Arbitrations Clauses

Is arbitration preferable to litigation? While it is usually less expensive, this case illustrates how things are rarely simple in litigation or arbitration:

BACKGROUND:

MailCoups…provided the 30-page preprinted form contract, which contained an arbitration clause that reserved MailCoups’ right to protect its intellectual property in court and provided for arbitration proceedings to be held in Boston at the American Arbitration Association regional office closest to its headquarters.

DISPUTE:

In September 2000, Nagrampa [franchisee] unilaterally terminated the agreement after two years of operating her MailCoups franchise in Contra Costa County at a loss. She allegedly incurred over $180,000 in personal debt and had to pay more than $400,000 in fees to the franchisor, but did not receive the 41 percent in profits that the company had promised her.

Claiming Nagrampa owed it over $80,000 in fees, MailCoups initiated arbitration proceedings in December 2001, initially designating Los Angeles as the hearing location. After her attorney objected to the proceeding and refused to file a response to the arbitration, the AAA case manager notified the parties that the hearing would take place in Boston in accordance with the arbitration clause’s forum selection provision.

The arbitration clause in a Mailcoup’s Franchise Agreement allowed the franchisor to pursue intellectual property claims in court while restricting all of the franchisee’s issues to arbitration, and designated Boston as the arbitral forum.

CLAIMS:

Among her [Mailcoup's franchisee] various claims was a cause of action challenging the validity and enforceability of the arbitration clause as violating the California Consumer Remedies Act. The clause was substantially one-sided, unconscionable, oppressive, outside her reasonable expectations and contained within an adhesion contract, the franchisee alleged.

JUDICIAL DECISION:

It was procedurally unconscionable because “Mail Coups had overwhelming bargaining power, drafted the contract, and presented it to Nagrampa on a take-it-or-leave-it basis,” she wrote.

Moreover, the judge noted, Nagrampa was a first-time franchise owner and apparently had no specialized education or training in the direct marketing industry even though she had been a sales manager for some years.

The clause was also substantively unconscionable because the forum selection and provisional remedy provisions exhibited a lack of mutuality.

“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 the MailCoups headquarters in Avon, but three thousand miles away from Nagrampa’s home,” Wardlaw said.

The arbitration clause was so permeated by substantive unconscionability that it cannot be cured by severing it from the contract, she concluded.

** Judge Kozinski (occasionally batted around as a possible Supreme Court nominee for President Bush) dissented:

In a separate dissent, Judge Alex Kozinski argued that Nagrampa had waived her right to object to arbitration by dint of her participation in the proceedings, however minimal. He also called the decision a “paternalistic endeavor” that carried “seeds of great irony.”

“By invoking the unconscionability 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,” he wrote, explaining that only those who are economically on par with corporations are considered “sophisticated” enough to enter into enforceable arbitration agreements.

“The result is that fewer aspiring business owners—many of whom are minorities and first generation Americans—will find franchisors willing to offer them opportunities like the one MailCoups offered to Nagrampa,” the judge said.

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