Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_08-cv-00767/USCOURTS-caed-2_08-cv-00767-2/pdf.json

Nature of Suit Code: 196
Nature of Suit: Franchise
Cause of Action: 28:1332 Diversity-Petition for Removal

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

BRIDGE FUND CAPITAL CORPORATION, No. 2:08-cv-00767-MCE-EFB

a California Corporation; and 

BIG BAD 1, LLC, a California

limited liability company,

Plaintiffs,

v. MEMORANDUM AND ORDER

FASTBUCKS FRANCHISE

CORPORATION, a Nevada

corporation; and CHARLES

HORTON, an individual; and

DOES 1-50, 

Defendants.

----oo0oo----

 Plaintiffs Bridge Fund Capital Corporation (“Bridge Fund”)

and Big Bad 1, LLC (“Big Bad”) (hereinafter collectively referred

to as “Plaintiffs”) seek monetary and injunctive relief against

Defendants FastBucks Franchise Corporation (“FastBucks”), Charles

Horton, (“Horton”), and Does 1-50 (hereinafter collectively

referred to as “Defendants”), arising out of a dispute regarding

payday loan and check cashing franchises operated by Plaintiffs

in California. 

Case 2:08-cv-00767-KJM -EFB Document 26 Filed 08/20/08 Page 1 of 26
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 Unless otherwise stated, all further references to a Rule 1

are to the Federal Rules of Civil Procedure.

 Because oral argument will not be of material assistance, 2

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h). 

 The factual assertions in this section are based on the 3

allegations in Plaintiffs’ Complaint unless otherwise specified.

2

Presently before the Court is Defendants’ Motion to Dismiss

under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), or 1

alternatively, to Stay the Action pending Arbitration. 

Defendants’ Motion alleges that Plaintiffs are bound to submit

their claims to arbitration in Texas pursuant to their respective

franchise agreements with FastBucks. Thus, according to

Defendants, this Court does not have jurisdiction to hear

Plaintiffs’ claims. For the reasons set forth below, Defendants’

Motion to Dismiss or Stay the Action is DENIED.2

BACKGROUND3

In 2006, each Plaintiff executed separate franchise

agreements with FastBucks for the operation of payday loan and

check cashing franchises within California. Bridge Fund operates

its franchise in Montclair, California, and Big Bad operates its

franchise in Stockton, California. FastBucks is a Nevada

Corporation with its principal place of business in Texas. 

Horton was, at all relevant times herein, the Chief Executive

Officer of FastBucks and a member of its Board of Directors. 

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3

Plaintiffs allege that Horton’s ownership of the vast majority of

FastBucks’ common and preferred stock constitutes a joint

enterprise between Defendants. 

Plaintiffs assert that FastBucks has been offering payday

lending franchises via franchise agreements, a written Uniform

Franchise Offering Circular (“UFOC”), a website, and other

materials, since at least 2003. Further, Plaintiffs allege that

Horton was and is actively involved in the marketing of FastBucks

franchises to Plaintiffs and others. FastBucks’ franchise

marketing allegedly included representations of a unique system

with substantial forms and training, a manual for the business

system, and forms and collections materials for loans which were

proper for use in California.

Plaintiffs’ respective franchise agreements with FastBucks

each contain an arbitration provision requiring all disputes

arising between the parties to be resolved through arbitration

primarily under the rules of the American Arbitration Association

(“AAA”). These franchise agreements also contained choice of law

and choice of forum provisions requiring any dispute to take

place in Texas in accordance with Texas law. 

Plaintiffs received UFOCs from FastBucks in conjunction with

the franchise agreements. These UFOCs contained an addendum

pertaining to the enforcement of the franchise agreements under

California law (“California Appendix”). Plaintiffs claim that

the California Appendix modifies the franchise agreements so that

they are in compliance with California law, and this compliance

requires Plaintiffs’ disputes with Defendants to be resolved in

California in accordance with California law. 

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4

Further, Plaintiffs claim that the arbitration provisions

included in the franchise agreements are unenforceable as they

are both procedurally and substantively unconscionable under

California law. Plf’s Mem. in Opp. to Def’s Mot. at 9-20.

On February 28, 2008, Plaintiffs filed their Complaint in

state court alleging breach of written franchise contracts, fraud

and deceit, negligent misrepresentation, violation of the

California Franchise Investment Law (“CFIL”), and unfair trade

practices under the California Business and Professions Code

§ 17200. Plaintiffs seek damages, declaratory relief, and

injunctive relief including the rescission of the franchise

agreements. Plaintiffs allege Defendants made material

misrepresentations and omissions regarding Defendants’

franchises. Specifically, Plaintiffs allege that FastBucks has

no proven franchise system, no business manual, and provided

little training and forms improper for use in California. 

