Lead Opinion
Opinion
These coordinated cases arise out of disputes between Southland Corporation (Southland), owner and franchisor of 7-Eleven convenience food store operations throughout the country, and persons who are, or were, franchised operators of 7-Eleven stores in 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., franchisee-by-franchisee) basis, pursuant to an arbitration provision contained in its agreement with each franchisee. The franchisees, who have sued Southland
We first describe the factual and procedural background relevant to analysis. Under the terms of Southland’s standard 7-Eleven franchise agreement (hereafter the agreement(s)), Southland provides each franchisee with a license to use certain nationally known and federally registered trademarks, a lease or sublease of certain convenience food stores owned or leased by Southland, the financing of store inventories, and advertising and merchandising assistance. The franchisees, in turn, operate the stores, supply Southland with certain bookkeeping data, make bank deposits of receipts from the operation of the stores, and pay Southland a fixed percentage of gross profits. Each of the agreements contains 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.”
Between September 1975 and January 1977, franchisees 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
In May 1977 franchisee Keating filed a class action on behalf of an asserted class composed of ápproximately 800 Southland franchisees in California, alleging claims substantially similar to those being claimed by the other franchisees, and alleging also that Southland’s accounting procedures were unfair and inaccurate. Southland promptly 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 arbitration as a defense. When Keating was remanded to the state courts, at franchisees’ request, Southland petitioned to compel arbitration in all of the pending cases, but ruling on that petition was stayed pending determination of a motion by the franchisees for coordination of the actions. By this time, the list of actions included 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 various actions was granted by the Judicial Council, on condition that franchisees file substantially amended complaints which would demonstrate the asserted similarities among the actiqns. The amended complaints contain substantially comparable allegations including claims of misrepresentations in connection with the sale of the franchises and inaccurate information about fees, discounts, and the overall performance of 7-Eleven stores.
Except for the claims based on the Franchise Investment 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 Franchise Investment Law, and the franchisees fileid a petition 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 discussipn. Initially, we observe that since the franchise agreements were between a Texas corporation and California residents, entailed the right to use federally registered trademarks, and contemplated a continuing business relationship between the parties across state lines, they involve interstate commerce and fall within the
I. Adhesion.
In his declaration in opposition to Southland’s petition to compel arbitration, Keating stated the franchise agreement 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 information set forth in the franchise agreement itself, and a pamphlet of the American Arbitration Association describing 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 procedure of this type.” He, and the other franchisees who, in effect, adopt his declaration, contend that the declaration 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 franchise 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)
It does not follow, however, that the contracts are unenforceable. “To describe a contract as adhesive in character is not to indicate its legal effect. It is, rather, fthe beginning and not the end of the analysis insofar as enforceability of its terms is concerned.’ [Citation.]” (Graham v. Scissor-Tail, Inc., supra,
In the absence of some special element of unfair advantage, however, arbitration is generally considered to be a mutually advantageous process, providing for resolution of disputes in a presumptively less costly, more expeditious, and more private manner by an impartial person or persons typically selected by the parties themselves. (See Madden v. Kaiser Foundation Hospitals, supra,
Moreover, provision for arbitration in a commercial context is quite common, and reasonably to be anticipated. Indeed, Keating’s declaration itself makes clear that he was aware of the provision, and of the American Aribitration 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 arbitration 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 expectations.” (Graham v. Scissor-Tail, Inc., supra,
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. Arbitrability of Franchise Investment Law Claims.
We next consider Southland’s appeal from the trial court’s denial of its petitions to compel arbitration concerning certain claims made against it pursuant to the Franchise Investment Law (Corp. Code,
In Wilko v. Swan (1953)
The evidence is persuasive that in drafting the Franchise 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 investors through preinvestment disclosure statements, but their parallel provisions are often expressed in identical language.
