Facts
- Southland Corporation franchised 7‑Eleven convenience stores to California franchisees under agreements requiring arbitration of any dispute arising out of or relating to the agreement.
- Franchisees sued Southland in California state court for fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violations of the California Franchise Investment Law (CFIL).
- The CFIL contained an antiwaiver provision (CFIL § 31512) construed to invalidate contractual terms requiring waiver of CFIL compliance.
- Southland moved to compel arbitration under the franchise agreements.
- The trial court compelled arbitration of all claims except CFIL claims.
- The California Court of Appeal ordered arbitration of CFIL claims and directed class-certification proceedings.
- The California Supreme Court held CFIL claims were not arbitrable under CFIL § 31512 and remanded for consideration of class certification.
Issues
- Whether the Supreme Court had jurisdiction to review a state-court refusal to enforce an arbitration agreement before final judgment in the state proceedings.
- Whether FAA § 2 preempts a state statute, as construed, that requires a judicial forum for CFIL claims notwithstanding an agreement to arbitrate.
Decision
- The Court held it had jurisdiction because delaying review would defeat the parties’ contractual entitlement to arbitrate rather than litigate.
- The Court reversed on the merits, holding that the FAA applies in state as well as federal courts and creates substantive federal law governing arbitration clauses in contracts involving commerce.
- The Court held the FAA preempted CFIL § 31512 insofar as it was interpreted to bar arbitration of CFIL claims covered by the parties’ arbitration agreement.
- Justice Stevens concurred in part and dissented in part.
- Justice O’Connor, joined by Justice Rehnquist, dissented, arguing the FAA was intended as a procedural statute for federal courts and should not bind state courts.
Legal Principles
- FAA § 2 makes arbitration agreements in contracts involving commerce “valid, irrevocable, and enforceable,” except on generally applicable contract defenses.
- The FAA creates substantive federal law that is enforceable in state courts, not merely a federal procedural rule.
- State law is preempted to the extent it singles out arbitration or requires a judicial forum for claims the parties agreed to arbitrate.
- States may regulate contracts, including arbitration clauses, only through generally applicable rules that apply equally to arbitration and nonarbitration agreements.
Conclusion
The Court held that the FAA governs arbitration clauses in covered contracts in state courts and preempts state statutes, as applied, that invalidate or bar arbitration of particular state-law claims, requiring enforcement of the parties’ agreement to arbitrate CFIL disputes.