Plaintiffs allege they learned of the franchise system’s noncompliance with California law only after an inspection by the

State of California. 

On April 9, 2008, Defendants successfully removed the action

to this Court under diversity jurisdiction.

On May 30, 2008, Defendants filed this Motion to Dismiss

under Rules 12(b)(1) and 12(b)(6), or alternatively, to Stay the

Action pending Arbitration pursuant to the Federal Arbitration

Act, 9 U.S.C. § 3 (“FAA”). 

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5

Defendants allege that arbitration, in Texas, under Texas law, is

the required dispute resolution forum for Plaintiffs’ claims,

pursuant to their respective franchise agreements with FastBucks. 

They urge the Court to dismiss this action on that basis.

STANDARD

A. Motion to Dismiss - 12(b)(1)

In moving to dismiss for lack of subject-matter jurisdiction

pursuant to Rule 12(b)(1), the challenging party may either make

a “facial attack” on the allegations of jurisdiction contained in

the complaint or can instead take issue with subject-matter

jurisdiction on a factual basis (“factual attack”). Thornhill

Publ’g Co. v. General Tel. & Elect. Corp., 594 F.2d 730, 733 (9th

Cir. 1979); Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d

884, 891 (3d Cir. 1977). If the motion constitutes a factual

attack, “no presumptive truthfulness attaches to plaintiff’s

allegations, and the existence of disputed material facts will

not preclude the trial court from evaluating for itself the

merits of jurisdictional claims.” Thornhill, 594 F.2d at 733

(quoting Mortensen, 549 F.2d at 891). When resolving a factual

attack, the court “may review evidence beyond the complaint

without converting the motion to dismiss into a motion for

summary judgment.” Safe Air for Everyone v. Meyer, 373 F.3d 1035,

1039 (9th Cir. 2004).

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6

B. Motion to Dismiss - 12(b)(6)

On a motion to dismiss for failure to state a claim under

Rule 12(b)(6), all allegations of material fact must be accepted

as true and construed in the light most favorable to the

nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336,

337-38 (9th Cir. 1996). Rule 8(a)(2) requires only “a short and

plain statement of the claim showing that the pleader is entitled

to relief,” in order to “give the defendant fair notice of what

the... claim is and the grounds upon which it rests.” Conley v.

Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). 

While a complaint attacked by a Rule 12(b)(6) motion to dismiss

does not need detailed factual allegations, a plaintiff’s

obligation to provide the “grounds” of his “entitlement to

relief” requires more than labels and conclusions, and a

formulaic recitation of the elements of a cause of action will

not do. Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1964-65

(2007) (internal citations and quotations omitted). Factual

allegations must be enough to raise a right to relief above the

speculative level. Id. at 1965 (citing 5 C. Wright & A. Miller,

Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004)

(“The pleading must contain something more... than... a statement

of facts that merely creates a suspicion [of] a legally

cognizable right of action”).

If the court grants a motion to dismiss a complaint, it must

then decide whether to grant leave to amend. The court should

“freely give” leave to amend when there is no “undue delay, bad

faith[,] dilatory motive on the part of the movant... undue

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prejudice to the opposing party by virtue of... the amendment,

[or] futility of the amendment....” Fed. R. Civ. P. 15(a); Foman

v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is

only denied when it is clear that the deficiencies of the

complaint cannot be cured by amendment. DeSoto v. Yellow Freight

Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).

ANALYSIS

A. Choices of Law and Forum 

“Federal Courts sitting in diversity must apply ‘the forum

state’s choice of law rules to determine the controlling

substantive law.’” Fields v. Legacy Health Sys., 413 F.3d 943,

950 (9th Cir. 2005) (quoting Patton v. Cox, 276 F.3d 493, 495

(9th Cir. 2002)). In the instant case, Plaintiffs filed their

complaint in California, therefore California's choice-of-law

rules apply.

California courts have evidenced a strong policy in favor of

the enforcement of choice of law provisions. Omstead v. Dell,

Inc., 473 F. Supp. 2d 1018, 1023 (N.D. Cal. 2007). Further,

“where both a forum-selection clause and a choice-of-law clause

are at issue, the question of the enforceability of the

forum-selection clause is ‘inextricably bound up’ in the question

of the validity of the choice-of-law provision.” Id. (citing

Hall v. Superior Court, 150 Cal. App. 3d 411, 416 (4th Dist.

