Southland Corp. v. Keating
Encyclopedia
Southland Corp. v. Keating, 465 U.S.
1 (1984), is a United States Supreme Court decision concerning arbitration. It was originally brought by 7-Eleven
franchisees
in California state courts, alleging breach of contract
by the chain's then parent corporation. Southland pointed to the arbitration clause
s in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act
(FAA) applied to contracts executed under state law.
Chief Justice
Warren Burger wrote for the majority that it was clearly the intent of Congress
in passing the FAA to encourage the use of arbitration as widely as possible, that it enacted "a national policy favoring arbitration". Justice Sandra Day O'Connor
dissented, along with William Rehnquist
, arguing that the legislative history of the FAA strongly suggested it was intended to apply only to contracts executed under federal law. In later years, Clarence Thomas
would make her arguments the foundation of a series of dissents from cases concerning the application of the FAA to state law, even in cases where O'Connor went with the majority citing stare decisis
.
The decision was a turning point in the use of arbitration in American contract law, when it was followed with other decisions limiting the authority of states
to regulate arbitration. It has been described as "perhaps the most controversial case in the Supreme Court's history of arbitration jurisprudence." Its legal foundation has been examined and disputed, and some critics have found the FAA's legislative history directly contradicts the court's holding. One scholar has even found the decision an unconstitutional infringement of states' power over their own courts. Mandatory prebinding arbitration clause
s became widespread, particularly in credit card
agreements and other consumer services. Proponents of arbitration pointed to its success in reducing crowded court dockets, while consumer advocates charged that the arbitration process was biased in favor of large corporations and against consumers, many of whom were far poorer and legally unsophisticated. They would be joined in calling for it to be overturned (unsuccessfully) in a later case by 20 state attorneys general
.
charging Southland with fraud, misrepresentation, breach of contract
, breach of fiduciary duty and violations of disclosure provisions required in California's Franchise Investment Law (CFIL) between 1975 and 1977. Their actions were consolidated with another filed separately by Keating in Alameda County
seeking class
certification for all franchisees. Southland sought to compel arbitration per the franchise agreements. The Superior Court granted that request save for the CFIL claims, citing Section 31512 of that statute, under which any contractual language that binds a franchisee to waive rights it grants was void
. It did not see it as conflicting with the FAA, and did not rule on the motion for class certification.
A state appeals court reversed that decision, reading the arbitration clause
to require the arbitration of all claims under the contract, including those under the CFIL. If the CFIL's language did create an exception, it was superseded by the federal law and thus unenforceable. It directed the trial court to begin hearing the class certification motion.
The plaintiffs appealed to the California Supreme Court. It ruled in their favor, seeing the CFIL as requiring adjudication of all claims brought under it, and not in conflict with the FAA. Again, the case was remanded to trial court with an instruction to begin hearing the class certification motion.
in the early 20th century, persuaded Congress to pass the FAA in 1925. Until then many courts had been wary of the process, sometimes even refusing to accept it as binding. After they had persuaded New York to pass a state law allowing for the results of an arbitration to be considered binding on both parties, that statute became the model for the FAA.
For the first few decades after it was passed the FAA was understood to be applicable to contracts executed under federal law, specifically those concerning . The Supreme Court first considered a case related to it in Wilko v. Swan, where a 7-2 majority found that the anti-waiver provisions of the Securities Act of 1933
voided an arbitration clause where securities fraud
was alleged. The issue of a conflict with state law came up a few years later in Bernhardt v. Polygraphic Co., where the court, with only Harold Hitz Burton
dissenting, had refused to allow a federal court to decide whether an arbitration clause was valid simply because one party to the dispute had moved to another state
than the one in which the contract was originally executed. In 1959 the Second Circuit Court of Appeals
suggested that the FAA applied to state court actions as well, when it ruled that disputes over not just the execution but the contract itself were arbitrable.
In the 1967 Prima Paint
case the Court had opened the door to more widespread use of arbitration when it adopted the separability principle, compelling arbitration of a claim that a contract had been fraudulently induced
. This holds that any challenge to the validity of a contract with an arbitration clause must be heard by the arbitrator first, unless the challenge is to the arbitration clause itself. It creates a legal fiction
that two separate contracts exist.
The term before it heard Southland's appeal, a 6-3 court had, in Cone Mem. Hosp. v. Mercury Constr. Corp.
, upheld an appellate decision that overturned a district court's stay
of a federal action to compel arbitration pending the disposition of a parallel action in state court. The primary issue in that case had been the proper application of the Colorado River abstention doctrine and whether the lower court's decision was appealable. In passing, the opinion noted that "... state courts, as much as federal courts, are obliged to grant stays of litigation under § 3 of the Arbitration Act ... Congress can hardly have meant that an agreement to arbitrate can be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues on the same dispute in state court."
in late 1983 Mark Spooner pointed to the dictum
in Cone the previous term stating that the FAA applied to the states. He held firm despite being challenged on this reading. "[I]f Section 2 were read otherwise ... [t]hat would lead to forum shopping
and would destroy the predictability in interstate commercial dealings that is so important", he told the justices. "What Congress gives it can take away, but the states cannot take away what Congress has made valid and enforceable in a federal statute."
"[Q]uite apart from encouraging forum shopping, the conclusion if the Supreme Court of California's decision is upheld," responded John Wells, "the decision that Southland is asking for is the one that would encourage forum shopping." He noted that in securities law upheld in Wilko, Congress had not only included an anti-waiver provision but encouraged the states to pass parallel legislation, many of which included anti-waiver provisions of their own. If Southland's position were held applicable to those statutes, "[t]hat would result in the same claim that came into the federal court being not arbitrable but if it was brought in the state court under the state securities law it would be required to be arbitrated." He also noted that the contract simply gave the arbitrator jurisdiction over the instant dispute between the parties and did not specifically give the arbitrator power to enforce an award under the CFIL. "Arbitration is not a good place to enforce important rights set forward in a statute that is complicated."
while it considered the merits of the case. In April 1984 it handed down its 7-2 decision. Chief Justice
Warren Burger wrote for the majority, with John Paul Stevens
concurring in part and dissenting in part. Sandra Day O'Connor
's dissent was joined by William Rehnquist
, who had himself written a pointed dissent in Cone.
The next section of the opinion addressed the FAA's applicability to the states. "In enacting § 2 of the federal Act, 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," Burger declared. There were only two statutory exemptions: that it was applicable only a written maritime contract or a contract "evidencing a transaction involving commerce", and that the arbitration agreements could only be voided
"upon such grounds as exist at law or in equity for the revocation of any contract". Cone had found the FAA to be substantive law
that Congress had power to pass under the Commerce Clause
. In that case, "[we] expressly stated what was implicit in Prima Paint, i.e. that the substantive law the act created was applicable in both state and federal courts."
A third section addressed the legislative history in response to O'Connor's heavy reliance on it in her dissent. "Although [it] is not without ambiguities, there are strong indications that Congress had in mind something more than making arbitration agreements enforceable only in the federal courts". If the enforceability of arbitration agreements, which common law had long been skeptical of, were a problem only in federal court, he reasoned, Congress would have been less likely to take action. "To confine the scope of the Act to arbitrations sought to be enforced in federal courts would frustrate what we believe Congress intended to be a broad enactment appropriate in scope to meet the large problems Congress was addressing."
