr. 59, Atlas, a general contractor, sought to con-

solidate arbitration proceedings between itself and sev-

eral subcontractors, each of whom had entered into iden-

tical arbitration agreements with Atlas. The Atlas court

held that, because the parties had not agreed to con-

solidated proceedings and because consolidation would

deprive the individual subcontractors of their right to

choose an arbitrator in the manner set forth in the arbi-

tration agreement, the court lacked the power to order

consolidated proceedings. (Code Civ.Proc., § 1281.6.)

When Atlas was decided, no statute authorized a court

to order consolidation of arbitrations.

Following the decision in Atlas, the Legislature en-

acted Code of Civil Procedure section 1281.3 which spe-

cifically authorizes consolidated arbitration at the court’s

discretion under certain circumstances. This section was

relied upon in Conejo Valley Unified School Dist. v. Wil-

Tla

liare Blurock & Partners, Inc. (1980) 111 Cal.App.3d

983, 169 Cal.Rptr. 102, in which a party to an arbitra-

tion agreement was compelled to arbitrate his claim in

consolidated proceedings despite the fact that the agree-

ments contained conflicting provisions for choosing an

arbitrator. The Conejo court held that section 1281.3 did

not create substantive rights, but was a procedural stat-

ute and that therefore no constitutional bar to its retro-

active application existed.

Unlike the Conejo situation, there is no state statute

which permits a court to order arbitration proceedings

on a class-wide basis when the contractual arrangement

of the parties does not authorize it. The Legislature ex-

amined the specific problems of related arbitration pro-

ceedings when it permitted the consolidation of arbitra-

tion. After scrutinizing these problems the Legislature

declined to provide for class arbitration.

Nor, as the majority concedes, is there any federal

authority for class arbitration. Although federal courts

have ordered consolidated arbitration under the authority

of rule 42(a) of the Federal Rules of Civil Procedure,

the courts have attempted to assure each party the right

to select an arbitrator and to express their individual

views. (See, e.g., Compania Espanola de Pet., S.A. v.

Nereus Ship. (2d Cir. 1975) 527 F.2d 966, 974-975,

cert. den. (1976) 426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.

2d 387; Marine Trading Ltd. v. Ore Intern. Corp.

(S.D.N.Y. 1977) 432 F.Supp. 683, 685; Robinson v.

Warner (D.R.I.1974) 370 F.Supp. 828, 829.) In fact,

the issue of the application of consolidation to arbitra-

tion proceedings is not a settled matter in the federal

courts. (See Gavlik Construction Co. v. H. F. Campbell

Co. (W.D.Pa.1975) 389 F.Supp. 551, 556, revd. on other

grounds (3d Cir.) 526 F.2d 777; see also Robinson v.

Warner, supra, at p. 830.)

In the absence of a statute authorizing class arbitra-

tion or agreement of the parties, it is inappropriate in

72a

my view for us, judicially, to superimpose such a proce-

dure on the arbitration process over objections of a party

to the contract. (Compare, Stevenson v. Com., Dept. of

Revenue (1980) 489 Pa. 1, 413 A.2d 667 [the Pennsyl-

vania Board of Arbitration of Claims Act specifically

incorporates procedures embodied in rules of Pennsyl-

vania civil procedure and class action is therefore avail-

able to parties appearing before board].)

The majority is compelled to acknowledge that class-

wide arbitration “would entail a greater degree of judi-

cial involvement than is normally associated with arbi-

tration... .” (Ante, at p. 377 of 183 Cal.Rptr., at p.

1209 of 645 P.2d.) Nonetheless, it argues that if the

alternative would be to require hundreds of individual

arbitration proceedings, then such a procedure may

be appropriate. I believe, however, that the majority

fails to accord proper deference to the recognized prin-

ciple that arbitration is a favored means of dispute reso-

lution because it permits a non-judicial, informal, and

speedy alternative to litigation. (See, eg., Taylor v.

Crane (1979) 24 Cal.3d 442, 452, 155 Cal.Rptr. 695, 595

P.2d 129: Doers v. Golden Gate Bridge etc. Dist. (1979)

23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 588 P.2d 1261;

Aerojet-General Corp. v. American Arbitration Assn.

