The Franchise Memorandum

In Munoz, v. Earthgrains Distribution, LLC, 2023 WL 5986129 (S.D. Cal. Sept. 13, 2023), the plaintiffs, members of a class of independent distributors of baked goods for Earthgrains and other bakeries, alleged that they were misclassified as independent contractors rather than employees and were denied the protections of the California Labor Code as a result of the misclassification. Prior to the litigation, the plaintiffs each entered into distribution agreements with Earthgrains, and each agreement contained a Dispute Resolution Provision (DRP) which required mandatory arbitration of all claims. The plaintiffs also received franchise disclosure documents containing an addendum that stated that “the arbitration provisions might not be enforceable in California.” Earthgrains filed a motion to compel arbitration based on the DRP. The plaintiffs argued that the DRP was invalid because there was no mutual assent and that its terms were both procedurally and substantively unconscionable.

The court first found that there was no mutual assent because the plaintiffs, as California residents, received contradictory statements about whether arbitration would be required. The court noted the body of law holding that there is an absence of mutual assent where a document disclaims the enforceability of the contract provision itself. The court then addressed the claim of procedural unconscionability, which turns on an inequality of bargaining power. The court found that that since Earthgrains was part of the world’s largest baking company while the plaintiffs were hourly workers, and because the plaintiffs had no opportunity to negotiate their contracts, they were contracts of adhesion and oppressive in nature and therefore procedurally unconscionable. The court also found that several of the provisions were unreasonably harsh and in favor of the defendants, including a $10,000 liquidated damages provision that applied if the plaintiffs even tried to litigate a dispute outside of arbitration, and that this constituted substantive unconscionability. The court found that the circumstances demonstrated an intent to force a weaker party into arbitration and declared the entire DRP unenforceable, denying Earthgrains’ motion to compel arbitration.