KEATING v. SUPERIOR COURT ALAMEDA COUNTY

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Court of Appeal, First District, Division 3, California.

Richard D. KEATING et al., Petitioners, v. SUPERIOR COURT, ALAMEDA COUNTY, Respondent,

The SOUTHLAND CORPORATION et al., Real Parties in Interest. Paulino GARZA et al., Plaintiffs and Respondents, v. The SOUTHLAND CORPORATION et al., Defendants and Appellants. (And 8 other cases.) *

Civ. 45162, Civ. 46123.

Decided: August 28, 1980

Robert M. Brown, Linda R. Joseph, Brown, Joseph & Finney, San Francisco, John F. Wells, Fonda Karelitz, Stark, Stewart & Simon, Oakland, John F. Banker, Banker & Linderman, Tiburon, for petitioners and respondents. McKenna & Fitting, San Francisco, Aaron M. Peck, Los Angeles, Charles G. Miller, San Francisco, Susan L. Carroll, Los Angeles, Arnold & Porter, Peter K. Bleakley, Mark J. Spooner, Washington, D. C., for real parties in interest and defendants-appellants.

Pursuant to stipulation, we ordered these two cases consolidated because both concern the trial court's orders regarding the propriety of arbitration vis-a-vis franchisors and franchisees.

In Keating, et al. v. Superior Court, petitioners (franchisees), seek a writ of prohibition or mandate to set aside the trial court's order to arbitrate pursuant to a contractual arbitration provision. Petitioners claim that the trial court erred: (1) by ruling that the contracts containing the arbitration clauses were not contracts of adhesion and by denying petitioners an evidentiary hearing concerning the validity of the arbitration clauses before ordering arbitration; (2) by failing to find that real parties had waived the right to compel arbitration; and (3) by failing to decide certain class action issues before ordering arbitration so that any arbitration could be conducted on a class-wide basis.

In Garza, et al. v. The Southland Corporation, et al., appellants (franchisors), claim that the trial court erred by failing to order arbitration of certain claims based upon the California Franchise Investment Law. They contend that, by their terms, the arbitration clauses require this result and that Corporations Code section 31512 does not invalidate contractual provisions calling for arbitration of claims arising under the Franchise Investment Law.

KEATING, ET AL. v. SUPERIOR COURT

Petitioners are current and former franchise operators of 7-Eleven Stores in the Bay Area. Real parties are The Southland Corporation (franchisors) and various current and former employees of the corporation. This petition arises from a group of cases which were coordinated under the title “Market Franchise Cases” (Judicial Council Coordination Proceeding No. 387).1 Petitioners' complaints included claims of fraud, misrepresentation and breach of contract, in addition to allegations of violations of the Franchise Investment Law.

Real parties filed their first petition to compel arbitration on September 28, 1977 in the Keating case. Ultimately, similar petitions were filed in all of the cases, and those petitions were granted with respect to all matters except the Franchise Investment Law claims.

I. The trial court did not err by denying petitioners an evidentiary hearing concerning the validity of the arbitration clauses before ordering arbitration.

All of the franchise agreements contained arbitration provisions. Real parties assert that the clause contained in the Keating contract is identical to or representative of the provisions contained in the other contracts. That clause is reproduced in the margin.2

In his declaration in opposition to real parties' petition to compel arbitration, Richard D. Keating stated that:

“ . . .

“2) Other than the information that is set forth in an American Arbitration Association pamphlet . . . and the information that is set forth in the Southland Store Agreement within the arbitration paragraphs . . . and what was set forth on page SA-78 . . . , I was given no verbal or written explanation of the meaning of arbitration, the concept of an arbitration proceeding, the fact that it involved my waiver of my constitutional rights to a jury trial, a loss of the right to utilize the protection of the courts in the discovery process, nor any information with respect to what arbitration would cost in a procedure of this type;

“3) The Southland agreements were presented to me by Southland representatives on a take it or leave it basis. I was given no opportunity to bargain or to negotiate with respect to any paragraph or clause within the said agreements. I was advised in effect, that the only way I could obtain the 7-11 franchise was to acquiesce to the entire printed agreement that was presented to me by the Southland representatives.

“4) There was nothing presented to me in writing or verbally that bore on the subject of the scope or limits of the subject matter to which the arbitration paragraphs purportly (sic) apply;

“5) The first time that I was aware of any aspect of what the arbitration clause might conceivingly (sic) be interpreted as meaning and the effect that said clause would have on my right to a jury and discovery and the possible impact on me as to the cost of such arbitration, occurred after I first contacted my attorneys in this case.”

The American Arbitration Association pamphlet to which the declaration refers includes a reproduction of a sample commercial arbitration clause and general information about the association and its services. The association's tribunals were described as follows: “Important arbitration tribunals of AAA are: Commercial, Accident Claims, Labor and International. Each tribunal is administered under Rules which govern conduct of parties, arbitrators and the administrative agency. Members of the Association and non-members are treated equally. Arbitrations conducted in this way result in awards that are enforceable under law. The Association cooperates closely with lawyers and trade associations.” The other information to which the Keating declaration refers is the following statement which appeared in very large print by itself under an even larger caption, “ARBITRATION.”

