Petition for Writ of Certiorari — ARCO Products Co. v. Graham Oil Co.

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‘i FILED"

B4206 0 JUN 1 4 1995

No. QEFICE OF THE CLERK

‘

SUPREME COURT OF THE UNITED STATES

October 1994 Term

ARCO Products Co.,

Petitioner,

Petition for Writ of Certiorari to the United States Court of Appeals

for the Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

Charles F. Adams (Counsel of Record)

Randolph C. Foster

Joseph D. Cohen

Stoel Rives Boley Jones & Grey

900 SW Fifth Avenue

Portland, OR 97204-1268

(503) 224-3380

Counsel for Petitioner

QUESTIONS PRESENTED FOR REVIEW

1. Are parties to a franchise agreement governed by the

Petroleum Marketing Practices Act (“PMPA”) per se prohibited from

mutually waiving procedures of the PMPA?

2. Under the Federal Arbitration Act, 9 U.S.C. § 2, and

Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S.

1, 24-25 (1983) (“any doubts concerning the scope of arbitrable

issues should be resolved in favor of arbitration”), may a court

invalidate an arbitration agreement in its entirety because of

objectionable satellite provisions in that agreement?

3. If fact-finding is required to determine the validity or

severability of an arbitration agreement, may a federal appellate court

engage in fact-finding in the first instance?

CONTENTS

QUESTIONS PRESENTED FOR REVIEW .................. i

AATTIREEODD 65 osc cchticiswa hd siamineateeseeeen iv

ptt ee he gt ere er eer Fe = ]

FUGA: caees cha Cesscises eed eee |

STATUTE PROVE in ccc viens vent ¥Ge soni ce aeen l

STATEMENT OF THE CAGE... 3.066 ks cei 2

ARDEA 6555s is 5a NOR eee 6

5... I nk. asa wcbos soon ee ee 6

2. The majority opinion has widespread effect and could

invalidate many arbitration clauses in a wide variety of

WUT. 065 eC eae a eee 7

3. The majority opinion ignores the Cone all-doubts rule,

adopting a negative view of arbitration that this Court has

WUE, 6 6 a's ce ee a ee ee eee 10

4. The majority improperly engaged in appellate fact-finding.

oth O66 one oka ana ee bier ee ie ee ne a 14

5. The PMPA contains no per se prohibition on mutual waiver

stents WOME, 28 66 Nr 17

G Ce ng gic kbc iadcock vos cet ee eee 19

eee

APPENDIX

Opinion Delivered Upon the Rendering of the Judgment ....... A-1

Original Ninth Circuit Slip Opinion ..................... A-16

Order Denying Rehearing’.............................. A-30

Federal Arbitration Act,9U.S.C.§2..................... A-31

Peer m, Jo US. $8 2001-2006 ......... A-31

Oregon Motor Fuel Franchises Act ....................... A-54

1987 and 1990 Red-Lined Resolution of Dispute Cans ee A-64

AUTHORITIES

Cases

Allied-Bruce Terminix Cos., Inc. v. Dobson,

S513 U.S. _, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) ..... ll

Amoco Canada Petroleum Co. v. Lakehead Pipe Line Co.,

SEG Fe Oe GA, ROME 0 os vere hanes cow enocen 18

Dean Witter Reynolds, Inc. v. Byrd,

eG bs da ie nse ne nko Sh hs heal ba 12

Getty Petroleum Corp. v. Bartco Petroleum Corp.,

858 F.2d 103 (2d Cir. 1988), cert. denied, 490 U.S. 1006

GR e le eu iils aaed (oe aay wk Se dea eure Cad 9

Gilmer v. Interstate/Johnson Lane Corp.,

yo EL... + ESN Oe cunbari a Denreemne eG Gmeee nee 1]

Golden v. Mobil Oil Corp.,

ere uae ae OO ag once on sh escapederns 18

Graham Oil Co. v. ARCO Products Co.,

43 F.3d 1244 (9th Cir. 1995) .............. 1,5, 11, 14, 15

Graham Oil Co. v. ARCO Products Co.,

slip op. (9th Cir. Dec. 16, 1994) ................0.. 4,5, 18

Graham v. Scissor-Tail, Inc.,

28 Cal.3d 807, 623 P.2d 165, 171 Cal. Rptr. 604 (1981) ... 12

Greenwood Int'l, Inc. v. Greenwood Forest Products, Inc.,

108 Or. App. 74, 814 P.2d 528, rev. denied, 312 Or. 150

REO aA oe bat aha Reber ghee 8

Johnson v. Zerbst,

ON 18

Lake Communications, Inc. v. ICC Corp.,

cit wie 4 A. |: ee ea OR em 12

Lawrence v. Comprehensive Business Serv. Co.,

Rod Woe Ree Ge, FON). seo occ 13

Maine v. T, aylor,

re eR MEI ee ek eek 15

Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,

NO REM es en ee ae i, 6, 10

Nghiem v. NEC Electronics, Inc.,

25 F.3d 1437 (9th Cir.), cert. denied, 115 S.Ct. 638 (1994)

RNP ROE UN ob ih es Wie Li bS Cid JA de ouie oc oes Gs 12

PaineWebber Inc. v. Hofmann,

Pee rae tere OG OSE) 4.5 oes ek 8

Rodriguez de Quijas v. Shearson/American Express, Inc.,

vsitiuele ice pss oxy OP Oe Ree 11,12

Shearson/American Express, Inc. v. McMahon,

Me ee OT a 3,7, 11, 16

Snap-On Tools Corp. v. Scott,

[1990-92 Transfer Binder] Bus. Franchise Guide (CCH) § 9701

EE ion da Ge 4 Vedas cs shaves aeastated ees 13

U-Haul Int'l, Inc., v. Jartran, Inc.,

Fee ee GE, SOD Skin lccncscRucdevecovenay 9

Union County Sch. Dist. No. 1 v. Valley Inland Pacific

Constructors, Inc.,

59 Or. App. 602, 652 P.2d 349 (1982) .................. 8

Wilko v. Swan,

nn SRT GROOT fk 66 0a oho Cn SS bel eM bas wekees 11,17

Statutes

SPCC PURE SG vkw's caw cuawaes ds ¥é00edes ReeeeReeees l

SP AE ood A on cea ccca (sk sua kewseaaeese beens a 6

Ss PEED oi cbs GA ga ba dka bovecne Les pe avekse’ 6

Federal Arbitration Act, 9 U.S.C. §§ 1-16 ....... 1, 10, 11, 13, 16

Oregon Motor Fuel Franchises Act,

Or. Rev. Stat. §§ 650.200-.250 (1993) .............. 1,2, 19

Petroleum Marketing Practices Act (PMPA),

Ee Gs OF ib osc sb ks occas anes 1-3, 6, 9, 19

Vil

Other

American Arbitration Association,

DRAFTING DISPUTE RESOLUTION CLAUSES: A Practical Guide

ERGs Scr Sank IR REL ge Oe RS ce ee ~

American Bar Association Section of Litigation,

COMMERCIAL ARBITRATION FOR THE 1990s (R. Medalie ed.

satitie! Le POT Cn eRe PIL Gee eee x

John D. Calamari & Joseph M. Perillo,

THE LAW OF CONTRACTS (3d ed. SE erecsrse Se aes 13

opine ene ecesssh fe ae TO ne ET IDOE eS Lat 8

S. Rep. No. 731, 95th Cong., 2d Sess. (1978),

reprinted in 1978 U.S.C.C.A.N. 873 ("Legislative History")

CUES We DES € CSE Sa URE CORN CT IER hs SS ee, 17, 18

Petitioner ARCO Products Company’ respectfully petitions

for a writ of certiorari to review the judgment of the United States

Court of Appeals for the Ninth Circuit.

