Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Cal.: Batteries Plus franchise litigation sent to arbitration with severance of unconscionable terms, (May 15, 2024)

By Justin Marcus Smith, J.D.

The court found substantive unconscionability for lack of mutuality with respect to the judicial forum and for unlawful restriction of punitive damages, but not with respect to venue restriction and class action waiver.

The parties to a Batteries Plus franchise agreement agreed to arbitrate a dispute where the franchisee’s owner-operator had sufficient time to review and understand the franchise agreement he signed without benefit of counsel, held a federal district court in Sacramento, California. Even so, some of the arbitration terms were unconscionable. Procedural unconscionability issues, like the location of the arbitration agreement within the larger franchise agreement, were minimal; however, the court severed the more serious substantively unconscionable terms. Specifically, the court nixed a carve-out that permitted only Batteries Plus, not the franchisee, to seek injunctive relief in court. The carve-out posed a mutuality problem. The court also found that California law made the restriction on punitive or exemplary damages was substantively unconscionable. The franchisee plaintiffs otherwise failed to show that the Milwaukee, Wisconsin, venue restriction was unduly oppressive with respect to “place and manner,” and the Federal Arbitration Act preempted California’s deprecation of class action waivers. The court granted the Batteries Plus defendants’ motion to compel arbitration and invoked its discretion to dismiss the action, without prejudice, instead of staying the action during pendency of arbitration (Singh v. Batteries Plus, L.L.C., No. 2:24-cv-00223-KJM-DB (E.D. Cal. May 13, 2024)).

Ashwant Singh, the owner and operator of franchisee Clean Future Technologies, LLC (collectively, the Singh plaintiffs), sued franchisor Batteries Plus, LLC (Batteries Plus) and two of its executives (collectively, the Batteries Plus defendants). Batteries Plus is a Wisconsin limited liability company with over 600 retail stores using the “Batteries Plus” trademark.

Singh complained that Batteries Plus grossly underestimated new franchise operating costs; provided false and inflated revenue projections; permitted another franchisee to encroach on its territory; failed to provide support; and, created a hostile work environment. Batteries Plus had the matter removed to federal district court and then moved to compel arbitration.

The franchise agreement contained mandatory arbitration, forum, and venue selection clauses or terms. The venue selection term restricted arbitral venue to Milwaukee, Wisconsin, but the choice of law provision provided for application of the law of the store’s location, in this case, California.

In the lead up to execution of the franchise agreement, Batteries Plus provided Singh with a 2021 and then a 2022 version of the Batteries Plus franchise disclosure document (FDD). Both FDDs drew attention to the arbitration and forum selection clauses. However, Singh declared that, among other things, no one explained the Batteries Plus 2021 Franchise Disclosure Document (FDD) contained a copy of the Franchise Agreement starting at FDD page 155.

Agent standing. The court held the two Batteries Plus executive defendants had contractual standing to move to compel arbitration under agency theory. The court reasoned that although the executives did not sign the franchise agreement, they were both acting within the scope of their employment at all relevant times. Because they were agents of Batteries Plus, their alleged conduct was related to and connected with the franchise agreement. Accordingly, the two executives were entitled to the benefits of the arbitration provision and to move to compel arbitration.

Arbitrability. The court found the question of arbitrability was properly before it and the parties had made a valid agreement to arbitrate. The court explained that it did not find any express language or equivalent provision delegating the issue of whether the agreement was void or voidable to the arbitrator. Moreover, the defendants noted the lack of delegation in their motion.

Turning to whether the parties had a valid agreement to arbitrate, there was no dispute that Singh signed the agreement, and the court presumed that Singh read it thoroughly and understood it, regardless of whether or not he had the benefit of counsel. The Singh plaintiffs only objected that they did not consent to arbitration because that clause was buried in the 57-page contract. The court concluded the Batteries Plus defendants met their burden of showing the parties had agreed to arbitrate.

The court also found the arbitration agreement was broad enough to cover the Singh plaintiffs’ claims. Given the agreement to arbitrate and the applicability of arbitration to the case, the court said it must compel arbitration “unless a ground for invalidation exists.”