The presumption established by that principle of statutory construction is reinforced by the language and history of the recently adopted California Franchise Relations Act (Bus. & Prof. Code, § 20000 et seq.), regulating 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 “prepurchase disclosure law patterned after the Securities Act of 1933,” discusses various proposals i for extending regulation of franchise relationships, and poses various rhetorical questions in that regard, among them the following: “Present law provides for the resolution of franchisee/franchisor disputes through the judicial system. Should the law be modified to provide ^for other means of resolution such as compulsory arbitration and/or ¡a Board of Franchising?”
Having determined that the California Legislature intended the non-waiver provision of the California Franchise Act to be interpreted in accord with Wilko v. Swan,
The Supreme Court in Prima Paint rejected the contention 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 question,” the court said, “is not whether Congress may fashion federal substantive rules to govern questions arising in simple diversity cases . .. [but] whether Congress 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 [
Shortly after Prima Paint was decided, the New York Court of Appeal indicated it would apply FAA principles to a maritime transaction “even if such a result is nqt 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)
While the federal district court in this case, by its remand, determined that federal jurisdiction over the franchisees’ lawsuit did not
Rather, we confront squarely the underlying issue of statutory interpretation: whether the principles of “substantive 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 affirmative answer (Allison v. Medicab Intern., Inc. (1979)
The FAA was adopted in 1925 (43 Stat. 883), against a background of judicial hostility to arbitration generally. (See Kulukundis Shipping Co. v. Amtorg Trading Corp. (2d Cir. 1942)
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 section 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 Arbitration (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
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)
Such exceptions to the general principle of arbitrability, like those expressed in California’s Franchise Investment Law, do not reflect hostility toward arbitration, nor do they constitute an obstacle to the general enforcement of arbitration agreements in a manner consistent with federal law. Rather, such exceptions are narrowly confined to rights and remedies create^ by state regulatory 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.
Preemption principles were recently summarized by the United States Supreme Court in Merrill Lynch, Pierce, Fenner & Smith v. Ware (1973)
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 announced strongly support rejection of
The United States Supreme Court has “repeatedly warned against the dangers of an approach to statutory construction which confines itself to the bare words cif a statute, [citations], for ‘literalness may strangle meaning.’ [Citation].” (Lynch v. Overholser (1962)
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 area is rather well defined. Arbitration is strongly favored. Courts will closely scrutinize any claims of waiver (Gavlik Const. Co. v. H. F. Campbell Co. (3d Cir. 1975) 526 F.2d 777, 783; Seidman & Seidman v. Wolfson (1975)
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 substantial evidence, is binding on an appellate court. [Citation.] ... [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. Dist., supra,
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 Northern California, supra, 25 Cal. 3d at pp. 425-426; see Germany v. River Terminal 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 litigation of the merits of arbitrable issues” (Doers v. Golden Gate Bridge etc. Dist., supra,
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 removal 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 discovery which took place consisted of an exchange of documents to franchisees’ benefit. Upon remand, Southland moved promptly to compel arbitration.
In the remaining four individual actions, namely, Gouveia, Sampson, Cheng, and Newell, the trial court granted the motions to arbitrate except as to the Franchise Investment Law claims, and stayed the proceedings pending completion of arbitration. In noting the coordination 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 inconsistent 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 coordinatipn 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 case after the actions had been coordinated at franchisees’ 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 ttiemselves asserted in their motion for coordination that “[e]ach of the actions 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.
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 arbitration of the other complaints, its filing of counterclaims and actions for unlawful detainer, and its participation in discovery did not require a finding of waiver. (Doers v. Golden Gate Bridge etc. Dist., supra,
Because of the mandatory nature of Code of Civil Procedure 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.
Neither side had completed its discovery, and Southland asserted, without refutation, that the filing of the new complaints significantly raised new issues requiring further discovery should the cases go to trial. The condition imposed by the trial court on its order for arbitration, however, prevented Southland from taking advantage of any previously discovered information.