REPORTS OF OPINIONS

The Ninth Circuit has one reported opinion in this case,

Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244 (9th Cir.

1995). The opinion is authored by Judge Reinhardt and joined by

Judge Brunetti. Judge Fernandez dissented.

JURISDICTION

The original decision in this case was filed December 16,

1994. On December 28, 1994, Peititioner filed a timely motion for

an extension of time to move for rehearing. The motion was granted

on January 6. On January 6, 1995, Peititioner filed its timely Petition

for Rehearing with Suggestion for Rehearing En Banc. The Ninth

Circuit denied that petition on March 16, 1995.

This Court has jurisdiction over this Petition under 28

U.S.C. § 1254(1).

STATUTORY PROVISIONS

Federal Arbitration Act, 9 U.S.C. § 2; Petroleum

Marketing Practices Act (PMPA), 15 U.S.C. $§ 2801-2806; Oregon

The named parties to the proceeding in the court below are Graham Oil

Company and ARCO Products Company. Peititioner is a division of Atlantic

Richfield Company, which has the following parents, subsidiaries, and affiliates

within the scope of S.Ct. Rule 29.1: ARCO Chemical Company, Lynondell

Petrochemical Company, and Vastar Resources, Inc.

Motor Fuel Franchises Act, Or. Rev. Stat. 650.200-.250 (1993).

Pursuant to S.Ct. Rule 14.1(f), the text of these statutes is set out in

the Appendix.

STATEMENT OF THE CASE

Petitioner (“Franchisor”) is a gasoline company, and

Respondent (“Franchisee”) was one of its franchised distributors.

This is a suit by Respondent Franchisee against Petitioner Franchisor

for violation of the Petroleum Marketing Practices Act (PMPA) and

Oregon Motor Fuel Franchises Act. See Complaint (Nov. 27, 1990)

(CR 1; ER 1-6).? Franchisee pleaded that the district court had

subject-matter jurisdiction under 15 U.S.C. § 2805 and pendent

jurisdiction over the state law claim. Id. ¢2. The Complaint sought

an injunction against termination or nonrenewal of a 1987 franchise

agreement, damages, and attorney fees.

The 1987 franchise agreement’ contained a provision

(paragraph 23) on Resolution of Disputes. See Graham Aff. at 18

(CR-2). The Resolution of Disputes clause is over 400 words long.

It also incorporates Procedures for Arbitration, attached as a separate

exhibit (Exhibit E). See Procedures for Arbitration, Exhibit A to

Defendant’s Opposition to Plaintiff's Motion (CR-27; ER 56-59).‘

These provisions include four noteworthy parts. First, they

2 —_ “CR” refers to the docket number in the trial court. “ER” refers to the

page number in the Substituted Excerpt of Record in the Ninth Circuit.

3" The 1987 franchise agreement went into effect January 1, 1988, but is

dated September 24, 1987.

$ This document appears to have been attached to a later franchise

agreement.

require each party to promptly pursue all claims -- within 90 days

after knowing the facts giving rise to a claim, and in no event later

than six months. (ER 56 { A).° Second, they require each party to

pay its own costs, expenses, and attorney fees. Graham Aff. at 18

(CR 2) (ER 38 ¢ 22(a)).® Third, they mutually waive punitive and

exemplary damages. Graham Aff. at 19 (CR 2). Finally, they allow

cach party to litigate, instead of arbitrate, federal statutory claims

arising under the PMPA. Id. at 18.

The 1987 franchise agreement was set to expire December

31, 1990. In August 1990, before the suit was filed, Franchisor

tendered an agreement renewing the franchise for 3 years (January 1,

1991 though December 31, 1993). This 1990 franchise agreement

also contained a Resolution of Disputes clause incorporating

Procedures for Arbitration. In 1987, this Court had decided

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220

(1987). McMahon stated that as a general rule, an agreement could

require arbitration of federal statutory claims. The 1990 arbitration

provisions contained one relevant difference from the 1987

provisions: they dropped the language allowing the parties to litigate

PMPA claims. See 1990 franchise agreemert 22(a) (ER 38). This

effectively required arbitration of those federal statutory claims.

Franchisee eventually moved for a preliminary injunction

against termination of the 1990 franchise agreement. Motion (Nov.

25, 1991) (CR 26). Franchisor argued that the case was arbitrable.

* These times correspond to PMPA periods for mandatory equitable relief.

See 15 U.S.C. § 2805(b)4) (court may refuse to continue or renew franchise if suit

brought over 90 days after notice of termination).

. The losing party must pay a variety of arbitration-related expenses. See

ER 38 ¢ 22(a), ER 58 1.

Franchisee argued that arbitration agreements are invalid under the

PMPA because the PMPA requires a judicial remedy.

The district court ordered Franchisor not to terminate the

franchise on the ground that Franchisee could not meet its fuel

purchase quota, stated that the Franchisee was required to arbitrate,

ordered that the injunction remain in effect until termination pending

arbitration, and ordered that the arbitration be completed within 90

days. Order (Dec. 3, 1991) (CR 32; ER 60-61). Nine days later,

Franchisee filed a notice of appeal, Notice of Appeal (Dec. 12, 1991)

(CR 33; ER 62).

Franchisee did not start an arbitration. After 90 days,

Franchisor moved (1) to clarify the injunction to make sure that it

could then terminate the franchise, (2) and for summary judgment or

entry of judgment because Franchisee had failed to start an

arbitration. Motion (March 4, 1992) (CR 35). The district court

granted this motion, Civil Minutes (March 12, 1992) (CR.41), and

entered judgment. Judgment (Apr. 7, 1992) (CR 42). Franchisee

appealed (Apr. 9, 1992).

The two appeals were consolidated, briefed, and argued.

On appeal, Franchisee again argued that arbitration agreements are

invalid under the PMPA because the PMPA requires a judicial

remedy.

On December 16, 1994, the Ninth Circuit panel, in a

two-to-one decision, disagreed with Franchisee’s argument, but ruled

in favor of Franchisee. Graham Oil Co. v. ARCO Products Co., slip

op. (9th Cir. Dec. 16, 1994). The ruling was on grounds that had not

been briefed. The majority held that three parts of the 1990

arbitration agreement (the mutual waivers of punitive damages,

mutual waivers of certain costs and expenses, and the mutually

shortened periods to begin arbitration) contravened the PMPA

“because the arbitration clause employed by ARCO compels Graham

Oil to surrender important statutorily-mandated rights afforded

franchisees by the PMPA.” This ruling was not based on an explicit

statutory prohibition on waiver, or any explicit statement in the

legislative hi forbiddi ioe

Then, in Section III.B of its opinion, the majority held that

the provisions identified as illegal could not be severed from the

remainder of the arbitration clauses because (a) there was no express

severability provision, (b) the 1990 agreement was a “contract of

adhesion,” (c) the Franchisee “would have desired a severability

clause” that allowed litigation of PMPA claims, and (d) “the

approach most favorable to [Franchisee]” was to sever and invalidate

not merely the provisions identified as contrary to the PMPA, but

arbitration provisions in their entirety. See slip op. at 15519-20.

Franchisor petitioned for rehearing with suggestion of

rehearing in banc. On March 13, 1995, the majority amended its

IIB changed the reasons for invalidating the entire arbitration

clause. The amended opinion dropped its statements about: the

1990 agreement being an adhesion contact, what the Franchisee

would have desired, and what was most favorable to the Franchisee.

were “highly integrated,” 43 F.3d at 1248; stated that the provisions

identified as contravening the PMPA achieved a result “expressly

forbidden” by Congress, id. at 1249; and found, as a “fact” that

Franchisor had deliberately attempted to use an arbitration clause to

Id.

