Lead Opinion
Opinion by Judge WARDLAW; Partial concurrence and Partial Dissent by Judge CLIFTON; Dissent by Judge O’Scannlain; Dissent by Judge KOZINSKI
OPINION
with whom Chief Judge SCHROEDER, Judges REINHARDT, THOMAS, GRABER, FISHER, and GOULD join, and with whom Judge CLIFTON joins as to Part II-A and II-B.
The question before us is whether a provision to submit to arbitration in a written franchise agreement is valid and enforceable, therefore requiring the district court to stay proceedings and refer the disputed franchise agreement to arbitration under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16 (2000). In a now-withdrawn opinion, a three-judge panel of our court held that the unconsciona-bility of an arbitration provision contained in the franchise agreement is a question for the arbitrator to decide. Here, however, the plaintiff did not seek invalidation of the franchise agreement as a whole on grounds of unconscionability; instead she challenged the unconscionability of solely the arbitration provision. Therefore, it was error to hold that consideration of the unconscionability of the arbitration provision was to be determined by the arbitrator.
We review this case en banc to clarify, as the Supreme Court has recently reiterated, that when the crux of the complaint challenges the validity or enforceability of the agreement containing the arbitration
One must closely examine Nagram-pa’s complaint and apply California legal principles to understand why striking the arbitration provision does not. affect the validity of. the franchise agreement at issue. Nagrampa asserts six separate causes of action
Because § 2 of the FAA provides that аrbitration agreements are generally valid
I
In June 1998, Connie Nagrampa received an offering circular from Mail-Coups, Inc. On August 24, 1998, Na-grampa entered into an agreement with MailCoups to establish and operate a direct mail coupon advertising franchise under Mail Coups’s Super Coups system. The franchise agreement contains a provision requiring the parties to arbitrate, in accordance with the rules of the American Arbitration Association (“AAA”), any dispute that arises out of or relates to the franchise agreement. The arbitration provision further provides:
[T]his clause shall not be construed to limit MailCoups’ right to obtain any provisional remedy, including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoups’ sole subjective judgment, to protect its Service Marks and proprietary information. The decision of the arbitrator shall be binding upon the parties and judgment upon the award may be entered in any court having jurisdiction thereof. The situs of the arbitration proceedings shall be the regional office of the American Arbitration Association which is located in Boston, Massachusetts. The costs of arbitration shall be borne equally by MailCoups and Franchisee. Each party shall be responsible for the fees and expenses of its respective attorneys and experts.
In September 2000, after two years of unprofitable operation of her MailCoups franchise, Nagrampa unilaterally terminated the franchise agreement. This contract dispute arose in December 2001 when Ma-ilCoups initiated arbitration proceedings by filing a Demand for Arbitration with the AAA, claiming that at the time Na-grampa terminated the agreement, she owed MailCoups in excess of $80,000 in fees. Nagrampa, in turn, charged that rather than making a forty-one percent profit per year, as MailCoups had promised, she incurred over $180,000 in personal debt and had to pay over $400,000 in various fees to MailCoups. Nagrampa states that the forty-one percent profit figure was orally communicated to her by MailCoups and that this was not a figure that she had calculated herself. Furthermore, in a letter sent to MailCoups on September 22, 2000, Nagrampa agreed to pay only the amount due on the mailings, which would be reduced by unused Advertising Funds and CoolSavings charges.
MailCoups’s initial arbitration demand designated Los Angeles, Cаlifornia, as the hearing locale. In a letter dated February 6, 2002, Nagrampa’s attorney objected to the arbitration proceeding. He clearly stated, “We are not ready or willing to proceed with arbitration.” He also asserted “serious concerns about the validity of
Following further procedural skirmishes, on September 11, 2002, the AAA case manager notified the parties that the arbitration hearing would take place in Boston, Massachusetts, in accordance with the forum selection clause in the arbitration provision. On October 16, 2002, the arbitrator suggested that arbitration proceed in Fresno, California, as a more cost-efficient and convenient venue. MailCoups vigorously objected to the Fresno venue, and the AAA case manager confirmed that the arbitration would take place in Boston, Massachusetts. After Nagrampa failed to obtain a fee waiver from the AAA, Na-grampa sent a letter indicating that she would not participate in the arbitration proceedings.
Instead, Nagrampa filed this action against MailCoups and AAA in the Superi- or Court of the State of California, Contra Costa County. Because Buckeye instructs that we examine the crux of the complaint to determine whether it is a challenge to the contract as a whole or to the arbitration provision,
On January 14, 2003, invoking jurisdiction on the basis of diversity of citizenship,
Although the choice of law clause in article 36.17 of the franchise agreement provides that the governing law is that of the State of Massachusetts, both parties have proceeded throughout the district court and on appeal on the assumption that the franchise agreement is governed by California law. As a result, the district court applied California law in determining whether the arbitration provision is unconscionable. We will follow suit because the parties through their course of conduct have waived the provision of the agreement that specifies the application of Massachusetts law. See 13 Williston on Contracts § 39:27 (4th ed.2005) (stating that parties to a contract impliedly waive a term through a course of conduct clearly manifesting an intention to waive the term). This principle is recognized both in California, Daugherty Co. v. Kimberly-Clark Corp.,
In ruling on the motion, the district court, quoting Bischoff v. DirecTV, Inc.,
Nagrampa timely appealed. On March 21, 2005, in a now-withdrawn opinion, a three-judge panel of our court affirmed the district court on grounds different from those upon which the district court relied. Nagrampa v. MailCoups, Inc.,
II
The validity and scope of an arbitration clause are reviewed de novo. See Ticknor v. Choice Hotels Int’l, Inc.,
A.
The arbitrability of a particular dispute is a threshold issue to be decided by the courts. See Howsam v. Dean Witter Reynolds, Inc.,
In Buckeye, the United States Supreme Court recognized that challenges to arbitration agreements fall into two categories: (1) those “challeng[ing] specifically the validity of the agreement to arbitrate;” and (2) those “challeng[ing] the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.”
Appellees do not challenge the validity of the arbitration provision. Rather, they contend that the underlying contract is void ab initio because it is criminally usurious and, therefore, never existed at all. They further argue ... that a trial court must determine the legal validity of the underlying contract before compelling arbitration.
Buckeye Check Cashing, Inc. v. Cardegna,
Similarly, in Prima Paint, the plaintiff did not include a claim challenging the validity of the arbitration provision, but rather alleged that the contract as a whole was fraudulently induced, rendering the arbitration provision unenforceable.
[T]he federal court is instructed to order arbitration to proceed once it is satisfied that “the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue.” Accordingly, if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the “making” of the agreement to arbitrate — the federal court may proceed to adjudicate it.
Id. at 403-04,
On the other hand, the Court in Buckeye noted approvingly that the claims advanced by the plaintiff class in Southland Corp. v. Keating,
We must “remain attuned to well-supported claims that the agreement to
Our sister circuits also examine the nature of claims to determine whether they are arbitrable. They hold that, where the causes of action or claims within a complaint are, in essence, an effort to invalidate the entire contract, then the federal court will send the dispute to arbitration. They also hold that where, as here, there are separate and independent claims specifically challenging enforcement of the arbitration provision, then the federal court will proceed to consider the challenge to arbitrability of the dispute.