1983)). 

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8

Enforceability of these provisions is determined under the

principles set forth in § 187 of the Restatement of Conflict of

Laws, through which they are generally enforced except where

either of two exceptions exist. Omstead, 473 F. Supp. 2d at 1023

(citing Nedlloyd Lines B.V. v. Superior Court of San Mateo

County, 3 Cal. 4th 459, 464-65 (Cal. 1992)). The exceptions

exist where either:

(a) the chosen state has no substantial relationship to

the parties or the transaction and there is no other

reasonable basis for the parties choice, or (b) the

application of the law of the chosen state would be

contrary to a fundamental policy of a state which has a

materially greater interest than the chosen state in

the determination of the particular issue....

Restatement (Second) of Conflict of Laws § 187(2) (1971). 

Defendants have adequately shown that Texas has a

substantial relationship to the parties and transaction, and thus

the first exception does not apply. In their Motion, Defendants

note that FastBucks’ principal place of business is in Texas and

that the franchise agreements were formed in Texas. Def’s Mot.

to Dis. 2:4-7. Defendants also state that Plaintiffs received

training in Texas, and transfer their royalty and franchise fees

to Texas. Id. 2:7-10. Therefore, there is a reasonable basis

for the parties’ choice of Texas law, and Plaintiffs correctly do

not challenge the provision under this exception.

On the contrary, Plaintiffs assert that the application of

Texas law to the dispute at issue is in conflict with fundamental

California public policy, and that California has a materially

greater interest than Texas in the dispute at hand. See Rest.

(Second) of Conf. of Laws § 187(2). 

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Specifically, Plaintiffs argue that their unwaivable statutory

rights under the CFIL would be effectively waived if Texas law

were applied, as the franchise agreements’ forum selection and

choice of law provisions would “subject California franchisees to

litigation in a state that does not provide the same level of

legal protections afforded by California law.” America Online,

Inc. v. Superior Court, 90 Cal. App. 4th 1, 10 (1st Dist. 2001)

(refusing to enforce a franchise agreement’s Virginia choice of

law and forum provisions when unwaivable statutory rights were at

issue). Moreover, Defendants have the burden of showing that

enforcement of the two provisions would not diminish Plaintiffs’

rights under California law. Id.; See also Nagrampa v.

MailCoups, Inc., 469 F.3d 1257, 1289 (9th Cir. 2006) (noting that

both the CFIL and CLRA shift the burden of proof on enforcement

of choice of law and forum to the franchisor); Smith v. Paul

Green School of Rock Music Franchising, LLC, 2008 WL 2037721, at

*4 (C.D. Cal. 2008) (noting that the CFIL provides special

protection to franchisees and thus franchisors have “the burden

of proof on enforcement of the forum selection and choice of law

clauses”). 

California has “a materially greater interest” than Texas in

the instant case. Rest. (Second) of Conf. of Laws § 187(2). As

noted by the California Court of Appeal in Wimsatt v. Beverly

Hills Weight etc. Internat., Inc., the CFIL is “one of the most

important protections California offers its franchisee citizens.” 

32 Cal. App. 4th 1511, 1520 (4th Dist. 1995). Application of

Texas law would deprive Plaintiffs of this protection. 

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 This holding applies solely to the determination of the 4

choice of law and forum matters at issue; the Court does not find

that Plaintiffs’ CFIL claims require a judicial forum. 

Defendants argue that the U.S. Supreme Court preempted the nonwaiver provision of the CFIL under the FAA, and thus arbitration

under Texas law is required. Southland Corp. v. Keating, 465

U.S. 1 (1984). However, the FAA preemption in Southland simply

states that the CFIL cannot require judicial resolution of CFIL

claims because of a direct conflict with the FAA’s policy

precluding states from singling out arbitration provisions for

suspect status. Id. at 10. This Court’s determination of the

choice of law and forum provisions in reference to the CFIL

simply speaks to Texas law and forum requirements, and does not

seek to mandate a judicial forum for all CFIL claims.

10

In contrast, Texas’ interest in applying its law is confined to

its more general interest in enforcing the arbitration provisions

of agreements made by its residents. Thus, California has

evidenced a materially greater interest in protecting its

franchisee citizens under the provisions of the CFIL.