Petition for a writ of certiorari followed.

Trial court jurisdiction was based on the PMPA, 15 U.S.C.

§ 2805. Appellate jurisdiction was based on 28 U.S.C. § 1292(a)(1)

(for the appeal of the refusal to grant Franchisce's entire injunction)

and 28 U.S.C. § 1291 (for the appeal of the final judgment).

ARGUMENT

1. Summary

of federal law -- how to treat an arbitration clause that contains

provisions identified as illegal -- in a way that ignores and conflicts

with this Court’s decision in Moses H. Cone Memorial Hosp. v.

Mercury Constr. Corp., 460 U.S. 1, 24 (1983). The majority

opinion also departed from the accepted and usual course of judicial

proceedings (as well as conflicting with controlling cases) in

explicitly engaging in fact finding on appeal (and explicitly relying on

those findings). Moreover, those findings were made against the

party that moved for summary judgment, were related to an issue --

severability of the provisicus that offended the majority from the

remainder of the arbitration provisions -- that was not raised by

Respondent at czy stage of the case, and were made without notice,

so that Petitioner lacked any fair opportunity to introduce evidence on

and/or opportunity to brief the issues.

The case also decides an important question of federal law

that has riot been, but should be, settled by this Court -- whether

parties to a franchise agreement governed by the PMPA are per se

prohibited from mutually waiving some procedures of the PMPA.

The majority opinion in this case has important,

widespread results, affecting arbitration clauses in a wide variety of

settings.

2. The majority opinion has widespread effect and could

invalidate many arbitration clauses in a wide variety of

settings.

The majority’s reasoning has important implications for all

sorts of arbitration agreements. Many arbitration agreements, like

the 1990 agreement here, do not mention specific statutes, but are

broad enough to cover disputes under potentially any statute. Those

statutes may create causes of action, allow punitive or exemplary

damages, allow attorney fees, give limitation periods, or create other

remedies or procedures. E.g., Shearson/American Express, Inc. v.

McMahon, 482 U.S. 220, 223 (1987) (clause requiring arbitration of

“any controversy arising out of or relating to my accounts, to

transactions with you for me or to this agreement or the breach

thereof” covers disputes arising under RICO and federal securities

laws).

It is also typical (i.e., not uncommon) for arbitration

agreements to include general, procedural provisions that apply to

offensive. For example, the American Arbitration Association

(“AAA”) provides the following as an example of “typical language

dealing with fees and expenses”:

All fees and expenses of the arbitration shall be borne

by the parties equally. However, cach party shall bear the

expense of its own counsel, experts, witnesses, and

preparation and preseaitstion of proofs.

Causes: A Practical Guide 27 (1992); see also American Bar

Association Section of Litigation, COMMERCIAL ARBITRATION FOR

THE 1990s, 156, 12(a) (R. Medalie ed. 1991) (arbitration fees split

equally, each side pays own attorney fees). This is similar to the

mutual waiver of costs and attorney fees that offended the majority

below. Compare id. with ER 38 4 22(a) ("Each party shall pay its

Likewise, as one “sample[] of clauses dealing with

remedies,” the AAA includes:

The arbitrators will have no authority to award

punitive damages or any other damages not measured by

the prevailing party's actual damages, and may not, in any

event, make any ruling, finding or award that does not

conform to the terms and conditions of the Agreement.

DRAFTING DISPUTE RESOLUTION CLAUSES at 20. This is similar to

the mutual waiver of exemplary and punitive damages that offended

the majority below. Compare id. with ER 38 4 22(b) (“The

arbitrator(s) may not assess punitive or exemplary damages . . . .”).

Finally, periods of limitations and repose are likewise not

uncommon. E.g., NASD Rules § 15; PaineWebber Inc. v. Hofmann,

984 F.2d 1372 (3d Cir. 1993) (applying NASD Rule 15);

Greenwood Int'l, Inc. v. Greenwood Forest Products, Inc., 108% Or.

App. 74, 814 P.2d 528, rev. denied, 312 Or. 150 (1991) (limiting

certain claims to three years); Union County Sch. Dist. No. | v.

Valley Intand Pacific Constructors, Inc., 59 Or. App. 602, 652 P.2d

349 (1982) (limiting claims to those brought within “reasonable

time”); COMMERCIAL ARBITRATION FOR THE 1990s, at 156, 3

(arbitration demand must be made within 30 days of delivery of

goods; arbitration demand must be made within 30 days following

architect’s decision; demand must be made within reasonable time

after claim has arisen, and no later than the date the applicable statute

of limitations has run).

These kinds of waivers are mutual in form and in substance.

For instance, the waivers in the 1990 franchise agreement had real

benefits to Franchisee as well as Franchisor. For instance, the PMPA

gives both franchisor and franchisee certain rights to attorney fecs.

See 15 U.S.C. § 2805(d)(1)(B), (d)(3). Both are waived. Also,

franchisors have sued franchisees (and others) for false advertising

and received large punitive damage awards. E.g., Getty Petroleum

Corp. v. Bartco Petroleum Corp., 858 F.2d 103, 105 (2d Cir. 1988)

(reversing $2 million punitive damages award against franchisee),

cert. denied, 490 U.S. 1006 (1989); U-Haul Int'l, Inc., v. Jartran,

Inc., 793 F.2d 1034, 1037 (9th Cir. 1986) ($20 million punitive

damages for false advertising against competitor). The waiver of

punitive damages protected Franchisee from this kind of exposure.

And the shortened limitations period causes disputes to be resolved

before they fester and cause real damage to the parties, such as

termination of the franchise relationship.

__ The remedies or procedures affected by these kinds of

provisions could be said to be “important to the effectuation” of

policies of any number of statutes. Indeed, the provisions used in this

case, as well as the typical provisions cited above, are general enough

to apply to any statutory cause of action. Thus, the majority’s

reasoning implicates, and could easily invalidate, a wide variety of

arbitration agreements that contain any of these typical waivers. As a

result, this case has drawn national press attention, and an amicus

attempted to support Petitioner’s position in the court of appeals.

See WALL STREET JOURNAL, Dec. 22, 1994, at B2, cols. 4-6

(discussing case); Motion of Kaiser Foundation Health Plan, Inc. for

Leave to File Letter Brief as Amicus Curiae in Support of ARCO

Products’ Petition for Rehearing (Jan. 18, 1995).

3. The majority opinion ignores the Cone all-doubts rule,

adopting a negative view of arbitration that this Court has

rejected.

In Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 24 (1983), this Court held that section 2 of the

Federal Arbitration Act, 9 U.S.C. § 2, creates substantive law, and

under that law, all doubts concerning arbitrability must be resolved in

favor of arbitration:

Sectieh 2 We a cig babel 4bnenk aa

policy favoring arbitration agreements, notwithstanding

any state substantive or procedural policies to the contrary.

The effect of the section is to create a body of federal

substantive law of arbitrability, applicable to any _

The Arbitration Act establishes that, as a matter of federal

law, any doubts concerning the scope of arbitrable issues

should be resolved in favor of arbitration, whether the

problem at hand is the construction of the contact language

itself or an allegation of waiver, delay, or a like defense to

Id. at 24-25 (emphasis added).

This Court (and others) have upheld and applied this

liberal arbitration policy in a wide variety of settings. For instance

this Court has given maximum allowable Constitutional scope to the

Federal Arbitration Act, held that state laws are preempted, held that

a wide variety of federal statutory claims are arbitrable, and even

explicitly overruled its own anti-arbitration precedent. E.g., Allied-

Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. __, 115 S.Ct. 834,

130 L.Ed.2d 753 (1995) (Federal Arbitration Act applies to

maximum extent allowed by Constitution); Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (federal

statutory ADEA claims are arbitrable); Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477 (1989) (overruling

Wilko v. Swan, 346 U.S. 427 (1953)); Shearson/American Express,

Inc. v. McMahon, 482 U.S. 220 (1987) (federal statutory claims

generally arbitrable, including claims under 1934 Securities

Exchange Act and RICO).