The plaintiff in the First Circuit case, Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Similarly, the Second Circuit considered a plaintiffs claim that the arbitration provisions of the London Metal Exchange Rules were unenforceable because the contracts which incorporated them were contracts of adhesion. David L. Threlkeld & Co. v. Metallgesellschaft Ltd.,
The Third Circuit examined a contract of adhesion allegation while analyzing the procedural unconscionability of an arbitration provision in a wrongful discharge and employment discrimination suit. Alexander v. Anthony Int’l, L.P.,
The Fifth Circuit likewise has considered defenses to arbitration provisions that implicate the entire contract, but has limited its consideration to claims which challenge the enforceability and validity of the arbitration provision. In Washington Mutual Finance Group, LLC v. Bailey,
The Sixth Circuit employed similar reasoning in Stout v. J.D. Byrider,
The Eighth Circuit has also required federal courts to examine claims made by a party seeking to invalidate an arbitration clause in order to determine whether the claims of invalidity go to the contract as a whole or relate specifically to the arbitration provision. In Madol v. Dan Nelson Automotive Group,
The only circuit that appears to be at odds with this approach is the Eleventh. In Jenkins v. First American Cash Advance of Georgia, LLC,
When the defendants removed the case to federal court and sought to enforce the arbitration agreement, the plaintiff asserted that the FAA did not apply to the loan agreements at issue, that the arbitration agreements were unconscionable, and that the arbitration agreements were unenforceable because the underlying payday loans were illegal and void ab initio under Georgia law. Id. at 873-74. In assessing the unconscionability of the arbitration provision, the Eleventh Circuit concluded that the plaintiffs contract of adhesion claim challenged the validity of the loan agreements as a whole, not the arbitration agreements specifically. Id. at 877. The “adhesion arguments were (1) that the consumers lacked bargaining power because these type[s] of consumer loans ... would only appeal to extremely desperate consumers, and (2) that the consumers were allegedly unable to negotiate the terms and conditions of the preprinted agreements.” Id. (internal quotation
The Eleventh Circuit may have applied Prima Paint too broadly by requiring that the contract of adhesion claim pertain specifically and exclusively to the arbitration agreement. The Supreme Court has clarified that to decide whether the federal court or the arbitrator will hear the claims, we are to determine whether the crux of the complaint is a challenge to the arbitration clause itself or the validity of the contract as a whole. Buckeye,
Judge O’Scannlain’s dissent misconstrues the holdings of our sister circuits. The dissent asserts that the Second Circuit in JLM Industries, Inc. v. Stolt-Nielsen SA,
Nor can Rojas v. TK Communications, Inc.,
Judge O’Scannlain’s dissent also misreads the Sixth Circuit’s statement in Burden, that “ ‘the grounds for revocation must relate specifically to the arbitration clause and not just to the contract as a whole.’”
Furthermore, the Eighth Circuit holdings in Houlihan v. Offerman & Co.,
We do not construe either Buckeye or Prima Paint to stand for the principle that if plaintiffs challenge an arbitration provision as unenforceable due to unconscionability, they may not include additional contractual or statutory claims in their complaint.
Throughout the course of these proceedings — before the AAA, the district court, and on appeal — Nagrampa has continuously challenged the validity of the arbitration provision separate from any litigation over the entire contract. Unlike the complaints in Jenkins and Buckeye, Nagrampa’s complaint asserts two causes of action specifically challenging only the arbitration provision. Nagrampa’s first, second, third, and fourth causes of action are claims for relief under the contract and, thus, are not before us. However, Nagrampa’s fifth and sixth causes of action are directed specifically to the arbitration provision, placing these challenges squarely within the category of claims that must be decided by a federal court. Buckeye,
B.
Before we reach the question of whether the arbitration agreement is unconscionable under California law, we detour to address MailCoups’s argument that Nagrampa “voluntarily participat[ed] in arbitration proceedings ... without objecting to the arbitration” and therefore waived her right to challenge the arbitrability of the dispute.
As a factual matter, MailCoups is wrong. Nagrampa’s counsel’s first act was to object to proceeding with arbitration, stating: “We are not ready or willing to proceed with arbitration.” He also asserted “serious concerns” about the validity of the arbitration provision and his disagreement with the notion that “we are in fact compelled by the alleged clause to arbitrate.”
Nagrampa’s “participation” in the arbitration proceedings thereafter was minimal, limited to procedural issues and undertaking certain actions to preserve her rights.
The record clearly demonstrates that only two telephonic preliminary
On August 15, 2002, AAA sent Nagram-pa and MailCoups the arbitrator’s scheduling order outlining deadlines that would be “strictly enforced.” The deadline for discovery requests was August 30, 2002, the day on which Nagrampa filed her discovery request. The deadline for filing a counterclaim was August 19, 2002; Na-grampa attempted to file her counterclaim on August 15, 2002. In the scheduling order, the arbitrator made clear that the parties were “awaiting a final decision with regard to the venue” and that the Notice of Hearing would be issued only once venue had been determined. Thus, Nagram-pa acted reasonably by filing her discovery request and counterclaim to preserve her rights on the chance that AAA and Mail-Coups would relent in their efforts to impose the one-sided and onerous fee, venue and associated costs clauses upon Nagram-pa. Indeed, venue remained an open issue through October 16, 2002. Although the arbitrator’s August 15, 2002 order noted that a third preliminary conference call was scheduled, there is no evidence that this conference occurred. Thus, Nagram-pa never participated in any proceedings which even touched the merits of the contractual claims that were to be the subject of arbitration. Although Nagrampa withdrew from arbitration in October 2002, she never withdrew her original objections to the arbitration agreement. She elected instead to include them in her state court complaint filed November 12, 2002.
The Supreme Court has defined waiver as the “intentional relinquishment or aban
Nagrampa’s limited involvement in preliminary matters does not preclude her from challenging arbitrability. The Supreme Court, in First Options of Chicago, Inc. v. Kaplan,
Our decision in Textile Unlimited, Inc. v. A..BMH & Co.,
In cases where we have found waiver, the objecting party has participated far more extensively than Nagrampa did before resorting to the courts. In Nghiem v. NEC Electronic, Inc.,
C.
It is well-established that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable. See Doctor’s Assocs.,
California courts analyze contract provisions for both procedural and substantive unconscionability. See Armendariz v. Found. Health Psychcare Servs., Inc.,
Procedural unconscionability analysis focuses on “ ‘oppression’ or ‘surprise.’ ” Flores v. Transamerica Home-First, Inc.,
An arbitration provision is substantively unconscionable if it is “ ‘overly harsh’ ” or generates “ ‘one-sided’ results.” Armendariz,
The district court sidestepped the requisite procedural unconscionability analysis, erroneously finding it “nondispositive.” Instead, it proceeded directly to the substantive analysis. The district court’s failure to analyze the evidence of procedural unconscionability in proportion to the evidence of substantive unconscionability was error. Because California courts employ a sliding scale in analyzing whether the entire arbitration provision is unconscionable, even if the evidence of procedural unconscionability is slight, strong evidence of substantive unconscionability will tip the scale and render the arbitration provision unconscionable. Armendariz,
1.
The threshold inquiry in California’s unconscionability analysis is “whether the arbitration agreement is adhesive.” Armendariz,
MailCoups concedes that the contract was non-negotiable and that Nagrampa’s only choice was to sign it as written or to opt out. However, MailCoups argues that there was no oppression because Nagrampa had meaningful choice and bargaining power, specifically the freedom to continue to work for ValPak, her then employer, or to enter into a contract with another direct mail company. In addition,
Under California law, the critical factor in procedural unconscionability analysis is the manner in which the contract or the disputed clause was presented and negotiated:
Procedural unconscionability focuses on the manner in which the disputed clause is presented to the party in the weaker bargaining position. When the weaker party is presented the clause and told to “take it or leave it” without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.
Szetela v. Discover Bank,
Although franchise agreements are commercial contracts they exhibit many of the attributes of consumer contracts. The relationship between franchisor and franchisee is characterized by a prevailing, although not universal, inequality of economic resources between the contracting parties. Franchisees typically, but not always, are small businessmen or businesswomen or people like the Sealys seeking to make the transition from being wage earners and for whom the franchise is their very first business. Franchisors typically, but not always, are large corporations. The agreements themselves tend to reflect this gross bargaining disparity. Usually they are form contracts the franchisor prepared and offered to franchisees on a take-[it-] or leave-it basis.
... Franchising involves the unequal bargaining power of franchisors and franchisees and therefore carries within itself the seeds of abuse. Before the relationship is established, abuse is threatened by the franchisor’s use of contracts of adhesion presented on a take-it-or-leave-it basis.
Internal quotation marks and citations omitted.