“SHOULD A DISPUTE ARISE BETWEEN YOU AND 7-ELEVEN, THE DISAGREEMENT WILL BE SETTLED BY THE AMERICAN ARBITRATION ASSOCIATION.”

The trial court found that the contracts were not adhesion contracts, as a matter of law.

Petitioners contend that Keating's affidavit raised a triable issue of fact concerning the validity of the arbitration clauses which should have been resolved before arbitration was ordered. They argue that, not only did the affidavit establish that the clauses were part of adhesion contracts about which petitioners were unable to bargain or negotiate, but also that the affidavit demonstrated real parties' failure to inform petitioners that agreeing to arbitration would result in waiving their rights to jury trial, discovery and punitive damages as a remedy for fraud nor were they informed of the costs of arbitration in an “unusual” or “complex” case such as this one.

Initially, it should be noted that since the franchise agreements were between a Texas corporation and California residents, entailed the right to use federally registered trademarks, and contemplated a continuing business relationship between the parties across state lines, they involve interstate commerce and fall within the ambit of the Federal Arbitration Act.3 However, we find it unnecessary to address the subject of preemption at this juncture because we have concluded that both federal and state law require us to reject petitioners' adhesion contract theory.

Since petitioners were neither consumers nor persons who would have had to accept the agreements at issue or forego necessary goods or services, the franchise agreements were not made in the setting in which the courts are most concerned with the doctrine of adhesion contracts. (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 711, 131 Cal.Rptr. 882, 552 P.2d 1178.) Petitioners were persons interested in establishing a beneficial business relationship with Southland Corporation, who, no doubt, could have gone elsewhere if they were dissatisfied with the proffered arrangement. Nevertheless, it cannot be said that the parties possessed absolute parity of bargaining power. Southland drafted the contracts, and Keating claimed that they were present on a “take it or leave it” basis, a fact which is relevant to the determination of whether a contract is one of adhesion. (Id., at pp. 710-711, 131 Cal.Rptr. 882, 552 P.2d 1178; Rust v. Drexel Firestone Inc. (S.D.N.Y. 1972) 352 F.Supp. 715, 717.)

However, the critical question under both the federal and California standards does not appear to be whether an agreement is an adhesion contract but, rather, whether the arbitration clause itself is oppressive or defeats the reasonable expectations of the parties. (Arkoosh v. Dean Witter & Co., Inc. (D.Neb. 1976) 415 F.Supp. 535, 543; Madden v. Kaiser Foundation Hospitals, supra, 17 Cal.3d at pp. 710, 712, 131 Cal.Rptr. 882, 552 P.2d 1178.) There is no indication that the franchisees and the franchisors were not equally affected by the arbitration clause.

Despite the importance of the constitutional right to a jury trial in a civil case (U.S.Const., 7th Amend.; Cal. Const., art. I, s 16), the failure to include an express waiver of this right in an arbitration agreement does not render the agreement unenforceable. (Madden v. Kaiser Hospitals, supra, 17 Cal.3d at p. 714, 131 Cal.Rptr. 882, 552 P.2d 1178.) Given this proposition, a fortiori, such an express waiver was not required respecting petitioners' rights to discovery and punitive damages nor were real parties required to give petitioners the aforementioned information regarding costs in order for the arbitration provision to be enforceable.

Petitioners rely upon Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 24, 136 Cal.Rptr. 378, 380, in which Justice Molinari stated that: “The (Federal) Arbitration Act provides for a ‘trial,’ by jury if requested, of the issue of whether a valid agreement to arbitrate the subject dispute is existent (citation); the issue to be resolved does not concern ‘the merits of the controversy as to which arbitration is sought.’ (Citation.) The issue ‘ ” ‘should not be determined on affidavits, but rather a full trial should be had.’ “ ‘ (A/S Custodia v. Lessin International, Inc. (2d Cir. 1974) 503 F.2d 318, 320; El Hoss Engineer. & Transport Co. v. American Ind. Oil Co. (2d Cir. 1961) 289 F.2d 346, 351 (cert. den., 368 U.S. 837, (82 S.Ct. 51, 7 L.Ed.2d 38) . . .).)” However, the federal cases upon which Justice Molinari relied did not raise the issue presented here. Furthermore, Main is distinguishable from the instant case because petitioners have not alleged that real parties' conduct constituted fraud which permeated the entire agreement or induced the arbitration clause itself, as did the plaintiff in Main. (67 Cal.App.3d at pp. 27, 33, 136 Cal.Rptr. 378.)

Petitioners also rely upon Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 361, 133 Cal.Rptr. 775, 786, in which the court concluded “that in order to be binding, an arbitration clause incorporated in a hospital's ‘CONDITIONS OF ADMISSION’ form should be called to patient's attention and he should be given a reasonable explanation of its meaning and effect, including an explanation of any options available to the patient.” Not only is Wheeler distinguishable given the circumstances peculiar to the hospital admission situation (id., at pp. 357-358, 133 Cal.Rptr. 775), Keating's affidavit showed that he was aware of the clause's existence, and demonstrated that he should have been aware what the clause meant, namely, if arbitration were sought, he would be compelled to forego his right to a judicial forum. In Wheeler the court wrote that “The hospital's admission clerk need only direct the patient's attention to the arbitration provision, request him to read it, and give him a simple explanation of its purpose and effect, including the available options. Compliance will not require the presence of the hospital's house counsel in the admission office.” (Id., at p. 361, 133 Cal.Rptr. at p. 786, fn. omitted.) Given the propriety of such a “simple explanation” in the medical services context, we do not believe that Wheeler supports the kind of explanation to which petitioners claim they were entitled.