This policy, and the Cone all-doubts rule in particular, do

not lose force when considering whether to invalidate an entire

arbitration provision. Both the policy and the rule are beyond

question. Indeed, the majority below did not question the Cone rule.

Instead, the majority simply ignored the rule. See 43 F.3d at 1248-

49. In so doing, it effectively adopted a “negative view of

arbitration,” id. at 1250 (Fernandez, J., dissenting), that contradicts

the precedent of this Court (and of the Ninth Circuit itself). See id.

The Cone “any-doubts” rule takes precedence over, and

controls the application of, the rule used by the majority for three

reasons. It is based on a statute, the Federal Arbitration Act, not

common law. It is specific (directed to arbitration clauses), not

general. And it was explicitly chosen by the parties to be used in

determining the validity of the arbitration clause. Procedures for

Arbitration { G (“Federal law, including the provision of Title 9 of

the United States Code, shall govern all issues concerning the

validity, enforceability and interpretation of this arbitration

agreement.”) (ER 58).

illegal or void, this Court and others do not invalidate arbitration

entirely. Rather, they refuse to give effect to the questioned language.

For instance, when federal securities or antitrust laws were

interpreted as making agreements to arbitrate those claims “void” or

unenforceable,’ courts did not invalidate entire arbitration clauses.

Rather, this Court and others held that those claims are non-

arbitrable; the remainder of the agreement was valid, and the other

claims could be arbitrated.* E.g., Dean Witter Reynolds, Inc. v.

Byrd, 470 U.S. 213, 217 (1985) (requiring arbitration of non-

securities clairns); Lake Communications, Inc. v. ICC Corp., 738

F.2d 1473 (9th Cir. 1984) (requiring arbitration of non-antitrust

claims). And in Graham v. Scissor-Tail, Inc., 28 Cal.3d 807, 831,

623 P.2d 165, 171 Cal. Rptr. 604 (1981), the court held an

arbitration provision specifying a biased arbitrator to be

unconscionable and unenforceable, but nonetheless ordered

arbitration before an unbiased arbitrator in light of the (state) policy

favoring arbitration.

This Court’s approach in Byrd is consistent with the

common-law rule on illegal provisions, also ignored by the majority.

The majority below threw out entirely an extensive, mutual, general

dispute-resolution mechanism because it decided that a small part of

it is “illegal” as applied to some types of PMPA claims by one party.

This result overlooks the rule that such clauses are disregarded or

7 Of course, under federal pro-arbitration policy those limits on arbitration

are no longer good law. Rodriguez de Quijas, 490 U.S. 477 (1989) (overruling

Wilko v. Swan, 346 U.S. 427 (1953)), Nghiem v. NEC Electronics, Inc., 25 F.3d

1437, 1441-42 (9th Cir.) (federal antitrust claims arbitrable), cert. denied, 115 S.Ct.

638 (1994).

§ It is noteworthy that Franchisee asserted claims other than claims under

the PMPA. Complaint { 2 (CR 1) (ER 2) (pleading claim under state franchise law).

curtailed:

If an agreement contains an illegal provision that is

not central to the agreement and the illegal provision does

not involve serious moral turpitude, the illegal portion of

the agreement is disregarded and the balance of the

agreement is enforceable. . . . Thus, contracts containing

illegal covenants not to compete are enforced. The illegal

covenant is disregarded or curtailed. Contracts containing

illegal penalty clauses or illegal exculpatory clauses are

enforced. The illegal clauses are in effect excised.

John D. Calamari & Joseph M. Perillo, THE LAw OF CONTRACTS

§ 22-2(d), at 893 (3d ed. 1987) (footnotes omitted).

reasonably and easily construed to allow arbitration. That is done

simply by any of four ways: refusing to give the mutual waivers any

effect as to PMPA claims, interpreting the arbitration provisions to

allow the mutual waivers to be severed from the remainder, limiting

the effect of the mutual waivers so that they do not apply to PMPA

claims, or construing the provisions to allow the arbitrator to decide

the validity of the mutual waivers, see Snap-On Tools Corp. v. Scott,

[1990-1992 Transfer Binder] Bus. Franchise Guide (CCH) 4 9701,

at 21,622 (E.D. Mo. 1990) (arbitrator decides whether shortened

statute of limitations in franchise agreement is unconscionable),

Lawrence v. Comprehensive Business Serv. Co., 833 F.2d 1159 (Sth

Cir. 1987) (arbitration clause in franchise agreement covered claim of

illegality of agreement); see generally Appellant's Answering Brief

at 20-21 & n.6. So even if the mutual waivers are invalid, the rest of

the arbitration provisions must stand under the Federal Arbitration

Act and the Cone rule.

4. The majority improperly engaged in appellate fact-finding.

In order to reach its result, the majority not only ignored the

Cone rule, but also had to engage in fact-finding. It was improper for

an appellate court to do so. It was doubly improper because

Respondent-Appellant had not asked for such findings. And such

fact-finding would have been improper at this stage of the case even

at the trial court level. Moreover, the majority’s findings are clearly

wrong.

The majority opinion says that the 1990 arbitration

provisions are “a highly integrated unit.” 43 F.3d at 1248; contra id.

at 1251 (offensive provisions are “not intertwined with the

alee isions”) (F eed ine) * Ths majcrity

also admittedly makes explicitly “fact” findings on which the

majority’s result depends:

Our decision to strike the entire clause rests in part

upon the fact that the offensive provisions clearly represent

an attempt by ARCO to achieve through arbitration what

% As Judge Fernandez pointed out:

clause that we find in many commercial contracts. Nevertheless, as I see

it, the arbitration provision can and does stand up quite well without the

offending provisions and would have been acceptable to both parties in

‘that form. I have not the slightest doubt that to the extent arbitration is

desirable it would have been just as desirable without those provisions.

They are not a sine qua non of arbitral attractiveness and are not

intertwined with the arbitration provision. If arbitration is a beauty, it is

no less a one because it has lost a slipper. That indicates that arbitration

should be required in this case.

Id. at 1251 (Fernandez, J., dissenting).

Congress has expressly forbidden. Congress enacted the

PMPA precisely to prevent the type of agreement that

ARCO included in the arbitration clause of its franchise

contract. ARCO attempted to use an arbitration clause to

achieve its unlawful ends.

43 F.3d at 1249 (emphasis added).

First, it was utterly improper for the Ninth Circuit to make

findings on appeal. It is, after all, a “Court of Appeals” not of trials.

It may not decide factual questions de novo. E.g., Maine v. Taylor,

477 US. 131, 145 (1986) (“As this Court frequently has

emphasized, appellate courts are not to decide factual questions de

novo ....”). Of course, an appellate court has some ability to review

findings made by the trial court and has some or complete latitude in

deciding the legal effect of the empirical facts. But no matter what

the standard of review, the appellate court may not engage in

empirical fact finding. E.g., id. at 144-45. The impropriety of

findings at this stage is reinforced by the fact that what purportedly

was “clearly” true is not even mentioned in the December slip

opinion, did not occur to the trial court (the proper trier of fact), and

is the subject of a dissent.

Second, the findings are wrong and unsupported. The

statement that Franchisor tried to achieve “what Congress has

expressly forbidden” is nonsense. Even the majority could find no

express prohibition on waiver either in the PMPA or in the legislative

history.

