Court Opinion

ID: 9499312
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:44:23.023947+00
Date Added: 2024-06-11T17:59:25.022487
License: Public Domain

KOZINSKI, Circuit Judge,
with whom Judges O’SCANNLAIN and TALLMAN join, and with whom Judge CLIFTON joins as to Part II, dissenting:
I agree with Judge O’Scannlain that Na-grampa’s uneonscionability challenge *1307should have been decided by an arbitrator, and that her contract with MailCoups was not substantively unconscionable. I write separately to dispute the majority’s conclusion that Nagrampa did not waive the right to contest arbitrability after participating in the arbitration proceedings for almost a year, and its finding that the arbitration was procedurally unconscionable.
I. Waiver
The majority reads Nagrampa’s February 6, 2002, letter to the arbitrator as a “forceful” objection to arbitrability. Maj. at 1280. But Nagrampa never said she objected — she merely expressed “serious concerns” about the “validity” of the arbitration clause. This statement contained none of the traditional indicia of a properly articulated objection. She never said “I object,” and she provided no grounds for her purported concerns. Most significantly, she never submitted the issue to the arbitrator.
For an example of a real objection, we need look no farther than that same letter, where Nagrampa clearly states that she “objects” to MailCoups’s proposal to hold the arbitration in Los Angeles. Mail-Coups and the arbitrator recognized this as an objection, and everyone spent the better part of the next eight months dealing with the matter. The parties submitted written statements and argued by way of telephone conference about where the proceedings should be held.1 The arbitrator recognized his duty to resolve the issue and ultimately did so by issuing a formal ruling on the matter.
There was no similar response to Na-grampa’s “concerns” about arbitrability. MailCoups never briefed the issue, and the arbitrator never ruled on it. And Na-grampa never explained her legal theory or any facts on which her concerns were based. Had they thought that Nagrampa was actually objecting to arbitrability, Ma-ilCoups and the arbitrator would certainly have turned to this issue first, rather than wasting months resolving matters that are of no consequence if the contract is not arbitrable in the first place. That Na-grampa’s expression of “concerns” was met with silence, and that she did nothing to press an arbitrability claim, fatally undermines the majority’s conclusion that Nagrampa preserved her objection by presenting it to the arbitrator.2
While Nagrampa failed to make the faintest allusion to her “concerns” about arbitrability during the course of the arbitration, she showed no such reticence when dealing with other issues. In addition to fighting tooth-and-nail over venue, she filed a broad discovery request, pressed four counterclaims and sought to have fees waived. The majority dismisses these activities as mere “procedural skirmishes,” but the record shows that Na-grampa’s participation went to the heart of *1308her dispute with MailCoups. Take the discovery request: Nagrampa asked for all documents describing “assumptions made by Claimant in preparing the Earnings Claims” set forth in the franchise offering circular, the economic and marketing conditions existing at the time the offer was made and the financial status of Mail-Coups’s existing franchisees. This is far more information than Nagrampa would have needed to contest arbitrability; it is information that would only have been useful to her in litigating her case on the merits. When the time came for raising counterclaims, Nagrampa didn’t elaborate on her “concerns” about arbitrability. Instead, she claimed that MailCoups violated multiple provisions of California’s franchise law. Nagrampa’s actions bespeak not only acquiescence in the arbitrator’s authority, but a desire to be a full participant in the proceedings.
Thus, even if we could somehow read the February 6, 2002, letter as objecting to arbitrability, we must still consider whether Nagrampa’s participation in the proceedings on matters that have no conceivable bearing on arbitrability was so extensive as to waive any right she may have had to withdraw. Waiver doctrine in this context is guided by the practical policies of the Federal Arbitration Act, which is designed to give businesses access to a cheap and speedy means of resolving disputes. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218-19, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). When a party actively participates in the arbitration process for many months and then suddenly withdraws, it wastes valuable time and resources. As we stated in Fortune, Al-sweet & Eldridge, Inc. v. Daniel, 724 F.2d 1355 (9th Cir.1983) (per curiam), “[i]t would be unreasonable and unjust to allow [a party] to challenge the legitimacy of the arbitration process, in which he had voluntarily participated over a period of several months....” Id. at 1357; see also Comprehensive Accounting Corp. v. Rudell, 760 F.2d 138, 140 (7th Cir.1985) (“It was then too late for [the parties contesting ar-bitrability] to sit back and allow the arbitration to go forward, and only after it was all done, and enforcement was sought, say: oh by the way, we never agreed to the arbitration clause. That is a tactic that the law of arbitration, with its commitment to speed, will not tolerate.”).