(9th Cir. 1973) 478 F.2d 248, 251.) The injection of

class action procedure into the arbitration process in the

absence of either statutory authority or contractual

agreement conflicts with these settled principles as well

as with the specific contract terms to which the parties

agreed. “It is axiomatic that commercial arbitration

is to be based on a voluntary agreement of the parties| :]

only then can the concept of arbitration be well under-

stood. In other words, nobody should be bound to resort

to arbitration unless he has previously agreed to that

method of dispute settlement.” (Domke on Commercial

Arbitration (1968) § 1.02, p.5.)

73a

The franchisees here do not contend that they would

be unable to proceed individually in separate or con-

solidated arbitration proceedings. We are not confronted

with a situation in which a plaintiff contends that it

would be economically unfeasible to mount a challenge

in the absence of a class proceeding. In fact, not all of

the actions before us have been brought as class actions.

It is very clear that the individual franchisees have been

fully able to proceed.

In a case where class proceedings provide the only eco-

nomical method of presenting a claim, an alternative

exists which would protect both the contractual integrity

of proper arbitration agreements and the interests of

individual claimants. One solution which has been sug-

gested, and which the majority rejects, “would be to

hold that arbitration agreements contained in contracts

of adhesion may not operate to stay properly maintain-

able class actions.” (Ante, at p. 375 of 183 Cal.Rptr.,

at p. 1207 of 645 P.2d.) I agree that as a general rule

such a holding would be contrary to the basic arbitration

agreement of the parties and to the policy favoring arbi-

tration. There is, however, another alternative. Under

settled principles of law, arbitration clauses in adhesion

contracts may be declared invalid where they are “be-

yond the reasonable expectations of an ordinary per-

son....” (Wheeler v. St. Joseph Hospital (1976) 63

Cal.App.3d 345, 357, 133 Cal.Rptr. 775) or bear op-

pressively on the weaker party. (Madden v. Kaiser

Foundation Hospitals (1976) 17 Cal.8d 699, 710, 131

Cal.Rptr. 882, 552 P.2d 1178; Graham v. Scissor-Tail,

Inc. (1981) 28 Cal.3d 807, 820, 171 Cal.Rptr. 604, 623

P.2d 165.) Thus, where an arbitration clause in an ad-

hesion contract would allow the stronger party to evade

responsibility for its acts, such a clause may, under those

facts, be found oppressive and the clause invalidated. In

instances where an arbitration clause would effectively

deny relief to the weaker party in an adhesion contract,

74a

relief under settled principles of law would potentially be

available. As the majority concludes, there is no such

evasion of liability here, and consequently, there is no

need for an extraordinary remedy such as the one pro-

posed by the majority.

In summary, the majority, in the absence of any con-

tractual, statutory, or judicial authority or any demon-

strated need, has seen fit to invent a procedure which is

fundamentally contrary to the purpose of arbitration and

to the public policy encouraging arbitration. Potentially,

the majority’s holding will effectively render arbitration

clauses in all adhesion contracts subject to class treat-

ment, thus engrafting on an informal, speedy method of

dispute resolution which often utilizes nonlegal arbitra-

tors a complex legal procedure which will require close

court supervision and frequent intervention antithetical

to the essential informal and nonjudicial nature of the

arbitration process.

CONCLUSION

From the foregoing, I conclude that the trial court

erred in holding that the Franchise Investment Law

claims were not arbitrable in the face of the clear na-

tional substantive law to the contrary. I would reverse

the trial court judgment to the extent that it denies

arbitration of these claims. In addition, I conclude that

in the absence of any statutory or contractual agreement

to the contrary, the strong policy reasons favoring arbi-

tration as a speedy, informal and nonjudicial method of

dispute resolution militate against the remand of this

case to the trial court to permit it to determine whether

class arbitration may be an appropriate procedure. I

would affirm the trial court’s order referring the individ-

ual cases to arbitration, recognizing that consolidation of

the individual arbitrations might be proper.

MOSK, J., concurs.

75a

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1983

No. 82-500

SOUTHLAND CorF. et al.

KEATING et al.

Appeal from the Supreme Court of California

Argued October 4, 1983—Decided January 23, 1984

Mark J. Spooner argued the case for appellants. With

him on the briefs were Peter K. Bleakiey and Martin

H. Krese.

John F. Wells argued the cause for appellees. With

him on the brief were Lise A. Pearlman and Fonda

Karelitz.*

CHIEF JUSTICE BURGER delivered the opinion of the

Court.

This case presents the questions (a) whether the Cali-

fornia Franchise Investment Law, which invalidates cer-

tain arbitration agreements covered by the Federal Ar-

bitration Act, violates the Supremacy Clause and (b)

*A brief of amici curiae was filed by Simon H. Trevas for the

Securities Division of the State of Washington et al.

