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The Franchise Memorandum

Unconscionability Arguments Fail in California and Washington Franchise Cases
Posted in Arbitration

Two more courts have weighed in on the unconscionability of arbitration clauses. In Sammy Enterprises v. O.P.E.N. America, Inc., 2008 WL 2010357 (Wash. App. Div. 1 May 12, 2008), the Washington Court of Appeals upheld enforcement of an arbitration provision despite the franchisee’s challenge. And in Smith v. Paul Green School of Rock Music Franchising, LLC., 2008 WL 2037721 (C.D. Cal. May 5, 2008), a federal district court in California refused a California franchisee’s request to stop an arbitration from being conducted in Pennsylvania, the home state of the franchisor.

In the Sammy Enterprises case, the Washington court rejected pleas that the lack of English proficiency of the plaintiff’s representatives rendered enforcement of the clause procedurally unconscionable. Although the arbitration provision was in paragraph 11.7 of a 33-page franchise agreement (which in turn was part of a 200-page offering circular), the court noted that the cover page of the offering circular highlighted the arbitration requirement in bold, capital letters. The franchisees also had 10 days to analyze the document and have it reviewed by others.

As to alleged substantive unconscionability, the Washington Court of Appeals found important that the contract expressly stated the “business realities” that create a special need for the franchisor to enforce certain rights in a court, whereas the franchisee had to arbitrate. Even if any part of the arbitration clause was one-sided, the appeals court emphasized, the trial court had found such language “severable” from the overall requirement to arbitrate. So long as Washington statutory remedies (including punitive damages) could be pursued in the arbitration, the agreement could be enforced.

The Smith case was a fight about where arbitration proceedings would be held. The court did find at least “minimal” evidence of procedural unconscionability in that the arbitration clause may have been offered on a “take it or leave it basis,” and that the parties’ bargaining power was “unequal.” But this “minimal indeed” showing was not backed up by the required “significant showing” of substantive unconscionability needed to invalidate the choice of a Pennsylvania forum. Importantly, the court found that the franchisor had conceded that the franchisee would be allowed to assert California statutory rights and remedies in the Pennsylvania forum.

Both courts applied and interpreted Nagrampa and other recent unconscionability decisions.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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