Defendants dispute the weight of California’s interest in

the present action, and assert that the application of Texas law

would not be contrary to a fundamental California policy. This

argument is not persuasive. Defendants base their assertions on

Plaintiffs’ non-CFIL claims, stating that none of these claims

have been shown to be fundamental under California law. Without

addressing this issue, this Court finds that Plaintiffs’ CFIL

claims are fundamental, and thus Plaintiffs’ unwaivable statutory

rights under the CFIL must be protected.4

Defendants seek to avoid this problem by asserting that this

Court can simply order them not to preclude application of the

CFIL by barring any assertion that the Texas choice of law

provision should be applied in a Texas arbitral forum. 

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Defendants cite Paul Green from the Central District of

California for support, wherein the court held Pennsylvania

choice of law and choice of forum provisions were enforceable,

where the plaintiff’s rights under the CFIL would be protected. 

2008 WL 2037721 at *5. The court in Paul Green based their

decision in part on the defendant’s agreement not to assert the

Pennsylvania choice of law provision in an attempt to preclude

application of the CFIL. Id. 

However, Paul Green is distinguishable from the instant case

on this issue. There, the defendant’s enforceability argument

was also supported by relevant Pennsylvania case law enforcing

the CFIL in a Pennsylvania forum, stating that the CFIL “is

‘fundamental public policy’ of California, that California had a

materially greater interest in having its law applied, and that

the CFIL offered a higher degree of protection to franchisees

than Pennsylvania common law.” Id. (citing Cottman Transmission

Sys., LLC v. Kershner, 492 F. Supp. 2d 461, 467-71 (E.D. Pa.

2007). As noted by the defendant in Paul Green, “it is well

established by case law within the judicial district where the

arbitration is to occur that the non-waivable statutory rights of

California franchisees are recognized and enforced,

notwithstanding a Pennsylvania forum with a contractual

Pennsylvania choice of law clause.” Id. Defendants fail to

highlight any similar cases supporting the enforcement of the

CFIL in a Texas forum, and a search of the relevant case law has

also failed to uncover any such case. 

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 Plaintiffs’ Complaint seeks declaratory relief from this 5

Court stating that “provisions” of the franchise agreements are

unconscionable and thus are unenforceable, but does not

specifically mention arbitration. However, given the notice

pleading structure of the Federal System, and the content of the

filings by both parties, this Court finds that the Defendants

were properly notified that Plaintiffs are seeking a judgment

declaring the arbitration provisions unenforceable as

unconscionable. Thus, Plaintiff’s lack of specific challenge to

the arbitration provision in the Complaint is immaterial. 

12

Therefore Defendants’ concession is insufficient assurance that

Plaintiffs’ rights under the CFIL would be protected in a Texas

forum applying Texas law.

Defendants have failed to show that Plaintiffs’ rights would

not be diminished if the choice of law and forum provisions were

enforced. This failure, combined with California’s strong

interest in the dispute and its fundamental policies and

protections provided to Plaintiffs under the CFIL, renders these

provisions unenforceable. Accordingly, Plaintiffs’ rights

require the instant action to be decided under California law,

within California’s borders. Therefore, this Court now moves on

to an examination of whether this dispute should be determined in

an arbitral or judicial forum, based on the alleged

unconscionability of the franchise agreements’ arbitration

provisions under California law.

B. Enforceability of Arbitration Provision5

The United States Supreme Court has expressed a strong

policy in favor of enforcing arbitration agreements, stating that

under the FAA, arbitration agreements between private parties

must be “rigorously enforced.” 

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Perry v. Thomas, 482 U.S. 483, 490, 107 S. Ct. 2520, 2526 (1987). 

When a contract contains an arbitration clause, there is a

presumption of arbitrability. AT & T Techs., Inc. v. Commc’ns

Workers of America, 475 U.S. 643, 650, 106 S. Ct. 1415, 1419

(1986). Arbitration should be compelled unless it is clear that

the dispute is not covered by the arbitration agreement. United

Steelworkers of America v. Warrior & Gulf Navigation Co., 363

U.S. 574, 582-583 (1960). Any doubts should be resolved in favor

of arbitration. Id. at 583. In making this decision, the court

looks only at whether the parties agreed to arbitrate the claim,

not to the merits of the claim itself. AT & T Techs., 475 U.S.

at 649-650. 

If the existence of an arbitration agreement between the

parties is proven or undisputed, the party opposing arbitration

has the burden of proving any fact necessary to its defense. 

Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951, 972

(1997). Under the FAA, arbitration agreements “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. §

2. “Thus, generally applicable contract defenses, such as fraud,

duress, or unconscionability, may be applied to invalidate

arbitration agreements without contravening” federal law.

Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.

Ct. 1652 (1996). 

