The Franchise Memorandum

A federal district court in California recently denied a franchisee’s motion for a preliminary injunction to prevent a franchisor from proceeding with arbitration, finding that the arbitration provision was neither procedurally nor substantially unconscionable. The dispute in Moody v. Metal Supermarket Franchising America Inc., 2014 WL 988811 (N.D. Cal. Mar. 10, 2014), involved Metal Supermarket’s exercise of its option to purchase Moody’s assets upon termination and the proper purchase price for those assets. After Moody filed a state court action seeking a declaration with regard to the purchase price issue, Metal Supermarket removed the action to federal court and filed a demand for arbitration. Moody moved unsuccessfully for a temporary restraining order to prevent the arbitration from moving forward and then sought the same relief through a preliminary injunction.

The court found that Moody had not established a likelihood of success on his challenge to the enforcement of the arbitration clause or irreparable injury. In particular, the court rejected Moody’s argument that the arbitration clause was procedurally and substantively unconscionable under California law. First, the court noted that Moody had been represented by counsel in the process of signing the franchise agreements and had been able to negotiate some contract terms, and found little evidence of procedural unconscionability. Next, although the court agreed that Metal Supermarket’s right to injunctive relief and the agreements’ damages limitations might have been one-sided, it had no problem with the lack of mutuality in forum selection or attorneys’ fees provisions. The district court noted that under California law, lack of mutuality in a one-sided contract did not necessarily render a contract invalid because it could provide a “margin of safety that provides the party with superior bargaining strength a type of extra protection for which it has a commercial need.” Finally, the court rejected Moody’s assertion that he would suffer irreparable harm, since he was only seeking monetary damages.