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 discovery 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 expressly rule upon the motions in Keating and Battersby for class certification. Franchisees contend that if arbitration is to proceed the trial court should be instructed to determine the preliminary issues regarding class certification so that it may proceed on| a classwide basis. This contention requires us to examine the special problems of unfair advantage which may appear in an adhesion setting when individual arbitration agreements are invoked to block an otherwise appropriate class action.
If the right to a classwide proceeding could be automatically eliminated in relationships governed by adhesion contracts through the inclusion of a provision for arbitration, the potential for undercutting these class action principles, and for chilling the effective protection of interests common to a group, would be substantial. Arbitration 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 advantages 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 arbitration proceedings, any issue resolved against a party such as Southland in one arbitration proceeding would have to be decided anew in a subsequent arbitration, resulting in needless duplication and the potential for inconsistent awards. And while arbitration ideally takes place outside the judicial arena, it would be naive to assume, in such a situation, that courts
It is common knowledge that arbitration clauses frequently appear in standardized contracts of adhesion. A primary consideration which has led courts to uphold suc¡h 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,
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 App.Div.2d 87 [
There is, as the parties acknowledge, an absence of direct authority either supporting or rejecting such a procedure. Analogous authority exists, however, with respect to the consolidation of arbitration proceedings involving 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 Arbitration] 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 substantially the same and/or because a substantial right might be prejudiced if separate arbitration proceedings are conducted.” (Matter of Czarnikow-Rionda Co.,
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 matters 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 justice so require.
A number of state courts also support consolidation of arbitration proceedings, even in the absence of express statutory authority. New York courts take the position that “jurisdiction to enforce contracts to arbitrate imports power to regulate the method of enforcement.” (Chariot Textiles Corp. v. Wannalancit Textile Co. (1964) 21 App. Div.2d 762 [
Consolidated arbitration often involves a tripartite relationship 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 arbitration, or a different method of selecting the arbitrator. Federal courts have held that a court “can mold the method of selection and the number of arbitrators to implement the consolidated proceedings.” (Matter of Czarnikow-Rionda Co., Inc., supra,
In these respects, an ¡order for classwide arbitration in an adhesion context would call for considerably less intrusion 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 assorted; each of those agreements 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
Without doubt a judicially ordered classwide arbitration 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)
An adhesion contract is not a normal arbitration setting, 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 alternative in a case of this sort is to force hundreds of individual franchisees each to litigate its cause with Southland in a separate arbitral forum, then the prospect of classwide 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.
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 factors normally relevant to class certification, but the special 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 fairness. Whether classwide proceedings would prejudice the legitimate in
In this case, the trial court did not consider the franchisees’ request for classwide arbitration át all, and a fortiori did not consider the factors which we have found to be relevant. Since we are unable to make the determination 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 vyrit of prohibition or mandate is denied. Each party to bear their own costs.
Bird, C. J., Newman, J., and Reynoso, J.,
Notes
Assigned by the Chairperson jof the Judicial Council.
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.
Section 2 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.”
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 bbth from an investment and a business point of view .... [¶] It is the intent of this laiw to provide each prospective franchisee with the information necessary to make an intelligent decision 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-l (1974); Ill. Rev. Stat., ch. 121-1/2, § 702 (1974) (Smith-Hurd); Ind. Code, § 23-2-2.5-47 (1975); Mich. Stat. Ann., § 19.854(1) (1974); Minn. Stat., 80C.01 (1973); Ore. Rev. Stat., § 650.007, rule 40-050 (1975); R.I. Gen.
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.”
Section 31101, subdivision (c)i listed some 14 items of information 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 regulations of the Commission shall be void.”