Third, the findings are based on nothing more than the

“idea that a picaresque oil company wronged its franchisee.” 43 F.3d

at 1251 (Fernandez, J., dissenting). The “ends” and motivation of

Franchisor in modifying the 1987 agreement to remove the PMPA

exclusion were not at issue in any point in this case. The majority’s

findings are entirely circular, being based on nothing more than the

1990 arbitration provisions themselves. The majority opinion reads

as though Franchisor took a clause that required arbitration of PMPA

claims and then added “offensive,” “illegal” provisions with the goal

of stealing Franchisee’s rights.

In fact, the opposite is true. The “offensive” provisions are

provisions of general applicability. They could not be aimed at

depriving anyone of PMPA rights because they were in the

arbitration clause while that clause exc/uded mandatory arbitration of

PMPA claims. And there is no evidence that the 1990 removal of the

PMPA exception is anything other than taking advantage of this

Court’s decision in McMahon, which made clear that the Federal

Arbitration Act makes federal statutory claims presumptively

arbitrable.

This appellate fact-finding was doubly improper in light of

Respondent’s positions on appeal. The thrust of Respondent’s

appellate argument was that PMPA claims are inherently not

arbitrable -- that “there is an ‘inherent conflict’ between allowing

franchisors to insist on arbitration and the underlying purposes of the

PMPA.” Substituted Appellant’s Brief at 23. Although Respondent

cited the provisions that the majority found offensive, Respondent did

not argue that those provisions alone could cause the arbitration

clause to be invalidated. And on the subject of fact-finding by the

court, Respondent first took the position that no court fact-findings

should be made, id. at 22 (“[I]t is not necessary or appropriate to

require such findings to be made on a case-by-case basis . . . .”)

(discussing whether there was an adhesion contract), and then took

the position that the Ninth Circuit should remand for findings by the

trial court.'°

Finally, fact finding against Petitioner would have been

improper even at the trial court level at this stage of the case. In

opposing arbitration at trial, Respondent had not argued, and offered

no evidence about, Franchisor’s goals or ends in including the

provisions that offended the majority. See Plaintiff's Response to

Defendant’s Opposition to Motion for Preliminary Injunction (Dec.

2, 1991) (CR 29). The trial court entered judgment based on a

motion by Petitioner for judgment in its favor, which was partly a

motion for summary judgment by Petitioner. It would have been

improper to make fact-findings against Petitioner in such a motion.

5. The PMPA contains no per se prohibition on mutual waiver

of statutory procedures.

Congress can and does explicitly forbid waiver of some

statutory rights. Cf, e.g., Wilko v. Swan, 346 US. 427 (1953)

(citing explicit federal securities anti-waiver provisions as reason

why claims are not.arbitrable), overruled, Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477 (1989). But the

PMPA contains no anti-waiver provision, and the Legislative History

does not state that the remedies at issue in this case are important.

sg Respondent argued that based on Gilmer,

this court, in Mago v. Shearson Lehman Hutton Inc., 956 F.2d 932 (9th

Cir. 1992), remanded and directed the district court to determine

whether the arbitration clause was part of a contract of “adhesion.” At

the very least, the court should require that determination in this case as

well.

Appellant’s Reply Brief at 6 (footnote omitted).

The general rule is that statutory remedies and procedures

are waivable, if the waiver is knowing and reasonable. See, e.g.,

Golden v. Mobil Oil Corp., 882 F.2d 490, 493-94 (11th Cir. 1989)

(limitation of liability is not substantively unconscionable); Amoco

Canada Petroleum Co. v. Lakehead Pipe Line Co., 618 F.2d 504,

506 (8th Cir. 1980) ("Parties to a contract normally are free to set a

limitation period for bringing suit that is shorter than that provided

by the applicable statute of limitation; it is only when the contractual

limitation period is unreasonably short that it is void as violative of

public policy."); cf Johnson v. Zerbst, 304 U.S. 458 (1938)

(constitutional right to jury trial may be waived if waiver is knowing

and intentional). As noted above, the waivers in this case were

mutual in form and in substance.

Moreover, the majority ignores the legislative history and

the provisions and effect of the PMPA and state franchise law. It

confuses the situation existing prior to the PMPA with the situation

that exists today.

Before enactment of the PMPA, Congress felt that "[t]he

disparity of bargaining power . . . disadvantage[d] the franchisee in

negotiations leading to execution of the franchise agreement." See S.

Rep. No. 731, 95th Cong., 2d Sess., 17 (1978), reprinted in 1978

U.S.C.C.A.N. 873, 876 ("Legislative History"), quoted in part in slip

op. at 15116. The PMPA was designed as "remedying the disparity

in bargaining power between franchisors and franchisees." /d. at 18,

1978 U.S.C.C.A.N. at 877. An "essential" aim of the PMPA was to

give "franchisees meaningful protections from arbitrary or

discriminatory terminations and non-renewals" and to allow

"fulfillment of the reasonable renewal expectations of franchisees."

Legislative History at 18, 1978 U.S.C.C.A.N. at 877 (emphasis

added).

The PMPA accomplished these goals by, among other

things, broadly restricting contract terms and the non-renewal or

termination of franchises. See 15 U.S.C. $§ 2801-2805. Moreover,

in many areas not preempted by federal law, motor-fuel franchises

are subject to additional, extensive regulation under state law. See

Or. Rev. Stat. §§ 650.200-.250 (Oregon Motor Fuel Franchises Act).

Thus, in the post-PMPA world, PMPA franchise agreements and

relationships are highly regulated and restricted.

Because of the substantive provisions provided by the

PMPA, as well provisions of state law, it is illogical to continue to

treat PMPA franchisees as if they were minor children. The have

enough bargaining power so that there should be no per se rule

against mutual waiver of the provisions of the PMPA at issue here.

6. Conclusion

An entire arbitration agreement generally cannot be

invalidated on the grounds that small portions of it contravene a

statute. The Cone any-doubts rule operates to make those

agreements presumptively valid. When the majority below ignored

that rule, it decided an important issue of federal law in a manner that

conflicted with this Court’s controlling precedent. And when the

majority reached this result by making findings of fact on appeal, it

departed from the accepted and usual course of judicial proceedings,

again conflicting with the Court’s controlling precedent. This

departure was worsened because those findings were made against a

party who had no notice that it should be introducing evidence on the

issues and because the appellate findings themselves are baseless and

wrong.

The majority below also decided an important question of

federal law that has not been, but should be, settled by this Court --

waivability of PMPA procedures -- and did so incorrectly.

Therefore, for the reasons stated above this Court should

issue a writ of certiorari to the United States Court of Appeals of the

Ninth Circuit in order to review this case.

Dated: June 14, 1995.

Charles F. Adams (counsel of record)

Joseph D. Cohen

Randolph C. Foster

Counsel for Peititioner

Stee

Naiireneens

A-1

Opinion Delivered Upon the Rendering of the Judgment

43 F.3d 1244

GRAHAM OIL CO., an Oregon corporation, Plaintiff-Appellant,

ARCO PRODUCTS CO., A DIVISION OF ATLANTIC

RICHFIELD CO., a Delaware corporation, Defendant-Appellee.

Nos. 92-35007, 92-35380.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Nov. 2, 1993.

Decided Dec. 16, 1994.

As Amended March 13, 1995.

[*1245] Mildred J. Carmack, Schwabe, Williamson &

Wyatt, Portland, OR, for plaintiff-appellant.

Charles F. Adams, Stoel, Rives, Boley, Jones & Grey, Portland,

OR, for defendant-appellee.

Appeals from the United States District Court for the District of

Oregon.

Before: REINHARDT, BRUNETTI, and FERNANDEZ,

Circuit Judges.

Opinion by Judge REINHARDT: Dissent by Judge

FERNANDEZ.

