Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Cal.: Franchise agreements neither procedurally nor substantively unconscionable, (Feb 25, 2015)

By Dan Selcke, J.D.

The federal district court in Oakland, California granted the defendant franchisors’ motions to compel arbitration according to the terms of franchise agreements signed by the plaintiff franchisees, since the agreements were only minimally procedurally unconscionable and not substantively unconscionable (Estrada v. CleanNet USA, Inc., February 24, 2015, White, J).

Franchise agreements. The plaintiffs consisted of three individuals who purchased franchises from a business allegedly operated by defendant CleanNet USA, Inc. The franchise agreements provided that the parties must first attempt to resolve disputes through direct negotiation. If negotiations failed, the agreements provided that all disputes would be settled through arbitration, but not before the parties tried to settle them through mediation. Finally, the agreements provided that, “Franchisee shall not seek to arbitrate or litigate as a representative of, or on behalf of, any other person or entity, any dispute, controversy, and claim of any kind arising out of or relating to this Agreement…”

The plaintiffs filed suit on behalf of a class of individuals who had been injured by the defendants, alleging 16 causes of action. The defendants moved to compel arbitration or dismiss the complaint.

Procedural unconscionability. The plaintiffs argued that the arbitration agreements were unenforceable because they were both procedurally and substantively unconscionable.

The plaintiffs argued that, because of the defendants’ superior bargaining power, they had no meaningful choice about whether to accept the agreements, and that the dispute resolution provisions were buried within lengthy contracts they were not given enough time to review. The defendants countered that the dispute resolution provisions were clearly labeled with bolded, capitalized section headings that should have alerted the plaintiffs to their existence. The plaintiffs, who had represented that they were capable of doing business in English, had been given an opportunity to look over the documents and were encouraged to consult an attorney. Looking at these facts, the court held that the agreements were procedurally unconscionable to a minimal degree.

Substantive unconscionability. Next, the court looked at the specific terms in the agreements and held that they were not substantively unconscionable. First, the plaintiffs pointed to a provision they argued impermissibly shortened the limitations period by providing that, should negotiations fail, the dissatisfied party must submit the dispute to mediation or arbitration within 180 days. The court held that this provision was ambiguous, but simply severed it from the agreements rather than holding that it made the agreements substantively unconscionable.

The court disagreed with the plaintiffs’ argument that the dispute resolution provisions limited their ability to recover fees and damages, pointing to a clause that expressly provided that any “arbitrator shall have the power to enter an award…protecting its rights to the same extent a court could do…” The agreements’ waiver of punitive damages, meanwhile, was not so egregious as to render the agreements substantively unconscionable.

Finally, the court rejected the plaintiffs’ argument that the agreements’ fee-splitting requirements would place an undue financial burden on them. The plaintiffs had not provided the court with enough information, such as an estimate of what it might cost them to engage in arbitration, for it to draw a valid conclusion regarding their ability to split costs. In any case, the agreements provided that small disputes could be settled in local dispute resolution offices, and the defendants had repeatedly offered to pay 100% of the costs of any AAA mediation.

A contract could only be held enforceable if it was both procedurally and substantively unconscionable. The agreements here were minimally procedurally unconscionable and not at all substantively unconscionable, so the court granted the defendants’ motions to compel arbitration and ordered the parties to resolve their disputes according to the terms of the agreements.

Class action waivers. The plaintiffs conceded that, if they were required to arbitrate, the agreements’ class action waivers would bar them from pursuing most of their claims on a representative basis. They argued, however, that these waivers did not reach the claims they brought pursuant to California’s Private Attorney General Act (PAGA). The court disagreed, as allowing the PAGA claims to proceed without being affected by the class action waivers would contravene the purpose of the Federal Arbitration Act, which aimed to resolve disputes efficiently by enforcement arbitration agreements according to their terms. Therefore, the plaintiffs had to bring their claims as individuals.

The case number is: 14-01758

Attorneys: Christopher Allen Wimmer (Emergent Legal) for Esther Estrada. R. Brian Dixon (Littler Mendelson, PC) for CleanNet USA, Inc. and CleanNet of Southern California, Inc. Charles G. Miller (Bartko Zankel Bunzel & Miller) for D&G Enterprises, Inc. William Vincent DePaul Whelan (Solomon Ward Seidenwurm Smith LLP) for CleanNet of San Diego and CleanNet of Sacramento.

Companies: CleanNet USA, Inc.; CleanNet of Southern California, Inc.; D&G Enterprises, Inc.; CleanNet of San Diego; CleanNet of Sacramento

Cases: FranchisingDistribution CaliforniaNews