The trial court did not err by refusing to conduct an evidentiary hearing concerning the validity of the arbitration clause under the principles of adhesion contracts before ordering arbitration.

II. Real parties did not waive their contractual right to compel arbitration.

In rejecting petitioners' waiver argument, the trial court reasoned that although it probably would have concluded that there had been a waiver of the right to compel arbitration in some of the cases, such a ruling was not appropriate because (1) the second amended complaint raised certain issues, exclusive of the Franchise Investment Law claims, which would otherwise be arbitrable and “it would serve no one's purpose to order that those newly added matters of the second amended complaint should be submitted to arbitration, and other matters not . . .” and (2) it would detract from the achievement of consistency in the coordinated cases. The trial court also added the following condition to its order: “To the extent that this order grants Southland's petitions for order to compel arbitration, said petitions are granted on the condition that Southland either abstain from the use of any discovery that it has had in any of the above actions, or that Southland stipulate to discovery of at least an equally extensive nature on behalf of the plaintiffs in these actions.”

Once again, there is a question of whether this issue is governed by federal or state law. However, it appears that petitioners' contention fails in either case.

The right to seek arbitration may be waived (9 U.S.C. section 3; Code Civ.Proc. section 1281.2, subd. (a)). It appears that when a claim of waiver is based upon actions taken before a court, the federal rule directs that the issue be resolved by the court rather than by the arbitrator. (Weight Watch. of Quebec Ltd. v. Weight W. Int., Inc. (E.D.N.Y. 1975) 398 F.Supp. 1957, 1059.) The California rule also assigns this question to the courts. (Code Civ.Proc., section 1281.2, subd. (a); also see, Butchers Union v. Farmers Markets (1977) 67 Cal.App.3d 905, 913, 136 Cal.Rptr. 894.)

The federal courts have held that where a party asserts arbitration in its answer as an affirmative defense, there is a heavy burden on the party seeking to establish waiver. (Martin Marietta Aluminum, Inc. v. General Elec. Co. (9th Cir. 1978) 586 F.2d 143, 146; Hilti, Inc. v. Oldach (1st Cir. 1968) 392 F.2d 368, 371.) Furthermore, “(c)ourts have specifically held that this factor alone is sufficient to defeat a claim of waiver. (Citations.)” (Michael v. SS Thanasis (N.D.Cal. 1970) 311 F.Supp. 170, 181.) Real parties' answers included such assertions with the exception of the one which they filed in the Gouveia case.

While federal law requires the courts to consider several factors in determining whether there has been a waiver of the right to demand arbitration, including the dilatory conduct of the party seeking arbitration and any other actions taken by the moving party which are inconsistent with seeking arbitration, a crucial inquiry is whether the conduct cited in support of this claim has resulted in prejudice to the party asserting waiver. If the element of prejudice is absent, waiver usually will not be found. (Shinto Shipping Co. v. Fibrex & Shipping Co., Inc. (9th Cir. 1978) 572 F.2d 1328, 1330; Erving v. Virginia Squires Basketball Club (2d Cir. 1972) 468 F.2d 1064, 1068; Weight Watch. of Quebec Ltd. v. Weight W. Int., Inc., supra, 398 F.Supp. 1057, 1059.) While “(s)ufficient prejudice to infer waiver might be found, for example, if the party seeking the stay took advantage of judicial discovery procedures not available in arbitration. (Citations.)” (Carcich v. Rederi A/B Nordie (2d Cir. 1968) 389 F.2d 692, 696, fn. 7, emphasis added.), the condition which the trial court included in its order compelling arbitration would appear to have disspelled any prejudice which might have resulted from any inequality in discovery.

Moreover, it is not clear that real parties' conduct can be characterized as dilatory. They moved to compel arbitration approximately four months after the complaint was filed in the Keating case and, apparently, filed similar petitions in the individual cases within a month of the filing of amended complaints.4 Not only did those amended complaints raise complex bookkeeping and accounting issues, but, as the trial judge noted, they were otherwise arbitrable.

Petitioners note that in the Gouveia, Newell, Sampson and Keating cases real parties either cross-complained or counterclaimed before seeking arbitration, and argue that by “irrevocably . . . (locking) litigious horns . . . (citation),” (Hilti, Inc. v. Oldach, supra, 392 F.2d 368, 371) waived their right to demand arbitration. In Gouveia, real parties also filed a separate action for a receivership and, in Keating, they attempted to remove the case to federal court and filed an unlawful detainer action for default under the franchise contract before seeking arbitration. While such conduct would appear to be inconsistent with an intent to seek arbitration, it does not amount to prejudice. “As an abstract exercise in logic it may appear that it is inconsistent for a party to participate in a lawsuit for breach of contract, and later to ask the court to stay that litigation pending arbitration. Yet the law is clear that such participation, standing alone, does not constitute a waiver, (citations), for there is an overriding federal policy favoring arbitration.” (Carcich v. Rederi A/B Nordie, supra, 389 F.2d at p. 696.)

