Nagrampa v. MailCoups, Inc.

United States Court of Appeals for the Ninth Circuit (en banc) · Contracts

ContractsArbitrationUnconscionabilityFranchise agreementsFAASection 2Section 4arbitrability

Facts

Nagrampa entered into a franchise agreement with MailCoups that required arbitration under AAA rules, set the arbitral situs in Boston, required equal sharing of arbitration costs, and preserved MailCoups's right to seek provisional judicial relief to protect its service marks and proprietary information. After her franchise proved unprofitable and she terminated the agreement, MailCoups began arbitration seeking more than $80,000 in fees. Nagrampa objected to arbitration, the venue, and the fee clause, refused to participate after the AAA insisted on Boston, and sued, with her fifth and sixth causes of action specifically attacking only the arbitration provision as unlawful and unconscionable. The franchise agreement was presented on a take-it-or-leave-it basis, and the offering circular stated that the arbitration and choice-of-law provisions might not be enforceable under California law.

Issue

When a plaintiff challenges only the arbitration provision in a franchise agreement as unconscionable, is that challenge for the court or the arbitrator to decide under the FAA? If the court decides it, is this arbitration provision unenforceable under California unconscionability law?

Rule

Under the FAA, if the crux of the complaint challenges the contract as a whole, validity issues go to the arbitrator; but if the challenge is directed specifically to the arbitration provision itself, the court must decide whether that provision is invalid under generally applicable contract defenses such as unconscionability. Under California law, an arbitration provision is unconscionable when procedural and substantive unconscionability, assessed on a sliding scale, show oppression or surprise plus overly harsh or one-sided terms; lack of mutuality and unduly oppressive forum provisions are strong indicators of substantive unconscionability.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz signs a franchise agreement with Pine Harbor Tutoring, LLC in San Diego. After a dispute arises, she sues in federal court seeking damages for fraudulent sales projections and, in two separate counts, an injunction against enforcement of only the arbitration clause because it requires arbitration in Seattle and lets Pine Harbor seek court injunctions while she must arbitrate all claims.

Who should decide Lena's unconscionability challenge to the arbitration clause?

Explanation. Under the majority rule, the court decides when the crux of the complaint attacks the arbitration provision itself, even if the analysis considers circumstances surrounding formation of the broader contract. Here, Lena seeks relief aimed at invalidating only the arbitration clause, not the entire franchise agreement. That makes validity of the arbitration provision a judicial question under the FAA. (Derived from Nagrampa v. MailCoups, Inc. (n.d.).)