Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Cal.: Arbitration agreement not unconscionable based on unequal bargaining power, (Jan 21, 2015)

By Dan Selcke, J.D.

An arbitration provision Sprint Solutions, Inc. had signed with one of its preferred dealers was not unconscionable based on Sprint’s superior bargaining power, a federal district court in California held (Haisha v. Sprint Solutions, January 14, 2015, Curiel, G.). The court granted Sprint’s motion to compel arbitration of the dealer’s claims.

The dealer, Haisha Corp., owned and operated six wireless phone stores as an exclusive dealer for Sprint, and consistently ranked amongst the top independent Sprint dealers. Despite indications that its relationship with Sprint was on track to expand, Haisha’s president suddenly received an email from a Sprint VP, stating that Sprint would not be renewing its contract with Haisha, which had 30 days to close all six stores or find someone else to buy them. Not wanting the stores to fall into the hands of a competitor, Sprint provided Haisha with a list of five preferred dealers and stated that sale of the stores would not be approved to anyone but those on the list.

Haisha obtained offers from companies not on the list, but could not take them. Ultimately, it sold to an approved dealer, which paid far less than fair market value for the stores. The buyer planned to close some of the stores, which left Haisha liable for leasehold obligations it had with landlords. Haisha filed claims for intentional interference with economic relations; negligent interference with business relationships; unlawful, unfair, and fraudulent business acts and practices; and interference with contractual relations.

Sprint sought to compel mediation of Haisha’s claims as required by an authorized representative agreement (AR agreement) the parties had signed years before that had lapsed prior to Sprint’s requiring Haisha to dispose of its stores. Haisha did not respond, and Sprint filed a motion to compel arbitration, which was also provided for in the AR agreement.

Reading the agreement so to resolve any doubts as to arbitrability in favor of coverage, the court held that the language in the agreement was broad enough to cover Haisha’s claims. After noting that the Federal Arbitration Act created a general policy favoring arbitration agreements, the court considered whether the scope of the AR agreement’s arbitration provision was wide enough to encompass the disputes at issue. Haisha argued that its claims were based not on a violation of the AR Agreement, but rather on Sprint preventing third parties from bidding on the stores it operated. Therefore, it argued, they were not governed by the AR agreement. The court disagreed, reasoning that the harms suffered by Haisha followed from the termination of the AR agreement.

Procedural unconscionability. Next, the court considered whether the arbitration provision was valid, starting with Haisha’s argument that it was procedurally unconscionable. There were several factors militating against that conclusion. For one thing, the arbitration provision could not have come as a surprise, since it was attached as a separate exhibit to the AR agreement rather than buried in fine print. Haisha also argued that the agreement was procedurally unconscionable because Sprint failed to attach a copy of the arbitration rules to it. The agreement did, however, incorporate the rules by reference, and they were easily accessible on the Internet. As long as that was true, the arbitration rules did not have to be attached to an agreement to avoid a finding of procedural unconscionability in California.

While Haisha’s president testified that he “felt” he had to either take or leave the contract, this did not mean that he could not have tried to negotiate or that he had weak bargaining power. Haisha, after all, was a sophisticated company that successfully ran six stores. Still, Sprint’s national presence gave it more bargaining power, so there was a small amount of procedural unconscionability present.

Substantive unconscionability. Because there was only a small amount of procedural unconscionability, Haisha had to demonstrate a large amount of substantive unconscionability for the court to find that the AR agreement’s arbitration provision was unconscionable as a whole. Haisha first argued that the forum selection clause made the provision substantively unconscionable, since it required Haisha representatives to travel to a faraway forum at great personal expense, even though the company was located in California. This created an overly harsh result. However, Sprint was willing to negotiate a different forum, and the forum selection clause was collateral to the main agreement. Therefore, the court was able to sever that clause and did not enter into the substantive unconscionability analysis.

Haisha also argued that the arbitration provision lacked mutuality, pointing to a redacted clause that gave Sprint the right to some kind of injunctive relief that was not afforded to Haisha. However, Sprint had a legitimate commercial interest and need for seeking that relief while Haisha did not, so the presence of that clause did not demonstrate a lack of mutuality.

The court held that there was no substantive unconscionability, which meant that the arbitration provision was not unconscionable. It granted Sprint’s motion to compel arbitration, dismissed the complaint, and directed the parties to find a mutually agreeable location for arbitration.

The case number is: 14cv2773

Attorneys: Seth Bobroff (The Law Offices of Seth B. Bobroff) for Haisha Corp. A. Brooks Gresham, II (McGuireWoods LLP) for Sprint Solutions, Inc.

Companies: Haisha Corp.; Sprint Solutions, Inc.

Cases: FranchisingDistribution CaliforniaNews