In Scherk v. Alberto-Culver Co. (1974)
Compare the definition of “sale” under section 2 of the Securities Act (15 U.S.C. § 77(b)(3)) with that in Corporations Code section 31018; the definition of “misrepresentations by omission” in section 12(2) of the Securities Act (15 U.S.C. § 77/(2)) with Corporations 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 actions in section 20 of the Securities Act (15 U.S.C. § 77t(a)) with Corporations Code section 31400; and the liability of control persons of section 15 of the Securities Act (15 U.S.C. § 77o) 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
Assembly Committee on Finance, Insurance, and Commerce, Ad Hoc Subcommittee on Franchising, An Evaluation of the Regulation of Franchising in California and Prospective Legislative Revisions — Background Notes for Interim Study, page 6.
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) Except as provided in subdivision (b) of this section, any condition, stipulation, provision, or term of any* franchise agreement waiving any rights granted under the chapter or relieving any person from liability imposed by this chapter shall be void and unenforceable.” (Italics added.) Subdivision (b) permitted agreements for “binding arbitration of disputes” subject to the restrictions presently contained in the new law.
As in Wilko, the agreement here was to arbitrate such disputes as might arise in the future. We express no view as to the enforceability of an agreement to arbitrate a pending dispute under the Franchise Investment Law.
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 Manufacturers (15 U.S.C. § 1221 et seq.) do not contain provisions similar to 15 United States Code section 77n. Neither of these statutes impose analogous disclosure requirements however, nor has the issue of arbitrability of disputes under them been litigated in reported cases.
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 misrepresentation 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,
It moved also for a change of venue, which was granted by stipulation.
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.
Federal law is in accord. (See, e.g., Weeks v. Bareco Oil Co. (7th Cir. 1941)
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 arbitration proceedings. (Atlas Plastering, Inc. v. Superior Court (1977)
Assigned by the Chairperson of the Judicial Council.
Concurrence Opinion
Iconcur with the majority’s conclusions that the arbitration agreement is enforceable and that Southland did not waive its right to arbitration. I itespectfully dissent, 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 available valid remedy.
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)
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)
In contrast, the case before us concerns a state statute which is contrary to the federal law. The Wilko reasoning 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 provision comparable to that relied on in Wilko. Thus, under the California statute an investor who consents to arbitration, thereby waiving the right to sue, does not forego 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, cl.
In reaching its conclusion that application of the Federal Arbitration Act here is not required, the majority wholly ignores a substantial line of very respectable authority. These cases, as I now develop, hold that in enacting the Federal Arbitration Act, Congress created national 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 intended by the Arbitration Act to create a new body of federal substantive law affecting the validity and interpretation of arbitration agreements.” (Robert Lawrence Company v. Devonshire Fabrics, Inc. (2d Cir. 1959)
The United States Supreme Court has acknowledged the Lawrence holding only in one instance, where it merely noted that the court of appeals in the case it was then considering had relied upon the Lawrence notion 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)
The great majority of lower federal and state courts has continued to adhere to the Lawrence holding. (See Annot. (1979)
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 in
In addition to encouraging the enforcement of arbitration agreements, the Arbitration Act also restricts the benefits of the usually disfavored practice of forum shopping. 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 easy. The action could have been readily removed to the federal courts on the basis of diversity and the Arbitration 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 In re Mercury Const. Corp., supra, specifically observed that, “The addition of the Architect as a party defendant might prevent removal of the state action .. . but it certainly could not frustrate Mercury’s plain, indisputable right to an arbitration of its dispute with the Hospital.” (
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 Intern., Inc. (1979)
In similar fashion, in Network Cinema Corporation v. Glassburn (S.D.N.Y. 1973)
Finally, in Barron v. Tastee-Freez Intern., Inc. (E.D.Wis. 1980)
B. Class Action Arbitration
The majority also concludes that class action arbitration may be an appropriate procedure and has remanded the case for determination by the trial court. In the absence of either statutory or contractual authority, I disagree with its holding.