Petitioners rely upon Barber & Ross Company v. Cornell & Company (D.D.C. 1965) 242 F.Supp. 825, aff'd in (D.C.Cir. 1966) 360 F.2d 512, in which the court declined to order arbitration where the party seeking arbitration had filed a motion for a change in venue, an answer, and a counterclaim, and had begun taking a deposition before it made its request for arbitration. However, we are persuaded that the inclusion of arbitration as an affirmative defense in all but one of real parties' answers, and trial court's equalization of any disparity in discovery, and the amendment to petitioners' pleadings distinguish this case from Barber.

As we noted above, California law also requires us to conclude that the trial court did not err in rejecting petitioners' claim of waiver. Since arbitration is a favored means of settling disputes, “the courts have been admonished to ‘closely scrutinize any allegation of waiver of such favored right’ (citation) and to ‘indulge every intendment to give effect to such proceedings' (citations).” (Doers v. Golden Gate Bridge Etc. Dist. (1979) 23 Cal.3d 180, 189, 151 Cal.Rptr. 837, 842, 588 P.2d 1261, 1266.) Nevertheless, the right to compel arbitration may be waived. “(P) Waiver of a contractual right to arbitration is ordinarily a question of fact and determination of this question, if supported by substantial evidence, is binding on an appellate court. (Citation.)” (Id., at p. 185, 151 Cal.Rptr. at p. 839, 588 P.2d at p. 1263.)

Our Supreme Court has recently indicated that there is no single test for determining whether the right to demand arbitration has been waived. (Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 426, 158 Cal.Rptr. 828, 600 P.2d 1060.) “California courts have found a waiver of the right to demand arbitration in a variety of contexts, ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration (citations) to instances in which the petitioning party has unreasonably delayed in undertaking the procedure. (Citations.) The decisions likewise hold that the ‘bad faith’ or ‘wilful misconduct’ of a party may constitute a waiver and thus justify a refusal to compel arbitration. (Citation.)” (Id., at pp. 425-426, 158 Cal.Rptr. at p. 832, 600 P.2d at p. 1064.) While the “mere filing of a lawsuit does not constitute a waiver of the right to arbitrate”, the “judicial litigation of the merits of arbitrable issues . . . waives a party's right to arbitration.” (Doers v. Golden Gate Bridge Etc. Dist., supra, 23 Cal.3d 180, 183, 188, 151 Cal.Rptr. 837, 841, 588 P.2d 1261, 1265.) A party who includes arbitration as an affirmative defense in his answer may be able to avoid a finding of waiver. (Cf. Butchers Union v. Farmers Markets, supra, 67 Cal.App.3d 905, 913, 136 Cal.Rptr. 894.) Finally, while the concept of prejudice is not as significant as it is in federal law, it is relevant to the question of waiver. (Doers v. Golden Gate Bridge Etc. Dist., supra, 23 Cal.3d 180, 188, 151 Cal.Rptr. 837, 588 P.2d 1261.) A consideration of the facts which lead us to conclude that there was no waiver under federal law also leads us to conclude that there was substantial evidence to support the trial court's finding of no waiver under California law.

The facts which distinguish this case from Barber also distinguish it from Gunderson v. Superior Court (1975) 46 Cal.App.3d 138, 120 Cal.Rptr. 35, disapproved in Doers v. Golden Gate Bridge Etc. Dist., supra, 23 Cal.3d 180, 188, 151 Cal.Rptr. 837, 588 P.2d 1261. Similarly, we have concluded that petitioners' reliance upon McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1980) 105 Cal.App.3d 946, 164 Cal.Rptr. 751 is misplaced. In addition to the factual discrepancies alluded to in the discussion of Barber and Gunderson, there were no pretrial proceedings in this case which could be analogized to the five “lengthy” hearings regarding class certification which were conducted in McConnell before arbitration was sought.

In light of our discussion, we find it unnecessary to address petitioners' argument that the trial court abused its discretion by relying upon the fact that the various cases had been coordinated in ordering arbitration.

III. The trial court should have determined the class actions issues.

In the Keating and Battersby cases, the named plaintiffs seek to represent some 800 persons who are California 7-Eleven franchisees who have entered into identical agreements with Southland Corporation during a four-year period. Petitioners contend that if arbitration is appropriate, the trial court should be instructed to determine the preliminary issues regarding class certification before the cases are resolved on their merits. The issue presented appears to be one of first impression.

Our review of the record indicates that while petitioners argued this point in the context of real parties' petitions to compel arbitration, no motion to certify the class was made, and the trial court did not expressly rule on the matter. In Phelan v. Superior Court (1950) 35 Cal.2d 363, 372, 217 P.2d 951, 956 the Supreme Court wrote that “Before seeking mandate in an appellate court to compel action by a trial court, a party should first request the lower court to act. If such request has not been made the writ ordinarily will not issue unless it appears that the demand would have been futile. (Citations.)” However, while petitioners did not focus upon this issue by means of a specific motion, the question clearly was raised before the trial court. Furthermore, given that petitioners argued that arbitration should not be ordered until the preliminary class action questions were determined, the trial judge implicitly rejected petitioners' argument by ordering arbitration. Thus, making a more formal demand would have been futile.