If, as O'Connor had argued, the FAA was merely procedural law
, why would Congress have limited it to maritime and interstate transactions? "We therefore view the 'involving commerce' requirement in § 2, not as an inexplicable limitation on the power of the federal courts, but as a necessary qualification on a statute intended to apply in state and federal courts." O'Connor's interpretation would lead to forum shopping
, Burger wrote:
Since the FAA allowed arbitration agreements to be voided under the same principles applicable to contracts generally, but did not specifically enumerate what principles might be applicable, "hence it would appear that the judiciary must fashion the limitations as a matter of federal common law". Such a federal common law would likely draw on state precedent and law regarding contract, as indeed the lower federal courts already did when evaluating questions of whether a contract was properly formed in challenges to an arbitration clause. For that reason, he believed state public policy decisions regarding arbitration and its enforcement were entitled to more latitude than that afforded by the majority. A past Supreme Court, in Paramount Famous Lasky Corp. v. United States, had voided arbitration agreements among parties where it found they served to restrain trade
.
She traced the majority's misreading to first Erie Railroad v. Tompkins and its holding that the courts could not create substantive law. Then, in Bernhardt, the court found that at least in diversity cases state law was controlling on arbitration clauses. Prima Paint, in her view, resolved concerns that Bernhardt problematized the FAA's constitutionality in such cases, but carefully avoided the question of whether it could be applied to state courts as well.
"Today's case is the first in which this Court has had occasion to determine whether the FAA applies to state court proceedings", O'Connor continued, calling the dictum in Cone "wholly unnecessary to its holding". She broke the majority opinion down into three conclusions, criticzing each in turn. The first, that § 2 of the FAA created substantive rights which state courts were bound to enforce, she called "unquestionably wrong as a matter of statutory construction". The second, that the substantive rights conferred could not be the basis for invoking federal jurisdiction "appears to be an attempt to limit the damage done by the first", and the final requirement that state courts follow procedures similar to those spelled out in the later sections that specifically mentioned federal court was "unnecessary and unwise".
"One rarely finds a legislative history as unambiguous as the FAA's", she wrote. Its sponsor in the House
had assured his colleagues the bill's sole goal was to make arbitration agreements enforceable; committee reports and American Bar Association
(ABA) briefs on it repeatedly described it as purely procedural. Its drafter had assured two subcommittees that Congress would not "[direct] its own courts ... [to] infringe upon the provinces or prerogatives of the States ... There is no disposition therefore by means of the Federal bludgeon to force an individual State into an unwilling submission to arbitration enforcement."
The hearing transcripts and other records of the FAA's passage also stated clearly that Congress relied on its power to regulate the federal courts and not the Commerce Clause, she pointed out. The House subcommittee's report had explicitly stated that the FAA was procedural and not substantive. "Plainly, a power derived from Congress' Art. III control over federal court jurisdiction would not, by any flight of fancy, permit Congress to control proceedings in state courts", O'Connor concluded. "The foregoing cannot be dismissed as 'ambiguities' in the legislative history." The one sentence Burger had quoted directly for the majority referring to "contracts involving commerce" was definitely resolved by other statements in the legislative history, she added.
Later readings had adhered to this intent. Both Prima Paint and Cone, she reminded the majority, had involved litigation in federal court. "Justice Black
would surely be surprised to find either the majority opinion or his dissent in Prima Paint cited by the Court today, as both are." His contention that holding the FAA applicable in state proceedings "would flout the intention of the framers of the Act" had not been challenged in Justice Fortas
's majority opinion in that case, she noted.
O'Connor also objected to the majority's insistence that state courts rigorously follow the federal procedures in enforcing the FAA. "Assuming, to the contrary, that § 2 does create a federal right that the state courts must enforce, state courts should nonetheless be allowed, at least in the first instance, to fashion their own procedures for enforcing the right. Unfortunately, the Court seems to direct that the arbitration clause at issue here must be specifically enforced; apparently no other means of enforcement is permissible." Even if she had agreed that the FAA applied in state court, she said, she would still have dissented over this provision alone.
The majority's concern about forum shopping was misplaced, since it had been addressed by the act's creation and earlier interpretation. "Because the FAA makes the federal courts equally accessible to both parties to a dispute, no forum shopping would be possible even if we gave the FAA a construction faithful to the congressional intent." The only issue that had been left unresolved in the original legislation, the question of which law was controlling in a diversity action, had been resolved by Bernhardt, she wrote.
"Today's decision is unfaithful to congressional intent, unnecessary, and, in light of the FAA's antecedents and the intervening contraction of federal power, inexplicable", she concluded. "Although arbitration is a worthy alternative to litigation, today's exercise in judicial revisionism goes too far."
With the question of the arbitrability of contracts under state law settled, arbitration clauses began appearing in many adhesion contracts offered for employment and consumer services such as credit. This has been described as the "consumerization" of arbitration. Many mandated binding arbitration before disputes even arose.
Since Southland and subsequent decisions held that state courts have no basis other than standard defenses to contract validity for staying arbitration, the states have instead begun to regulate the arbitration process and agreement themselves, particularly through a model statute called the Revised Uniform Arbitration Act (RUAA) which has as of 2010 been adopted by 13 states and the District of Columbia, with three more states considering it. California now requires that an arbitrator disclose any potential conflicts of interest
to parties prior to the arbitration, and New Mexico
added to its version of the RUAA a "disabling civil dispute clause" making arbitration agreements voidable
in consumer, credit, employment and tenant contracts. Some of these have been challenged in court. One case that did, Green Tree Financial Inc. v. Bazzle, where a South Carolina
court had ordered arbitration on a class basis, reached the Supreme Court but the majority did not consider the question, instead considering whether the contract permitted class arbitration to begin with (Rehnquist argued in his dissent that the FAA did indeed preempt).
-area Chrysler
-Plymouth
dealer
to arbitrate an antitrust
claim in Tokyo
was strongly criticized, and eventually led to the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001, which forbid contracts between automobile manufacturers and dealers from including pre-dispute arbitration clauses. It was the first time Congress had enacted an exemption to the FAA.
California's courts generated two more cases addressing the preemption issue. Perry v. Thomas, in 1987, overturned the state statute allowing a wage collection to proceed regardless of an arbitration agreement. O'Connor and Stevens dissented. Both reiterated their previous opinions and incorporated the others, O'Connor citing Stevens' belief that states should be entitled to restrict some arbitrations as a matter of public policy as a reason she would have upheld the California statute even if she agreed the FAA was applicable to state-level actions. In Volt Information Sciences v. Stanford University, the Court unanimously declined to compel arbitration under the FAA since the contract between the parties agreed that it would be governed by California law, which limited the arbitrable issues.
homeowner against Terminix
, the previous homeowner's exterminator, after they had found the newly purchased house heavily infested with termite
s despite the previous owner's assurances that it was free of them.
Terminix tried to stay the litigation citing the arbitration clause in its contract with the previous owner, who had also become plaintiffs. Alabama's Supreme Court
ruled that Southland didn't apply since it was a purely local transaction between a homeowner and the local branch of Terminix. After certiorari
was granted, 20 state attorneys general filed amici
briefs calling for the court to take this occasion to overturn Southland.
When the decision was handed down, as Allied-Bruce Terminix Cos. v. Dobson, a 7-2 Court not only declined to do so, it expanded the FAA's reach further, to include transactions such as the one under review, since they affected interstate commerce. Justice Stephen Breyer
, writing for the majority, read the use of "involving" to be equivalent to "affecting", a word he said indicated congressional intent for the statute to have the widest possible reach. Since nothing had changed since Southland, they declined to overturn it.
