Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: Choice-of-law, mutuality, and unconscionability arguments fail to preclude arbitration in Choice Hotels matter, (May 12, 2025)

By Justin Marcus Smith, J.D.

Even if there had been no meeting of the minds about the forum, that did not, in light of how the franchise agreement was written in this particular matter, invalidate the arbitration provision.

The federal district court in Los Angeles compelled arbitration of a judicial complaint brought by franchisee CS Anaheim Hotel Investments LLC (CS Anaheim) against franchisor Choice Hotels International (Choice). The choice of law provision in the parties’ 2016 franchise agreement was equally enforceable under either California or Maryland law, so there was no need for the court to resolve the choice-of-law dispute CS Anaheim raised. The court also distinguished the circumstances of the three cases CS Anaheim cited to hold that any unenforceability of the instant forum selection clause did not invalidate the remainder of the arbitration provision. A fourth case CS Anaheim cited did not conflict with the court’s conclusion that any lack of mutuality about the forum did not extend to the arbitration clause as a whole. Last, inasmuch as CS Anaheim failed to show substantive unconscionability, the court said it did not need to consider arguments about procedural unconscionability. The delegation clause was enforceable. That meant the enforceability of the arbitration provision was a question for the arbitrator, and accordingly, the court compelled arbitration (CS Anaheim Hotel Investments LLC v. Choice Hotels International, Inc., No. 8:24-cv-02131-ODW-ADS (C.D. Cal. May 9, 2025)).

Background. Franchisee CS Anaheim brought a judicial complaint against franchisor Choice for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud, with respect to a Cambria hotel franchise. Among the franchisee’s allegations, it contended that Choice improperly uses system fees that CS Anaheim pays to fund Choice’s own business development activities, when those system fees should have been spent on marketing and advertising. CS Anaheim also sought a declaratory judgment that it might terminate the parties 2016 franchise agreement without paying liquidated damages.

Choice moved to compel arbitration based on the franchise agreement arbitration and delegation provisions and to stay the case pending completion of arbitration. CS Anaheim did not contest the arbitration and delegation provisions. CS Anaheim argued instead that they were unenforceable because the Maryland forum selection clause was unenforceable, the delegation clause was unconscionable, and the arbitration clause in its entirety was unconscionable.

Choice of law. The court held that CS Anaheim must arbitrate its claims against Choice. CS Anaheim did not cite any Maryland law or contest that, if Maryland law governed, the court must compel arbitration. CS Anaheim only argued that the delegation and arbitration clauses were unenforceable under California law, but the court disagreed, it found they were, so there was no need to resolve CS Anaheim’s attempt to dispute which law to apply.

Mutuality. The court held that any unenforceability of the forum selection clause did not invalidate the remainder of the arbitration provision. The court explained that it was clear, unlike in the three cases that CS Anaheim cited, that a certain addendum to the Maryland forum selection clause which warned it might not be enforceable in California did not even mention arbitration. Therefore, there could be no ambiguity that the provision referred to forum selection only. Even if the parties did not mutually agree to the selected forum, it remained that they mutually agreed to the remainder or the arbitration provision.

CS Anaheim cited a fourth case for its argument the court should invalidate the entire arbitration clause, but the court analyzed that case, too, and it was about a disclosure similar to those in the first three cases CS Anaheim cited. The court said the fourth case did not conflict with the court’s prior conclusion that any lack of mutuality about the forum did not extend to the arbitration clause as a whole. The court declined to invalidate the entirety of the arbitration clause.

Unconscionability. The court said it did not reach the contract-of-adhesion argument that CS Anaheim raised because CS Anaheim failed to show the delegation clause was substantively unconscionable. CS Anaheim argued it was substantively unconscionable for two reasons. First, it said there was no meeting of the minds as to venue, so the parties did not agree on what arbitrator would decide arbitrability. Second, CS Anaheim argued the arbitrator was precluded from applying California unconscionability standards.

As to the first issue, the court had already concluded that, even if there were no meeting of the minds about the forum, that did not invalidate the arbitration provision. The court additionally observed that, if the forum selection clause were unenforceable, it would not be part of the franchise agreement; therefore, the court would not consider it in determining whether the delegation clause was unconscionable.

As to the second issue, the court again found the case CS Anaheim cited to be off-point. The choice of law clause in the instant franchise agreement was “nothing like” the one in the cited case. The instant choice of law clause did not prevent an arbitrator from applying California unconscionability law, whereas the provision in the cited case not only set forth a choice of law, it also prohibited the arbitrator from finding that choice unenforceable.

The Case is No. 8:24-cv-02131-ODW-ADS.

Judge: Wright, O.

Attorneys: Justin E. Proper (White and Williams LLP) for CS Anaheim Hotel Investments LLC. Alexander Pasquale Carroll (Pillsbury Winthrop Shaw Pittman LLP) for Choice Hotels International, Inc.

Companies: CS Anaheim Hotel Investments LLC; Choice Hotels International, Inc.

Cases: FranchisingDistribution CaliforniaNews