The parties do not dispute the existence of individual

franchise agreements between FastBucks and each Plaintiff which 

contain arbitration provisions that encompass the claims at

issue. 

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As such, Plaintiffs have the burden to prove these arbitration

provisions were unconscionable at the time of signing, and are

therefore unenforceable under general principles of contract law. 

Engalla, 15 Cal. 4th at 972.

When an opposing party’s defense rests on the contract

principle of unconscionability, the party must prove both

procedural and substantive unconscionability to overcome the

statutory presumption in favor of arbitration. Circuit City

Stores, Inc. v. Ahmed, 283 F.3d 1198, 1199 (9th Cir. 2002);

Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th

83 (2000). However, procedural and substantive unconscionability

need not be present in equal amounts. Armendariz, 24 Cal. 4th at

83. The two factors are evaluated on a “sliding scale,”

therefore, the more evidence of procedural unconscionability

there is, the less evidence of substantive unconscionability is

needed to render the agreement unenforceable, and vice versa. 

Id. If the opposing party fails to prove the existence of

procedural unconscionability, no finding of unconscionability is

possible, and the court’s analysis ends. Ahmed, 283 F.3d at

1199-1200. Moreover, California law recognizes that franchise

agreements resemble employment agreements where arbitration

provisions are at issue, as both contexts involve the

franchisee’s or employee’s livelihood. Independent Ass’n. of

Mailbox Center Owners, Inc. v. Superior Court, 133 Cal. App. 4th

396, 410 (4th Dist. 2005). 

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1. Procedural Unconscionability

The analysis of procedural unconscionability focuses on

“oppression or surprise, due to unequal bargaining power” while

substantive unconscionability is based on “overly harsh or onesided results.” Soltani v. Western & Southern Life Ins. Co., 258

F.3d 1038, 1042 (9th Cir. 2001) (citing Armendariz, 24 Cal. 4th

at 114). Though procedural unconscionability is generally proven

by a showing of contractual adhesion, “[t]here will be cases ...

where procedural unconscionability is obvious without the need to

establish that the contract is one of adhesion.” Nyulassy v.

Lockheed Martin Corp., 120 Cal. App. 4th 1267, 1281 (2004). 

Plaintiffs contend that the arbitration agreements are

procedurally unconscionable because they are contracts of

adhesion. Plaintiffs claim that the franchise agreements were

standard form contracts with prolix terms, and that Plaintiffs

had “no meaningful opportunity to negotiate the majority of [the]

terms.” Plf’s Mem. in Opp. to Def’s Mot. 11:14-15. While the

filings are unclear regarding which Plaintiff negotiated some of

the franchise agreement terms and which negotiated no terms, the

parties agree that neither Plaintiff negotiated any aspect of the

arbitration provisions. See Plf’s Mem. in Opp. to Def’s Mot.

11:16-19; Def’s Mot. to Dis. 2:21-22. Further, Plaintiffs were

in a substantially weaker bargaining position than Defendants. 

As reported in the UFOCs attached to Plaintiffs’ individual

declarations in support of their Opposition to Defendants’

current Motion, FastBucks is a corporation which in 2004 had over

$7,000,000 in assets and over $11,000,000 in revenues. 

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Plaintiffs, on the other hand, have not been able to pay

themselves a salary from their franchises, “with some losing what

amounts to their life savings.” Complaint at ¶¶ 4, 27.

Plaintiffs have adequately demonstrated potential oppression

through their allegations of an absence of real negotiation and a

disparity of bargaining power existing between the parties as

franchisor and franchisees. See Nagrampa v. MailCoups, Inc., 469

F.3d 1257, 1282 (9th Cir. 2006) (noting that “California courts

have long recognized that franchise agreements have some

characteristics of contracts of adhesion because of the vastly

superior bargaining strength of the franchisor.”); Smith v. Paul

Green School of Rock Music Franchising, LLC, 2008 WL 2037721, at

*3 (C.D. Cal. 2008) (finding procedural unconscionability where

“there is no evidence of real negotiation over the terms of the

arbitration clause... [and] ...no indication that Smith could

have opted out of the forum selection or choice of law provisions

within the arbitration clause.”); See also Kinney v. United

HealthCare Services, Inc., 70 Cal. App. 4th 1322, 1329 (4th Dist.

1999). 

Further, Plaintiffs adequately show surprise through their

allegations of a prolix agreement drafted by Defendants. See Id. 

While Defendants’ attempt to negate the claim of surprise by

claiming that the arbitration provisions were bolded in each

franchise agreement, the copies of the agreements provided to

this Court do not corroborate this claim. See Decl. of Charles

Horton, Exhibits 1 and 2. 