O'Connor voted with the majority this time, writing in a separate concurrence that although her opinion had not changed since her Southland dissent a decade before, stare decisis
dictated that she uphold that case since too many contracts would be voided if it was overturned. Two justices appointed to the Court in the meantime, Antonin Scalia
and Clarence Thomas
, dissented. Scalia, noting that he had joined majorities in Perry and Volt which relied on Southland, said that nevertheless he felt that case had been wrongly decided and, with the question of FAA preemption before the Court again, he voted to overturn it, not seeing stare decisis as an impediment. "I shall not in the future dissent from judgments that rest on Southland. I will, however, stand ready to join four other Justices in overruling it, since Southland will not become more correct over time, [and] the course of future lawmaking seems unlikely to be affected by its existence."
He reviewed the act's passage, noting sources, including a New York Court of Appeals
interpretation by Benjamin Cardozo of the state statute the FAA was modeled on, that described it as purely procedural. An early law review
article read it as not presuming to apply to state courts, although arguing it could. "Indeed, to judge from the reported cases, it appears that no state court was even asked to enforce the statute for many years after the passage of the FAA."
Federal courts, he noted, had refused to apply state arbitration statutes in federal cases to which the FAA did not apply, because it was not considered substantive. "In short, state arbitration statutes prescribed rules for the state courts, and the FAA prescribed rules for the federal courts". Arbitration clauses, Thomas wrote, were arguably forum selection, considered procedural rather than substantive. "And if a contractual provision deals purely with matters of judicial procedure, one might well conclude that questions about whether and how it will be enforced also relate to procedure."
Like O'Connor, he read the text of the FAA closely and found no implied authority over the states. "[T]he FAA treats arbitration simply as one means of resolving disputes that lie within the jurisdiction of the federal courts; it makes clear that the breach of a covered arbitration agreement does not itself provide any independent basis for such jurisdiction. Even the Southland majority was forced to acknowledge this point ..." That majority, according Thomas, had offered only one real response: its argument that Congress would have extended it to all contracts if it meant for the FAA to be procedural. He offered the possibility that Congress may have instead believed "there was no federal interest in doing so unless interstate commerce or maritime transactions were involved. This conclusion is far more plausible ..."
Along with Stevens and Scalia, he echoed O'Connor's point that even if the FAA unambiguously applied to state courts it did not follow that it imposed the same procedural requirements on them. Both statutory and case law in Alabama were hostile to predispute arbitration agreements, and he felt the Court should defer to the public policy goals of the legislature and courts in that state. A provision barring specific enforcement of such arbitration agreements seemed to provide adequte grounds for a stay, he wrote.
He joined Scalia in dismissing O'Connor's stare decisis concerns.
Even if stare decisis did apply, Thomas concluded, it would not cover the procedural requirements of the act since the Court had never formally held that those applied to the states as well.
Scalia has since joined many majorities upholding arbitration clauses in contracts under state law, in one case writing an holding that an arbitrator must be the first to decide whether a contract was illegal under state law. Thomas was the lone dissenter in that case, and in another California case the next year where the majority ruled that state law providing for administrative dispute resolution was also pre-empted by the FAA. His dissents in those cases have consisted of a single paragraph referencing his Terminix dissent and its progeny.
Margaret Moses, an international arbitration scholar at Loyola University Chicago School of Law
, has traced Southland to a series of misreadings in its predecessor decisions that make the original FAA "unrecognizable" in its current judicial incarnation. It began with the dilemma created by the twin precedents of Erie Railroad, which overruled Swift v. Tyson
by holding that federal courts had to apply the state law of the state in which it sat in diversity cases, and Guaranty Trust Co. v. York
, which clarified Erie Railroad with the "outcome-determinative" requirement that if the federal law would produce a different outcome than state law, state law must be applied. Bernhardt had raised this question, but the Court avoided it by holding that an employment contract, even across state lines, did not constitute interstate commerce for FAA purposes, while noting that the outcome-determinative test would have produced the same result.
Prima Paint forced the Court to confront the issue directly, when a New Jersey
company resisted a Maryland
company's demand for a claim of misrepresentation to be arbitrated. If they applied the outcome-determinative test, according to Moses, the justices would render the FAA ineffective at its intended purpose. The Court could have ruled the FAA purely procedural following a recent decision, Hanna v. Plumer
, but was concerned about Congress making rules affecting contracts, traditionally primarily a matter for the states. So, it chose to follow the Second Circuit decision in Robert Lawrence by relying on the Dormant Commerce Clause
as grounding its reading of the FAA. This, she wrote, conflicted with the statute's legislative history, which repeatedly refers to it as a purely procedural measure. "In Prima Paint, the Court reached a pragmatic result but used an unfortunate method to get there."
In addition, she argued, the court failed to limit the scope of the decision. This set the stage for Justice William J. Brennan, Jr.
to assert in dicta in Cone both that the FAA made arbitration a national policy and that it applied to the state courts, without support for either assertion. Again, the legislative history of the act showed that it had been meant merely to allow federal courts to permit arbitration. "The so-called policy favoring arbitration appears to be one created by the judiciary out of whole cloth," Moses observed. It may have arisen from the more explicit assertion of a national policy favoring labor arbitration, which the Court cited in Mitsubish Motors later."
As a result of the Cone dicta, the appellees in Southland stipulated that the FAA applied to the states and did not argue the point much either in their brief or orally. The majority, Moses continued, repeated Prima Paints error in grounding the FAA in the Commerce Clause. Burger's interpretation of the language that limited the covered contracts to maritime or commercial agreements was not only speculative, it was wrong. That language had been added in an amendment offered by Senator Thomas J. Walsh
, whose intent was to limit the scope of the act, not expand it, so it could not be applied to employment and insurance contracts. The single reference to the Commerce Clause as empowering Congress was at the end of a memo prepared by the FAA's drafter, intended, Moses believes, as a "fallback position" should the FAA be found outside the scope of Congress's powers to regulate federal courts.
David Schwartz of Wisconsin Law School
, author of an amicus filed in Bazzle, has argued that the reach Southland gives the FAA is unconstitutional even if it were clearly intended to apply to state courts "and no one has noticed." He joins with the dissenting justices and other critics in finding it "properly seen as procedural when viewed from any angle." To Schwartz, it also constitutes a federally mandated restructuring of state courts. "The proper constitutional solution is not to change a state's neutral rule of judicial administration, but to make sure that a federal forum is available to hear the claim (and require that the state dismiss the federal claim for lack of appropriate jurisdiction)."
Some commentators have defended the decision. Prominent among them has been Christopher Drahozal of Kansas, who has argued the legislative history does indeed support its application to state courts as a secondary purpose. "The vast majority of statements in the legislative history relied on by commentators to criticize the Southland holding", he writes, "state simply that the FAA applies in federal court, not that it applies only in federal court". While he is also critical of the way Burger made the argument, and agrees there are ambiguities in the record, he believes the Court read it correctly.
Schwartz says Drahozal's analysis is "thought-provoking" but incorrect. Moses says that while Drahozal's argument has some points, "he may continue to swim upstream on this point without much scholarly company". She believes he rests too much on a statement in the drafter's memo saying its secondary purpose is make arbitration agreements enforceable in federal courts, which ignores many explicit statements that it was not intended to.
United States Reports
The United States Reports are the official record of the rulings, orders, case tables, and other proceedings of the Supreme Court of the United States. Opinions of the court in each case, prepended with a headnote prepared by the Reporter of Decisions, and any concurring or dissenting opinions are...