REINHARDT, Circuit Judge:

I. INTRODUCTION

Graham Oil Co. ("Graham Oil") appeals the judgment of the

district court, which dismissed, with prejudice, all of its claims

ene nin NET a

A-2

against ARCO Products Co. ("ARCO"). The claims were dismissed

because Graham Oil [*1246] refused to submit to arbitration as

required by an arbitration clause in its distributorship agreement with

ARCO.

Graham Oil contends that the arbitration clause is invalid

because it requires the surrender of certain rights provided under the

Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C.

§§ 2801-2806. Accordingly, it argues that the district court--not an

arbitrator--must decide the merits of its claims under the PMPA. We

agree.

II. FACTS

For nearly forty years, Graham Oil was a branded distributor of

ARCO gasoline in Coos Bay, Oregon. On October 2, 1990, Graham

Oil and ARCO entered into a Branded Distributor Gasoline

Agreement ("Agreement"), which was effective from January |,

1991, to December 31, 1993. Among other things, the parties agreed

that Graham Oil would purchase a minimum amount of gasoline each

month during the two-year period of the Agreement.

On November 10, 1991, ARCO notified Graham Oil that it

intended to terminate the Agreement as of October 31, 1991, because

Graham Oil had not been purchasing the required minimum amount

of gasoline as specified in the Agreement. On November 27, 1991,

Graham Oil filed a motion for a preliminary injunction against

ARCO in federal district court. Graham Oil argued that ARCO had

violated the PMPA by deliberately raising its prices so that Graham

Oil would be unable to meet the minimum gasoline requirements.

Accordingly, Graham Oil argued that ARCO should not be allowed

to terminate the Agreement.

On December 3, 1991, the district court issued a preliminary

injunction that prohibited ARCO from terminating the Agreement for

A-3

90 days. Instead of reaching the merits of Graham Oil's claims under

the PMPA, however, the court found that arbitration was Graham

Oil's exclusive remedy. The court required the parties to complete

the arbitration within 90 days.

Graham Oil appealed the district court's order and refused to

submit to arbitration. Upon the expiration of the 90 days, ARCO

moved for summary judgment. Graham Oil filed a cross-motion to

keep the court's preliminary injunction in force pending the resolution

of its appeal. The court denied Graham Oil's cross-motion and

granted summary judgment in favor of ARCO. On appeal, Graham

Oil argues that the arbitration clause in the Agreement is invalid and

that the court must determine the merits of its claims under the

PMPA.

Ill. ANALYSIS

This case involves the validity of an arbitration clause that, in

addition to specifying arbitration as the means by which disputes are

to be resolved, purports to waive certain statutory rights conferred

upon petroleum franchisees by the PMPA. We conclude that the

clause is invalid. As a result, we strike it and remand for further

proceedings.

A. Validity of the Clause.

1. Purpose of the PMPA. In determining the validity of the

arbitration clause, we first review the purpose of the PMPA.

Congress enacted the PMPA with the primary goal of "protecting

franchisees." See Khorenian v. Union Oil Co., 761 F.2d 533, 535

(9th Cir.1985) (internal quotes omitted). Such protection was needed

in order to correct the great "disparity of bargaining power" between

Cong., 2d Sess., in 1978 U.S.C.C.A.N. 873, 876 [hereinafter

Legislative History |. According to the legislative history of the

A-4

PMPA, petroleum franchise agreements generally are nothing more

than "contracts of adhesion" that perpetuate the "continuing

vulnerability of the franchisee to the demands and actions of the

franchisor." Jd.

In order to correct some of the effects of this disparity in

bargaining power, Congress enacted certain protections for

franchisees like Graham Oil. Essentially, the Act affords franchisees

statutory remedies for the arbitrary or discriminatory termination (or

non-renewal) of franchises by their franchisors. Jd. Among other

things, these protections include exemplary damages, reasonable

attorney's fees, and a one-year statute of limitations. See 15 U.S.C.

§ 2805; Legislative History at 899. These rights and benefits are, of

course, not only designed to compensate [*1247] for injury, but also

to deter unfair conduct.

2. Arbitration Clause. Turning to the arbitration clause, we

note as an initial matter that arbitration is a form of dispute resolution

that finds favor in the courts. In a number of instances, the Supreme

Court has upheld agreements to submit statutory claims to

arbitration, see, e.g., Gilmer v. Interstate/Johnson Lane

Corporation, 500 U.S. 20, 26, 111 S.Ct. 1647, 1652, 114 L.Ed.2d

26 (1991) ("It is by now clear that statutory claims may be the

subject of an arbitration agreement, enforceable pursuant to the

[Federal Arbitration Act, 9 U.S.C. § 2 et seq.]."), including claims

involving unfair business practices. Among the claims in that

category are those arising under the Sherman Act, the Securities

Exchange Act of 1934, and the Securities Act of 1933. See, e.g.,

Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S.

477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989); Shearson/American

Express Inc. v. McMahon, 482 U.S. 220, 107 $.Ct. 2332, 96

L.Ed.2d 185 (1987); Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d

444 (1985). Some of the arbitration provisions--like the provisions

A-5

here--have been contained in form agreements executed before the

dispute arose. See, e.g., De Quijas, 490 U.S. at 478, 109 S.Ct. at

1918; McMahon, 482 U.S. at 223, 107 S.Ct. at 2335.

3. Analysis. Nothing in the PMPA suggests that Congress

intended to change the general presumption in favor of upholding

agreements to submit statutory claims to arbitration. A simple

agreement for arbitration of disputes is valid, whether or not

contained in a franchise agreement. Such a provision constitutes

nothing more than an agreement to substitute one legitimate dispute

resolution forum for another and involves no surrender of statutory

protections or benefits.

However, the fact that franchisees may agree to an arbitral

forum for the resolution of statutory disputes in no way suggests that

they may be forced by those with dominant econoinic power to

surrender the statutorily- mandated rights and benefits that Congress

intended them to possess. This is certainly true in cases arising under

the PMPA, which was enacted to shield franchisees from the gross

"disparity of bargaining power" that exists between them and

franchisors. If franchisees could be compelled to surrender their

statutorily-mandated protections as a condition of obtaining franchise

agreements, then franchisors could use their superior bargaining

power to deprive franchisees of the PMPA's protections. In effect,

the franchisors could simply continue their earlier practice of

presenting prospective franchisees with contracts of adhesion that

deny them the rights and benefits afforded by Congress. In that way,

the PMPA would quickly be nullified.

Here, the arbitration clause! purports to forfeit certain important

statutorily-mandated rights or benefits afforded to Graham Oil and

other franchisees by the PMPA. First, the arbitration clause

expressly forfeits Graham Oil's statutorily-mandated right to recover

exemplary damages from ARCO if Graham Oil prevails on certain

A-6

claims. The clause provides that neither party can be awarded

exemplary damages. Compare 15 U.S.C. § 2805(d)(1)(B) ( "If the

franchisee prevails in [certain] action[s] ... such franchisee shall be

entitled ... to exemplary damages, where appropriate..." (emphasis

added)) with Agreement § 22(b) ("The arbitrator(s) may not assess

punitive or exemplary damages...." (emphasis added)).

1. The relevant provisions of the arbitration clause are set forth in the Appendix

below.

Second, the arbitration clause expressly forfeits Graham Uil's

statutorily-mandated right to recover reasonable attorney's fees from

ARCO if Graham Oil prevails on certain claims. The clause provides

that each party will bear its own attorney's fees. Compare 15 U.S.C.

§ 2805(d)(1)(C) (“If the franchisee prevails in [certain] action{s] ...

such franchisee shall be entitled ... to reasonable attorney and expert

witness fees to be paid by the franchisor...." (emphasis added)) with

Agreement § 22(a) ("Each party shall pay its own costs and

expenses, including attorneys’ fees related to such arbitration...."

