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Southland Corp. v. Keating - 465 U.S. 1, 104 S. Ct. 852 (1984)

Rule:

In enacting § 2 of the Federal Arbitration Act, 9 U.S.C.S. § 2 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.

Facts:

Appellant Southland Corp. (appellant) was the owner and franchisor of 7-Eleven convenience stores. Appellees were 7-Eleven franchisees. Each franchise agreement between appellant and appellees contained a clause requiring arbitration of any controversy or claim arising out of or relating to the agreement or breach thereof. Several of the appellees filed individual actions against appellant in California Superior Court, alleging fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violation of the disclosure requirements of the California Franchise Investment Law. These actions were consolidated with a subsequent class action filed by another appellee making substantially the same claims. Appellant moved to compel arbitration of the claims pursuant to the contract. The trial court granted arbitration except for those claims under the Franchise Investment Law, Cal. Corp. Code § 31000 et seq., because that law required judicial consideration of claims brought under it. The appellate court reversed the ruling, and the state supreme court reversed the appellate court. The state supreme court held that the arbitration clause in the contract appellant had with its franchisees was unenforceable under Californian Franchise Investment Act.  Subsequently, appellant sought review of the judgment of the state supreme court.

Issue:

Under the Californian Franchise Investment Act, was the arbitration clause in the parties’ contract unenforceable?

Answer:

No.

Conclusion:

The U.S. Supreme Court held that § 2 of the Federal Arbitration Act (Act), 9 U.S.C.S. § 2, which made arbitration provisions in contracts involving commerce enforceable, was a substantive rule under the Commerce Clause. It was binding on the states and preempted state laws that invalidated arbitration provisions. The Court thus reversed the judgment of the state supreme court on that issue. However, because the Court did not have jurisdiction on the class action issues, as those issues were not drawn in question on federal grounds, the Court dismissed the appeal as to those issues, and remanded the case.

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