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The parties also dispute whether Plaintiffs understood from the

franchise agreements and UFOCs that any dispute would be resolved

in an arbitration proceeding in Texas in accordance with Texas

law. See Def’s Reply Mem. 9:21-23; Decl. of Onofrio Pentolino,

II ¶4; Decl. of Derek Barrington ¶4. Regardless, “[w]here an

adhesive contract is oppressive, surprise need not be shown.” 

Abramson v. Juniper Networks, Inc., 115 Cal. App. 4th 638, 656

(6th Dist. 2004).

In sum, Plaintiffs have adequately shown some indication of

procedural unconscionability. However, as the evidence of

procedural unconscionability is minimal, Plaintiffs must show

significant evidence establishing substantive unconscionability

in order to invalidate the arbitration provisions under

California law. Accordingly, this Court moves on to examine the

extent of substantive unconscionability present in the

arbitration provisions.

2. Substantive Unconscionability

Substantive unconscionability stems from a lack of

mutuality, and “may generally be described as unfairly

one-sided.” Gentry v. Superior Court, 42 Cal. 4th 443, 469

(2007). A lack of mutuality is present in an arbitration

agreement if its terms are “so one-sided as [to] shock the

conscience.” Soltani v. Western & Southern Life Ins. Co., 258

F.3d 1038, 1043 (9th Cir. 2001). 

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substantively unconscionable because they seek to void the

Plaintiffs’ unwaivable statutory rights under the CFIL through

Texas choice of law and forum. As this Court has discussed the

impact of these provisions on Plaintiffs CFIL rights above, it

will not repeat the analysis here. 

18

To avoid a finding of substantive unconscionability, arbitration

agreements must contain at least “a modicum of bilaterality.” 

Armendariz, 24 Cal. 4th at 119. 

In the instant case, Plaintiffs contend that the arbitration

provisions lack mutuality in multiple ways. First, the

arbitration provisions reserve FastBucks’ right to seek

injunctive relief, while barring similar access to Plaintiffs. 

Second, the arbitration provisions limit damages recoverable

under the agreement to actual damages, effectively prohibiting

consequential, punitive, or exemplary damages. Third, the

arbitration provisions shorten the applicable statute of

limitations. Fourth, the arbitration provisions include place

and manner provisions that favor FastBucks. Finally, the

arbitration provisions ban class and consolidated actions.6

a. Injunctive Relief

Substantive unconscionability can be found where an

“agreement requir[es] arbitration only for the claims of the

weaker party but a choice of forums for the claims of the

stronger party.” Armendariz, 24 Cal. 4th at 119. 

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Where both parties to an agreement are bound to arbitration, but

the stronger party may seek “other equitable relief” through the

court system, without proper justification for this lack of

mutuality, California courts consistently have found such

arbitration provisions unconscionable. Davis v. O'Melveny &

Myers, 485 F.3d 1066, 1081 (9th Cir. 2007); See also Mercuro v.

Superior Court, 96 Cal. App. 4th 167, 176 (2nd Dist. 2002);

Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1541-42 (1st

Dist. 1997).

In the instant case, the arbitration provisions of the

franchise agreements reserve FastBucks’ right to seek injunctive

relief, including “temporary, preliminary, or permanent

injunctive relief,” at FastBucks’ option. Franchise Agreements

¶ 26.3. There is no similar exception for Plaintiffs, and thus

the arbitration provisions lack a “modicum of bilaterality.” 

Armendariz, 24 Cal. 4th at 119. This lack of mutuality may be

enforceable if Defendants can establish “business realities” as

justification. Stirlen v. Supercuts, Inc., 51 Cal. App. 4th

1519, 1536 (1st Dist. 1997). However, Defendants’ argument that

“franchisors will often need emergency relief to prevent

trademark infringement against terminated franchisees...” is

insufficient. Def’s Reply Mem. 11:13-14. Under California Civil

Procedure Code § 1281.8(b), both parties may seek provisional

remedies in court “in connection with an arbitral

controversy....” Cal. Civ. Proc. Code § 1281.8(b). 

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These provisional remedies include “injunctions... attachments,

temporary protective orders, writs of possession and appointments

of receivers.” Stirlen, 51 Cal. App. 4th at 1536 (citing Woolley

v. Embassy Suites, Inc., 227 Cal. App. 3d 1520, 1527 (1st Dist.