The majority discounts Nagrampa’s participation in the proceedings, because she never participated in a merits hearing. But I don’t see why it should matter whether the hearings in which Nagrampa or her lawyer participated were on the merits or preliminary matters; in either event, the opposing party suffered the unfairness of unnecessary cost and delay. None of the cases on which the majority relies holds that participation in the merits hearings is necessary for waiver. See First Options, 514 U.S. at 946, 115 S.Ct. 19203; Textile Unlimited, Inc. v. A..BMH & Co., 240 F.3d 781, 788 (9th Cir.2001); Fortune, 12A F.2d at 1357; Ficek v. S. Pac. Co., 338 F.2d 655, 657 (9th Cir.1964). And the two cases on which the majority relies most heavily, First Options and Textile Unlimited, don’t deal with waiver at all, but rather with what conduct amounts to consent to arbitrate where there is no written agreement to do so. See First Options, 514 U.S. at 941, 115 S.Ct. 1920; *1309Textile Unlimited, 240 F.3d at 788.4 As the record in this case demonstrates, parties can waste considerable time and money before ever getting to a hearing on the merits. It is contrary to the policies of the Arbitration Act to hold, as the majority does, that waiver can only occur once an arbitrator hears the merits, no matter how deeply a party gets involved in the arbitration process. It is also significant that Nagrampa didn’t attempt to get out of the arbitration until she lost on venue and hired a new lawyer — at which point, she picked up her marbles and left. Waiver doctrine, with its emphasis on fairness and efficiency, should discourage such gamesmanship. And before today’s decision, such was the law in this circuit. See Ficek, 338 F.2d at 657 (“A claimant may not voluntarily submit his claim to arbitration, await the outcome, and, if the decision is unfavorable, then challenge the authority of the arbitrators to act.”). The majority’s ruling that there can be no waiver until1 the merits hearings means that parties can never be sure, until that point, that they are litigating in the right forum. No matter how much time and effort are spent in pre-merits proceedings, the opposing party retains the right to abort the proceedings and leave the other side behind to pay the fees. This rule contradicts our caselaw and the policies of the Arbitration Act, which seeks to promote swift and inexpensive resolution of commercial disputes.
II. Procedural Unconscionability
After some handwringing, the majority finds that Nagrampa has presented “minimal” evidence of procedural unconsciona-bility, but even this is an overstatement. To show procedural unconscionability, Na-grampa was required to prove surprise or oppression. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (Cal.2000). She comes nowhere close. First as to surprise: Nagrampa had the contract for almost two months before she signed it, ample time to read and digest its contents. ' She could afford to consult a lawyer and had every incentive to do so. She was not purchasing cell phone service or an everyday consumer good — she was leaving a secure, six-figure job to invest her future in a national franchise with one of her employer’s competitors. Nagrampa admits that she carefully reviewed the financial elements of the contract and obtained confirmation of her anticipated profit margin. She declared under penalty of perjury that she had read the agreement. Nagrampa doesn’t claim that she was unaware of the arbitration clause when she signed the contract. What Na-grampa does claim is that she was “never informed” of the arbitration clause. This claim is specious. Page one of the offering circular contains a heading labeled “Risk Factors,” the first of which reads as follows:
THE FRANCHISE AGREEMENT REQUIRES YOU TO ARBITRATE AND SUE IN MASSACHUSETTS. OUT-OF-STATE ARBITRATION OR LITIGATION. MAY FORCE YOU TO *1310ACCEPT A LESS FAVORABLE SETTLEMENT. IT MAY ALSO COST YOU MORE TO ARBITRATE OR LITIGATE WITH U.S. IN MASSACHUSETTS THAN IN YOUR HOME STATE.