(emphasis added)).

Third, the arbitration clause expressly forfeits Graham Oil's

statutorily-mandated right [* 1248] to a one-year statute of limitations

on its claims against ARCO. The clause reduces the time in which a

claim can be brought from one year to 90 days, or in some cases six

months. Compare 15 U.S.C. § 2805(a) ("[N]o such action may be

maintained unless commenced within | year after ... the date the

franchisor fails to comply with [certain] requirements ... of this

title.") with Appendix, EXHIBIT E § A ("The party waives the right

to seek any relief or pursue any claim not included in an arbitration

demand filed ... within 90 days following the date the party knew or

should have known of the facts giving rise to the claim [and in no

event more than six months after the occurrence of the facts giving

A-7

rise to the claim]" (emphasis added)).

Each of the three statutory rights is important to the effectuation

of the PMPA's policies. The purpose of exemplary damages is to

deter franchisors from engaging in improper terminations of franchise

agreements. The purpose of attorney's fees is to deter franchisors

from improperly contesting meritorious claims. Finally, the purpose

of a one-year statute of limitations is to afford franchisees a

reasonable period of time in which to seek relief for improper

terminations and other abuses by petroleum franchisors. In

attempting to strip franchisees of these Statutory rights and benefits

by means of an arbitration clause included in the franchise agreement,

ARCO violated the purpose as well as the specific terms of the

PMPA.

Because the arbitration clause employed by ARCO compels

Graham Oil to surrender important statutorily-mandated rights

afforded franchisees by the PMPA, we hold that the clause

contravenes the Act.

B. Severability of the Clause.

Having determined that ARCO's arbitration clause violates

federal law, we turn to the question of its severability. "Arbitration

Clauses [must] be treated as severable from the documents in which

they appear unless there is clear intent to the contrary." Republic of

Nicaragua v. Standard Fruit Co., 937 F.2d 469, 476 (9th Cir.1991),

cert. denied, --- U.S. ----, 112 S.Ct. 1294, 117 L.Ed.2d 516 (1992).

Here, there is no evidence of any contrary intent.” More important

from a practical standpoint, neither Party suggests that if the

arbitration clause is unlawful, the entire contract must be invalidated.

Accordingly, we conclude that, as in the usual case, the arbitration

clause here is severable.

2. In fact, the franchise agreement expressly states that the entire arbitration

A-8

clause—paragraph 22 and Exhibit E~survives the termination or expiration of the

agreement. See Appendix 4 22(c).

The more difficult question is whether the entire arbitration

clause should be severed, or simply the provisions pertaining to

exemplary damages, attorney's fees, and the statute of limitations.

Relying on principles that are analogous to those we use in

determining whether a particular clause is severable from an entire

contract, we conclude that in this case the entire clause must be

eliminated.

It is a well-known principle in contract law that a clause cannot

be severed from a contract when it is an integrated part of the

contract. As one leading treatise has noted, "a contract should be

treated as entire when by consideration of its terms, nature and

purposes each and all of the parts appear to be interdependent and

common to one another." Joseph D. Calamari & Joseph M. Perillo,

Contracts 478 n. 76 (3d ed. 1987). As we noted in one of our early

surveys of contract law, a "contract is entire, and not severable, when,

by its terms, nature, and purpose, it contemplates and intends that

each and all of its parts, [and] material provisions ... are common to

the other, and interdependent." Hudson v. Wylie, 242 F.2d 435, 446

(9th Cir. 1957).

Here, the offending parts of the arbitration clause do not merely

involve a single, isolated provision; the arbitration clause in this case

is a highly integrated unit containing three different illegal provisions.

Unlike the other clauses, the arbitration clause here includes a

[*1249] survival provision that expressly preserves the entire clause

in the event the contract is declared invalid. Moreover, it establishes

a unified procedure for handling all disputes, and its various unlawful

provisions are all a part of that overall procedure. Thus, we conclude

that the clause must be treated as a whole and that its various

A-9

provisions are not severable.

Our decision to strike the entire clause rests in part upon the fact

that the offensive provisions clearly represent an attempt by ARCO

to achieve through arbitration what Congress has expressly

forbidden. Congress enacted the PMPA precisely to prevent the type

of agreement that ARCO included in the arbitration clause of its

franchise contract. ARCO attempted to use an arbitration clause to

achieve its unlawful ends. Such a blatant misuse of the arbitration

procedure serves to taint the entire clause. As a leading treatise

notes, severance is inappropriate when the entire clause represents an

"integrated scheme to contravene public policy." See E. Allan

Farnsworth, Farnsworth on Contracts § 5.8, at 70 (1990). For the

above reasons, we conclude that the entire arbitration clause, and not

merely the offensive provisions, must be stricken from the contract.

We remand to the district court, which is the proper forum for the

resolution of this underlying dispute.

IV. CONCLUSION

The district court improperly dismissed Graham Oil's claims.

The arbitration provision contained in the franchise agreement is

invalid, and the court--not an arbitrator--must decide the merits of the

claims. Accordingly, the judgment is reversed, and the case is

remanded for further proceedings not inconsistent with this Opinion.

REVERSED and REMANDED.

APPENDIX

BRANDED DISTRIBUTOR GASOLINE STANDARD

TERMS AND CONDITIONS

22. Resolution of Disputes

A-10

a) Except as set forth below or where prohibited by applicable law,

any dispute or controversy relating to or arising out of the Agreement

... Shall be resolved by binding arbitration in accordance with the

procedures and rules set forth in Exhibit E attached hereto and

incorporated herein. The site of such arbitration shall be set forth in

Exhibit E. The decision of the arbitrator(s) shall be final and binding

on the parties and access to a judicial forum is foreclosed, except to

enforce an arbitral decision or as required by law. Judgment upon the

award of the arbitrator(s) may be entered and enforced in any court

having jurisdiction thereof. Each party shall pay its own costs and

expenses, including attorneys’ fees related to such arbitration, except

that the cost and expenses of the arbitration association or service

utilized, stenographic record, and witnesses and proofs that may have

been produced at the direction of the arbitrator(s) shall be paid by the

party against whom the decision of the arbitrator(s) is entered and the

cost of the arbitrator(s) shall be paid as set forth in the succeeding

sentence. If an arbitral panel consists of a single arbitrator, the cost

and expenses of the arbitrator shall be paid by the party against

whom the decision of the arbitrator is entered; however, if an arbitral

panel consists of three arbitrators, the cost and expenses of the two

additional arbitrators shall be paid by the party which initially

requested three arbitrators; the cost and expenses of any single

arbitrator appointed by the arbitration association or service utilized,

as set forth in Section F of Exhibit E, before the arbitral panel is

selected shall be paid one-half by the plaintiff(s) and one-half by the

defendant(s).

b) The arbitrator(s) may not assess punitive or exemplary damages

but may award both legal and equitable relief. If the dispute or

controversy involves a claim for equitable relief as well as a claim for

damages or other legal relief and the arbitrator(s) enter(s) a decision

as to the equitable claims before entering a decision as to the legal

claims, judgment upon the decision as to the equitable relief may be

A-11

immediately entered and enforced in any court having jurisdiction

thereof.

c) This Paragraph 22 shall survive termination or expiration of the

Agreement as to any claims covered by the Agreement.

* * *£

[*1250] EXHIBIT E

PROCEDURES FOR ARBITRATION

A. INITIATION

To initiate an arbitration, ARCO or Buyer must file with the

arbitration association or service set forth in Section J below (the

Association/Service) and send the Opposing party at the address

specified in the Notices provision of the Agreement by registered or

certified mail, return receipt requested, a written arbitration demand.