Here, Nagrampa was in a substantially weaker bargaining positiоn than Mail-Coups. As reported in the franchise offering circular attached to Nagrampa’s complaint, Advo, MailCoups’s parent company, is a large corporation which in 1997 had $208,553,000 in assets and $1,016,492,000 in revenues. Nagrampa, on the other hand, had a yearly salary of approximately $100,000 and had never owned her own
The California Court of Appeal has rejected the notion that the' availability in the marketplace of substitute employment, goods, or services alone can defeat a claim of procedural unconscionability. See, e.g., Martinez,
Moreover, the sophistication of a party, alone, cannot defeat a procedural unconscionability claim. See Graham v. Scissor-Tail, Inc.,
Nagrampa argues that the element of surprise was present because thе contract was adhesive and she was not informed of the existence of the arbitration provision, which appeared on page twenty-five of a thirty-page agreement. See Wheeler v. St. Joseph Hosp.,
Judge O’Scannlain’s dissent mistakenly asserts that Brookwood v. Bank of America,
Therefore, regardless of whether Mail-Coups had a duty to inform Nagrampa of the clause, it remains true that MailCoups had overwhelming bargaining power, drafted the contract, and presented it to Nagrampa on a take-it-or-leave-it basis. While we acknowledge that the evidence of procedural uneonscionability appears minimal, it is sufficient to require us, under California law, to reach the second prong of the uneonscionability analysis. We therefore next examine the extent of substantive uneonscionability to determine, whether based on the California courts’ sliding scale approach, the arbitration provision is unconscionable.
2.
Nagrampa argues that the arbitration provision is substantively unconscionable because it is “one-sided,” contains unconscionable feersplitting and arbitral forum provisions, and does not counteract the “repeat player effect,”
Second, merely raising the “repeat player effect” claim, without presenting more particularized evidence demonstrating impartiality, is insufficient under California law to support an unconsciona-bility finding. See McManus v. CIBC World Mkts. Corp.,
Two other provisions set forth in the arbitration clause, however, exhibit a lack of mutuality supporting a finding of substantive unconscionability. First, the contract gives MailCoups access to a judicial forum to obtain provisional remedies to protect its intellectual property, while it provides Nagrampa with only the arbitral forum to resolve her claims. Second, the arbitral forum is designated as Boston, Massachusetts, a location considerably more advantageous to MailCoups.
Where the party with stronger bargaining power has restricted the weaker party to the arbitral forum, but reserved for itself the ability to seek redress in either an arbitral or judicial forum, California courts have found a lack of mutuality supporting substantive unconscionability. As the California Supreme Court held in Armendariz, substantive unconsciona-bility may manifest itself in the form of “an agreement requiring arbitration only
In O’Hare v. Municipal Resource Consultants,
The MailCoups arbitration provision lacks mutuality. Like the contract in O’Hare, it requires that Nagrampa submit to arbitration any controversy related to the franchise agreement, “or any breach thereof, including without limitation, any claim that this Agreement or any portion thereof is invalid, illegal or otherwise voidable or void,” while reserving MailCoups’s right to obtain any provisional remedy “including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoups’s sole subjective judgment to protect its Service Marks and proprietary information.” This language, read plainly, means that Mail-Coups could go to court to obtain “any provisional remedy,” even if it related to a claim for breach of contract, as long as the claim also implicated MailCoups’s Service Marks or proprietary information. Moreover, it is far more likely that Nagrampa— and not MailCoups — would assert claims related to the invalidity or unenforceability
As noted, the arbitration provision itself states the purported business justification for excluding MailCoups’s right to obtain provisional relief on any cause of action it might assert: “to protect its Service Marks and proprietary information.” California courts routinely have rejected this justification as a legitimate basis for allowing only one party to an agreement access to the courts for provisional relief. O’Hare,
Nagrampa also argues that the forum selection clause in the arbitration provision requiring her to arbitrate in Boston, Massachusetts, is unconscionable. “[F]orum selection clauses are valid and should be given effect unless enforcement of the clause would be unreasonable.” Intershop Commc’ns, AG v. Superior Court,
To assess, the reasonableness of the “place and- manner” provisions in the arbitration clause, we must take into account the “respective circumstances of the parties.” Bolter,
We respectfully disagree with the view expressed in Judge O’Scannlain’s dissent that the holding in Bolter rested on the unfairness and lack of notice engendered by the franchisor’s insertion of a clause setting the arbitral forum to be out-of-state into a subsequent franchise agreement. The Bolter court repeatedly emphasized that its holding rested on the financial hardship the forum selection provision would impose on the franchisees, effectively precluding them from litigating their claims, and that the forum selection provision had “no justification other than as a means of maximizing an advantage over the petitioners.”
Here, the district court erred by misapplying California law on the substantive unconscionability of the forum selection clause. Although it had not actually analyzed procedural unconscionability, it found that the absence of restrictions which could be considered “unfair, harsh, or overly onesided” distinguished Nagram-pa’s case from Bolter. It then concluded that because Nagrampa had signed the franchise agreement containing the arbitration provision, it was “valid, irrevocable and enforceable.”
Moreover, the district court did not consider Nagrampa’s allegations, as stated in the fourth, fifth, and sixth causes of action in her complaint, that Mail-Coups’s imposition of the arbitration provision violated three California statutes — (1) the California Franchise Investment Law (“FIL”), Cal. Corp.Code §§ 31000-31516; (2) the California Unfair Competition Law (“UCL”), Cal. Bus. & Prof.Code §§ 17200-17208; and (3) the California Consumer Legal Remedies Act (“CLRA”), Cal. Civ. Code §§ 1750-1785 — which establish nonwaivable statutory rights. See Indep. Ass’n of Mailbox Ctr. Owners,
The parties’ bargaining positions were unequal, resulting in an oppressive contract of adhesion containing a forum selection clause that places venue in Boston, Massachusetts, only a few miles away from MailCoups headquarters in Avon, but three thousand miles away from Nagram-pa’s home. As in Bolter, the MailCoups contract would require a one-woman franchisee who operates from her home to fly across the country to arbitrate a contract signed and performed in California. Na-grampa would incur additional traveling and living expenses and “increased costs associated in having counsel familiar with [Massachusetts] law.” Bolter,
Moreover, Nagrampa did not have reason to expect that the arbitration would take place in Boston; nor, apparently, did MailCoups. We have found that, where the franchise-offering circular contained language suggesting that the out-of-state forum selection and choice of law clauses may not be enforceable under California law, there was “no reasonable expectation that [the franchisee] had agreed to a forum other than California.” Laxmi Invs., LLC v. Golf USA,
Nagrampa and MailCoups entered into the franchise agreement in 1998, when section 20040.5 was still considered good law and out-of-state forum selection provisions in franchise agreements were not enforceable under California law. To this end, the MailCoups offering circular,
The clauses in Section H of the MailCoups offering circular, which Nagrampa filed as an exhibit to her complaint, are virtually identical to those at issue in Laxmi:
(4) Item 17 of this disclosure document is modified to include the following paragraph under the Summary column of part (u) of both charts:
The franchise agreement requires binding arbitration. The arbitration will occur at the offices of the American Arbitration Association nearest our home office. This provision may not be enforceable under California law.
(5) Item 17 of this disclosure document is modified to include the following paragraphs under the Summary column of parts (v) and (w) of both charts:
California Business Professional Code Sections 20000 through 20043 provide rights to you concerning termination or nonrenewal of a franchise. If the franchise agreement contains a provision that is inconsistent with the law, the law will control.
The franchise agreement requires application of the laws of the State of Massachusetts. This provision may not be enforceable under California law.
Like the Laxmi court, we conclude that the misleading language of the MailCoups offering circular provided inadequate notice to Nagrampa that the forum selection clause was valid. Nagrampa thus had no reason to expect that arbitration would take place in Boston. To the contrary, she had every reason to expect that the arbitration, if any, would take place in California, in accordance with California law, as expressly raised in the circular. That MailCoups initially filеd for Los Angeles, California, as the arbitration venue only reinforces the conclusion that both parties reasonably expected arbitration to take place in California.
Moreover, where a party has not received actual notice of a forum selection clause, the California Court of Appeal has refused to enforce it. See Intershop Commc’ns, AG,
Second, California courts refuse to enforce arbitration provisions on public policy grounds if they impede the enforcement of unwaivable statutory rights. See Boghos v. Certain Underwriters at Lloyd’s of London,
To the extent that the fee-splitting clause in the arbitration provision impedes the exercise of unwaivable statutory rights under California law, it may also be unenforceable. The arbitration agreement provides:
The costs of arbitration shall be borne equally by MailCoups and Franchisee. Each party shall be responsible for the fees and expenses of its respective attorneys and experts.
