Research Task #4 – Southland Corp. v. Keating, 465 U.S. 1 (1984)

Question 1: Parties Involved

Plaintiff – Southland Corporation

Defendant – Keating

Question 2: Case Facts

Southland Corporation owned and franchised 7-Eleven convenience stores. Keating was a franchisee of 7-Eleven. Each franchise agreement between Southland Corporation and Keating contained a clause that required arbitration of any controversy or claim arising out of relating to the agreement or breach thereof. All 7-Eleven franchisees had filed individual cases against Southland Corporation in California Superior Court in which they accused Southland Corporation of fraud, breach of contract, misinterpretation, breach of fiduciary and violation of the disclosure requirements stipulated in the California Franchise Investment Law between 1975 and 1977. The cases were consolidated with another case filed differently by Keating in Alameda County seeking class certification for all franchisees.

Southland Corporation sought to compel arbitration as stipulated by the franchise agreements. The Superior Court granted the request for arbitration, except for the CFIL claims citing Section 31512 of the California Franchise Investment Law which required judicial consideration of claims brought under it. The appellant court reversed the ruling, and the state Supreme Court reversed the appellant court’s decision on the basis that the arbitration clause in the contract Southland Corporation had with its franchisees was unenforceable under the Californian Franchise Investment Act. As a result, Southland Corporation sought review of the judgement of the California Supreme Court, which ruled in their favor perceiving the California Franchise Investment Law as requiring adjudication of all claims brought under it and not in conflict with the Federal Arbitration Act.

Question 3: Standing

The franchise owners had to prove that they all sought arbitration as stipulated in the franchise agreement which is in line with the Federal Arbitration Act (FAA).

Question 4: Alternative dispute resolution method

Other than going to court and seeking justice for the various accusations, the franchisees were bound by a clause that required arbitration of any controversy or claim arising out of relating to the agreement or breach thereof. Based on this, they were obligated to solve the disputes through arbitration, and if it did not work, they could have gone to court.

Question 5: Preemption

Preemption occurs when, by legislative or regulatory action, a higher level of government (state or federal) eliminates or reduces the authority of a lower level over a given issue. Based on this case, federal law preempts state law – the Federal Arbitration Act (FAA) preempts the California Franchise Investment Law (CFIL).

Question 6: Procedural history of the case

The case was presented to the Superior Court which granted a request for arbitration as it did not see any conflict to FAA. The franchisees were not contented with the decision and appealed to the California Courts of Appeal which ruled in their favor considering the CFIL that asserted the need for judicial claims. Southland Corporation was not contented with the ruling and appealed to the California Supreme Court for further directions. The Supreme Court reversed the decision, holding for arbitration as stipulated by FAA by preemption of the CFIL.

Question 7: Supreme Court’s decision

The Supreme Court held that the FAA made the arbitration provisions in contracts involving commerce enforceable, and thus, preempted the CFIL provisions. As a result, the Supreme Court reversed the judgement of the state supreme court. However, since the Supreme Court lack jurisdiction on the class action issues, and the issues were not drawn into question on federal grounds, the Court dismissed the appeal as to those issues and remanded the case.

Question 8:

I do agree with the court’s decision as the FAA preempts the CFIL. The FAA facilitates the parties to solve their disputes as bounded by the company’ clause, and thus, they should have sought to arbitrate before taking the matter to court and using the CFIL as the basis for their claims.

Question 9:

All lower courts are bound by the U.S. Supreme Court decision as it applied FAA, a federal law that seeks to facilitate arbitration among commerce parties. Also, FAA preempts all other state laws such as CFIL, making it dominant over state laws in such cases. Based on this, all courts will be required to apply FAA in their cases.