76a

whether arbitration under the federal Act is impaired

when a class-action structure is imposed on the process

by the state courts.

I

Appellant Southland Corp. is the owner and franchisor

of 7-Eleven convenience stores. Southland’s standard

franchise agreement provides each franchisee with a

license to use certain registered trademarks, a lease or

sublease of a convenience store owned or leased by South-

land, inventory financing, and assistance in advertising

and merchandising. The franchisees operate the stores,

supply bookkeeping data, and pay Southland a fixed

percentage of gross profits. The franchise agreement

also contains the following provision requiring arbitra-

tion:

“Any controversy or claim arising out of or relating

to this Agreement or the breach hereof shall be

settled by arbitration in accordance with the Rules

of the American Arbitration Association ... and

judgment upon any award rendered by the arbi-

trator may be entered in any court having jurisdic-

tion thereof.” :

Appellees are 7-Eleven franchisees. Between Septem-

ber 1975 and January 1977, several appellees filed in-

dividual actions against Southland in California Super-

ior Court alleging, among other things, fraud, oral mis-

representation, breach of contract, breach of fiduciary

duty, and violation of the disclosure requirements of the

California Franchise Investment Law, Cal. Corp. Code

Ann. § 31000 et seg. (West 1977). Southland’s answer,

in all but one of the individual actions, included the

affirmative defense of failure to arbitrate.

In May 1977, appellee Keating filed a class action

against Southland on behalf of a class that assertedly

includes approximately 800 California franchisees. Keat-

ing’s principal claims were substantially the same as

77a

those asserted by the other franchisees. After the various

actions were consolidated, Southland petitioned to compel

arbitration of the claims in all cases, and appellees moved

for class certification.

The Superior Court granted Southland’s motion to

compel arbitration of all claims except those claims based

on the Franchise Investment Law. The court did not pass

on appellees’ request for class certification. Southland

appealed from the order insofar as it excluded from

arbitration the claims based on the California statute.

Appellees filed a petition for a writ of mandamus or

prohibition in the California Court of Appeal arguing that

the arbitration should proceed as a class action.

The California Court of Appeal reversed the trial

court’s refusal to compel arbitration of appellees’ claims

under the Franchise Investment Law. Keating v. Superior

Court, Alameda County, 167 Cal. Rptr. 481 (1980). That

court interpreted the arbitration clause to require arbitra-

tion of all claims asserted under the Franchise Invest-

ment Law, and construed the Franchise Investment Law

not to invalidate such agreements to arbitrate.’ Alter-

natively, the court concluded that if the Franchise In-

vestment Law rendered arbitration agreements involving

commerce unenforceable, it would conflict with § 2 of the

Federal Arbitration Act, 9 U.S.C. § 2, and therefore be

invalid under the Supremacy Clause. 167 Cal. Rptr., at

493-494. The Court of Appeal also determined that there

was no “insurmountable obstacle’ to conducting an arbi-

tration on a classwide basis, and issued a writ of mandate

directing the trial court to conduct class-certification pro-

ceedings. Zd., at 492.

The California Supreme Court, by a vote of 4-2, re-

versed the ruling that claims asserted under the Franchise

1 California Corp. Code Ann. § 31512 (West 1977) provides:

“Any condition, stipulation or provision purporting to bind any

person acquiring any franchise to waive compliance with any pro-

vision of this law or any rule or order hereunder is void.”

aca ail aia

78a

Investment Law are arbitrable. Keating v. Superior

Court of Alameda County, 31 Cal. 3d 584, 645 P. 2d 1192

(1982). The California Supreme Court interpreted the

Franchise Investment Law to require judicial considera-

tion of claims brought under that statute and concluded

that the California statute did not contravene the federal

Act. Id., at 604, 645 P. 2d, 1203-1204. The court also

remanded the case to the trial court for consideration of

appellees’ request for classwide arbitration.

We postponed consideration of the question of jurisdic-

tion pending argument on the merits. 459 U. S. 1101

(1983). We reverse in part and dismiss in part.

II

A

Jurisdiction of this Court is asserted under 28 U. 8. C.