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)
A recent New York case examined the propriety of the class action device used in arbitration. Harris v. Shearson Hayden Stone, Inc. (1981) 82 App.Div.2d 87 [
In dissent, Justice Bloom urged that the conflict should be resolved in favor of the class action. Even he, however, expressly rejected the idea of a “class arbitration” saying, “Nor is it an answer 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 ongoing 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.” (Id., at p. 79; cf. Coleman v. National Movie-Dine, Inc. (E.D.Pa. 1978)
Moreover, class action procedures would interfere with the expeditious resolution of the claims. After certification of a class, the court must notify class members1 of the existence of the suit so that they will have the opportunity 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, substantial judicial involvement by the court will be required to monitor the progress of the arbitration and potentially will undermine the arbitrator’s discretion. In fact, the court’s due process responsibilities include the duty to “undertake a stringent and continuing examination of the adequacy of representation by the named class representatives at all stages of the litigation.” (Nat. Ass’n of Regional Medical Programs, Inc. v. Mathews (D.C.Cir. 1976)
Yet another consideration arises from the fact that unlike settlements reached through arbitration, which are ordinarily not subject to court review on either procedural issues or the merits (see Barrett v. Manufacturers Railway Company (8th Cir. 1972)
Finally, the normally “informal” nature of arbitration requires no transcripts. Arbitrators generally need not explain the basis for their decision. (Bernhardt v. Poly graphic Co. (1956)
In addition, arbitrators, of course, are not necessarily either lawyers or judges. Requiring the administration of complex class procedures during arbitration may either make lay experts unavailable as arbitrators as a practical matter, or result in intrusive judicial participation and supervision.
In summary, class procedures would tend to make arbitration inefficient instead of efficient, lengthy instead of expeditious, and procedural instead of informal “‘[A]n arbitration proceeding is, except in specified particulars, outside the court realm and jurisdiction — deliberately so taken out of the court by choice and commitment of the parties. Arbitration is subject to its own rules and practices at variance with court procedures. It is supposed to be a complete proceeding, without resort to court facilities, .... 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, ....)” (East San Bernardino County Water Dist. v. City of San Bernardino (1973)
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.
Following the decision in Atlas, the Legislature enacted Code of Civil Procedure section 1281.3 which specifically authorizes consolidated arbitration at the court’s discretion under certain circumstances. This section was relied upon in Conejo Valley Unified School Dist. v. William Blurock & Partners, Inc. (1980)
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 examined the specific problems of related arbitration proceedings when it permitted the consolidation of arbitration. 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 j attempted to assure each party the right to select an arbitrator and tó express their individual views. (See, e.g., Compania Espanola de Pet., S.A. v. Nereus Ship. (2d Cir. 1975)
In the absence of a statute authorizing class arbitration or agreement of the parties, it is inappropriate in my view for us, judicially, to superimpose such a procedure on the arbitration process over objections of a party to the contract. (Compare, Stevenson v. Com., Dept. of Revenue (1980)
The majority is compelled to acknowledge that class-wide arbitration “would entail a greater degree of judicial involvement than is normally associated with arbitration . ..(Ante, p. 613.) 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 principle that arbitration is a favored means of dispute resolution because it permits a nonjudicial, informal, and speedy alternative to litigation. (See, e.g., Taylor v. Crane (1979)
The franchisees here do not contend that they would be unable to proceed individually in separate or consolidated 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
In a case where class proceedings provide the only economical 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 suggested, and which the majority rejects, “would be to hold that arbitration agreements contained in contracts of adhesion may not operate to stay properly maintainable class actions.” (Ante, p. 610.) 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 arbitration. There is, however, another alternative. Under settled principles of law, arbitration clauses in adhesion contracts may be declared invalid where they are “beyond the reasonable expectations of an ordinary person ...” (Wheeler v. St. Joseph Hospital (1976)
In summary, the majority, in the absence of any contractual, statutory, or judicial authority or any demonstrated 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 tb class treatment, thus engrafting on an informal, speedy method of dispute resolution which often utilizes nonlegal arbitrators 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.
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 national 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 arbitration 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 individual cases to arbitration, recognizing that consolidation of the individual arbitrations might be proper.
Mosk, J., concurred.