The demand shall set forth a clear and complete statement of the

nature of the claim, its basis, the remedy sought, including the

amount of damages if any, and whether the party desires a panel

consisting of one or three arbitrator(s). The party waives the right to

seek any relief or pursue any claim not included in an arbitration

demand filed and served within 90 days following the date the party

knew or should have known of the facts giving rise to the claim and

in no event more than six months after the occurrence of the facts

giving rise to the claim in the absence of active fraud or concealment

of the facts by the Opposing party.

FERNANDEZ, Circuit Judge, dissenting:

I agree with the majority that arbitration of PMPA disputes is

appropriate. Where we part company is at the point where the

majority decides to strike down the arbitration provision in its

A-12

entirety because that provision purports to remove some remedies

that would otherwise be available under the PMPA.

Graham suggests the court should evince a hostility to

arbitration in cases of this type. The majority does not exactly

acquiesce, but it does suggest that Graham should not be bound to

arbitration at all. Why? The only reason, subliminal as it is, may be

that arbitration is such a bad thing for companies like Graham that a

few limitations of statutory rights (entirely satellite’ to any dispute)

will taint the whole.

1. By “satellite” I mean that neither exemplary damages, attorney fees, nor

statutes of limitations have anything to do with the arbitrable question—was or was not

there a breach of the agreement?

In the past that kind of argument has not carried the day.

Neither the Supreme Court nor this court has accepted a negative

view of arbitration. See, e.g., Gilmer v. Interstate/Johnson Lane

Corp., 500 U.S. 20, 22-23, 111 S.Ct. 1647, 1651-56, 114 L.Ed.2d

26 (1991); Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 226-27, 107 S.Ct. 2332, 2337-38, 96 L.Ed.2d 185 (1987);

Mago v. Shearson Lehman Hutton, Inc., 956 F.2d 932, 934-35 (9th

Cir.1992); Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282,

286-87 (9th Cir.1988). When it adopted the broad language of the

Federal Arbitration Act, Congress also rejected a negative view of

arbitration proceedings. See 9 U.S.C. §§ 1-16. I do not think we

should adopt a negative view at this time.

I will assume, without deciding, that the arbitration provision's

removal of attorneys fees and punitive damages and its changing of

the date to bring a claim are all provisions which, as a matter of law,

cannot be agreed to by these contracting parties. I will also assume

that those questions should not be submitted to the arbitrator in the

first instance, although I find that question to be a knotty one indeed.

A-13

Even given those assumptions, I disagree with the conclusion that the

arbitration provision should be stricken in its entirety.

Although we must descry the intent of the Parties, I do not agree

that we should determine that public policy considerations must lead

to a conclusion that Graham (or Congress) would not have wanted

arbitration in this case. Rather, we should ask if the improper

requirements so permeate the arbitration provision that the whole of

it must be stricken. See, €.g., Sheet Metal Workers' Int'l Ass n,

Local 206 v. R. K. Burner Sheet Metal, Inc., 859 F.2d 758, 761 (9th

Cir.1988); National Labor Relations Board v. Southern California

Pipe Trades Counsel No. 16, 449 F.2d 668, 672-73 (9th Cir.1971);

Plumbers and Steamfitters Union v. Dillion, 255 F.2d [*125 1] 820,

823 (9th Cir.1958). That is a much more appropriate index of the

intent of the parties, or either of them, than some assumption about

what one of the parties might or might not have obtained in some

Panglossian world. Who knows what should be assemed in this

would? I, for one, think that an assumption that there would have

been no arbitration provision at all is unfounded. Reliance upon

public policy to say that there should not be one is similarly

unfounded.

Here the contract itself does not provide the specific severance

clause that we find in many commercial contracts.” Nevertheless, as |

see it, the arbitration provision can and does stand up quite well

without the offending Provisions and would have been acceptable to

both parties in that form. I have not the slightest doubt that to the

extent arbitration is desirable it would have been just as desirable

without those provisions. They are not a sine qua non of arbitral

attractiveness and are not intertwined with the arbitration provision.

If arbitration is a beauty, it is no less a one because it has lost a

slipper. That indicates that arbitration should be required in this

Case.

at aat

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2. The contract does have a rather ill-written paragraph that might be described

as a severance clause. That paragraph provides that "[i]f the Agreement, or any

procedure ... shall at any time be in conflict with any legal requirements ... then the

Agreement shall immediately become inoperative and ineffective with respect thereto.”

It then goes on to provide that should that event occur either party may terminate the

agreement in its entirety. Para. 20. Whatever one is to think about that paragraph, |

would feel somewhat disingenuous were I to assert that if resolved the issue in this

case. I shall not do so.

Nor do I believe that this blinks at reality. Had the arbitration

provision been offered without the offending provisions, Graham

would surely have accepted it in that more favorable form. It would

have been less favorable to ARCO, but that company would

undoubtedly have still offered the provision, even without that which

it could not have.

In fine, the parties agreed upon arbitration. Some of the terms

they agreed to may not be possible. However, on the whole,

arbitration is possible, and the real point of this litigation--should

ARCO pay damages for breaching the agreement by mispricing its

products--can and should be submitted to the arbitrators, as agreed.

Thus, I do not agree that we should elide the arbitration provision and

bring the whole of this contractual dispute into the federal courts

based upon an idea that a picaresque oil company wronged its

franchisee when it asked for arbitration of disputes between them.

Arbitration is a favored procedure, and we should favor it here.

Therefore, I respectfully dissent.

ORDER

March 13, 1995

The opinion in this case filed December 16, 1994 shall be

amended by deleting Section III.B, which begins on page 15519 and

—_—

A-15

ends on page 15521, and replacing it with the following:

[Editor's Note: Amendments incorporated for purposes of

publication. }

In addition, the dissent, which begins on page 15524 and ends

on page 15526, shall be deleted and replaced with the following:

[Editor's Note: Substitution incorporated for purposes of

publication. ]

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Original Ninth Circuit Slip Opinion

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GRAHAM OIL CO., an Oregon corporation, Plaintiff-Appellant,

ARCO PRODUCTS CO., a division of Atlantic Richfield Co.,a

Delaware corporation, Defendant-Appellee.

Nos. 92-35007, 92-35380

D.C. No. 90-06476 JO

OPINION

Appeals from the United States District Court

for the District of Oregon

Robert E. Jones, District Judge, Presiding

Argued and Submitted

November 2, 1993--Portland, Oregon

Filed December 16, 1994

Before: Stephen Reinhardt, Melvin Brunetti,

and Ferdinand F. Fernandez, Circuit Judges.

Opinion by Judge Reinhardt; Dissent by Judge Fernandez

[*15514}

REINHARDT, Circuit Judge:

I. INTRODUCTION

Graham Oil Co. ("Graham Oil") appeals the judgment of the

district court, which dismissed, with prejudice, all of its claims

against ARCO Products Co. ("ARCO"). The claims were dismissed

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because Graham Oil refused to submit to arbitration as required by

an arbitration clause in its distributorship agreement with ARCO.

Graham Oil contends that the arbitration clause is invalid

because it requires the surrender of certain rights provided under the

Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C.

$§ 2801-2806. Accordingly, it argues that the district court -- not an

arbitrator -- must decide the merits of its claims under the PMPA. We

agree.

Il. FACTS

For nearly forty years, Graham Oil was a branded distributor of

ARCO gasoline in Coos Bay, Oregon. On October 2, 1990, Graham

Oil and ARCO entered into a Branded Distributor Gasoline

Agreement ("Agreement"), which was effective from January 1,

1991, to December 31, 1993. Among other things, the parties agreed

that Graham Oil would purchase a [*15515] minimum amount of

gasoline each month during the two-year period of the Agreement.