You’d have to be blind to miss this warning. There was no surprise here.
So if this agreement is procedurally unconscionable, it must be because Nagram-pa was somehow oppressed. The majority finds oppression because of the great financial disparity between MailCoups and Nagrampa, and because MailCoups presented Nagrampa with a form contract, the terms of which were non-negotiable. But, these conditions are always present where an individual signs up for a franchise, and yet “[fjranchise agreements are not per se unenforceable” in California. Maj. at 1280 (quoting Indep. Ass’n of Mailbox Ctr. Owners, Inc. v. Superior Court, 133 Cal.App.4th 396, 407, 34 Cal.Rptr.3d 659 (4th Dist.2005) (internal quotation marks omitted)).
Franchisors are typically large enterprises with an established business model and a suite of products and services that enjoy widespread — often nationwide — recognition. That’s the very point of buying a franchise rather than starting a business from scratch. Franchisees tend to be individuals or families who hope to achieve economic self-sufficiency by marketing the franchisor’s products and services. The franchisor invariably has financial resources that far exceed those of the prospective franchisee, but “large business entities may have relatively little bargaining power, depending on the identity of the other contracting party and the commercial circumstances surrounding the agreement.” A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 489-90, 186 Cal.Rptr.114 (Ct.App.1982).
Likewise, franchise agreements are typically offered by means of form contracts, consistent with the standardized nature of the franchise business model. And, California courts have recognized that “the fact that [a] provision for arbitration is contained in a contract of adhesion will not, of itself, render the provision unenforceable.” Keating v. Superior Court, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192, 1198 (Cal.1982), rev’d on other grounds, Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). So, if franchise agreements in general and form arbitration clauses in particular are not per se oppressive, we must find a way to separate enforceable agreements from those that are not. To do this, we must examine closely the facts and circumstances of this negotiation. When we do so, it is perfectly clear Nagrampa was not oppressed.
First, Nagrampa is a sophisticated businesswoman with special expertise in the direct mail business. In her complaint, Nagrampa states: “On or about July 1998 plaintiff prepared- a spreadsheet reflecting her prospective costs and profits based on conversations with MAILCOUPS INC.’s agent....” In her declaration, she states:
I reviewed the materials from Super-Coups and discovered that instead of calculating costs on a line by line basis, SuperCoups charged its franchisees an inflated lump sum that is later reduced by postage overcharge refund and other production credits.
The majority’s romantic vision of Nagram-pa as a modern-day Candide is shattered by her ability to do complicated financial forecasting and her easy use of terms such as “inflated lump sum,” “postage overcharge refund” and “production credits.” In reality, Nagrampa was a savvy businesswoman who knew the direct mail industry inside and out, and was more than *1311capable of taking care of herself. To suggest otherwise denies Nagrampa the respect a woman in her position deserves.
All this is easily dismissed, according to the majority, because Nagrampa “apparently” didn’t have “specialized education or training in the field.” Maj. at 1283. But even if this were supported by the record — and I’ve found nothing to support it — it’s not clear why it matters. Nagram-pa obviously had what it takes to be a high-level executive in this very industry. Whether she gained these skills through formal training, experience, a knack for business, or a combination of the three, the point is that if Nagrampa was not sophisticated enough to sign up as a direct-mail franchisee, nobody is.
It’s also significant that Nagrampa was under no economic pressure because she held a lucrative job with another company. That Nagrampa continued to work at her six-figure job while she considered whether to sign the contract meant that she was negotiating from a position of strength. She could have easily said “no” at any time and sought another franchise opportunity or kept her job and six-figure salary. California courts have recognized that inequality of bargaining power “depends in part on the absence of meaningful choice by a contracting party; and even though a contract may be adhesive,.the existence of ‘meaningful’ alternatives available to such contracting party in the form of other sources of supply tends to defeat any claim of unconseionability.” Dean Witter Reynolds, Inc. v. Superior Court, 211 Cal.App.3d 758, 771, 259 Cal.Rptr. 789 (Ct.App.1989).