It appears that no federal decision had dealt with this question; however, there is some authority which indicates that the class action and arbitration procedures could be joined in an appropriate case. Under Federal Rule of Civil Procedure 81(a)(3) which provides that the federal rules apply to proceedings under the Federal Arbitration Act to the extent that the act does not provide for procedural matters, the courts have held that consolidation of arbitrations is permissible pursuant to Federal Rule of Civil Procedure 42. (Compania Espanola de Pet., S.A. v. Nereus Ship. (2d Cir. 1975) 527 F.2d 966, 975, cert. den. 426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387; Marine Trading Ltd. v. Ore Intern. Corp. (S.D.N.Y. 1977) 432 F.Supp. 683, 684; Robinson v. Warner (D.R.I. 1974) 370 F.Supp. 828, 829-830.) Applying rule 23 of the Federal Rules of Civil Procedure to arbitration proceedings would appear to be a logical extension of the theory employed in the consolidation cases.

Real parties respond that Rule 81(a)(3) only applies to judicial proceedings, and, therefore, cannot serve as a means for applying rule 23 to arbitrations. (Great Scott Supermkts., Inc. v. Local U. No. 337, Teamsters (E.D. Mich., S.D. 1973) 363 F.Supp. 1351, 1354.) However, given the fact that issues such as those involved in the certification of the class would be dealt with by the court before the matter was sent to the arbitrator, petitioners appear to be correct in arguing that real parties' claim misses the mark. (Cf. Robinson v. Warner, supra, 370 F.Supp. 828, 830.)

Real parties also argue that imposing the class action format upon arbitrations would result in unnecessary interference by the courts in and undue delay of the arbitration process. The most forceful claim made in this regard concerns the requirement that the courts oversee the adequacy of representation by the named plaintiffs of the interests of absent class members. (In re General Motors Corp. Engine Interchange Lit. (7th Cir. 1979) 594 F.2d 1106, 1124, cert. den. 444 U.S. 870, 100 S.Ct. 146, 62 L.Ed.2d 95; Guerine v. J. & W. Inv., Inc. (5th Cir. 1977) 544 F.2d 863, 864; Gonzales v. Cassidy (5th Cir. 1973) 474 F.2d 67, 75.) In this connection, real parties also note that court approval must be obtained in order to dismiss or settle a class action. (Fed.R.Civ.P. 23(e).)

Turning to California law, the two California decisions which have considered the relationship between arbitration and the class action procedure do not appear to be dispositive. In Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20 Cal.App.3d 668, 672, 97 Cal.Rptr. 811, 818 the court rejected respondent's argument that arbitration should not be required because respondent had brought his action on behalf of the class of persons affected by the contract at issue. “But if all employees similarly situated have signed the same arbitration agreement as that which respondent challenges, all are equally bound. If the agreement is valid, it is valid as to all members of the class. It would be inappropriate to allow respondent and the other members of the class he claims to represent to evade the terms of the agreement simply by bringing their action together as a ‘class' rather than as individuals.”

In Vernon v. Drexel Burnham & Co. (1975) 52 Cal.App.3d 706, 125 Cal.Rptr. 147, the court reversed the trial court's denial of the defendant's petition to compel arbitration. The court concluded that the trial court had relied upon a faulty premise and held that “if VERNON did proceed alone to arbitration it would not mechanically render him unfit to represent a class or subclass of customers of DREXEL BURNHAM similarly situated. The determination whether or not VERNON can fairly and adequately protect that class rests in the sound discretion of the trial court (citation), although, of course, VERNON may be disqualified to act as a representative plaintiff to subclasses of customers of DREXEL BURNHAM, if any, where the arbitration clause is not a factor. (Citation.)” (52 Cal.App.3d at p. 715, fn. 4, 125 Cal.Rptr. at p. 152.) The court also held that “in the instant case, the policy of law favoring arbitration prevails over the policy of the law pertaining to class actions . . . .” (Id., at p. 715, 125 Cal.Rptr. at p. 152.) The court reasoned that: (1) “arbitration is a recognized and favored means by which parties expeditiously and efficiently may settle disputes which might otherwise take years to resolve. (Citations.)”; (2) “(P) . . . there is perhaps no higher public policy than to uphold and give effect to contracts validly entered into and legally permissible in subject matter . . . .”; and (3) “(P) . . . the substantive law of contractual agreement takes precedence over the class action, which is merely a procedural device for consolidating matters properly before the court.” (Id. at pp. 715-716, 125 Cal.Rptr. at p. 153.)

Real parties argue that Vernon is controlling because, given the procedural context in which it was decided, the court rejected the very order which petitioners seek here a postponement of the determination of the arbitration petition pending certification of the class. However, not only is it unclear that the trial court's order in Vernon amounted to a postponement of the determination of the arbitration petition pending certification of the class because such certification would require the resolution of other issues such as the adequacy of named representatives, but Vernon also appears to be factually distinguishable in at least two important respects. First, as petitioners note, it was not clear that the case involved class-wide issues regarding arbitration because “neither VERNON nor DREXEL BURNHAM . . . (had) alleged or proved that the other purported members of the class represented by VERNON entered into or were subject to the same or similar agreements; . . .” (Id. at p. 711, 125 Cal.Rptr. at p. 150.) More importantly, it appears that the plaintiff in Vernon effectively argued that the existence of the class action vitiated his agreement to arbitrate, and the court specifically concluded that the trial court's order denying arbitration was based upon the incorrect premise discussed above. It should be noted that given this conclusion, the court's “holding” regarding what it perceived to be conflicting policy considerations was dicta.