1 (1984), is a United States Supreme Court decision concerning arbitration. It was originally brought by 7-Eleven
7-Eleven
7-Eleven is part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co...
franchisees
Franchising
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
in California state courts, alleging breach of contract
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
by the chain's then parent corporation. Southland pointed to the arbitration clause
Arbitration clause
An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process...
s in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act
Federal Arbitration Act
In United States law, the Federal Arbitration Act is a statute that provides for judicial facilitation of private dispute resolution through arbitration. It applies in both state courts and federal courts, as was held in Southland Corp. v. Keating...
(FAA) applied to contracts executed under state law.
Chief Justice
Chief Justice of the United States
The Chief Justice of the United States is the head of the United States federal court system and the chief judge of the Supreme Court of the United States. The Chief Justice is one of nine Supreme Court justices; the other eight are the Associate Justices of the Supreme Court of the United States...
Warren Burger wrote for the majority that it was clearly the intent of Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
in passing the FAA to encourage the use of arbitration as widely as possible, that it enacted "a national policy favoring arbitration". Justice Sandra Day O'Connor
Sandra Day O'Connor
Sandra Day O'Connor is an American jurist who was the first female member of the Supreme Court of the United States. She served as an Associate Justice from 1981 until her retirement from the Court in 2006. O'Connor was appointed by President Ronald Reagan in 1981...
dissented, along with William Rehnquist
William Rehnquist
William Hubbs Rehnquist was an American lawyer, jurist, and political figure who served as an Associate Justice on the Supreme Court of the United States and later as the 16th Chief Justice of the United States...
, arguing that the legislative history of the FAA strongly suggested it was intended to apply only to contracts executed under federal law. In later years, Clarence Thomas
Clarence Thomas
Clarence Thomas is an Associate Justice of the Supreme Court of the United States. Succeeding Thurgood Marshall, Thomas is the second African American to serve on the Court....
would make her arguments the foundation of a series of dissents from cases concerning the application of the FAA to state law, even in cases where O'Connor went with the majority citing stare decisis
Stare decisis
Stare decisis is a legal principle by which judges are obliged to respect the precedents established by prior decisions...
.
The decision was a turning point in the use of arbitration in American contract law, when it was followed with other decisions limiting the authority of states
Federal preemption
Federal preemption refers to the invalidation of US state law when it conflicts with Federal law.-Constitutional basis:According to the Supremacy Clause of the United States Constitution,...
to regulate arbitration. It has been described as "perhaps the most controversial case in the Supreme Court's history of arbitration jurisprudence." Its legal foundation has been examined and disputed, and some critics have found the FAA's legislative history directly contradicts the court's holding. One scholar has even found the decision an unconstitutional infringement of states' power over their own courts. Mandatory prebinding arbitration clause
Arbitration clause
An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process...
s became widespread, particularly in credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
agreements and other consumer services. Proponents of arbitration pointed to its success in reducing crowded court dockets, while consumer advocates charged that the arbitration process was biased in favor of large corporations and against consumers, many of whom were far poorer and legally unsophisticated. They would be joined in calling for it to be overturned (unsuccessfully) in a later case by 20 state attorneys general
Attorney General
In most common law jurisdictions, the attorney general, or attorney-general, is the main legal advisor to the government, and in some jurisdictions he or she may also have executive responsibility for law enforcement or responsibility for public prosecutions.The term is used to refer to any person...
.
Background of the case
The plaintiffs, all 7-Eleven franchisees, filed suit individually in California Superior CourtSuperior Courts of California
The Superior Courts of California are the superior courts in the U.S. state of California with general jurisdiction to hear and decide any civil or criminal action which is not specially designated to be heard in some other court or before a government agency...
charging Southland with fraud, misrepresentation, breach of contract
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
, breach of fiduciary duty and violations of disclosure provisions required in California's Franchise Investment Law (CFIL) between 1975 and 1977. Their actions were consolidated with another filed separately by Keating in Alameda County
Alameda County, California
Alameda County is a county in the U.S. state of California. It occupies most of the East Bay region of the San Francisco Bay Area. As of the 2010 census it had a population of 1,510,271, making it the 7th most populous county in the state...
seeking class
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
certification for all franchisees. Southland sought to compel arbitration per the franchise agreements. The Superior Court granted that request save for the CFIL claims, citing Section 31512 of that statute, under which any contractual language that binds a franchisee to waive rights it grants was void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
. It did not see it as conflicting with the FAA, and did not rule on the motion for class certification.
A state appeals court reversed that decision, reading the arbitration clause
Arbitration clause
An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process...
to require the arbitration of all claims under the contract, including those under the CFIL. If the CFIL's language did create an exception, it was superseded by the federal law and thus unenforceable. It directed the trial court to begin hearing the class certification motion.
The plaintiffs appealed to the California Supreme Court. It ruled in their favor, seeing the CFIL as requiring adjudication of all claims brought under it, and not in conflict with the FAA. Again, the case was remanded to trial court with an instruction to begin hearing the class certification motion.
Existing arbitration law
New York City merchants, who had embraced arbitration as a method of alternative dispute resolutionAlternative dispute resolution
Alternative Dispute Resolution includes dispute resolution processes and techniques that act as a means for disagreeing parties to come to an agreement short of litigation. ADR basically is an alternative to a formal court hearing or litigation...
in the early 20th century, persuaded Congress to pass the FAA in 1925. Until then many courts had been wary of the process, sometimes even refusing to accept it as binding. After they had persuaded New York to pass a state law allowing for the results of an arbitration to be considered binding on both parties, that statute became the model for the FAA.
For the first few decades after it was passed the FAA was understood to be applicable to contracts executed under federal law, specifically those concerning . The Supreme Court first considered a case related to it in Wilko v. Swan, where a 7-2 majority found that the anti-waiver provisions of the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
voided an arbitration clause where securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
was alleged. The issue of a conflict with state law came up a few years later in Bernhardt v. Polygraphic Co., where the court, with only Harold Hitz Burton
Harold Hitz Burton
Harold Hitz Burton was an American politician and lawyer.He served as the 45th mayor of Cleveland, Ohio, as a U.S. Senator from Ohio, and as an Associate Justice of the Supreme Court of the United States. He was known as a dispassionate jurist who prized equal justice under the law.-Biography:He...
dissenting, had refused to allow a federal court to decide whether an arbitration clause was valid simply because one party to the dispute had moved to another state
Diversity jurisdiction
In the law of the United States, diversity jurisdiction is a form of subject-matter jurisdiction in civil procedure in which a United States district court has the power to hear a civil case where the persons that are parties are "diverse" in citizenship, which generally indicates that they are...
than the one in which the contract was originally executed. In 1959 the Second Circuit Court of Appeals
United States Court of Appeals for the Second Circuit
The United States Court of Appeals for the Second Circuit is one of the thirteen United States Courts of Appeals...
suggested that the FAA applied to state court actions as well, when it ruled that disputes over not just the execution but the contract itself were arbitrable.
In the 1967 Prima Paint
Prima Paint Corp. v. Flood & Conklin Mfg. Co.
Prima Paint Corp. v. Flood & Conklin Mfg. Co. , is a United States Supreme Court decision that established what has become known as the "separability principle" in contracts with arbitration clauses...
case the Court had opened the door to more widespread use of arbitration when it adopted the separability principle, compelling arbitration of a claim that a contract had been fraudulently induced
Misrepresentation
Misrepresentation is a contract law concept. It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality...