1991). Therefore, “[t]he unilateral right to litigate rather

than arbitrate claims... cannot be justified by the need for

provisional remedies.” Stirlen, 51 Cal. App. 4th at 1536. 

Defendants fail to provide sufficient justification for this lack

of mutuality. The arbitration provisions are substantively

unconscionable for purposes of this analysis. 

b. Damage Limitations

“The principle that an arbitration agreement may not limit

statutorily imposed remedies such as punitive damages and

attorney fees appears to be undisputed.” Armendariz v.

Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 103

(Cal. 2000). This principle holds true in the franchise context. 

Id., (discussing Graham Oil Co. v. ARCO Products Co., 43 F.3d

1244, 1248 (9th Cir. 1995) (arbitration agreement unenforceable

because it did not allow for punitive damages and attorney’s fees

available under statute). Further, whether punitive or

consequential damages are statutorily authorized or “otherwise

allowed,” arbitration provisions seeking to deprive plaintiffs of

these remedies are unconscionable. Independent Ass'n of Mailbox

Center Owners, Inc. v. Superior Court, 133 Cal. App. 4th 396,

412-413 (4th Dist. 2005). 

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In the instant case, the arbitration provisions at issue

limit damages recoverable under the agreement to actual damages,

effectively prohibiting consequential, punitive, or exemplary

damages. Franchise Agreements ¶ 26.4. Plaintiffs’ unwaivable

statutory rights under the CFIL may allow for the recovery of a

variety of damages, including punitive, consequential, and

exemplary. 

Further, Plaintiffs’ claims of fraud and deceit due to the

alleged misrepresentations and omissions made by Defendants, if

proven, may also allow for the recovery of punitive or exemplary

damages under California law. “Where it is proven by clear and

convincing evidence that the defendant has been guilty of

oppression, fraud, or malice, plaintiff may recover damages in

addition to the actual damages.” Wolk v. Green, 516 F. Supp. 2d

1121, 1134-35 (N.D. Cal. 2007) (discussing Cal. Civ. Code §

3294). As the party who drafted and imposed the damages waiver

provision, it is reasonable to conclude that Defendants imposed

the waiver “with the knowledge or belief that [Fastbucks] would

generally be the defendant,” and thus Defendants effectively

created a one-sided agreement aimed at limiting their liability. 

Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1073 (Cal.

2003). Therefore, the arbitration provisions’ damage limitations

lack mutuality and are also substantively unconscionable. 

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c. Shortening of the Statute of Limitations

The arbitration provisions of the franchise agreements bar

any claim brought by Plaintiffs against Defendants if not

“commenced within one (1) year from the occurrence of the facts

giving rise to such claim or action....” Franchise Agreements

¶ 26.4. Plaintiffs’ claims under the CFIL and for unfair trade

practices under the California Business and Professions Code

§§ 17200-17208 carry either two- or four-year limitations

periods. See Cal. Corp. Code §§ 31303-31304; Gentry v. Superior

Court, 42 Cal. 4th 443, 471 (Cal. 2007) (discussing Cal. Bus. &

Prof. Code §§ 17200-17208). Thus, Plaintiffs claim that this

contractual shortening of the limitations period is substantively

unconscionable.

Defendants argue that California permits contractual waivers

of statutes of limitations. Defendants point this Court to

Pokorny v. Quixtar Inc., where the Northern District discussed

the contractual shortening of limitations periods. 2008 WL

850358, at *14 (N.D. Cal. 2008). The Pokorny court stated that

contractual shortening of limitations periods may be enforceable

under California law, “if it applies to both parties and the

shortened time is still reasonable.” Id. (referencing Soltani v.

W. & S. Life Ins. Co., 258 F.3d 1038, 1043-44 (9th Cir. 2001)). 

However the Defendants failed to mention the next sentence in

Pokorny, which states that “[w]here the reduction is unilateral,

as here, it is substantively unconscionable.” Id. (referencing

Nyulassy v. Lockheed Martin Corp., 120 Cal. App. 4th 1267, 1283

(6th Dist. 2004). 

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Further, the general rule allows the shortening of limitations

periods where there is an “absence of a controlling statute to

the contrary....” Order of United Commercial Travelers v. Wolfe,

331 U.S. 586, 608, 67 S. Ct. 1355, 91 L. Ed. 1687 (1947). In the

instant case, the plain text of the arbitration provision

shortening the limitations period speaks only to claims “brought

by Franchisee against Franchisor,” and Plaintiffs’ statutory

claims carry contrary limitations periods. Thus, the arbitration

provisions’ unilateral shortening of the limitations period is

substantively unconscionable.

d. Place and Manner Provisions

Under California law, “if the ‘place and manner’

restrictions of a forum selection provision are ‘unduly

oppressive,’ or have the effect of shielding the stronger party

from liability, then the forum selection provision is

unconscionable.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257,

1287 (9th Cir. 2006) (citing Bolter v. Superior Court, 87 Cal.