The majority tries to distinguish Dean Witter by pointing out that the attorney there “had a great degree of experience with financial service contracts,” maj. at 1283, but misses the point of that case entirely. In Dean Witter, the plaintiff, an attorney who specialized in litigation against financial institutions, purchased a self-directed IRA from Dean Witter and sued to contest the contract’s fee provisions. Dean Witter, 211 Cal.App.3d at 762, 259 Cal.Rptr. 789. The court held the contract was not procedurally unconscionable, because plaintiff had failed to show “lack [of] a meaningful choice” in where to purchase an IRA. Id. at 772, 259 Cal.Rptr. 789. That the plaintiff in Dean Witter was an experienced lawyer while Nagrampa is an experienced businesswoman is a distinction without a difference. Just as the plaintiff in Dean Witter could have purchased an IRA from another financial institution, so Nagrampa could have looked for another franchisor-all the while continuing to draw her salary. Dean Witter cites numerous cases, from California and elsewhere, that reach precisely the same conclusion: A party who has a meaningful choice cannot be oppressed. See id. at 769-72, 259 Cal.Rptr. 789 (citing Kurashige v. Indian Dunes, Inc., 200 Cal.App.3d 606, 614, 246 Cal..Rptr. 310 (Ct.App.1988); Parr v. Superior Court, 139 Cal.App.3d 440, 444, 188 Cal.Rptr. 801 (Ct.App.1983); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69, 87, 94 (N.J.1960)).
Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138 (Ct.App.1997), turns on this very point. In Stirlen, the corporation did not disclose the arbitration requirement to a sophisticated executive until after he had already accepted employment with the defendant. Id. at 1534, 60 Cal.Rptr .2d 138. By that time, he had quit his previous “highly paid position with a major corporation,” id. at 1533, 60 Cal.Rptr.2d 138, and thus was dependent on his new job for his livelihood. That is a very different situation from the one here, where Nagrampa could have rejected the franchise agreement and still have had an *1312income with which to pay the mortgage and put food on the table.
Our case is the antithesis of Stirlen. As Nagrampa admits, MailCoups approached her about the possibility of opening a franchise and pursued her aggressively to keep the negotiations alive. As the solicited party, with a good income and a secure job with one of MailCoups’s competitors, Na-grampa held the trump card in the negotiations: She could have “just said no,” and forced MailCoups to go scrambling for the business partner, it seems to have desperately needed. Walking away from the deal would have caused her no loss of livelihood, no inconvenience of any sort, since her sole motivating factors were self-interest and ambition. These are swell reasons, to be sure, but hardly the stuff of economic duress. Under these circumstances, I cannot conclude that the contract negotiations were oppressive, nor that the resulting contract was procedurally unconscionable.
I’d be much less troubled by the majority’s contrary conclusion if my colleagues took seriously the sliding scale test they discuss in the procedural unconscionability section of the opinion. Maj. at 1281. After all, the difference between no procedural unconscionability (as I see it) and “minimal” or “slight” procedural uncon-scionability (as the majority sees it) should make no difference unless there is evidence of overwhelming substantive uncon-scionability to offset the “minimal” showing on the procedural side of the scale. And, as Judge O’Scannlain shows, if there is substantive unconscionability at all, it is nowhere near overwhelming; the majority doesn’t even pretend that it is.
As it is, the majority pays only lip service to the sliding scale test. It briefly discusses the test in the procedural uncon-scionability part of its opinion, but then forgets all about it when it gets to the other end of the sliding scale. The majority does say that the evidence of substantive unconscionability is “strong enough” to offset the “slight” evidence of procedural unconscionability. Maj. at 1293. But this merely states the conclusion the majority wants to reach; it does not explain why the substantive unconscionability it finds is of such a “high degree” as to offset the “slight” or “minimal” degree of procedural unconscionability. See, e.g., Nyulassy v. Lockheed Martin Corp., 120 Cal.App.4th 1267, 1286-87, 16 Cal.Rptr.3d 296 (Ct.App.2004).