$ 1257(2), which provides for an appeal from a final

judgment of the highest court of a state when the validity

of a challenged state statute is sustained as not in conflict

with federal law. Here Southland challenged the Cali-

fornia Franchise Investment Law as it was applied to

invalidate a contract for arbitration made pursuant to

the Federal Arbitration Act. Appellees argue that the

action of the California Supreme Court with respect to

this claim is not a “final judgment or decree” within the

meaning of § 1257(2).

Under Cox Broadcasting Corp. v. Cohn, 420 U. S. 469,

482-483 (1975), judgments of state courts that finally

decide a federal issue are immediately appealable when

“the party seeking review here might prevail [in the state

court] on the merits on nonfederal grounds, thus render-

ing unnecessary review of the federal issue by this Court,

and where reversal of the state court on the federal issue

would be preclusive of any further litigation on the

relevant cause of action... .” In these circumstances,

we have resolved the federal issue “if a refusal immedi-

79a

ately to review the state-court decision might seriously

erode federal policy.” IJd., at 483.

The judgment of the California Supreme Court with

respect to this claim is reviewable under Cox Broadcast-

ing, supra. Without immediate review of the California

holding by this Court there may be no opportunity to pass

on the federal issue and as a result “there would remain

in effect the unreviewed decision of the State Supreme

Court” holding that the California statute does not conflict

with the Federal Arbitration Act. Jd., at 485. On the

other hand, reversal of a state-court judgment in this set-

ting will terminate litigation of the merits of this dispute.

Finally, the failure to accord immediate review of the

decision of the California Supreme Court might “seriously

erode federal policy.” Plainly the effect of the judgment

of the California court is to nullify a valid contract made

by private parties under which they agreed to submit all

contract disputes to final, binding arbitration. The fed-

eral Act permits “parties to an arbitrable dispute [to

move] out of court and into arbitration as quickly and

easily as possible.” Moses H. Cone Memorial Hospital v.

Mercury Construction Corp., 460 U. S. 1, 22 (1983).

Contracts to arbitrate are not to be avoided by allowing

one party to ignore the contract and resort to the courts.

Such a course could lead to prolonged litigation, one of the

very risks the parties, by contracting for arbitration,

sought to eliminate. In The Bremen v. Zapata Off-Shore

Co., 407 U. S. 1, 12 (1972), we noted that the contract

fixing a particular forum for resolution of all disputes

“was made in an arm’s-length negotiation by experi-

enced and sophisticated businessmen, and absent some

compelling and countervailing reason it should be

honored by the parties and enforced by the courts.”

The Zapata Court also noted that

“the forum clause was a vital part of the agreement,

and it would be unrealistic to think that the parties

ia

80a

did not conduct their negotiations, including fixing

the monetary terms, with the consequences of the

forum clause figuring prominently in their calcula-

tions.” Jd., at 14 (footnote omitted).

For us to delay review of a state judicial decision deny-

ing enforcement of the contract to arbitrate until the

state-court litigation has run its course would defeat the

core purpose of a contract to arbitrate. We hold that the

Court has jurisdiction to decide whether the Federal

Arbitration Act preempts § 31512 of the California Fran-

chise Investment Law.

B

That part of the appeal relating to the propriety of

superimposing class-action procedures on a contract arbi-

tration raises other questions. Southland did not contend

in the California courts that, and the state courts did not

decide whether, state law imposing class-action procedures

was pre-empted by federal law. When the California

Court of Appeal directed Southland to address the ques- ~

tion whether state or federal law controlled the class-

action issue, Southland responded that state law did not

permit arbitrations to proceed as class actions, that the

Federal Rules of Civil Procedure were inapplicable, and

that requiring arbitrations to proceed as class actions

“could well violate the [federal] constitutional guaranty

of procedural due process.” * Southland did not claim in

the Court of Appeal that if state law required class-action

procedures, it would conflict with the federal Act and thus

violate the Supremacy Clause.

In the California Supreme Court, Southland argued

that California law applied but that neither the contract

to arbitrate nor state law authorized class-action proce-

dures to govern arbitrations. Southland also contended

2 Supplemental Memorandum of Points and Authorities in Op-

position to Petition for Writs of Mandate or Prohibition in Civ.

No. 45162 (Ct. App. Cal., Ist App. Dist.), pp. 19-25.

8la

that the Federal Rules were inapplicable in state proceed-

ings. Southland pointed out that although California law

provided a basis for class-action procedures, the Judicial

Council of California acknowledged ‘“‘the incompatibility

of class actions and arbitration.” Petition for Hearing 23.

