Opinion ID: 175423
Heading Depth: 2
Heading Rank: 3

Heading: Unconscionability and Severability

Text: To defeat an arbitration clause, the litigant must show both procedural and substantive unconscionability, although the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. Procedural unconscionability involves `oppression' or `surprise' due to unequal bargaining power while substantive unconscionability focuses on `overly harsh' or `one-sided' results. Id. California law treats contracts of adhesion, or at least terms over which a party of lesser bargaining power had no opportunity to negotiate, as procedurally unconscionable to at least some degree. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. The district court determined that in this case there was an absence of real negotiation and a disparity of bargaining power . . . between the parties. Indeed, 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. Nagrampa, 469 F.3d at 1282. We conclude that procedural unconscionability has been established in this case. Next, as already described, California law holds that mandatory waivers of non-waivable statutory rights granted under the CFIL are the sort of one-sided and overly-harsh terms that render an arbitration provision substantively unconscionable. See Wimsatt, 38 Cal.Rptr.2d at 618; Indep. Ass'n of Mailbox Ctr. Owners, 34 Cal.Rptr.3d at 672. In addition, class action waivers are usually considered substantively unconscionable, see Omstead, 594 F.3d at 1086-87, as are terms granting the party of greater bargaining power the right to seek injunctive relief in court while denying such relief to the weaker party (at least in the absence of a valid business justification for such non-mutuality), see Mercuro v. Superior Court, 96 Cal.App.4th 167, 116 Cal.Rptr.2d 671, 677-78 (2002). The only business justification offered by Fastbucks for the non-mutual judicial remedy provision was its need to seek provisional remedies, which is insufficient under California law to justify non-mutuality (because California law protects parties' rights to seek provisional remedies in court regardless of any arbitration clause that may cover the parties' dispute). See Stirlen v. Supercuts, Inc., 51 Cal. App.4th 1519, 60 Cal.Rptr.2d 138, 148 (1997) (citing Cal.Civ.Proc.Code § 1281.8). The class action and injunctive relief waivers are accordingly substantively unconscionable. Moreover, 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, 469 F.3d at 1287 (citations omitted). Because the selection of Texas as the forum (which is inherently intertwined with the choice of Texas law, see Hall v. Superior Court, 150 Cal.App.3d 411, 197 Cal.Rptr. 757, 761 (1983)) makes the arbitration clause primarily a tool that Fastbucks may employ to evade California statutory protections for franchisees, the provision would have the effect of shielding the stronger party from liability, and is thus likely unconscionable. In any event, because the Plaintiffs understandably expected, based on the Addendum, that the forum selection clause might not be enforceable in California (and that California law would control in the event of a conflict between the law and the franchise agreement), Fastbucks has not shown that this provision was a product of a meeting of the minds between the parties. See Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951, 64 Cal.Rptr.2d 843, 938 P.2d 903, 916-17 (1997) (The [party seeking arbitration] bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and a party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense.). In sum, four of the five paragraphs of the arbitration clause are unconscionable, or at least unenforceable, in California. See Indep. Ass'n of Mailbox Ctr. Owners, 34 Cal.Rptr.3d at 672. Fastbucks essentially concedes this. Fastbucks instead concentrates its energies on arguing that the district court abused its discretion by declining to sever the offending provisions. See id. (To the extent that the arbitration clauses . . . seek to deprive plaintiffs of statutorily authorized remedies, or relief in court that would otherwise be allowable to them, they are unconscionable, and the trial court should have stricken them from the arbitration clause.). California Civil Code § 1670.5(a) provides that, [i]f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. The California Supreme Court has construed § 1670.5(a) as giving a trial court some discretion as to whether to sever or restrict the unconscionable provision or whether to refuse to enforce the entire agreement. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 695. In addition, it has identified two reasons for severing an unconscionable provision rather than voiding the entire contact: (1) to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement; and (2) because the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme. Id. at 696. The overarching inquiry is whether `the interests of justice . . . would be furthered' by severance.' Id. (quoting Beynon v. Garden Grove Med. Grp., 100 Cal.App.3d 698, 161 Cal.Rptr. 146, 155 (1980)). Having found the major part of the arbitration provision substantively unconscionable, and imposed on Plaintiffs without any opportunity to negotiate, the district court determined that unconscionability permeated the entire arbitration agreement and was overwhelming. Such multiple defects indicate a systematic effort to impose arbitration.. . not simply as an alternative to litigation, but as an inferior forum that works to [Fastbucks's] advantage. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 697. Following Armendariz, then, the court determined that the arbitration agreements as a whole should not be enforced. See id. at 669 (finding severability inappropriate where the lack of mutuality permeated the agreement and removal of the unconscionable taint would require reforming the agreement, as opposed to striking a single provision); see also Nagrampa, 469 F.3d at 1293-94. We cannot find this was an abuse of discretion. For the district court to have severed the offending provisions would have left almost nothing to the arbitration clause. Fastbucks contends that the forum selection clause alone, combined with the one remaining unchallenged provision subjecting the arbitrator to the forum's legal ethics rules, could be enforced. But because the forum selection clause requires Texas arbitration, the district court could not have simply severed it; the district court would have had to rewrite that paragraph in order to enforce it consistently with its (correct) unconscionability rulings. We find nothing to suggest that Plaintiffs will obtain an undeserved benefit from being able to avoid arbitration in this case; indeed, application of California law, and avoidance of the Texas arbitral forum, is consistent with the Addendum the Plaintiffs received as part of the franchise agreement and were entitled to rely upon. Similarly, Fastbucks would not suffer any undeserved detriment by being forced to litigate this case in California court. Although Fastbucks's arbitration scheme is not illegal, it is inconsistent with California public policy concerning the rights of California franchisees. The district court acted well within its discretion in concluding that under the circumstances of this case, the interests of justice favored refusal to enforce the arbitration provision in its entirety.