Unconscionable agreement. The court held the Singh plaintiffs showed the arbitration provision had elements that were both procedurally and substantively unconscionable. The court began by noting that even though California does not view franchise agreements as per se unenforceable, it has long recognized that they have some characteristics of adhesion.

The court found some evidence of minimal procedural unenforceability. Here, the Singh plaintiffs contended that the arbitration provision was procedurally unenforceable because: 1) Singh had no meaningful opportunity to negotiate and no bargaining power; 2) he did not have enough time to review the agreement; 3) the lack of a table of contents meant Singh could not reference or understand it terms; and, 4) he had already paid the first installment of the initial franchise fee. The court saw some oppression inasmuch as Battery Plus drafted the agreement, had the greater bargaining power, and presented the agreement on a take-it-or-leave-it basis “with no reasonable opportunity to negotiate.” The court also saw some surprise inasmuch as the arbitration clause “was buried in the lengthy Franchise Agreement and did not appear until page 32 of the 57-page agreement.” The court said the Batteries Plus defendants conceded minimal procedural unconscionability during the hearing.

More importantly, the court also found some substantive unconscionability. Here, the Singh plaintiffs argued that the arbitration agreement was substantively unconscionable because: 1) it gave Battery Plus access to a judicial forum while restricting plaintiffs to the arbitral forum; 2) it restricted venue to Milwaukee, Wisconsin; 3) it unreasonably restricted the arbitrator from awarding exemplary or punitive damages; and, 4) it contained an unenforceable waiver of class action joinder. The court found substantive unconscionability for lack of mutuality with respect to the judicial forum and damages restrictions, but not with respect to venue restriction and class action waiver.

With respect to lack of mutuality, the Batteries Plus defendants argued that their injunctive relief carve-out was justified because they could suffer irreparable harm. The court disagreed because the carve-out was “not so narrowly drawn,” and there was nothing to suggest that any kind of breach would cause unique harm to Batteries Plus. Batteries Plus also did not explain why it could not obtain injunctive relief in the arbitral forum. In sum, Batteries Plus failed to justify the carve-out, and the resulting lack of mutuality rendered the arbitration provision substantively unconscionable.

Next, the court held the restriction on punitive or exemplary damages was also substantively unconscionable under California law. Specifically, in California, arbitration agreements cannot not limit statutory remedies. Armendariz v. Found. Health Psychcare Servs., 7 Inc., 24 Cal. 4Th 83, 103 (2000). Batteries Plus conceded this at the hearing.

In contrast, the court did not find the venue restriction unconscionable. In California, mere inconvenience or additional expense would not make a forum selection clause unduly oppressive or unreasonable with respect to “place and manner.” The court noted here that the Singh plaintiffs did not explain why the restriction was unduly burdensome. The court concluded the Singh plaintiffs could have reasonably anticipated arbitration in a different state given the disclosures Batteries Plus presented to Singh before he signed.

Last, the court also found the waiver of class action joinder was also “permissible and not unconscionable” because the Federal Arbitration Act preempted California’s rule against class action waivers. The Singh plaintiffs conceded this point at the hearing.

Severability. Next, the court held it could sever the provisions it found unconscionable. The parties ultimately agreed to severability of the restrictions on damages, and the court severed the waiver of special damages and the injunctive relief carve-out. With minimal procedural unconscionability and severance of the substantively unconscionable provisions, the court found the balance of the arbitration agreement was valid and enforceable.

Disposition. The court granted the Batteries Plus defendants’ motion to compel arbitration such that the severed provisions would have no effect. The court said it could not discern any reason to stay the action because all of the Singh claims were subject to arbitration. The court accordingly invoked its discretion to dismiss the action without prejudice.

The Case is No. 2:24-cv-00223-KJM-DB.

Judge: Mueller, K.

Attorneys: Douglas R. Luther (Luther Firm, PC) for Ashwant Singh and Clean Future Technologies LLC. Michael Gray (Lathrop Gpm LLP) for Batteries Plus, L.L.C. and Victor Daher.

Companies: Clean Future Technologies LLC; Batteries Plus, L.L.C.

Cases: FranchisingDistribution CaliforniaNews