The California Court of Appeal has previously found that the vindication of statutory rights under the FIL, the UCL, and the CLRA deserves protection from insurmountable and unreasonable arbitration fees. See Indep. Ass’n of Mailbox Ctr. Owners,
D.
We hold that the arbitration provision in the MailCoups’s franchise agreement is both procedurally and substantively unconscionable. Applying California’s sliding scale test for unconscionability, even though the evidence of procedural uncon-scionability is slight, the evidence of substantive unconscionability is strong enough to tip the scale and render the arbitration provision unconscionable.
MailCoups’s reservation to itself of the right to seek any provisional remedy it decides it needs from any court of competent jurisdiction is substantively unconscionable because it lacks mutuality. Further, the forum selection clause is substantively unconscionable because (1) as part of a contract of adhesion, it was not entered into freely and voluntarily; (2) Nagrampa was provided inadequate notice in the offering circular because the circular contained misleading language creating the reasonable expectation that it would not be enforced; and (3) considering the respective circumstances of the parties, the “place and manner” requirements are unduly oppressive and harsh upon Nagrampa, who had no bargaining power. In addition, the forum selection clause, as well as the fee-splitting clause, may contravene California public policy to the extent that they impede the exercise of Nagrampa’s unwaivable statutory rights. Because the district court did not reach the public policy issue, however, we decline to reach it now.
The only portion of the arbitration provision that may yet be viable is the fee-splitting clause. However, we must conclude that the fee-splitting clause does not save the arbitration provision from a finding of invalidity. The MailCoups arbitration provision is so permeated by substantive unconscionability that it cannot be cured by severance or any other action short of rewriting the contract. See Armendariz,
Ill
The district court properly undertook to decide whether the arbitration provision in the MailCoups franchise agreement is valid and enforceable within the meaning of FAA § 2, and properly relied upon California law in its analysis. However, the district court erred by failing to analyze whether there is evidence of procedural unconscionability and to weigh both procedural and substantive unconscionability on a sliding scale as dictated by the California Supreme Court in Armendariz. Thus, we conclude that the district court erroneously found that the arbitration provision was valid and enforceable and improperly dismissed the action. We therefore REVERSE and REMAND for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
Notes
. Judge O'Scannlain's dissent acknowledges that Nagrampa challenges the arbitration provision separately and independently from the contract as a whole in two isolated causes of action. Indeed, no cause of action in the complaint alleges that the franchise agreement is invalid because it is a contract of adhesion; nor does Nagrampa seek to invalidate the franchise agreement; nor would it be invalidated if the arbitration provision is deemed unconscionable.
. A "cause of action” under California law is equivalent to a "claim” under federal law, although the California system is based upon the old code pleading system, which creates differences between the two pleading systems that affect splitting, amendment, and res judi-cata principles. See 4 B.E. Witkin, California Procedure § 25 (4th ed.2006). Under the federal system, "[t]he word ‘claim’ denotes the allegations that give rise to an enforceable right to relief.” Moore's Federal Practice § 10.03[2][a] at 10-23 (3d ed.2006); see also Fed.R.Civ.P. 8(a)(2) ("A pleading which sets forth a claim for relief ... shall contain ... (2) a short and plain statement of the claim showing that the pleader is entitled to relief. ...”); Original Ballet Russe, Ltd. v. Ballet Theatre, Inc.,
. Pleading requirements differ between federal law and California law. California law requires that a complaint contain "a statement of the facts constituting the cause of action, in ordinary and concise language,” Cal.Civ.Proc.Code § 425.10(a)(1), which explains why Nagrampa’s attorney would include the factual allegation that the contract was one of adhesion in support of the cause of action challenging the arbitration agreement as unconscionable, even though she did not seek invalidation of the entire agreement on that ground. On the other hand, ”[t]he Federal Rules do not use the term 'cause of action,’ and their emphasis is on the factual rather than the 'legal right' aspects of the cause of action.” 4 B.E. Witkin, California Procedure § 25 (4th ed.2006). The Federal Rules do not require that the complaint state all of the facts constituting a cause of action:
Conspicuously absent from Federal Rule 8(a)(2) is the requirement found in the codes that the pleader set forth the 'facts’ constituting a ‘cause of action.' The substitution of 'claim showing that the pleader is entitled to relief' for the code formulation of the 'facts’ constituting a 'cause of action’ was intended to avoid the distinctions drawn under the codes ... and eliminate the unfortunate rigidity and confusion surrounding the words 'cause of action.’
5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed.2006). Under federal law, the primary aim of the pleading requirements is to give fair notice to the other party. Unlike under California law, ''[a] reading of Garcia, Conley, and Swierkiewicz, and a host of other cases ... suggests that the complaint, and other relief-claiming pleadings need not state with precision all of the elements that are necessary to give rise to a legal basis for recovery as long as fair notice of the nature of the action is provided to the opposing party.” Id. (citing Swierkiewicz v. Sorema N.A.,
. Indeed, it would be absurd to require that the complaint allege only claims attacking the arbitration agreement and not also include any other claims related to the contract. Moreover, as discussed infra at n. 5, a California state plaintiff would be precluded from doing so by California's pleading requirements.
. Indeed, California pleading requirements prohibit plaintiffs from splitting causes of action into separate suits. See Crowley v. Katleman,
. Judge O’Scannlain's dissent disregards what the Supreme Court plainly said in Buckeye and Prima Paint — that we must look to the complaint to determine whether the validity of the arbitration provision is in jeopardy. The obvious reason for the Court's instruction is that relief is granted, or not, as to claims, or under California law, causes of, action. The type of claim asserted in the complaint dictates the nature of the relief that may be afforded to the plaintiff. Nagrampa does not assert any claim for which the appropriate relief would be invalidation of the entire franchise agreement. The inclusion of language in the remedies section seeking "such other and further relief as the court may deem proper” is mere boilerplate, meant to cover all bases as to the claims asserted in the complaint. That boilerplate language does not constitute a claim not already asserted in the complaint, as Judge O'Scannlain suggests. It hardly needs to be said that an attorney’s arguments also do not constitute a claim if they are not asserted in the complaint.
. We note that the district court elected not to reach the question of waiver and the three-judge panel, by addressing the unconsciona-bility of the arbitration agreement on the merits, implicitly rejected MailCoups's waiver argument.
. It is ironic that Nagrampa's very efforts to amicably resolve the question of the substantive unconscionability of the arbitration provision and to preserve her rights have been twisted by MailCoups into an alleged waiver of those rights.
. By definition a "preliminary” hearing conference takes place before a hearing on the merits and deals with preliminary matters, such as scheduling and deadlines. See Am. Arb. Ass'n, Commercial Arbitration Rules and Mediation Procedures, R-20 (2003).
.Judge Kozinski says there were three teleconferences, but there is no evidence in the record, other than a statement in MailCoups's Motion to Compel, that a third call took place.
. In an attempt to distinguish First Options, Judge Kozinski presumes that the parties "consented” to arbitration. But that is a shaky premise, given that Nagrampa's position throughout was that she did not voluntarily consent to the arbitration provision.
. Contrary to Judge O’Scannlain’s dissent, Nagrampa did not waive her argument that the arbitration provision was unconscionably "one-sided.” She alleged the one-sided nature of the arbitration provision in her complaint and argued this point in her opening brief, stating in support of her contention that California courts "have refused to uphold venue provisions that work to deny the weaker party any real access to a forum in which to air — or defend — her or his claims, while allowing the stronger party full access to the same forum.” Moreover, MailCoups’s brief argued in response that the arbitration provision does have mutuality of obligation. We may consider the claim that the fee-splitting provision is unconscionable because both parties have briefed the issue and argued the question before us, the record is adequately developed, and the cost of arbitration is undisputed. See In re Am. West Airlines, Inc.,
. Judge O'Scannlain’s dissent asserts that Nagrampa had more than enough money to pay the $6,500 in arbitration fees and to litigate in an out-of-state forum, on the false assumption that she had an average of $16,000 in her bank account during the relevant time period. However, the dissent misconstrues the record, which contains three bank statements for the three months preceding September 2002 for the account held jointly by Nagrampa and her husband. The average monthly deposits during this period were $41,151.17 and the average monthly withdrawals and debits were $45,031.30. The ending balance on August 14, 2002 was $9,991.90. Assuming that, in the following month, Nagrampa and her husband's deposits and withdrawals were close to the average, then payment of the initial $6,500 filing fee alone, without consideration of the additional expenses required to litigate in an out-of-state forum, would result in a bank account overdrawn by $388.23.
