Reference no: EM131272734

Southland Corp. v. Keating
Supreme Court of the United States
Plaintiffs, a group of individuals who ran 7-Eleven stores franchised by the Southland Corporation, sued the defendant corporation for breach of contract, fraud, and violation of the California Franchise Investment Law. The defendant responded by filing a motion to compel arbitration because their contract included a clause stating that any claim or controversy related to the agreement would be settled by arbitration in accordance with the rules of the AAA.

The trial court held that the fraud and breach-ofcontract claims should be arbitrated but that the cause of action (or claim) filed under the state franchise law should be litigated. The California Court of Appeals held that all claims should be subject to arbitration. The court stated that to allow the state franchise law claim to be litigated would be to contravene the Federal Arbitration Act, which withdraws from the courts claims covered by an arbitration clause. The California Supreme Court reversed the decision of the court of appeals and reinstated the trial court's decision. The defendant corporation appealed to the U.S. Supreme Court.

Chief Justice Burger
The California Franchise Investment Law provides that "Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of the law or any rule or order hereunder is void.

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 Section 2 of the Federal Arbitration Act and violates the Supremacy Clause

In enacting Section 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 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.

Congress has thus mandated the enforcement of arbitration agreements.

We discern only two limitations on the enforceability of arbitration provisions governed by the Federal Arbitration Act: they must be part of a written maritime contract 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. The Court examined the legislative history of the act and concluded that the statute "is based upon . . . the incontestable federal foundations of ‘control over interstate commerce and over admiralty.'"

We reaffirmed our view that the Arbitration Act "creates a body of federal substantive law"and expressly stated what was implicit-the substantive law the act created was applicable in state and federal court.

Although the legislative history is not without ambiguities, 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 and enforceable agreements for arbitration contained in contracts involving interstate commerce or within the jurisdiction or admiralty, or which may be the subject of litigation in the Federal courts."

The 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 enforce any arbitration agreement."

And because the overwhelming proportion of all civil litigation in this country is in the state courts, we cannot believe Congress intended to limit the Arbitration Act to disputes subject only to federal court jurisdiction. Such an interpretation would frustrate Congressional intent to place "an arbitration agreement . . . upon the same footing as other contracts, where it belongs."

In creating a substantive rule applicable in state as well as federal courts, Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements. We hold that Section 31512 of the California Franchise Investment Law violates the Supremacy Clause.

Reversed in favor of Defendant, Southland Corporation.

CRITICAL THINKING ABOUT THE LAW
By now, you realize that legal reasons have degrees of quality, reliability, and acceptability. A claim is not valid simply because reasons are given for its truth or merit.

The following questions, pertaining to Case 4-2, will refresh your appreciation of this point.
1. Crucial to the Court's reasoning is its claim that Congress intended the Federal Arbitration Act's authority to extend to the state courts. What evidence does the Court provide for this claim?
Clue: Reread the section that begins with this claim.

2. Having answered Question 1, you now know that the Court relies to some extent on the legislative history of the act to support its position. What are the dangers with this type of evidence?
Clue: Think about your own personal history. Have your intentions always been expressed in a form that everyone who knew you could interpret accurately?