Petitioners contend that since Code of Civil Procedure section 382 is silent on the question of class-wide arbitration, we should look to rule 23 of the Federal Rules of Civil Procedure for guidance. (La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 872, 97 Cal.Rptr. 849, 489 P.2d 1113.) Real parties respond that the policy considerations discussed above concerning unnecessary judicial interference in and undue delay of arbitrations apply with equal force to California law. (Sapp v. Barenfeld (1949) 34 Cal.2d 515, 520, 212 P.2d 233; East San Bernardino County Water Dist. v. City of San Bernardino (1973) 33 Cal.App.3d 942, 949-950, 109 Cal.Rptr. 510; McRae v. Superior Court (1963) 221 Cal.App.2d 166, 171, 34 Cal.Rptr. 346.) They also argue that while consolidation is permissible in California, it cannot be equated with class-wide arbitration because the former procedure is of a limited nature and all parties are present. Real parties further note that in California Rule of Court 1600.5, subdivision (b), the Judicial Council exempted class actions from compulsory judicial arbitration, and argue that this action indicated that the Council was of the opinion that class actions were not amenable to arbitration.

We have concluded that there is no insurmountable obstacle to conducting an arbitration on a class-wide basis. In an appropriate case, such a procedure undoubtedly would be the fairest and most efficient way of resolving the parties' dispute. The initial determinations regarding certification and notice will not unduly burden the arbitration because those matters must be resolved by the trial court before arbitration begins.

We wish to stress that we have formed no opinion upon the question of whether this case should proceed as a class action. However, if the trial court answers this question affirmatively, it will be necessary to devise methods to safeguard the rights of absent class members to adequate representation and in the event of dismissal or settlement. Since these matters may be purely academic and have not been thoroughly explored by the parties here, we shall leave their determination to the trial court.

Let the peremptory writ of mandate issue directing the trial court to determine the preliminary class action issues, including the suitability of the action as a class suit, the composition of the class, and the appropriate notice procedure, in accordance with the guidelines established in Federal Rule of Civil Procedure 23. Insofar as the petition seeks a writ to compel the trial court to set aside its order compelling arbitration, it is denied.

Each side is to bear its own costs for proceedings on the writ petition.

GARZA, ET AL. v. THE SOUTHLAND CORPORATION, ET AL.

The Southland Corporation and various employees and former employees have appealed from the trial court's denial of their petitions to compel arbitration concerning certain claims made against them pursuant to the Franchise Investment Law. (Corp. Code, s 31000 et seq.)

The claims which respondents cite as being typical of those at issue here relate to appellants' failure to disclose information at least 48 hours prior to the execution of the franchise agreements and certain wilful misrepresentations and omissions in the disclosure statements which appellants did make. The parties agree that although the trial judge relied primarily upon his interpretation of the contractual arbitration provisions as being too narrow to include respondents' claims, he also believed that the Legislature did not intend that claims pursuant to the Franchise Investment Law should be subject to arbitration.

I. The arbitration clauses, by their terms, require arbitration of these claims.

The arbitration clauses state, in pertinent part: “any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in accordance with the Rules of the American Arbitration Association . . . .” (Emphasis added.) Looking to the language of the clauses as a principal source from which to derive the contracting parties' intent (Healy Tibbitts Construction Co. v. Employers' Surplus Lines Ins. Co. (1977) 72 Cal.App.3d 741, 748, 140 Cal.Rptr. 375; Cal.Civ.Code, s 1638), the language emphasized above is broad enough to cover respondents' claims under the Franchise Investment Law.

Respondents' arguments to the contrary are untenable. Not only would it be unreasonable to require that an arbitration clause specify the legal basis for a claim in order for the clause to apply (Weinrott v. Carp (1973) 32 N.Y.2d 190, 344 N.Y.S.2d 848, 853-854, 298 N.E.2d 42), but it would also be unreasonable to assume that the violations at issue did not “arise out of” or “relate to” the franchise agreements, especially in light of the expressed legislative intent of the Franchise Investment Law.5

Appellants rely upon various cases in which the courts have held that arbitration clauses which were similar to the ones at issue were broad enough to encompass tort as well as contract claims. (Berman v. Dean Witter & Co., Inc. (1975) 44 Cal.App.3d 999, 1003, 119 Cal.Rptr. 130; Lewsadder v. Mitchum, Jones & Templeton, Inc. (1973) 36 Cal.App.3d 255, 259, 111 Cal.Rptr. 405; Acevedo Maldonado v. PPG Industries, Inc. (1st Cir. 1975) 514 F.2d 614, 616.) While respondents may be correct in asserting that the torts at issue in these cases had occurred after the execution of the contracts, their attempt to distinguish this case is artificial. Although the “roots” of respondents' claims may be in the Franchise Investment Law, in a technical sense, their source is the creation of the franchise relationship. Furthermore, as appellants note, the United States Supreme Court has held that an arbitration clause such as the one at issue may extend to a claim that the creation of the contract was induced by fraud. (Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 403-404, 87 S.Ct. 1801, 1805-1806, 18 L.Ed.2d 1270.)