. We may properly consider the franchise offering circular, which was attached as an exhibit to Nagrampa's complaint and was admitted before the district court.'
. The majority states that under Buckeye and Prima Paint a court must consider only the complaint to discern the "nature of the relief that may be afforded.” Majority Opinion at 1277 n. 6. The majority then concedes that it is the “type of claim asserted in the complaint” that matters. Id. (emphasis added). Next the majority decides that certain parts of the complaint should be ignored. In particular, the majority discounts the portion of the complaint requesting "such other and further relief as the court may deem proper” as “mere boilerplate," id. (emphasis added), although Nagrampa later explained what other relief she sought.
The majority’s flawed analysis both contorts the claims presented in the complaint, and disrespects Nagrampa's abilities. I believe Nagrampa was capable of choosing substance over form in her complaint, and capable of reading her "attorney's arguments” before accepting their inclusion in her submissions to the district court.
Dissenting Opinion
with whom Judges KOZINSKI and TALLMAN join, and with whom Judge CLIFTON joins as to Parts II-D and III, dissenting:
I respectfully dissent because I believe that the Court ignores clear Supreme Court precedent in choosing to entertain Nagrampa’s challenge to the validity of the entire franchise contract. In addition, I cannot agree with much of the majority’s analysis regarding the substantive uncon-scionability of the arbitration clause.
I
Connie A. Nagrampa, a resident of Contra Costa County (in the San Francisco Bay area), California, earned over $100,000 per year as a Sales Manager for ValPak Direct Marketing Systems, a position she held from 1992-1998.
In the summer of 1998, a MailCoups, Inc.,
On August 24, 1998, Nagrampa signed the thirty-page franchise agreement, declaring under penalty of perjury that she had read and agreed to each of its provisions. Article 35 of the agreement, entitled “Dispute Resolution,” reads:
Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, including, without limitation, any claim that this Agreement or any portion thereof is invalid, illegal or otherwise voidable or void, shall be submitted to arbitration before and in accordance with the rules of the American Arbitration Association or successor organization. Provided, however, that this clause shall not be construed to limit MailCoups’ right to obtain any provisional remedy, including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoups’ sole subjective judgment, to protect its Service Marks and proprietary information. The decision of the arbitrator shall be binding upon the parties and judgment upon the award may be entered in any court having jurisdiction thereof. The situs of the arbitration proceedings shall be the regional office of the American Arbitration Association which is located in Boston, Massachusetts. The costs of arbitration shall be borne equally by MailCoups and Franchisee. Each party shall be responsible for the fees and expenses of its respective attorneys and experts.
The term of the franchise agreement was ten years.
Although Nagrampa worked over sixty hours a week, her MailCoups franchise was a failure. Despite her efforts, she claims that she never received any personal income, instead incurring substantial debt to cover her living expenses. Owing in part to her precarious financial situation, Nagrampa sent MailCoups a September 22, 2000, letter terminating her franchise agreement and stating her intent to pay certain “amounts due” under the agreement.
MailCoups never received payment for the full amount it claimed was due under the franchise agreement, and in December 2001, it filed a Demand for Arbitration, seeking payment of over $80,000 owed by Nagrampa. MailCoups requested the arbitration be held in Los Angeles, the location of its regional office. Na-grampa initially participated in the pre-hearing procedures, but she objected to holding the arbitration in Los Angeles, requesting instead that it take place in Contra Costa County. When the parties were unable to agree on a location, the American Arbitration Association (“AAA”) arbitrator determined that — per the terms of the franchise agreement — the arbitration would be held in Boston.
When she received a schedule of fees for the arbitration, Nagrampa requested a waiver for all fees from the AAA. However, she failed to complete the necessary forms to receive the waiver, despite being advised of the requirements. The waiver became moot when Nagrampa ceased her participation in the arbitration following the designation of Boston as the venue. The arbitration proceeded without her and resulted in an award against her of over $160,000.
In the meantime, Nagrampa filed suit against MailCoups and the AAA in California state court, alleging that MailCoups was liable for common-law misrepresentation and fraud, as well as for violating the California Consumer Legal Remedies Act and California’s franchise and unfair com
Invoking the parties’ diversity of citizenship, MailCoups removed the case to federal court and then moved to compel arbitration and to stay or dismiss the court proceedings. In opposition, Nagrampa argued that the arbitration clause was unconscionable and thus unenforceable. She argued that the arbitration clause was procedurally unconscionable because her “franchise agreement [was] a contract of adhesion. It was presented to her on a take-it-or-leave-it basis. She was not allowed to negotiate any of its terms.” She then gave three grounds for the arbitration clause’s substantive unconscionability: 1) a venue of Boston was unfair, 2) the arbitrator was not neutral, and 3) Mail-Coups did not disclose the costs of arbitration.
The district court concluded that the agreement was valid and granted Mail-Coups’ motion to dismiss.
II
California law places the burden of proving unconscionability on the party challenging the validity of the arbitration clause.
Nagrampa claims that the franchise agreement’s arbitration clause was both procedurally and substantively unconscionable. At the district court, Nagrampa insisted that the “franchise agreement [was] a contract of adhesion” and therefore procedurally unconscionable. I remain con
A
The Supreme Court has identified two types of challenges to the validity of an arbitration agreement. Buckeye Check Cashing, Inc. v. Cardegna, —- U.S.-,
Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,
Buckeye reaffirmed this approach.
B
Nagrampa clearly challenged the validity of the contract as a whole. Even her more directed complaint against the arbitration clause incorporates a contract-of-adhesion claim that “directly affects the entire agreement.” See id. Considering the Supreme Court’s classification of this type of challenge as one that must be considered by an arbitrator, our duty could not be clearer. When an agreement to arbitrate is challenged, we must look to see whether the challenge goes to the validity of the contract as a whole or whether it goes “specifically” to the arbitration clause. Id. Whether difficulties result from our lack of jurisdiction should have no bearing on our decision on the issue; we “are bound to apply rules enacted by Congress with respect to matters — here, a contract involving commerce — over which it has legislative power.” Prima Paint,
Contrary to the majority’s view, Na-grampa does not specifically and exclusively target the arbitration clause as a contract of adhesion. Nor could she, considering her argument on appeal that the clause was “hidden” in the contract and never “pointed out or explained to her.” Indeed, she argues that the arbitration agreement is procedurally unconscionable because the entire contract was a contract of adhesion, offered on a “take-it-or-leave-it” basis. A clear statement of her position can be found in the Plaintiffs Opposition to Motion to Compel [Arbitration], filed with the district court: “Ms. Nagram-pa’s franchise agreement is a contract of adhesion.” It is the validity of the entire franchise agreement that Nagrаmpa challenges. The opposition brief continues: “Ms. Nagrampa’s entire contract was obtained by fraud and therefore should be revoked.”
Refusing to acknowledge these statements made by Nagrampa to the district court,
Adequate review of the district court requires us to evaluate all relevant documents filed with that court, including those that led the district court to state: “Plaintiff characterizes the franchise agreement as a contract of adhesion, and argues that it is therefore procedurally unconscionable per se.” Because the full record makes evident that Nagrampa’s claims of procedural unconscionability were not aimed specifically at the arbitration provision, Prima Paint and Buckeye require us to leave this argument to be decided by an arbitrator.
