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Southland Corp. v. Keating

Supreme Court of United States
465 U.S. 1 (1984)
ELI5:

Rule of Law:

The Federal Arbitration Act (FAA) establishes a national policy favoring arbitration that constitutes substantive federal law, applicable in both state and federal courts. Under the Supremacy Clause, the FAA pre-empts state laws that require a judicial forum for resolving claims which the contracting parties have agreed to resolve by arbitration.


Facts:

  • Southland Corp. is the owner and franchisor of 7-Eleven convenience stores.
  • Southland's standard franchise agreement, signed by its franchisees, included a clause requiring any controversy or claim related to the agreement to be settled by arbitration.
  • John Keating and approximately 800 other California franchisees entered into these standard franchise agreements with Southland to operate 7-Eleven stores.
  • Disputes arose between the parties, with the franchisees alleging that Southland had engaged in fraud, misrepresentation, and breach of contract.
  • The franchisees also claimed that Southland violated the disclosure requirements of the California Franchise Investment Law, a statute designed to protect franchisees.

Procedural Posture:

  • Franchisees filed individual and class-action lawsuits against Southland Corp. in California Superior Court, a state trial court.
  • Southland petitioned the trial court to compel arbitration of all claims based on the franchise agreement.
  • The Superior Court ordered arbitration for the contract claims but denied the motion to compel arbitration for claims brought under the California Franchise Investment Law.
  • Southland appealed the denial to the California Court of Appeal, an intermediate appellate court.
  • The Court of Appeal reversed the trial court, holding that the claims under the state franchise law were arbitrable and that the Federal Arbitration Act would pre-empt the state law if it were interpreted to invalidate the arbitration agreement.
  • The franchisees, as appellants, sought review in the California Supreme Court, the state's highest court.
  • The California Supreme Court reversed the Court of Appeal, concluding that the state law required judicial consideration of the claims and was not pre-empted by the Federal Arbitration Act.
  • Southland Corp. then appealed to the Supreme Court of the United States.

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Issue:

Does the Federal Arbitration Act pre-empt a state law that invalidates arbitration agreements for claims brought under that state law, thereby violating the Supremacy Clause?


Opinions:

Majority - Chief Justice Burger

Yes. The California Franchise Investment Law, by invalidating arbitration agreements covered by the Federal Arbitration Act (FAA), directly conflicts with § 2 of the FAA and violates the Supremacy Clause. The FAA creates a body of federal substantive law of arbitrability, which is enforceable in both state and federal courts. Congress's power under the Commerce Clause allows it to enact this substantive rule, which was intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements. To hold otherwise would encourage forum shopping and frustrate the national policy favoring arbitration, making the enforcement of a valid contract dependent on the courthouse in which the claim is asserted.


Dissenting - Justice O'Connor

No. The Federal Arbitration Act (FAA) does not pre-empt the state law because the FAA's legislative history conclusively shows Congress intended it as a procedural statute applicable only in federal courts, not as substantive law binding on state courts. The implementing provisions of the FAA, sections 3 and 4, expressly apply only to federal courts. The majority's decision ignores this clear congressional intent, misreads the Act's structure, and improperly extends federal power to compel state courts to follow federal procedures. The FAA was meant to govern procedure in federal courts, not to create a new body of substantive federal law that overrides state policies.


Concurring-in-part-and-dissenting-in-part - Justice Stevens

Yes, but the state law here should be upheld. While I agree with the majority that the Federal Arbitration Act (FAA) applies in state courts, I dissent from the conclusion that it pre-empts the California Franchise Investment Law. The FAA's saving clause in § 2, which allows revocation of an arbitration agreement on 'such grounds as exist at law or in equity for the revocation of any contract,' permits states to implement important public policies. California's law, which declares waivers of its protections void, is a valid expression of state policy designed to protect franchisees from unequal bargaining power. This state policy provides a legitimate ground for revoking the arbitration agreement under the FAA's own terms and should be respected.



Analysis:

This decision fundamentally shifted the legal landscape by establishing the Federal Arbitration Act as a body of substantive federal law that pre-empts conflicting state laws. Prior to this case, the FAA was widely considered a procedural statute applicable only in federal court proceedings. By holding that the FAA applies in state courts under the Supremacy Clause, the Court dramatically expanded its reach, federalizing arbitration law and severely limiting the ability of states to regulate or prohibit arbitration in areas of local concern, such as consumer protection, employment, and franchise law. This ruling laid the groundwork for decades of expansive FAA pre-emption jurisprudence that has consistently favored arbitration over litigation.

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