. This holds that any challenge to the validity of a contract with an arbitration clause must be heard by the arbitrator first, unless the challenge is to the arbitration clause itself. It creates a legal fiction
Legal fiction
A legal fiction is a fact assumed or created by courts which is then used in order to apply a legal rule which was not necessarily designed to be used in that way...
that two separate contracts exist.
The term before it heard Southland's appeal, a 6-3 court had, in Cone Mem. Hosp. v. Mercury Constr. Corp.
Moses H. Cone Memorial Hospital v. Mercury Constr. Corp.
Moses H. Cone Memorial Hospital v. Mercury Construction Corp. , commonly cited as Moses Cone or Cone Hospital, is a United States Supreme Court decision concerning civil procedure, specifically the abstention doctrine, as it applies to enforcing an arbitration clause in a diversity case...
, upheld an appellate decision that overturned a district court's stay
Stay of proceedings
A stay of proceedings is a ruling by the court in civil and criminal procedure, halting further legal process in a trial. The court can subsequently lift the stay and resume proceedings. However, a stay is sometimes used as a device to postpone proceedings indefinitely.-United Kingdom:In United...
of a federal action to compel arbitration pending the disposition of a parallel action in state court. The primary issue in that case had been the proper application of the Colorado River abstention doctrine and whether the lower court's decision was appealable. In passing, the opinion noted that "... state courts, as much as federal courts, are obliged to grant stays of litigation under § 3 of the Arbitration Act ... Congress can hardly have meant that an agreement to arbitrate can be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues on the same dispute in state court."
Before the Court
At oral argumentOral argument
Oral arguments are spoken presentations to a judge or appellate court by a lawyer of the legal reasons why they should prevail. Oral argument at the appellate level accompanies written briefs, which also advance the argument of each party in the legal dispute...
in late 1983 Mark Spooner pointed to the dictum
Dictum
In United States legal terminology, a dictum is a statement of opinion or belief considered authoritative though not binding, because of the authority of the person making it....
in Cone the previous term stating that the FAA applied to the states. He held firm despite being challenged on this reading. "[I]f Section 2 were read otherwise ... [t]hat would lead to forum shopping
Forum shopping
Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment...
and would destroy the predictability in interstate commercial dealings that is so important", he told the justices. "What Congress gives it can take away, but the states cannot take away what Congress has made valid and enforceable in a federal statute."
"[Q]uite apart from encouraging forum shopping, the conclusion if the Supreme Court of California's decision is upheld," responded John Wells, "the decision that Southland is asking for is the one that would encourage forum shopping." He noted that in securities law upheld in Wilko, Congress had not only included an anti-waiver provision but encouraged the states to pass parallel legislation, many of which included anti-waiver provisions of their own. If Southland's position were held applicable to those statutes, "[t]hat would result in the same claim that came into the federal court being not arbitrable but if it was brought in the state court under the state securities law it would be required to be arbitrated." He also noted that the contract simply gave the arbitrator jurisdiction over the instant dispute between the parties and did not specifically give the arbitrator power to enforce an award under the CFIL. "Arbitration is not a good place to enforce important rights set forward in a statute that is complicated."
Decision
The Court postponed ruling on whether it had jurisdictionJurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
while it considered the merits of the case. In April 1984 it handed down its 7-2 decision. Chief Justice
Chief Justice of the United States
The Chief Justice of the United States is the head of the United States federal court system and the chief judge of the Supreme Court of the United States. The Chief Justice is one of nine Supreme Court justices; the other eight are the Associate Justices of the Supreme Court of the United States...
Warren Burger wrote for the majority, with John Paul Stevens
John Paul Stevens
John Paul Stevens served as an Associate Justice of the Supreme Court of the United States from December 19, 1975 until his retirement on June 29, 2010. At the time of his retirement, he was the oldest member of the Court and the third-longest serving justice in the Court's history...
concurring in part and dissenting in part. Sandra Day O'Connor
Sandra Day O'Connor
Sandra Day O'Connor is an American jurist who was the first female member of the Supreme Court of the United States. She served as an Associate Justice from 1981 until her retirement from the Court in 2006. O'Connor was appointed by President Ronald Reagan in 1981...
's dissent was joined by William Rehnquist
William Rehnquist
William Hubbs Rehnquist was an American lawyer, jurist, and political figure who served as an Associate Justice on the Supreme Court of the United States and later as the 16th Chief Justice of the United States...
, who had himself written a pointed dissent in Cone.
Majority
"Contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts", Burger wrote, explaining why the Court chose not to let the state litigation run its course before ruling on the core issue. "For us to delay review of a state judicial decision denying enforcement of the contract to arbitrate until the state court litigation has run its course would defeat the core purpose of a contract to arbitrate." However, the Court lacked jurisdiction to decide the class-certification question at that point in the action.The next section of the opinion addressed the FAA's applicability to the states. "In enacting § 2 of the federal Act, 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," Burger declared. There were only two statutory exemptions: that it was applicable only a written maritime contract or a contract "evidencing a transaction involving commerce", and that the arbitration agreements could only be voided
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
"upon such grounds as exist at law or in equity for the revocation of any contract". Cone had found the FAA to be substantive law
Substantive law
Substantive law is the statutory or written law that defines rights and duties, such as crimes and punishments , civil rights and responsibilities in civil law. It is codified in legislated statutes or can be enacted through the initiative process.Substantive law stands in contrast to procedural...
that Congress had power to pass under the Commerce Clause
Commerce Clause
The Commerce Clause is an enumerated power listed in the United States Constitution . The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Courts and commentators have tended to...
. In that case, "[we] expressly stated what was implicit in Prima Paint, i.e. that the substantive law the act created was applicable in both state and federal courts."
A third section addressed the legislative history in response to O'Connor's heavy reliance on it in her dissent. "Although [it] is not without ambiguities, there are strong indications that Congress had in mind something more than making arbitration agreements enforceable only in the federal courts". If the enforceability of arbitration agreements, which common law had long been skeptical of, were a problem only in federal court, he reasoned, Congress would have been less likely to take action. "To confine the scope of the Act to arbitrations sought to be enforced in federal courts would frustrate what we believe Congress intended to be a broad enactment appropriate in scope to meet the large problems Congress was addressing."
If, as O'Connor had argued, the FAA was merely procedural law
Procedural law
Procedural law or adjective law comprises the rules by which a court hears and determines what happens in civil lawsuit, criminal or administrative proceedings. The rules are designed to ensure a fair and consistent application of due process or fundamental justice to all cases that come before...
, why would Congress have limited it to maritime and interstate transactions? "We therefore view the 'involving commerce' requirement in § 2, not as an inexplicable limitation on the power of the federal courts, but as a necessary qualification on a statute intended to apply in state and federal courts." O'Connor's interpretation would lead to forum shopping
Forum shopping
Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment...
, Burger wrote:
Stevens' concurrence
"I am persuaded that the intervening developments in the law compel the conclusion that the Court has reached", Stevens began. "I am nevertheless troubled by one aspect of the case that seems to trouble none of my colleagues." He referred to the majority's contention that, had the case been brought in federal court as a diversity case analogous to Prima Paint, the arbitration clause would have been enforceable.Since the FAA allowed arbitration agreements to be voided under the same principles applicable to contracts generally, but did not specifically enumerate what principles might be applicable, "hence it would appear that the judiciary must fashion the limitations as a matter of federal common law". Such a federal common law would likely draw on state precedent and law regarding contract, as indeed the lower federal courts already did when evaluating questions of whether a contract was properly formed in challenges to an arbitration clause. For that reason, he believed state public policy decisions regarding arbitration and its enforcement were entitled to more latitude than that afforded by the majority. A past Supreme Court, in Paramount Famous Lasky Corp. v. United States, had voided arbitration agreements among parties where it found they served to restrain trade
Restraint of trade
Restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds Lord Smith LC said,...