Turning away from a comprehensive analysis of the documents filed by Na-grampa, the majority seeks to distill the “crux of the complaint.” Majority Opinion at 1264. This narrowing technique leads the majority to conclude that Nagrampa’s cognizable claims “specifically and exclusively challenge the validity of the arbitration provision.” Id. at 1264. Having reached this conclusion, the majority apparently allows Nagrampa to attack such clause on any ground, “even if substantive state law requires an examination of the making of the entire contract.” Id. at
The majority adopts certain language from Buckeye, while ignoring more relevant passages. Buckeye notes that two different types of challenges fall within the broader category that must be submitted to an arbitrator.
The majority insists that none of Na-grampa’s claims would invalidate the entire contract, if proved. Majority Opinion at 1271. Buckeye does not support this approach; it identifies the first type of challenge that must be submitted to an arbitrator, not based on whether the ground for attack invalidates the entire contract, but on whether the ground “directly affects” it. See Buckeye,
C
Our sister circuits do not follow the majority’s approach. Instead, the Second, Fifth, Sixth, Eighth, and Eleventh Circuits
Speaking directly to the issue, the Eleventh Circuit held that “the FAA does not permit a federal court to consider claims alleging the contract as a whole was adhesive.” Jenkins v. First Am. Cash Advance of Ga., LLC,
Similarly, the Sixth Circuit
Similarly, the Fifth Circuit has stated that “unless a defense relates specifically to the arbitration agreement, it must be submitted to the arbitrator as part of the underlying dispute.” Primerica Life Ins. Co. v. Brown,
Finally, the Eighth Circuit has held that a plaintiffs claims must be referred to arbitration when the “arguments of uncon-scionability ‘cannot fairly be limited to the making of the arbitration clause.’ ” Madol v. Dan Nelson Auto. Group,
The majority chooses to focus only on whether a plaintiffs claim would invalidate the entire contract, ignoring Buckeye’s plain statement regarding challenges brought on “a ground that directly affects the entire agreement,”
In addition to proffering her eontract-of-adhesion argument, Nagrampa also contends that the arbitration clause alone is proeedurally unconscionable because it is found on the twenty-fifth page of the thirty-page franchise agreement and because she was not informed about the clause or the costs of arbitration. These claims pertain solely to the arbitration provision’s validity and are thus cognizable under Pri-ma Paint and Buckeye.
Nagrampa does not cite any authority for the proposition that MailCoups was required to apprise her of the existence of the arbitration clause or the costs associated with arbitration. Indeed, California case law establishes that MailCoups had no such obligation. In Brookwood v. Bank of America,
Here, MailCoups sent the franchise agreement to Nagrampa and asked her to return it with her signature. Nagrampa— an experienced businessperson who had worked for more than seven years in the direct marketing field — had ample opportunity to read the arbitration clause and to consider its implications; by her own admission, she had the franchise agreement containing the arbitration clause for nearly two months. It follows that this case is appreciably different from those in which an inexperienced consumer was pressured to sign an agreement without being afforded an opportunity to read or to comprehend the fine print. See, e.g., Gutierrez v. Autowest, Inc.,
Ill
Though Nagrampa’s unconscionability claim fails for the lack of procedural un-conscionability, we may reject her arguments that the arbitration agreement is substantively unconscionable as well. As the majority notes, Nagrampa argued that the arbitration agreement was substantively unfair for three reasons. First, she asserted that the venue prwision defeated her ability to defend her claims. Second, she claimed that the agreement’s fee-splitting provision was unconscionable. Third, she contended that the AAA was a repeat player and therefore biased against her.
A
I agree with the majority that Nagram-pa’s “repeat player” argument is without merit. See Majority Opinion at 1284-1286.
Nagrampa contends that the AAA and its arbitrators have an interest in ruling in favor of “repeat players” such as Mail-Coups because corporate parties that frequently appear before the AAA will take their business elsewhere if they receive an adverse ruling. Nagrampa is unable, however, to muster any case law in which courts have questioned the neutrality of the AAA. Instead, she relies upon Mercuro v. Superior Court, which held that it was substantively unconscionable to require an employee to arbitrate his employment discrimination claim before the National Arbitration Forum because the employer bene-fitted from repeatedly appearing before the eight arbitrators the organization employed in the Central District of California.
Mercuro is readily distinguishable because there is no evidence to suggest that the AAA uses a comparably small number of arbitrators or that MailCoups has repeatedly appeared before the organization. Moreover, the AAA Commercial Arbitration Rules incorporate safeguards to neutralize any bias in favor of repeat litigants, requiring arbitrators to “disclose to the AAA any circumstance likely to affect impartiality or independence, including ... any past or present relationship with the parties or their representatives.” See AAA Commercial Arbitration Rules, R-19(a). Because either party can then request that the arbitrator be removed from the matter, this rule minimizes the risk of a repeat player effect favoring corporate parties. See AAA Commercial Arbitration Rules, R-19(b).
Indeed, California courts have uniformly concluded that the AAA provides a neutral forum for dispute resolution. See Armendariz,
Because there is neither case law nor record evidence supporting the proposition that the AAA is a biased forum, Nagrampa has failed to establish that the arbitration clause is substantively unconscionable on that basis.
B
I also agree with the majority that the fee-splitting provision of the arbitration clause is not substantively unconscionable, but I cannot agree that the provision could endanger Nagrampa’s ability to vindicate her statutory rights.
Nagrampa argues that the arbitration clause is substantively unconscionable because it requires the parties to share the costs of arbitration.
Much of Nagrampa’s argument relies upon Armendariz v. Foundation Health Psychcare Services, Inc. and its progeny.
Neither have the fees in this particular case forced Nagrampa “to forgo unwaivea-ble public rights.” Majority Opinion at 1292 (quoting Little v. Auto Stiegler, Inc.,
Nagrampa cannot present evidence that the arbitration fees would prevent her from vindicating her statutory rights, and MailCoups never conceded the issue, instead arguing that Nagrampa’s bank account balance during the relevant time period belied her claim that she could not afford to pay the arbitration fees or to go to Boston. Nagrampa had an average balance of $16,000 in her personal bank account during the relevant time period, more than enough to pay the $6,500 in fees. In light of this, there is simply no basis for holding that the arbitration fees here were insurmountable or unreasonable.
C
I must also disagree with the majority’s conclusion that the venue provision — specifying Boston as the arbitration site — was unconscionable.
Nagrampa’s argument on this point relies heavily upon Bolter v. Superior Court,
Where Bolter’s extenuating circumstances are absent, however, California courts have sustained the validity of forum selection clauses in franchise agreements. In Lu v. Drydean-U.S.A. of California, Inc., for example, the court upheld a clause requiring California franchisees to litigate claims against their franchisor in Florida.
Because Nagrampa had sufficient funds to pursue her claim against MailCoups even in Boston, there is no danger that the venue provision would “impede Nagrampa from vindicating statutory rights.” Majority Opinion at 1285. There is no reason to consider Boston “a location so prohibitively costly to Nagrampa” that she could not participate. Id. at 1290. Nagrampa had the funds to participate and chose not to. The majority’s assertion to the contrary, that Nagrampa “may not be able to maintain her claim to recover any of her losses if forced to do so in Massachusetts,” is directly contrary to the record. Id. Any such claim is also flimsy given the amounts of money that were involved in the franchise. Nagrampa claims that she paid more than $400,000 in fees to MailCoups over her franchise’s brief two-year existence, all while receiving no personal income. To claim now that the cost of a round-trip plane ticket from San Francisco to Boston ($338.60), a four-night hotel stay ($316.00), and twelve meals ($160.00), will prevent her from vindicating her statutory rights (priceless) is laughable.
The arbitration provision’s specification of a Boston venue is not unconscionable,
D
Inexplicably, the majority manufactures an argument that was never raised by either party. Without explanation as to why it decided to create a new issue, the majority concludes that the burden of proof is on MailCoups to establish that the venue provision will not diminish Nagram-pa’s substantive rights as a California franchisee. While her original complaint alleged violations of the statutes cited by the majority, Nagrampa never argued that these statutes shifted the burden to Mail-Coups while before the district court, in her opening brief here, in front of the three-judge panel, or before the en banc panel.