App. 4th 900, 909-10 (2001); Comb v. PayPal, Inc., 218 F. Supp.

2d 1165, 1177 (N.D. Cal. 2002)). Plaintiffs allege that the

arbitration provisions include place and manner provisions that

favor FastBucks, with the intent of maximizing Defendants’

contractual advantage, and are thus substantively unconscionable. 

Bolter, 87 Cal. App. 4th at 910. Plaintiffs point to provisions

requiring Texas choice of law and forum and requiring arbitration

to commence two weeks following the initial meeting of the

parties. Franchise Agreements 26.1, 26.2. 

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Defendants argue that Plaintiffs’ inconvenience and expense

arising out of the place and manner provisions are “not enough to

invalidate the forum selection provision in the arbitration

clause here.” Smith v. Paul Green School of Rock Music

Franchising, LLC, 2008 WL 2037721, at *6 (C.D. Cal. 2008) 

However, in Paul Green the alleged unconscionability of the

franchise agreement’s place and manner requirements stood alone

as the remaining argument against Pennsylvania arbitration. Id. 

In the instant case, however, it is only one of many factors

constituting the arbitration provisions’ overall substantive

unconscionability. 

Defendants also seek support from the California Supreme

Court’s holding in Smith, Valentino & Smith, Inc. v. Superior

Court, 17 Cal. 3d 491, 496 (Cal. 1976) (place and manner

restrictions are not generally unconscionable because contracting

parties “can be held to have contemplated in negotiating their

agreement the additional expense and inconvenience attendant on

the litigation of their respective claims in a distant forum”). 

Where parties understood the agreement to require arbitration in

a distant forum, it is assumed that adequate consideration was

received in exchange. Id. Here, the parties dispute whether

Plaintiffs understood that the forum provisions discussed in the

franchise agreements and the California Appendices required a

Texas resolution of any dispute between the parties. Therefore

it cannot be said, as a matter of law, that Plaintiffs knowingly

agreed to a Texas forum or Texas law. 

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As discussed above, Defendants have the burden of proving

the reasonableness and fairness of the arbitration provisions’

choice of law and forum, and they have failed to meet this

burden. Accordingly, the arbitration provisions’ place and

manner restrictions add yet another layer of substantive

unconscionability.

e. Waiver of Class and Consolidated Actions

Plaintiffs do not seek class action status for this dispute. 

However, as “multiple defects indicate a systematic effort to

impose arbitration... as an inferior forum...” the arbitration

provisions’ ban on class and consolidated actions adds further

weight to a finding of substantive unconscionability. 

Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.

4th 83, 124 (Cal. 2000); Franchise Agreements 26.2. California

law has long recognized the importance of class action

litigation, and has codified the right to consolidate arbitrable

disputes. See Cal. Code Civ. Pro. 1281.3; Independent Ass'n of

Mailbox Center Owners, Inc. v. Superior Court, 133 Cal. App. 4th

396, 410-11 (4th Dist. 2005). Where a contractual class action

ban effectively limits the rights of just one contracting party,

the agreement is substantively unconscionable. Ingle v. Circuit

City Stores, Inc., 328 F.3d 1165, 1176 (9th Cir. 2003). It is

hard to imagine any situation in which a franchisor could bring a

class action suit against a franchisee. See Id. 

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Defendants seek to avoid this problem by stating that they

would not seek to enforce the class action ban. However, this

concession is immaterial as the unconscionability of an agreement

is determined as of the time the contract was formed. 

Armendariz, 24 Cal. 4th at 114. The franchise agreements, as

signed, each contained unconscionable bans on class actions

within their arbitration provisions. Combined with the entirety

of substantively unconscionable requirements contained in the

arbitration provisions, and Plaintiffs’ showing of procedural

unconscionability, the evidence of unconscionability in the

arbitration provisions is overwhelming. These provisions are

thus “permeated by unconscionability... [and] should not be

enforced.” Id. at 126. Accordingly, Defendants’ Motion to

Dismiss or Stay the Action must be denied. 

CONCLUSION

Based on the foregoing, Defendants’ Motion to Dismiss or

Stay the Action is hereby DENIED. 

IT IS SO ORDERED.

Dated: August 19, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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