.
Dissent
O'Connor began by noting that the "courts of the United States" language the majority rested its decision on did not specify which courts, and that the following two sections specifically refer to federal court. "Today, the Court takes the facial silence of § 2 as a license to declare that state as well as federal courts must apply § 2", she wrote. "The Court's decision is impelled by an understandable desire to encourage the use of arbitration, but it utterly fails to recognize the clear congressional intent underlying the FAA. Congress intended to require federal, not state, courts to respect arbitration agreements."She traced the majority's misreading to first Erie Railroad v. Tompkins and its holding that the courts could not create substantive law. Then, in Bernhardt, the court found that at least in diversity cases state law was controlling on arbitration clauses. Prima Paint, in her view, resolved concerns that Bernhardt problematized the FAA's constitutionality in such cases, but carefully avoided the question of whether it could be applied to state courts as well.
"Today's case is the first in which this Court has had occasion to determine whether the FAA applies to state court proceedings", O'Connor continued, calling the dictum in Cone "wholly unnecessary to its holding". She broke the majority opinion down into three conclusions, criticzing each in turn. The first, that § 2 of the FAA created substantive rights which state courts were bound to enforce, she called "unquestionably wrong as a matter of statutory construction". The second, that the substantive rights conferred could not be the basis for invoking federal jurisdiction "appears to be an attempt to limit the damage done by the first", and the final requirement that state courts follow procedures similar to those spelled out in the later sections that specifically mentioned federal court was "unnecessary and unwise".
"One rarely finds a legislative history as unambiguous as the FAA's", she wrote. Its sponsor in the House
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
had assured his colleagues the bill's sole goal was to make arbitration agreements enforceable; committee reports and American Bar Association
American Bar Association
The American Bar Association , founded August 21, 1878, is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. The ABA's most important stated activities are the setting of academic standards for law schools, and the formulation...
(ABA) briefs on it repeatedly described it as purely procedural. Its drafter had assured two subcommittees that Congress would not "[direct] its own courts ... [to] infringe upon the provinces or prerogatives of the States ... There is no disposition therefore by means of the Federal bludgeon to force an individual State into an unwilling submission to arbitration enforcement."
The hearing transcripts and other records of the FAA's passage also stated clearly that Congress relied on its power to regulate the federal courts and not the Commerce Clause, she pointed out. The House subcommittee's report had explicitly stated that the FAA was procedural and not substantive. "Plainly, a power derived from Congress' Art. III control over federal court jurisdiction would not, by any flight of fancy, permit Congress to control proceedings in state courts", O'Connor concluded. "The foregoing cannot be dismissed as 'ambiguities' in the legislative history." The one sentence Burger had quoted directly for the majority referring to "contracts involving commerce" was definitely resolved by other statements in the legislative history, she added.
Later readings had adhered to this intent. Both Prima Paint and Cone, she reminded the majority, had involved litigation in federal court. "Justice Black
Hugo Black
Hugo Lafayette Black was an American politician and jurist. A member of the Democratic Party, Black represented Alabama in the United States Senate from 1927 to 1937, and served as an Associate Justice of the Supreme Court of the United States from 1937 to 1971. Black was nominated to the Supreme...
would surely be surprised to find either the majority opinion or his dissent in Prima Paint cited by the Court today, as both are." His contention that holding the FAA applicable in state proceedings "would flout the intention of the framers of the Act" had not been challenged in Justice Fortas
Abe Fortas
Abraham Fortas was a U.S. Supreme Court associate justice from 1965 to 1969. Originally from Tennessee, Fortas became a law professor at Yale, and subsequently advised the Securities and Exchange Commission. He then worked at the Interior Department under Franklin D...
's majority opinion in that case, she noted.
O'Connor also objected to the majority's insistence that state courts rigorously follow the federal procedures in enforcing the FAA. "Assuming, to the contrary, that § 2 does create a federal right that the state courts must enforce, state courts should nonetheless be allowed, at least in the first instance, to fashion their own procedures for enforcing the right. Unfortunately, the Court seems to direct that the arbitration clause at issue here must be specifically enforced; apparently no other means of enforcement is permissible." Even if she had agreed that the FAA applied in state court, she said, she would still have dissented over this provision alone.
The majority's concern about forum shopping was misplaced, since it had been addressed by the act's creation and earlier interpretation. "Because the FAA makes the federal courts equally accessible to both parties to a dispute, no forum shopping would be possible even if we gave the FAA a construction faithful to the congressional intent." The only issue that had been left unresolved in the original legislation, the question of which law was controlling in a diversity action, had been resolved by Bernhardt, she wrote.
"Today's decision is unfaithful to congressional intent, unnecessary, and, in light of the FAA's antecedents and the intervening contraction of federal power, inexplicable", she concluded. "Although arbitration is a worthy alternative to litigation, today's exercise in judicial revisionism goes too far."
Aftermath and legacy
Upon remand to the Superior Court where the cases originated, the trial judge decided all the class issues. The case proceeded to arbitration, where the arbitrators refused to revisit the judge's ruling. It was then settled out of court.With the question of the arbitrability of contracts under state law settled, arbitration clauses began appearing in many adhesion contracts offered for employment and consumer services such as credit. This has been described as the "consumerization" of arbitration. Many mandated binding arbitration before disputes even arose.
Since Southland and subsequent decisions held that state courts have no basis other than standard defenses to contract validity for staying arbitration, the states have instead begun to regulate the arbitration process and agreement themselves, particularly through a model statute called the Revised Uniform Arbitration Act (RUAA) which has as of 2010 been adopted by 13 states and the District of Columbia, with three more states considering it. California now requires that an arbitrator disclose any potential conflicts of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
to parties prior to the arbitration, and New Mexico
New Mexico
New Mexico is a state located in the southwest and western regions of the United States. New Mexico is also usually considered one of the Mountain States. With a population density of 16 per square mile, New Mexico is the sixth-most sparsely inhabited U.S...
added to its version of the RUAA a "disabling civil dispute clause" making arbitration agreements voidable
Voidable
In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ab initio and unenforceable....
in consumer, credit, employment and tenant contracts. Some of these have been challenged in court. One case that did, Green Tree Financial Inc. v. Bazzle, where a South Carolina
South Carolina
South Carolina is a state in the Deep South of the United States that borders Georgia to the south, North Carolina to the north, and the Atlantic Ocean to the east. Originally part of the Province of Carolina, the Province of South Carolina was one of the 13 colonies that declared independence...
court had ordered arbitration on a class basis, reached the Supreme Court but the majority did not consider the question, instead considering whether the contract permitted class arbitration to begin with (Rehnquist argued in his dissent that the FAA did indeed preempt).
Subsequent jurisprudence
In the years following Southland, arbitration cases continued to come to the Supreme Court from state and federal courts. In accordance with Burger's "national policy", it decided many of them in favor of compelling arbitration. The 1985 decision requiring a San JuanSan Juan, Puerto Rico
San Juan , officially Municipio de la Ciudad Capital San Juan Bautista , is the capital and most populous municipality in Puerto Rico, an unincorporated territory of the United States. As of the 2010 census, it had a population of 395,326 making it the 46th-largest city under the jurisdiction of...
