The U.S. Supreme Court case California et al. v. Southland Royalty Co. et al., 1977, revolved around the issue of whether a state could impose its own tax on out-of-state natural gas producers who sold their product to an interstate pipeline company within the state's borders, even though that gas was destined for out-of-state consumers and therefore part of interstate commerce. The court ruled in favor of Southland Royalty Company and other similar companies, stating that such taxation by states would be unconstitutional as it interfered with federal regulation over interstate commerce under the Commerce Clause of the Constitution (Article I, Section 8). This decision upheld previous rulings which maintained that only Congress has power to regulate trade between states.

In the dissenting opinion for California et al. v. Southland Royalty Co. et al., Justice William Rehnquist argued that the majority's decision to enforce arbitration clauses in state court proceedings was a misinterpretation of Section 2 of the Federal Arbitration Act (FAA). He contended that this section should only apply to federal courts, not state ones, as it is silent on its applicability to states and does not expressly preempt state law. Furthermore, he believed that applying FAA provisions at a state level could infrac upon states' rights and their ability to regulate contracts within their jurisdiction under traditional principles of federalism. In his view, if Congress had intended such an expansive interpretation of Section 2 - one which would significantly alter the balance between federal and state judicial responsibilities - they would have made it explicit in clear statutory language.