It does not appear that Southland opposed class proce-

dures on federal grounds in the California Supreme

Court.* Nor does the record show that the California

Supreme Court passed upon the question whether super-

imposing class-action procedures on a contract arbitration

was contrary to the federal Act.*

% The question Southland presented to the State Supreme Court

was “[{w]hether a court may enter an order compelling a private

commercial arbitration governed by the Federal Arbitration Act...

to proceed as a class action even though the terms of the parties’

arbitration agreement do not provide for such a procedure.” Peti-

tion for Hearing in Civ. No. 45162 (Cal. 1980). Southland argued

that (1) the decision of the Court of Appeal “is in conflict with

the decisions of other Courts of Appeal in this State,” id., at 3;

(2) class actions would delay and complicate arbitration, increase

its cost, and require judicial supervision, “considerations [which]

strongly militate against the creation of class action arbitration

procedures,” id., at 22; and (3) there was no basis in law for class

actions. According to appellants, the Federal Rules of Civil Pro-

cedure did not apply in California courts. Jd., at 23. Southland thus

relied, not on federal law, but on California law in opposing class-

action procedures.

*The California Supreme Court cited “[a]nalogous authority”

supporting consolidation of arbitration proceedings by federal

courts. 31 Cal. 3d, at 611-612, 645 P.2d, at 1208. E.9., Compania

Espanola de Petroleos, S. A. v. Nereus Shipping, S. A., 527 F.2d 966,

975 (CA2 1975), cert. denied, 426 U.S. 936 (1976) ; In re Czarnikow-

Rionda Co., 512 F. Supp. 1308, 1309 (S.D.N.Y. 1981). This, along with

support by other state courts and the California Legislature for con-

solidation of arbitration proceedings, permitted the court to conclude

that class-action proceedings were authorized: “It is unlikely that

the state Legislature in adopting the amendment to the Arbitration

Act authorizing consolidation of arbitration proceedings, intended

to preclude a court from ordering classwide arbitration in an ap-

propriate case. We conclude that a court is not without authority

iii

82a

Since it does not affirmatively appear that the validity

of the state statute was “drawn in question” on federal

grounds by Southland, this Court is without jurisdiction

to resolve this question as a matter of federal law under

28 U.S. C. § 1257(2). See Bailey v. Anderson, 326 U.S.

203, 207 (1945).

III

As previously noted, the California Franchise Invest-

ment Law provides:

“Any condition, stipulation or provision purporting to

bind any person acquiring any franchise to waive

compliance with any provision of this law or any rule

or order hereunder is void.” Cal. Corp. Code Ann.

$ 31512 (West 1977).

The California Supreme Court interpreted this statute to

require judicial consideration of claims brought under the

state statute and accordingly refused to enforce the

parties’ contract to arbitrate such claims. So interpreted

the California Franchise Investment Law directly conflicts

with § 2 of the Federal Arbitration Act and violates the

Supremacy Clause.

In enacting § 2 of the federal Act, Congress declared a

national policy favoring arbitration and withdrew the

power of the states to require a judicial forum for the

resolution of claims which the contracting parties agreed

to resolve by arbitration. The Federal Arbitration Act

provides:

“A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce

to settle by arbitration a controversy thereafter aris-

ing out of such contract or transaction, or the refusal

to perform the whole or any part thereof, or an agree-

ment in writing to submit to arbitration an existing

to do so.” 31 Cal. 3d, at 613, 645 P.2d, at 1209. The California

Supreme Court thus ruled that imposing a class-action structure on

the arbitration process was permissible as a matter of state law.

83a

controversy arising out of such a contract, transac-

tion, or refusal, shall be valid, irrevocable, and en-

forceable, save upon such grounds as exist at law or

in equity for the revocation of any contract.” 9

U.S.C. § 2.

Congress has thus mandated the enforcement of arbitra-

tion agreements.

We discern only two limitations on the enforceability of

arbitration provisions governed by the Federal Arbitra-

tion Act: they must be part of a written maritime con-

tract or a contract “evidencing a transaction involving

commerce”’® and such clauses may be revoked upon

“grounds as exist at law or in equity for the revocation

of any contract.” We see nothing in the Act indicating

that the broad principle of enforceability is subject to any

additional limitations under state law.

