Question: NAGRAMPA v. MAILCOUPS, INC., 469 F.3D 1257 (9TH CIR. 2006) (EN BANC)
FACTS The franchisee and franchisor had entered into an agreement for a direct-mail advertising franchise. The agreement had a provision stating that disputes were to be arbitrated. After two unprofitable years of operation, the franchisee unilaterally terminated the relationship. The franchisor then started an arbitration proceeding, claiming that the franchisee owed it over $80,000 in fees. The franchisee challenged the validity of the arbitration clause in court. DECISION The appellate court ruled that the arbitration clause was both procedurally and substantively unconscionable and thus unenforceable. Under California law (which governed the agreement), "[p]rocedural unconscionability analysis focuses on ‘oppression' or ‘surprise.'" Furthermore, "[o]ppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice," while "[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them." By contrast, "[a]n arbitration provision is substantively unconscionable if it is "‘overly harsh'" or generates "‘one-sided' results."
The court explained that "the paramount consideration in assessing [substantive] conscionability is mutuality." Here, the franchise agreement was procedurally unconscionable because the franchisee was in a "substantially weaker bargaining position" than the franchisor, the franchisor had drafted the franchise agreement, and the franchisor had presented the agreement to the franchisee on a "take-it-or-leave-it" basis. In fact, the franchisee's efforts to negotiate certain of the terms had been rebuffed by the franchisor. The franchise agreement was also substantively unconscionable because it lacked mutuality (in that it allowed the franchisor to bring certain actions in court while restricting the franchisee's causes of action against the franchisor to arbitration proceedings) and the forum designated for arbitration (the franchisor's home of Boston, Massachusetts) was oppressive to the franchisee, who was located in California.