II. Corporations Code section 31512 does not operate to invalidate contractual provisions insofar as they require that claims under the Franchise Investment Law be submitted to arbitration, and, even if it did, the statute would be superseded by federal law.

Appellants contend that the Legislature did not intend Corporations Code section 31512 to be interpreted according to the doctrine established by the Supreme Court in Wilko v. Swan (1953) 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168.6 They claim that the statute was designed to invalidate contractual provisions purporting to require that a franchisee surrender a right under the Franchise Investment Law and that the arbitration clause at issue does not come within that proscription.

“In proceeding with the task of interpretation . . . we are aided by certain general principles of statutory construction. As stated by this court in Moyer v. Workmen's Comp. Appeals Bd. (1973) 10 Cal.3d 222 . . ., at page 230 (110 Cal.Rptr. 144, 514 P.2d 1224): ‘We begin with the fundamental rule that a court ”should ascertain the intent of the Legislature so as to effectuate the purpose of the law.“ (Citation.) In determining such intent ”(t)he court turns first to the words themselves for the answer.“ (Citation.) We are required to give effect to statutes ”according to the usual, ordinary import of the language employed in framing them.“ (Citations.)’ ” (Palos Verdes Faculty Assn. v. Palos Verdes Peninsula Unified Sch. Dist. (1978) 21 Cal.3d 650, 658-659, 147 Cal.Rptr. 359, 363, 580 P.2d 1155, 1159.) Applying these principles to section 31512, we agree that the Legislature does not appear to have intended that the section preclude arbitration of all claims brought under the Franchise Investment Law.

However, as appellants concede, to the extent that the statutory language can be argued to be ambiguous, another rule of statutory construction is relevant. That rule has been expressed by our Supreme Court as follows: “This court has long recognized the principle of statutory construction that ‘(w)hen legislation has been judicially construed and a subsequent statute on the same or an analogous subject is framed in the identical language, it will ordinarily be presumed that the Legislature intended that the language as used in the later enactment would be given a like interpretation. This rule is applicable to state statutes which are patterned after federal statutes. (Citations.)’ (Citations.)” (Belridge Farms v. Agricultural Labor Relations Bd. (1978) 21 Cal.3d 551, 557, 147 Cal.Rptr. 165, 169, 580 P.2d 665, 669.)

In Wilko v. Swan, supra, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168, the arbitration agreement at issue was subject to the provisions of the Federal Arbitration Act. The court concluded that “The words of s 14 . . . void any ‘Stipulation’ waiving compliance with any ‘provision’ of the Securities Act (of 1933). This arrangement to arbitrate is a ‘stipulation,’ and we think the right to select the judicial forum is the kind of ‘provision’ that cannot be waived under s 14 of the Securities Act.”7 (346 U.S. at pp. 434-435, 74 S.Ct. at p. 186.)

Although the language of the two statutes is parallel and the statutory schemes containing them may have shared similar policy concerns, respondents have cited no authority which indicates that section 31512 was patterned after section 14. Moreover, unlike Wilko, which involved competing federal statutes, this case presents a conflict between a federal statute and a state statute. (Allison v. Medicab Intern., Inc. (1979), 92 Wash.2d 199, 597 P.2d 380, 382.)

Appellants argue that if section 31512 were interpreted according to the doctrine of Wilko v. Swan, the statute would conflict with the Federal Arbitration Act and would be void pursuant to the Supremacy Clause. (U.S.Const., Art. III, s 2.) We agree. If the doctrine were applied, section 31512 would conflict with the language in section 2 of the Federal Arbitration Act which makes provisions to arbitrate in contracts pertaining to transactions in interstate commerce “valid, irrevocable, and enforceable.” Furthermore, the application of the rule in Wilko v. Swan does not fit within the exception in section 2 for “such grounds as exist at law or in equity for the revocation of any contract” because that exception appears to be directed toward tenets of general contract law.

In Allison v. Medicab Intern., Inc., supra, 597 P.2d 380, plaintiffs and defendants had entered into a franchise agreement for the transportation of the physically handicapped which contained an arbitration clause. Plaintiffs brought an action which included alleged violations of Washington's Franchise Investment Protection Act. Defendants' demand for arbitration was denied. On appeal, plaintiffs contended that “because the statute gives jurisdiction of such matters to state courts (RCW 19.100.160), the arbitration clause does not apply.” (Id., at p. 381.) The Supreme Court of Washington reversed. Having concluded the Federal Arbitration Act was controlling, the court said “(t)he majority rule . . . appears to be that the act does apply and requires a state court to enforce an arbitration clause despite a contrary state law or policy. (Citations.)” (Id., at p. 382.) Applying this rule, the court rejected the claim that defendants' failure to register pursuant to the Franchise Investment Protection Act vitiated the arbitration clause. While the court did not specifically refer to the anti-waiver provision in the Franchise Investment Protection Act (RCW 19.100.220), the court distinguished Wilko v. Swan as follows: “. . . this case involved two federal acts and not as here the federal arbitration act and a state franchising act. (Citation.)” (Id., at p. 382.)