So what we’re left with is a sophisticated executive who willingly left a six-figure job to buy a franchise in an industry where she’d been doing business for years. There was no coercion, surprise or duress in the negotiations-indeed, Nagrampa was being aggressively courted by MailCoups. She had the contract for two months before she signed it and could have taken longer if she’d liked. But because she might be forced to spend something like $800, see O’Scannlain dissent at 18966, in order to arbitrate in the venue she freely agreed to, the arbitration clause is thrown out the window.
As with most paternalistic endeavors, the majority’s opinion carries the seeds of great irony. By invoking the unconsciona-bility doctrine to protect “the little guy” in this case, the majority has construed California franchise law in a way that will result in fewer opportunities for other “little guys” in the future. The ever-growing cost of litigation is one of the most serious and uncontrollable risks faced by modern businesses. As the California courts have recognized, arbitration helps businesses manage this risk by “providing for resolution of disputes in a presumptively less costly, more expeditious, and more private manner by an impartial person or persons typically selected by the parties them*1313selves.” Keating, 183 Cal.Rptr. 360, 645 P.2d at 1198. But, according to the majority, only those who already control the means of production or possess vast economic resources on par with those of a major corporation are sophisticated enough to enter into enforceable arbitration agreements. This undermines the important policies of the Arbitration Act, denying potential first-time business owners the very benefits Congress meant to secure for them. The result is that fewer aspiring business owners — -many of whom are minorities and first generation Americans — will find franchisors willing to offer them opportunities like the one MailCoups offered to Nagrampa.
While I believe that this contract is entirely valid under California law as construed by the courts in that state, the majority’s exegesis of unconscionability doctrine does point to a disturbing trend of judicial hostility to form contracts. Commercial transactions today are typically governed by standardized contracts, the terms of which are non-negotiable. The era of the individually-negotiated contract — like that of the hand-crafted fliv-ver — is fading from living memory. As the majority opinion demonstrates, however, California courts have shown a lamentable tendency to hold the arbitration clauses in such contracts unenforceable. The effect of these developments is that such provisions are now easily challenged on grounds of unconscionability, routinely channeling contract disputes away from arbitrators and into the courts. Buckeye Check Cashing, Inc. v. Cardegna, — U.S. -, 126 S.Ct. 1204, 1209, 163 L.Ed.2d 1038 (2006), stands squarely for the proposition that state law may not be used to so easily divest arbitrators of their authority. I would not be the least surprised to see the Supreme Court of the United States soon take a close look at whether the unconscionability doctrine, as developed by some state courts, undermines the important policies of the Arbitration Act.

. The majority says there were two conference calls, maj. at 1278, but MailCoups’s attorney asserts that Nagrampa or her lawyer participated in at least three calls, and Na-grampa does not contest this assertion in her brief.

. Even if one reads the February 6, 2002, letter as objecting to arbitrability, I’m not sure how it helps Nagrampa. All it would mean is that Nagrampa submitted the question to the arbitrator, thereby acquiescing in his authority to decide the issue. It would certainly not preserve her right to withdraw from the arbitration and have the arbitrability issue decided de novo by a court. Because, unlike the respondent in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 941, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), Nagram-pa consented to arbitration, she was not entitled to submit a question to the arbitrator yet retain the right to de novo consideration of the same issue injudicial proceedings.

. First Options is particularly unhelpful to the majority, even if it were on point But see note 4 infra. The party objecting to arbitra-bility in First Optiom appeared only to contest arbitrability; he did not participate in any other aspect of the arbitration. 514 U.S. at 940-41, 115 S.Ct. 1920 (explaining that the Kaplans made an objection to arbitrability in their personal capacities while Mr. Kaplan participated only as the principal shareholder of his company for the remainder of the proceedings).

. Contrary to what the majority claims, consent and waiver are quite different. There is no presumption that parties have consented to arbitration and thus the party wishing to establish consent by conduct must do so by making a clear showing that the opposing party's conduct amounts to consent. First Options, 514 U.S. at 944, 115 S.Ct. 1920. But where the parties have consented to arbitration by contract, as they did here, there is a presumption that all issues between them are to be decided by the arbitrator. Id. In such circumstances, the party attempting to withdraw a question from arbitration must affirmatively establish that it preserved the right to do so. Thus, conduct that is insufficient to establish consent may be more than sufficient to establish waiver.