In Bridge Fund Capital Corporation v. Fastbucks Franchise Corporation, 2008 WL 3876341 (E.D. Cal. Aug. 20, 2008), the court dismissed a franchisor’s motion to dismiss or stay the action pending the outcome of arbitration because it declined to enforce the choice of law, choice of forum, and arbitration clauses in the franchise agreements at issue. This case demonstrates how careful franchisors must be, especially in cases where courts would apply California law, with respect to contractual provisions in franchise agreements that create one-sided legal rights in their favor.
The franchisees in this case operated payday loan and check cashing franchises located in California. The franchisor was a Nevada corporation with its principal place of business in Texas, and it provided training to the franchises at its headquarters in that state. The franchise agreements at issue contained choice of law and choice of forum provisions requiring any dispute to take place in Texas in accordance with Texas law. In addition, the franchise agreements required all disputes arising between the parties to be resolved through arbitration in Texas. However, the UFOCs contained an addendum pertaining to the enforcement of the franchise agreements under California law. The franchisees sued Fastbucks in state court, alleging that the franchisor had made material misrepresentations and omissions of fact regarding the franchise system and that it had failed to comply with state franchising laws. After the case was removed to federal court, Fastbucks filed a motion to dismiss or stay the action pending the outcome of arbitration.
The federal court denied the motion to dismiss. Turning first to the choice of law and choice of forum clauses, the court found that California had a “materially greater interest” than Texas in the case, and, therefore, the latter state’s laws should apply to any dispute between the parties. For the most part, the court reached this conclusion because applying Texas law would bar the franchisees from the protections provided by the California Franchise Investment Law. The court rejected the franchisor’s suggestion that the arbitration could be brought in Texas because they could not show any prior case in which a Texas court or arbitrator had applied the CFIL with respect to a California franchisee. Therefore, the court concluded, the franchisor had failed to show that the franchisees’ rights “would not be diminished” if the choice of law and choice of forum clauses were enforced.
The court also declined to enforce the arbitration provisions finding that the provisions were both procedurally and substantively unconscionable. Specifically, the court found that the franchise agreements were contracts of adhesion because the franchisees had no real negotiating power when they entered into the agreements, citing to a handful of California cases holding that franchisees have no real power to negotiate the terms of arbitration provisions. Further, the court deemed the arbitration provisions substantively unconscionable because they lacked mutuality, as the arbitration clauses allowed only the franchisor to seek injunctive relief, limited the franchisees’ recoverable damages, shortened the applicable statute of limitations, imposed place and manner restrictions, and waived the franchisees’ rights to participate in class action litigation against the franchisor.