In the recent case of Barron v. Tastee Freeze Intern., Inc. (E.D.Wis.1980) 482 F.Supp. 1213, the court denied the plaintiffs' motion to permanently enjoin a pending arbitration. Plaintiffs' claims included violations of the Wisconsin and Illinois franchise investment acts. In rejecting an argument analogous to the one which respondents make here, the court said that “Except in a few areas of law, however, notably the Federal Securities Act of 1933 and the federal antitrust statutes (citations), federal policy strongly favors the enforcement of arbitration clauses under Title 9 U.S.C.” (Id., at p. 1216; see Romnes v. Bache & Co., Incorporated (W.D.Wis.1977) 439 F.Supp. 833.) The court concluded that: “. . . the effect of my holding with respect to this argument of the plaintiffs is to render void any effort made by a state to protect the remedies of franchise investors whose arguments encompass transactions in interstate commerce, even when the contracting parties are both residents of the state which passes the protective laws, see Allison v. Medicab International, Inc. 92 Wash.2d 199, 597 P.2d 380, 383 (1979), but that result is compelled by the language of 9 U.S.C. s 2 and by the authority of Congress under the Interstate Commerce and Supremacy Clauses of the United States Constitution to regulate interstate commercial transactions in the manner it sees fit and to preempt state regulatory efforts which conflict with the federal scheme. (482 F.Supp. at p. 1217.)

Respondents' reliance upon American Airlines, Inc. v. Louisville & Jefferson C.A.B. (6th Cir. 1959) 269 F.2d 811 is misplaced. Not only did the court take a restrictive view of the scope of the Federal Arbitration Act (id., at pp. 816-817), but the argument made against enforcing the contract concerning the capacity of one of the parties appears to fit within the exception in section 2 of the Federal Arbitration Act for “such grounds as exist at law or in equity for the revocation of any contract.”

The judgment is reversed and the trial court is directed to enter its order granting arbitration. Appellants are to receive costs on this appeal.

FOOTNOTES

1.  The coordinated actions are:Gouveia v. The Southland Corporation (Gouveia), filed September 1975;Garza v. The Southland Corporation (Garza), filed September 1976;Sampson v. The Southland Corporation (Sampson), filed October 1976;Cheng v. The Southland Corporation (Cheng), filed December 1976;Newell v. The Southland Corporation (Newell), filed January 1977;Keating v. The Southland Corporation (Keating), filed May 1977; andBattersby v. The Southland Corporation (Battersby), filed December 1977.Two other actions have been coordinated which are not the subject of this petition: Coy v. The Southland Corporation, filed March 1978, and Scovis v. The Southland Corporation, filed April 1978.

2.  Article 35. Arbitration.(a) Unless prohibited by applicable law, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in accordance with the Rules of the American Arbitration Association (the “Association”) and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof.(b) Any demand for arbitration shall contain a statement setting forth the nature of the dispute, the amount involved, if any, and the remedy sought.(c) Any demand for arbitration which may be based in whole or in part on wrongful Termination shall be filed within ten days after a 30 day or longer notice of Termination is issued and prior to any other notice of Termination becoming effective.(d) Any other demand for arbitration may be filed with the Association and served on the other party at any time during the term of this Agreement or within the period provided by the applicable statute of limitations.(e) Arbitration shall not proceed until any protest of arbitrability is resolved by an appropriate court, if necessary.(f) A demand for arbitration or proceedings in arbitration shall not operate to stay, postpone, prohibit or rescind any Expiration or Termination or the right of 7-ELEVEN to take possession of the Leased Property in accordance with this Agreement (unless otherwise provided by applicable law), and the parties will be relegated to their remedy in damages, as determined by the arbitrator, for Expiration or Termination found by the arbitrator to be wrongful.(g) The arbitrator shall have authority to assess damages sustained by reason of any breach of this Agreement.(h) The arbitrator shall not extend, modify or suspend any of the terms of this Agreement or the reasonable standards of business performance set by 7-ELEVEN in good faith.(i) The decision of the arbitrator within the scope of the submission (as provided in this Article 35) shall be final and binding on all parties, and any right to judicial action on any matter subject to arbitration hereunder is hereby waived (unless otherwise provided by applicable law), except suit to enforce the arbitration award or in the event arbitration is not available for any reason other than for the time periods provided herein.(j) The parties shall share equally all expenses of the arbitrator and the Association, and each party shall bear his own expenses incident to the arbitration.(k) If the rules of the Association differ from this Article 35, the provisions herein shall control.

3.  Section 2 of the act provides that: “A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C., s 2.) “Commerce” is defined, in part, as “commerce among the several States.” (9 U.S.C., s 1.)

4.  When the trial court heard the petitions in the individual cases, the parties stipulated that a similar petition be deemed to have been made in the Battersby class action.

5.  Corporations Code section 31001 provides in pertinent part:It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship.

6.  Corporations Code section 31512 provides:Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.

7.  Section 14 of the Securities Act provides: “Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void.” (15 U.S.C., s 77n.)

FEINBERG, Associate Justice.

WHITE, P. J., and SCOTT, J., concur.