-area Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....
-Plymouth
Plymouth (automobile)
Plymouth was a marque of automobile based in the United States, produced by the Chrysler Corporation and its successor DaimlerChrysler.-Origins:...
dealer
Car dealership
A car dealership or vehicle local distribution is a business that sells new or used cars at the retail level, based on a dealership contract with an automaker or its sales subsidiary. It employs automobile salespeople to do the selling...
to arbitrate an antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...
claim in Tokyo
Tokyo
, ; officially , is one of the 47 prefectures of Japan. Tokyo is the capital of Japan, the center of the Greater Tokyo Area, and the largest metropolitan area of Japan. It is the seat of the Japanese government and the Imperial Palace, and the home of the Japanese Imperial Family...
was strongly criticized, and eventually led to the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001, which forbid contracts between automobile manufacturers and dealers from including pre-dispute arbitration clauses. It was the first time Congress had enacted an exemption to the FAA.
California's courts generated two more cases addressing the preemption issue. Perry v. Thomas, in 1987, overturned the state statute allowing a wage collection to proceed regardless of an arbitration agreement. O'Connor and Stevens dissented. Both reiterated their previous opinions and incorporated the others, O'Connor citing Stevens' belief that states should be entitled to restrict some arbitrations as a matter of public policy as a reason she would have upheld the California statute even if she agreed the FAA was applicable to state-level actions. In Volt Information Sciences v. Stanford University, the Court unanimously declined to compel arbitration under the FAA since the contract between the parties agreed that it would be governed by California law, which limited the arbitrable issues.
Allied-Bruce Terminix Cos. v. Dobson
State judges and many commentators had come to agree with O'Connor that Southland had been wrongly decided, and looked for an opportunity to overturn it. In the early 1990s they appeared to have it with a case that also involved a group of individuals against the local branch of a multistate corporation, where state law appeared to make the issue non-arbitrable. The action was brought by an AlabamaAlabama
Alabama is a state located in the southeastern region of the United States. It is bordered by Tennessee to the north, Georgia to the east, Florida and the Gulf of Mexico to the south, and Mississippi to the west. Alabama ranks 30th in total land area and ranks second in the size of its inland...
homeowner against Terminix
Terminix
Terminix International Company, L.P. is the largest pest control company in the world, operating in 45 states in the United States and 14 countries around the world. It is a unit of ServiceMaster.-History:...
, the previous homeowner's exterminator, after they had found the newly purchased house heavily infested with termite
Termite
Termites are a group of eusocial insects that, until recently, were classified at the taxonomic rank of order Isoptera , but are now accepted as the epifamily Termitoidae, of the cockroach order Blattodea...
s despite the previous owner's assurances that it was free of them.
Terminix tried to stay the litigation citing the arbitration clause in its contract with the previous owner, who had also become plaintiffs. Alabama's Supreme Court
Alabama Supreme Court
The Supreme Court of Alabama is the highest court in the state of Alabama. The court consists of an elected Chief Justice and eight elected Associate Justices. Each justice is elected in partisan elections for staggered six year terms. The Governor of Alabama may fill vacancies when they occur...
ruled that Southland didn't apply since it was a purely local transaction between a homeowner and the local branch of Terminix. After certiorari
Certiorari
Certiorari is a type of writ seeking judicial review, recognized in U.S., Roman, English, Philippine, and other law. Certiorari is the present passive infinitive of the Latin certiorare...
was granted, 20 state attorneys general filed amici
Amicus curiae
An amicus curiae is someone, not a party to a case, who volunteers to offer information to assist a court in deciding a matter before it...
briefs calling for the court to take this occasion to overturn Southland.
When the decision was handed down, as Allied-Bruce Terminix Cos. v. Dobson, a 7-2 Court not only declined to do so, it expanded the FAA's reach further, to include transactions such as the one under review, since they affected interstate commerce. Justice Stephen Breyer
Stephen Breyer
Stephen Gerald Breyer is an Associate Justice of the U.S. Supreme Court. Appointed by President Bill Clinton in 1994, and known for his pragmatic approach to constitutional law, Breyer is generally associated with the more liberal side of the Court....
, writing for the majority, read the use of "involving" to be equivalent to "affecting", a word he said indicated congressional intent for the statute to have the widest possible reach. Since nothing had changed since Southland, they declined to overturn it.
O'Connor voted with the majority this time, writing in a separate concurrence that although her opinion had not changed since her Southland dissent a decade before, stare decisis
Stare decisis
Stare decisis is a legal principle by which judges are obliged to respect the precedents established by prior decisions...
dictated that she uphold that case since too many contracts would be voided if it was overturned. Two justices appointed to the Court in the meantime, Antonin Scalia
Antonin Scalia
Antonin Gregory Scalia is an American jurist who serves as an Associate Justice of the Supreme Court of the United States. As the longest-serving justice on the Court, Scalia is the Senior Associate Justice...
and Clarence Thomas
Clarence Thomas
Clarence Thomas is an Associate Justice of the Supreme Court of the United States. Succeeding Thurgood Marshall, Thomas is the second African American to serve on the Court....
, dissented. Scalia, noting that he had joined majorities in Perry and Volt which relied on Southland, said that nevertheless he felt that case had been wrongly decided and, with the question of FAA preemption before the Court again, he voted to overturn it, not seeing stare decisis as an impediment. "I shall not in the future dissent from judgments that rest on Southland. I will, however, stand ready to join four other Justices in overruling it, since Southland will not become more correct over time, [and] the course of future lawmaking seems unlikely to be affected by its existence."
Thomas's dissent
Thomas filed a longer dissent critiquing the majority opinion in Southland and expanding on O'Connor's dissent in that case. "In my view, the Federal Arbitration Act (FAA) does not apply in state courts", he began. As Stevens had in Perry, he noted the 35 years between the act's passage and the first suggestion (in Robert Lawrence) that it applied in state courts as well. "The explanation for this delay is simple: The statute that Congress enacted actually applies only in federal courts."He reviewed the act's passage, noting sources, including a New York Court of Appeals
New York Court of Appeals
The New York Court of Appeals is the highest court in the U.S. state of New York. The Court of Appeals consists of seven judges: the Chief Judge and six associate judges who are appointed by the Governor to 14-year terms...
interpretation by Benjamin Cardozo of the state statute the FAA was modeled on, that described it as purely procedural. An early law review
Law review
A law review is a scholarly journal focusing on legal issues, normally published by an organization of students at a law school or through a bar association...
article read it as not presuming to apply to state courts, although arguing it could. "Indeed, to judge from the reported cases, it appears that no state court was even asked to enforce the statute for many years after the passage of the FAA."
Federal courts, he noted, had refused to apply state arbitration statutes in federal cases to which the FAA did not apply, because it was not considered substantive. "In short, state arbitration statutes prescribed rules for the state courts, and the FAA prescribed rules for the federal courts". Arbitration clauses, Thomas wrote, were arguably forum selection, considered procedural rather than substantive. "And if a contractual provision deals purely with matters of judicial procedure, one might well conclude that questions about whether and how it will be enforced also relate to procedure."
