Ninth Circuit Invalidates Arbitration Clause in Franchise Agreement

In Bridge Fund Capital Corp. v. Fastbucks Franchise Corp. (9th Cir., September 16, 2010) --- F.3d ----, 2010 WL 3584060, the franchisees of a payday loan and check cashing company sued the franchisor in state court, alleging breach of franchise agreements, fraud and deceit, negligent misrepresentation, violation of the California Franchise Investment Law (CFIL), declaratory relief, and unfair trade practices. After removal, the district court (Judge England, E.D.Cal.)denied the franchisor's motion to dismiss or to stay pending arbitration, and the franchisor appealed.

The Ninth Circuit affirmed the order, holding:

As long as the plaintiff's challenge to the validity of an arbitration clause is a distinct question from the validity of the contract as a whole, the question of arbitrability is for the court to decide, regardless of whether the specific challenge to the arbitration clause is raised as a distinct claim in the complaint. Slip op. at 4-5.

The district court did not err in determining that California law governed the unconscionability question, despite a Texas choice of law clause and the defendant's residence in Texas, because California possessed a materially greater interest in the matter, where enforcement of the arbitration clause would contravene fundamental California public policy in favor of protecting California franchisees from unfair and deceptive business practices, as established by the CFIL. Slip op. at 6.

Because most of the arbitration clause was both procedurally and substantively unconscionable under California law, and severance of the unconscionable provisions would have left almost nothing to the clause, the district court did not abuse its discretion in invalidating the entire clause, rather than redacting the offending portions of it. Slip op. at 7-8.

Parties seeking to invalidate arbitration clauses in employment agreements undoubtedly will want to analogize to this case.

The opinion is available here.