The Franchise Memorandum

A California appellate court reversed the trial court’s ruling that an arbitration agreement related to a former Papa John’s employee was unconscionable in Spaulding v. PJCA-2 LP, 2019 WL 517667 (Cal. Ct. App. Feb. 11, 2019). Plaintiff Jason Spaulding began working in a restaurant operated by defendant Papa John’s in 2009, and Papa John’s later sold the business to a franchisee, PJCA-2. PJCA-2 offered to continue to employ Spaulding at the restaurant but required him to review and sign a 40-page new hire package, which included a four-page arbitration agreement. Spaulding signed the arbitration agreement but crossed out the word “voluntarily” and wrote “UD” on the first page to indicate that he was signing the agreement under duress. When Spaulding was fired a year later for violating company policy, he filed multiple employment-related claims against PJCA-2, the manager of the restaurant, and Papa John’s. PJCA-2 and the manager moved to compel arbitration, and Papa John’s joined in the motion on the grounds that it could enforce the arbitration agreement as an agent or thirdparty beneficiary.

The trial court denied the motion after determining that the arbitration agreement was unconscionable. Under California law, both procedural and substantive unconscionability must be present in order to render a contract unenforceable. The trial court found that the arbitration agreement was procedurally unconscionable because PJCA-2 did not make someone available to answer questions Spaulding may have had about the agreement, did not attach the rules of the American Arbitration Association that would govern the arbitration of any claims, and presented the arbitration agreement on a take-it-or-leave-it basis. Further, the trial court found the agreement substantively unconscionable because it enabled the arbitrator to limit discovery. The defendants appealed the decision.

In its review of procedural unconscionability, the appellate court was unmoved by some of the trial court’s conclusions, finding that there was no evidence that Spaulding had any questions about the arbitration agreement, and noted that the AAA rules were easily accessible on the internet. However, the court agreed with the trial court’s conclusion that the arbitration agreement was procedurally unconscionable because Spaulding was unable to negotiate the terms of the agreement and was required to sign it as a condition of his employment. In its review of substantive unconscionability, the appellate court disagreed with the trial court’s finding, noting that under existing precedent similar AAA rules governing discovery were not substantively unconscionable. Because there was no substantive unconscionability, the appellate court reversed the trial court’s ruling.