Pursuant to Federal Rule of Appellate Procedure 28, our usual practice is to require parties to make an argument containing their “contentions and the reasons for them, with citations to the authorities and parts of the record on which the appellant relies.” We gеnerally enforce this rule by reviewing “only issues argued specifically and distinctly in a party’s opening brief.” Greenwood v. FAA,
Here the majority manufactures an argument for Nagrampa that lacks even so much as a bare assertion in support. I am puzzled; I would have expected a reasoned explanation for such a drastic departure from our past precedent and practice. I continue to believe that “[a]s judges, the essence of our role is restrained service as impartial arbiters of disputes framed by litigants. It is not, I respectfully suggest, to act as backup counsel when litigants make poor arguments, or when they come into court without first having ‘figure[d] out’ their cases.” Kennedy v. Lockyer,
Thus, I would avoid this issue entirely and hold that it was waived by the parties.
IV
In summary, I continue to believe that we ignore the Supreme Court’s direction in Prima Paint and Buckeye at our peril when we choose to consider Nagrampa’s contract-of-adhesion claim. In any event, the arbitration clause here was neither proeedurally nor substantively unconscionable. I would therefore affirm the judgment of the district court.
I respectfully dissent.
. MailCoups is a corporation incorporated under the laws of Delaware and has its principal place of business in Massachusetts.
. A MailCoups franchisee recruits businesses to advertise through coupons mailed to residences in her service area.
. The district court denied MailCoups’ motion to compel arbitration because § 4 of the Federal Arbitration Act ("FAA”) requires that an arbitration hearing take place in the district in which the motion to compel was filed. See 9 U.S.C. § 4 ("The hearing and proceedings ,.. shall be within the district in which the petition for an order directing such arbitration is filed.’’). Relying upon the franchise agreement’s designation of Boston as the arbitration forum, the district court concluded that the District' of Massachusetts was the proper venue for 'MailCoups to obtain an order compelling arbitration. MailCoups did not file a cross-appeal.
. I agree with the' majority that the parties have waived the franchise agreement's choice of law provision, which specified Massachusetts law as controlling, by arguing their respective causes on the basis of California law both in the district court and here. See Panno v. Russo,
. Neither Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
. The majority cites David L. Threlkeld & Co. v. Metallgesellschaft Ltd.,
. Stout v. J.D. Byrider,
. The majority cites Washington Mutual Finance Group, LLC v. Bailey,
. The majority concludes that Brookwood is inapplicable because "[t]he analysis of procedural unconscionability under California law focuses on the manner in which the contract or the disputed clause was presented and negotiated and the disparity in bargaining power, not on whether the party claiming procedural unconscionability should have known of the arbitral provision.” Majority Opinion at 1284. But when the majority later argues that procedural unconscionability may exist even with sophisticated parties, it cites A & M Produce Co. v. FMC Corp.,
. Nagrampa did not raise this argument in opposing MailCoups' motion to compel; she argued only that the arbitration clause failed to disclose the costs. Nowhere did Nagram-pa contend that the fee-splitting provision imposed unconscionably high costs. She accordingly failed to cite any of the extensive California case law concerning the propriety of fee-splitting arrangements, and the district court had no opportunity to pass upon this issue. Therefore, Nagrampa waived it. See In re Am. West Airlines, Inc.,
. For the same reason, I reject the majority's contention that the forum selection clause might "substantially diminish [Nagrampa’s] rights.” Unlike the plaintiffs in America Online, Inc. v. Superior Court,
. The majority's reliance on Laxmi Investments, LLC v. Golf USA,
Even if the forum selection clause were substantively unconscionable, the appropriate remedy would be for this Court to sever that provision, rather than to invalidate the arbitration clause in its entirety. See Bolter,
. The arbitration in this case was scheduled to last only two days. The price of a round-trip ticket from San Francisco to Boston on American Airlines is $338.60, assuming Sim-
Dissenting Opinion
with whom Judges O’SCANNLAIN and TALLMAN join, and with whom Judge CLIFTON joins as to Part II, dissenting:
I agree with Judge O’Scannlain that Na-grampa’s uneonscionability challenge
I. Waiver
The majority reads Nagrampa’s February 6, 2002, letter to the arbitrator as a “forceful” objection to arbitrability. Maj. at 1280. But Nagrampa never said she objected — she merely expressed “serious concerns” about the “validity” of the arbitration clause. This statement contained none of the traditional indicia of a properly articulated objection. She never said “I object,” and she provided no grounds for her purported concerns. Most significantly, she never submitted the issue to the arbitrator.
For an example of a real objection, we need look no farther than that same letter, where Nagrampa clearly states that she “objects” to MailCoups’s proposal to hold the arbitration in Los Angeles. Mail-Coups and the arbitrator recognized this as an objection, and everyone spent the better part of the next eight months dealing with the matter. The parties submitted written statements and argued by way of telephone conference about where the proceedings should be held.
There was no similar response to Na-grampa’s “concerns” about arbitrability. MailCoups never briefed the issue, and the arbitrator never ruled on it. And Na-grampa never explained her legal theory or any facts on which her concerns were based. Had they thought that Nagrampa was actually objecting to arbitrability, Ma-ilCoups and the arbitrator would certainly have turned to this issue first, rather than wasting months resolving matters that are of no consequence if the contract is not arbitrable in the first place. That Na-grampa’s expression of “concerns” was met with silence, and that she did nothing to press an arbitrability claim, fatally undermines the majority’s conclusion that Nagrampa preserved her objection by presenting it to the arbitrator.
While Nagrampa failed to make the faintest allusion to her “concerns” about arbitrability during the course of the arbitration, she showed no such reticence when dealing with other issues. In addition to fighting tooth-and-nail over venue, she filed a broad discovery request, pressed four counterclaims and sought to have fees waived. The majority dismisses these activities as mere “procedural skirmishes,” but the record shows that Na-grampa’s participation went to the heart of
Thus, even if we could somehow read the February 6, 2002, letter as objecting to arbitrability, we must still consider whether Nagrampa’s participation in the proceedings on matters that have no conceivable bearing on arbitrability was so extensive as to waive any right she may have had to withdraw. Waiver doctrine in this context is guided by the practical policies of the Federal Arbitration Act, which is designed to give businesses access to a cheap and speedy means of resolving disputes. See Dean Witter Reynolds, Inc. v. Byrd,
The majority discounts Nagrampa’s participation in the proceedings, because she never participated in a merits hearing. But I don’t see why it should matter whether the hearings in which Nagrampa or her lawyer participated were on the merits or preliminary matters; in either event, the opposing party suffered the unfairness of unnecessary cost and delay. None of the cases on which the majority relies holds that participation in the merits hearings is necessary for waiver. See First Options,
II. Procedural Unconscionability
After some handwringing, the majority finds that Nagrampa has presented “minimal” evidence of procedural unconsciona-bility, but even this is an overstatement. To show procedural unconscionability, Na-grampa was required to prove surprise or oppression. Armendariz v. Found. Health Psychcare Servs., Inc.,
THE FRANCHISE AGREEMENT REQUIRES YOU TO ARBITRATE AND SUE IN MASSACHUSETTS. OUT-OF-STATE ARBITRATION OR LITIGATION. MAY FORCE YOU TOACCEPT A LESS FAVORABLE SETTLEMENT. IT MAY ALSO COST YOU MORE TO ARBITRATE OR LITIGATE WITH U.S. IN MASSACHUSETTS THAN IN YOUR HOME STATE.
You’d have to be blind to miss this warning. There was no surprise here.
