Southland Corp. v. Keating

Southland Corp. v. Keating, 465 U.S. 1 (1984), is a United States Supreme Court decision concerning arbitration . It was originally brought by 7-Eleven franchisees in California state courts, alleging breach of contract by the chain's then parent corporation. Southland pointed to the arbitration clauses in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act (FAA) applied to contracts executed under state law.

Chief Justice Warren Burger wrote for the majority that it was clearly the intent of Congress in passing the FAA to encourage the use of arbitration as widely as possible, that it enacted "a national policy favoring arbitration." Justice Sandra Day O'Connor dissented, along with William Rehnquist , arguing that the legislative history of the FAA strongly suggested it was intended to apply only to contracts executed under federal law. In later years, Clarence Thomas would make those arguments the foundation of a series of dissents from cases concerning the application of the FAA to state law, even in cases for which O'Connor decided with the majority, citing _stare decisis _.

The decision was a turning point in the use of arbitration in American contract law, as it was followed with other decisions limiting the authority of states to regulate arbitration. It has been described as "perhaps the most controversial case in the Supreme Court's history of arbitration jurisprudence." Its legal foundation has been examined and disputed, and some critics have found the FAA's legislative history directly contradicts the court's holding. One scholar has even found the decision an unconstitutional infringement of states' power over their own courts. Mandatory prebinding arbitration clauses became widespread, particularly in credit card agreements and other consumer services. Proponents of arbitration pointed to its success in reducing crowded court dockets, but consumer advocates charged that the arbitration process was biased in favor of large corporations and against consumers, many of whom were far poorer and legally unsophisticated. They would be joined in calling unsuccessfully for it to be overturned in a later case by 20 state attorneys general .

Contents

• 1 Background

  • 1.1 Existing arbitration law

• 2 Before the Court

• 3 Decision

  • 3.1 Majority

    • 3.1.1 Stevens' concurrence

  • 3.2 Dissent

• 4 Aftermath and legacy

• 5 Subsequent jurisprudence

  • 5.1 Allied-Bruce Terminix Cos. v. Dobson
    • 5.1.1 Thomas's dissent

• 6 Analysis and commentary

• 7 See also

• 8 References

• 9 Further reading

• 10 External links

Background

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The plaintiffs, all 7-Eleven franchisees, filed suit individually in California Superior Court charging Southland with fraud, misrepresentation, breach of contract , breach of fiduciary duty and violations of disclosure provisions required in California's Franchise Investment Law (CFIL) between 1975 and 1977. Their actions were consolidated with another filed separately by Keating in Alameda County seeking class certification for all franchisees. Southland sought to compel arbitration per the franchise agreements. The Superior Court granted that request except for the CFIL claims, citing Section 31512 of that statute under which any contractual language that binds a franchisee to waive rights it grants was void . It neither saw it as conflicting with the FAA and nor ruled on the motion for class certification.

A state appeals court reversed that decision, reading the arbitration clause to require the arbitration of all claims under the contract, including those under the CFIL. If the CFIL's language created an exception, it was superseded by the federal law and thus unenforceable. It directed the trial court to begin hearing the class certification motion.

The plaintiffs appealed to the California Supreme Court . It ruled in their favor, seeing the CFIL as requiring adjudication of all claims brought under it, and not in conflict with the FAA. Again, the case was remanded to trial court with an instruction to begin hearing the class certification motion.

Existing arbitration law

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New York City merchants, who had embraced arbitration as a method of alternative dispute resolution in the early 20th century, persuaded Congress to pass the FAA in 1925. Until then many courts had been wary of the process, sometimes even refusing to accept it as binding. After they had persuaded New York to pass a state law allowing for the results of an arbitration to be considered binding on both parties, that statute became the model for the FAA.

For the first few decades after it was passed the FAA was understood to be applicable to contracts executed under federal law, specifically those concerning . The Supreme Court first considered a case related to it in _Wilko v. Swan _, where a 7-2 majority found that the anti-waiver provisions of the Securities Act of 1933 voided an arbitration clause where securities fraud was alleged. The issue of a conflict with state law came up a few years later in _Bernhardt v. Polygraphic Co. _, where the court, with only Harold Hitz Burton dissenting, had refused to allow a federal court to decide whether an arbitration clause was valid simply because one party to the dispute had moved to another state than the one in which the contract was originally executed. In 1959 the Second Circuit Court of Appeals suggested that the FAA applied to state court actions as well, when it ruled that disputes over not just the execution but the contract itself were arbitrable.

In the 1967 _Prima Paint _ case the Court had opened the door to more widespread use of arbitration when it adopted the separability principle, compelling arbitration of a claim that a contract had been fraudulently induced . That held that any challenge to the validity of a contract with an arbitration clause must be heard by the arbitrator first unless the challenge is to the arbitration clause itself. It creates a legal fiction that two separate contracts exist.

The term before it heard Southland's appeal, a 6-3 court had, in _Moses H. Cone Memorial Hospital v. Mercury Construction Corp.

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