The Federal Arbitration Act rests on the authority of

Congress to enact substantive rules under the Commerce

Clause. In Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U. S. 395 (1967), the Court examined the legis-

lative history of the Act and concluded that the statute

“is based upon .. . the incontestable federal foundations

of ‘control over interstate commerce and over admiralty.’ ”

Id., at 405 (quoting H. R. Rep. No. 96, 68th Cong., Ist

Sess., 1 (1924)). The contract in Prima Paint, as here,

contained an arbitration clause. One party in that case

alleged that the other had committed fraud in the induce-

ment of the contract, although not of the arbitration

clause in particular, and sought to have the claim of fraud

adjudicated in federal court. The Court held that, not-

withstanding a contrary state rule, consideration of a

claim of fraud in the inducement of a contract “is for the

5 We note that in defining “commerce” Congress declared that

“nothing herein contained shall apply to contracts of employment

of seamen, railroad employees, or any other class of workers en-

gaged in foreign or interstate commerce.” 9 U.S.C. § 1.

84a

arbitrators and not for the courts,” 388 U. S., at 400. The

Court relied for this holding on Congress’ broad power to

fashion substantive rules under the Commerce Clause.*®

At least since 1824 Congress’ authority under the Com-

merce Clause has been held plenary. Gibbons v. Ogden, 9

Wheat. 1, 196 (1824). In the words of Chief Justice

Marshall, the authority of Congress is “the power to regu-

late; that is, to prescribe the rule by which commerce is

to be governed.” Jbid. The statements of the Court in

Prima Paint that the Arbitration Act was an exercise of

the Commerce Clause power clearly implied that the sub-

stantive rules of the Act were to apply in state as well as

federal courts. As Justice Black observed in his dissent,

when Congress exercises its authority to enact substantive

federal law under the Commerce Clause, it normally

creates rules that are enforceable in state as well as fed-

eral courts. Prima Paint, supra, at 420.

In Moses H. Cone Memorial Hospital v. Mercury Con-

struction Corp., 460 U. S., at 1, 25, and n. 32, we reaf-

firmed our view that the Arbitration Act “creates a body

of federal substantive law” and expressly stated what was

implicit in Prima Paint, i. e., the substantive law the Act

created was applicable in state and federal courts. Moses

H. Cone began with a petition for an order to compel

arbitration. The District Court stayed the action pending

resolution of a concurrent state-court suit. In holding

that the District Court had abused its discretion, we found

no showing of exceptional circumstances justifying the

stay and recognized “the presence of federal-law issues”

under the federal Act as “a major consideration weighing

against surrender |of federal jurisdiction].” 460 U.S.

at 26. We thus read the underlying issue of arbitrability

to be a question of substantive federal law: “Federal law

® The procedures to be used in an arbitration are not prescribed

by the federal Act. We note, however, that Prima Paint considered

the question of what issues are for the courts and what issues are

for the arbitrator.

85a

in the terms of the Arbitration Act governs that issue in

either state or federal court.” Jd., at 24.

Although the legislative history is not without ambigui-

ties, there are strong indications that Congress had in

mind something more than making arbitration agreements

enforceable only in the federal courts. The House Report

plainly suggests the more comprehensive objectives:

“The purpose of this bill is to make valid enforcible

[sic] agreements for arbitration contained in con-

tracts involving interstate commerce or within the

jurisdiction or [sic] admiralty, 07 which may be the

subject of litigation in the Federal courts.” H. R.

Rep. No. 96, 68th Cong., 1st Sess., 1 (1924) (em-

phasis added).

This broader purpose can also be inferred from the

reality that Congress would be less likely to address a

problem whose impact was confined to federal courts than

a problem of large significance in the field of commerce.

The Arbitration Act sought to “overcome the rule of

equity, that equity will not specifically enforee an[y] arbi-

tration agreement.” Hearing on S. 4213 and S. 4214 be-

fore a Subcommittee of the Senate Committee on the Judi-

ciary, 67th Cong., 4th Sess., 6 (1923) (Senate Hearing)

(remarks of Sen. Walsh). The House Report accompany-

ing the bill stated:

“The need for the law arises from . . . the jealousy

of the English courts for their own jurisdiction. .. .

This jealously survived for so lon[g] a period that

the principle became firmly embedded in the English

common law and was adopted with it by the Amer-

ican courts. The courts have felt that the precedent

was too strongly fixed to be overturned without legis-

lative enactment ....” H. R. Rep. No. 96, supra,

at 1-2.

Surely this makes clear that the House Report contem-

plated a broad reach of the Act, unencumbered by state-

86a

law constraints. A

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