So if this agreement is procedurally unconscionable, it must be because Nagram-pa was somehow oppressed. The majority finds oppression because of the grеat financial disparity between MailCoups and Nagrampa, and because MailCoups presented Nagrampa with a form contract, the terms of which were non-negotiable. But, these conditions are always present where an individual signs up for a franchise, and yet “[fjranchise agreements are not per se unenforceable” in California. Maj. at 1280 (quoting Indep. Ass’n of Mailbox Ctr. Owners, Inc. v. Superior Court,
Franchisors are typically large enterprises with an established business model and a suite of products and services that enjoy widespread — often nationwide — recognition. That’s the very point of buying a franchise rather than starting a business from scratch. Franchisees tend to be individuals or families who hope to achieve economic self-sufficiency by marketing the franchisor’s products and services. The franchisor invariably has financial resources that far exceed those of the prospective franchisee, but “large business entities may have relatively little bargaining power, depending on the identity of the other contracting party and the commercial circumstances surrounding the agreement.” A & M Produce Co. v. FMC Corp.,
Likewise, franchise agreements are typically offered by means of form contracts, consistent with the standardized nature of the franchise business model. And, California courts have recognized that “the fact that [a] provision for arbitration is contained in a contract of adhesion will not, of itself, render the provision unenforceable.” Keating v. Superior Court,
First, Nagrampa is a sophisticated businesswoman with special expertise in the direct mail business. In her complaint, Nagrampa states: “On or about July 1998 plaintiff prepared- a spreadsheet reflecting her prospective costs and profits based on conversations with MAILCOUPS INC.’s agent....” In her declaration, she states:
I reviewed the materials from Super-Coups and discovered that instead of calculating costs on a line by line basis, SuperCoups charged its franchisees an inflated lump sum that is later reduced by postage overcharge refund and other production credits.
The majority’s romantic vision of Nagram-pa as a modern-day Candide is shattered by her ability to do complicated financial forecasting and her easy use of terms such as “inflated lump sum,” “postage overcharge refund” and “production credits.” In reality, Nagrampa was a savvy businesswoman who knew the direct mail industry inside and out, and was more than
All this is easily dismissed, according to the majority, because Nagrampa “apparently” didn’t have “specialized education or training in the field.” Maj. at 1283. But even if this were supported by the record — and I’ve found nothing to support it — it’s not clear why it matters. Nagram-pa obviously had what it takes to be a high-level executive in this very industry. Whether she gained these skills through formal training, experience, a knack for business, or a combination of the three, the point is that if Nagrampa was not sophisticated enough to sign up as a direct-mail franchisee, nobody is.
It’s also significant that Nagrampa was under no economic pressure because she held a lucrative job with another company. That Nagrampa continued to work at her six-figure job while she considered whether to sign the contract meant that she was negotiating from a position of strength. She could have easily said “no” at any time and sought another franchise opportunity or kept her job and six-figure salary. California courts have recognized that inequality of bargaining power “depends in part on the absence of meaningful choice by a contracting party; and even though a contract may be adhesive,.the existence of ‘meaningful’ alternatives available to such contracting party in the form of other sources of supply tends to defeat any claim of unconseionability.” Dean Witter Reynolds, Inc. v. Superior Court,
The majority tries to distinguish Dean Witter by pointing out that the attorney there “had a great degree of experience with financial service contracts,” maj. at 1283, but misses the point of that case entirely. In Dean Witter, the plaintiff, an attorney who specialized in litigation against financial institutions, purchased a self-directed IRA from Dean Witter and sued to contest the contract’s fee provisions. Dean Witter,
Stirlen v. Supercuts, Inc.,
Our case is the antithesis of Stirlen. As Nagrampa admits, MailCoups approached her about the possibility of opening a franchise and pursued her aggressively to keep the negotiations alive. As the solicited party, with a good income and a secure job with one of MailCoups’s competitors, Na-grampa held the trump card in the negotiations: She could have “just said no,” and forced MailCoups to go scrambling for the business partner, it seems to have desperately needed. Walking away from the deal would have caused her no loss of livelihood, no inconvenience of any sort, since her sole motivating factors were self-interest and ambition. These are swell reasons, to be sure, but hardly the stuff of economic duress. Under these circumstances, I cannot conclude that the contract negotiations were oppressive, nor that the resulting contract was procedurally unconscionable.
I’d be much less troubled by the majority’s contrary conclusion if my colleagues took seriously the sliding scale test they discuss in the procedural unconscionability section of the opinion. Maj. at 1281. After all, the difference between no procedural unconscionability (as I see it) and “minimal” or “slight” procedural uncon-scionability (as the majority sees it) should make no difference unless there is evidence of overwhelming substantive uncon-scionability to offset the “minimal” showing on the procedural side of the scale. And, as Judge O’Scannlain shows, if there is substantive unconscionability at all, it is nowhere near overwhelming; the majority doesn’t even pretend that it is.
As it is, the majority pays only lip service to the sliding scale test. It briefly discusses the test in the procedural uncon-scionability part of its opinion, but then forgets all about it when it gets to the other end of the sliding scale. The majority does say that the evidence of substantive unconscionability is “strong enough” to offset the “slight” evidence of procedural unconscionability. Maj. at 1293. But this merely states the conclusion the majority wants to reach; it does not explain why the substantive unconscionability it finds is of such a “high degree” as to offset the “slight” or “minimal” degree of procedural unconscionability. See, e.g., Nyulassy v. Lockheed Martin Corp.,
So what we’re left with is a sophisticated executive who willingly left a six-figure job to buy a franchise in an industry where she’d been doing business for years. There was no coercion, surprise or duress in the negotiations-indeed, Nagrampa was being aggressively courted by MailCoups. She had the contract for two months before she signed it and could have taken longer if she’d liked. But because she might be forced to spend something like $800, see O’Scannlain dissent at 18966, in order to arbitrate in the venue she freely agreed to, the arbitration clause is thrown out the window.
As with most paternalistic endeavors, the majority’s opinion carries the seeds of great irony. By invoking the unconsciona-bility doctrine to protect “the little guy” in this case, the majority has construed California franchise law in a way that will result in fewer opportunities for other “little guys” in the future. The ever-growing cost of litigation is one of the most serious and uncontrollable risks faced by modern businesses. As the California courts have recognized, arbitration helps businesses manage this risk by “providing for resolution of disputes in a presumptively less costly, more expeditious, and more private manner by an impartial person or persons typically selected by the parties them
While I believe that this contract is entirely valid under California law as construed by the courts in that state, the majority’s exegesis of unconscionability doctrine does point to a disturbing trend of judicial hostility to form contracts. Commercial transactions today are typically governed by standardized contracts, the terms of which are non-negotiable. The era of the individually-negotiated contract — like that of the hand-crafted fliv-ver — is fading from living memory. As the majority opinion demonstrates, however, California courts have shown a lamentable tendency to hold the arbitration clauses in such contracts unenforceable. The effect of these developments is that such provisions are now easily challenged on grounds of unconscionability, routinely channeling contract disputes away from arbitrators and into the courts. Buckeye Check Cashing, Inc. v. Cardegna, — U.S. -,
. The majority says there were two conference calls, maj. at 1278, but MailCoups’s attorney asserts that Nagrampa or her lawyer participated in at least three calls, and Na-grampa does not contest this assertion in her brief.
. Even if one reads the February 6, 2002, letter as objecting to arbitrability, I’m not sure how it helps Nagrampa. All it would mean is that Nagrampa submitted the question to the arbitrator, thereby acquiescing in his authority to decide the issue. It would certainly not preserve her right to withdraw from the arbitration and have the arbitrability issue decided de novo by a court. Because, unlike the respondent in First Options of Chicago, Inc. v. Kaplan,
. First Options is particularly unhelpful to the majority, even if it were on point But see note 4 infra. The party objecting to arbitra-bility in First Optiom appeared only to contest arbitrability; he did not participate in any other aspect of the arbitration.
. Contrary to what the majority claims, consent and waiver are quite different. There is no presumption that parties have consented to arbitration and thus the party wishing to establish consent by conduct must do so by making a clear showing that the opposing party's conduct amounts to consent. First Options,
Concurrence Opinion
concurring in part and dissenting in part:
I agree with the majority that the district court properly undertook in this case to decide whether the arbitration provision in the MailCoups franchise agreement is valid and enforceable within the meaning of the Federal Arbitration Act. I also agree that Nagrampa did not waive her right to object to the arbitrability of the dispute. I thus concur in sections II-A and II-B of the majority opinion by Judge Wardlaw. .
I part company with the majority as to its conclusion that the arbitration provision was unconscionable under California law. I believe that the district court was correct in concluding that the arbitration provision was valid and enforceable. I concur in the relevant portions of the dissents by Judge O’Scannlain (sections II-D and III) and by Judge Kozinski (section II). Like them, I would affirm the judgment of the district court.