Like O'Connor, he read the text of the FAA closely and found no implied authority over the states. "[T]he FAA treats arbitration simply as one means of resolving disputes that lie within the jurisdiction of the federal courts; it makes clear that the breach of a covered arbitration agreement does not itself provide any independent basis for such jurisdiction. Even the Southland majority was forced to acknowledge this point ..." That majority, according Thomas, had offered only one real response: its argument that Congress would have extended it to all contracts if it meant for the FAA to be procedural. He offered the possibility that Congress may have instead believed "there was no federal interest in doing so unless interstate commerce or maritime transactions were involved. This conclusion is far more plausible ..."
Along with Stevens and Scalia, he echoed O'Connor's point that even if the FAA unambiguously applied to state courts it did not follow that it imposed the same procedural requirements on them. Both statutory and case law in Alabama were hostile to predispute arbitration agreements, and he felt the Court should defer to the public policy goals of the legislature and courts in that state. A provision barring specific enforcement of such arbitration agreements seemed to provide adequte grounds for a stay, he wrote.
He joined Scalia in dismissing O'Connor's stare decisis concerns.
Even if stare decisis did apply, Thomas concluded, it would not cover the procedural requirements of the act since the Court had never formally held that those applied to the states as well.
Scalia has since joined many majorities upholding arbitration clauses in contracts under state law, in one case writing an holding that an arbitrator must be the first to decide whether a contract was illegal under state law. Thomas was the lone dissenter in that case, and in another California case the next year where the majority ruled that state law providing for administrative dispute resolution was also pre-empted by the FAA. His dissents in those cases have consisted of a single paragraph referencing his Terminix dissent and its progeny.
Analysis and commentary
O'Connor, Scalia and Thomas have not been the only critics of Southland and its take on Congress's intent in passing the FAA. It has been called "remarkable for its preemption holding that blatantly ignores legislative intent", "extraordinarily disingenuous" and "painfully misleading".Margaret Moses, an international arbitration scholar at Loyola University Chicago School of Law
Loyola University Chicago School of Law
Loyola University Chicago School of Law is the law school of the Loyola University Chicago, in Illinois. Established in 1909, by the Society of Jesus, the Roman Catholic order of the Jesuits, the School of Law is located in downtown Chicago, within walking distance of the Water Tower , the John...
, has traced Southland to a series of misreadings in its predecessor decisions that make the original FAA "unrecognizable" in its current judicial incarnation. It began with the dilemma created by the twin precedents of Erie Railroad, which overruled Swift v. Tyson
Swift v. Tyson
Swift v. Tyson, , was a case brought in diversity in the Circuit Court for the Southern District of New York on a bill of Exchange accepted in New York in which the Supreme Court of the United States determined that United States federal courts hearing cases brought under their diversity...
by holding that federal courts had to apply the state law of the state in which it sat in diversity cases, and Guaranty Trust Co. v. York
Guaranty Trust Co. v. York
Guaranty Trust Co. v. York, 326 U.S. 99 , was a United States Supreme Court case that described how federal courts were to follow state law. Justice Frankfurter delivered the majority opinion further refining the doctrine set forth in Erie Railroad Co. v...
, which clarified Erie Railroad with the "outcome-determinative" requirement that if the federal law would produce a different outcome than state law, state law must be applied. Bernhardt had raised this question, but the Court avoided it by holding that an employment contract, even across state lines, did not constitute interstate commerce for FAA purposes, while noting that the outcome-determinative test would have produced the same result.
Prima Paint forced the Court to confront the issue directly, when a New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
company resisted a Maryland
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
company's demand for a claim of misrepresentation to be arbitrated. If they applied the outcome-determinative test, according to Moses, the justices would render the FAA ineffective at its intended purpose. The Court could have ruled the FAA purely procedural following a recent decision, Hanna v. Plumer
Hanna v. Plumer
Hanna v. Plumer, 380 U.S. 460 , was a decision by the Supreme Court of the United States, in which the Court further refined the Erie doctrine regarding when and by what means federal courts are obliged to apply state law in cases brought under diversity jurisdiction...
, but was concerned about Congress making rules affecting contracts, traditionally primarily a matter for the states. So, it chose to follow the Second Circuit decision in Robert Lawrence by relying on the Dormant Commerce Clause
Dormant Commerce Clause
The "Dormant" Commerce Clause, also known as the "Negative" Commerce Clause, is a legal doctrine that courts in the United States have inferred from the Commerce Clause in Article I of the United States Constitution...
as grounding its reading of the FAA. This, she wrote, conflicted with the statute's legislative history, which repeatedly refers to it as a purely procedural measure. "In Prima Paint, the Court reached a pragmatic result but used an unfortunate method to get there."
In addition, she argued, the court failed to limit the scope of the decision. This set the stage for Justice William J. Brennan, Jr.
William J. Brennan, Jr.
William Joseph Brennan, Jr. was an American jurist who served as an Associate Justice of the United States Supreme Court from 1956 to 1990...
to assert in dicta in Cone both that the FAA made arbitration a national policy and that it applied to the state courts, without support for either assertion. Again, the legislative history of the act showed that it had been meant merely to allow federal courts to permit arbitration. "The so-called policy favoring arbitration appears to be one created by the judiciary out of whole cloth," Moses observed. It may have arisen from the more explicit assertion of a national policy favoring labor arbitration, which the Court cited in Mitsubish Motors later."
As a result of the Cone dicta, the appellees in Southland stipulated that the FAA applied to the states and did not argue the point much either in their brief or orally. The majority, Moses continued, repeated Prima Paints error in grounding the FAA in the Commerce Clause. Burger's interpretation of the language that limited the covered contracts to maritime or commercial agreements was not only speculative, it was wrong. That language had been added in an amendment offered by Senator Thomas J. Walsh
Thomas J. Walsh
Thomas James Walsh was a lawyer and Democratic Party politician from Helena, Montana, in the United States.-Background:...
, whose intent was to limit the scope of the act, not expand it, so it could not be applied to employment and insurance contracts. The single reference to the Commerce Clause as empowering Congress was at the end of a memo prepared by the FAA's drafter, intended, Moses believes, as a "fallback position" should the FAA be found outside the scope of Congress's powers to regulate federal courts.
David Schwartz of Wisconsin Law School
University of Wisconsin Law School
The University of Wisconsin Law School is the professional school for the study of law at the University of Wisconsin–Madison in Madison, Wisconsin. The law school was founded in 1868.-Facilities:...
, author of an amicus filed in Bazzle, has argued that the reach Southland gives the FAA is unconstitutional even if it were clearly intended to apply to state courts "and no one has noticed." He joins with the dissenting justices and other critics in finding it "properly seen as procedural when viewed from any angle." To Schwartz, it also constitutes a federally mandated restructuring of state courts. "The proper constitutional solution is not to change a state's neutral rule of judicial administration, but to make sure that a federal forum is available to hear the claim (and require that the state dismiss the federal claim for lack of appropriate jurisdiction)."
Some commentators have defended the decision. Prominent among them has been Christopher Drahozal of Kansas, who has argued the legislative history does indeed support its application to state courts as a secondary purpose. "The vast majority of statements in the legislative history relied on by commentators to criticize the Southland holding", he writes, "state simply that the FAA applies in federal court, not that it applies only in federal court". While he is also critical of the way Burger made the argument, and agrees there are ambiguities in the record, he believes the Court read it correctly.
Schwartz says Drahozal's analysis is "thought-provoking" but incorrect. Moses says that while Drahozal's argument has some points, "he may continue to swim upstream on this point without much scholarly company". She believes he rests too much on a statement in the drafter's memo saying its secondary purpose is make arbitration agreements enforceable in federal courts, which ignores many explicit statements that it was not intended to.