A California appellate court upheld a lower court's denial of arbitration between a franchiser and some of its franchisees when the remainder of the franchisees were engaged in a pending court action arising out of common issues of law and fact.

In Rosales v. SuperShuttle Franchise Corp., No. B196431, 2008 WL 274066 (Cal. Ct. App. Feb. 1, 2008), Rosales and eighteen others were franchisees of SuperShuttle. The franchisees brought six causes of action in a suit against SuperShuttle after they were terminated for their involvement in a labor dispute.

SuperShuttle moved to compel arbitration of the claims of nine of the eighteen franchisees, arguing that the franchise agreement between these franchisees contained an agreement to arbitrate.

The lower court denied SuperShuttle's motion because allowing some franchisees to proceed to arbitration while others proceeded in court created the possibility of conflicting rulings. On appeal, SuperShuttle argued that the lower court's decision abused its discretion.

The Court noted that under the California Code of Civil Procedure, a court need not compel arbitration if a party is also a party to a pending court action arising out of the same transaction and there is a possibility of conflicting rulings on a common issue of law or fact. The statute further prescribes four different options that courts may use in resolving the possibility of conflicting rulings.

SuperShuttle argued that there was no possibility of conflicting rulings because the franchisees' claims were not identical and involved separate facts. The Court noted that the franchisee's claims could involve common issues of law or fact, even if the claims involved some separate facts and were not completely identical.

SuperShuttle argued that the lower court abused its discretion because it could have addressed the problem of potentially inconsistent rulings in another manner, rather than refusing to compel arbitration. The Court rejected this argument as the lower court was authorized by statute to deny arbitration under such circumstances.

Lastly, SuperShuttle argued that the lower court's decision conflicts with California policies that favor the enforcement of arbitration agreements. The Court rejected this argument, reasoning that the lower court selected an option, expressly authorized by statute, to resolve the court's concerns about the possibility of conflicting rulings. Moreover, the Court noted that it was not aware of any policy that so strongly favors arbitration that it prohibits courts from doing what the legislature has expressly authorized. The Court affirmed the decision of the lower court and refused to compel arbitration.

Absent from the Court's opinion was a mention of the strong federal policy of favoring arbitration. The Federal Arbitration Act preempts state laws which require a judicial forum for claims that parties have agreed to arbitrate. See Southland Corp. v. Keating, 465 U.S. 1, 16 (1984). Under the FAA, arbitration must be given priority over litigation to the extent the same issues are involved. See AgGrow Oils, L.L.C. v. Nat'l Union Fire Ins. Co., 242 F.3d 777, 783 (8th Cir. 2001).

Ordinarily, when faced with the potential for dual forums, courts will either stay the litigation pending the outcome of arbitration, or bifurcate the proceedings. See In re Merrill Lynch Trust Co. FSB, No. 04-0865, 2007 WL 2404845 (Tex. Aug. 24, 2007) (staying litigation); Volkswagen of America, Inc. v. Süd's of Peoria, Inc., No. 05-3276, 2007 WL 209983 (7th Cir. Jan. 29, 2007) (bifurcating proceedings). If this were not done, parties would be able to pursue litigation that potentially precludes claims appropriately subject to arbitration. See IDS Life Ins. Co., 103 F.3d 524, 530 (7th Cir. 1996).