622 F.3d 996 (9th Cir. 2010), 08-17071, Bridge Fund Capital Corp. v. Fastbucks Franchise Corp.

Docket Nº:08-17071.
Citation:622 F.3d 996
Opinion Judge:MILAN D. SMITH, JR., Circuit Judge:
Party Name:BRIDGE FUND CAPITAL CORPORATION, a California corporation; Big Bad 1, LLC, a California limited liability company, v. FASTBUCKS FRANCHISE CORPORATION, a Nevada corporation; Charles Horton, an individual, Defendants-Appellants.
Attorney:Peter C. Lagarias and Robert S. Boulter, Lagarias & Boulter, LLP, San Rafael, CA, for the plaintiffs-appellees. Margaret C. Toledo, Mennemeier, Glassman & Stroud LLP, Sacramento, CA; Steven L. Solomon, Fastbucks Franchise Corp., Dallas, TX, for the defendants-appellants.
Judge Panel:Before MYRON H. BRIGHT,[*]MICHAEL DALY HAWKINS and MILAN D. SMITH, JR., Circuit Judges.
Case Date:September 16, 2010
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 996

622 F.3d 996 (9th Cir. 2010)

BRIDGE FUND CAPITAL CORPORATION, a California corporation; Big Bad 1, LLC, a California limited liability company,

v.

FASTBUCKS FRANCHISE CORPORATION, a Nevada corporation; Charles Horton, an individual, Defendants-Appellants.

No. 08-17071.

United States Court of Appeals, Ninth Circuit.

September 16, 2010

Argued Jan. 14, 2010.

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[Copyrighted Material Omitted]

Page 998

Peter C. Lagarias and Robert S. Boulter, Lagarias & Boulter, LLP, San Rafael, CA, for the plaintiffs-appellees.

Margaret C. Toledo, Mennemeier, Glassman & Stroud LLP, Sacramento, CA; Steven L. Solomon, Fastbucks Franchise Corp., Dallas, TX, for the defendants-appellants.

Appeal from the United States District Court for the Eastern District of California, Morrison C. England, District Judge, Presiding. D.C. No. 2:08-cv-00767-MCE-EFB.

Before MYRON H. BRIGHT,[*]MICHAEL DALY HAWKINS and MILAN D. SMITH, JR., Circuit Judges.

OPINION

MILAN D. SMITH, JR., Circuit Judge:

In this case, we consider whether the " crux of the complaint" rule requires the question of arbitrability to be determined by the arbitrator when a plaintiff's challenge to the arbitration clause does not appear in his complaint. We hold that, 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.

Plaintiff-Appellees Bridge Fund Capital Corp. and Big Bad 1, LLC (collectively, Plaintiffs) filed suit against Defendant-Appellant Fastbucks Franchise Corp. (Fastbucks, or Franchisor) in California state court, alleging various claims sounding in contract. One of the claims alleged was the unconscionability of certain provisions of the franchise agreement, but through apparent clerical error, Plaintiffs neglected to include in the complaint the list of the specific provisions of the franchise agreement they claimed were unconscionable. Fastbucks removed to federal court, and moved to compel arbitration. The district court declined to order the parties to arbitrate their dispute, agreeing with Plaintiffs, based on their motion papers, that the arbitration clause is unconscionable under California law. This appeal followed.

We address first Fastbucks's argument that the question of arbitrability was itself a question for the arbitrator to decide, and affirm the district court's decision that it was not. We also affirm the district court's determination that California law governs the unconscionability question, and that under that law the arbitration clause of the franchise agreement is unconscionable. Finally, we affirm the district court's decision to invalidate the entire arbitration clause rather than sever its offending provisions.

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FACTS AND PROCEDURAL BACKGROUND

Bridge Fund, a California corporation, and Big Bad, a California LLC, entered into franchise agreements with Fastbucks for the operation of " payday loan" franchises in California.1 Fastbucks is a Nevada corporation with its principal place of business in Texas. The franchise agreements include a Texas choice-of-law clause, as well as an arbitration provision directing that " any and all disputes between [the parties] and any claim by either party that cannot be amicably settled shall be determined solely and exclusively by arbitration under the rules of the American Arbitration Association," In addition, the five-paragraph arbitration clause provides, in pertinent part, that (1) the arbitrator, a Texas bar member, shall hear the dispute in Dallas County, Texas; (2) the claims subject to arbitration shall not be arbitrated on a class-wide basis; (3) while the Franchisor may institute an action for temporary, preliminary, or permanent injunctive relief, the franchisee is not afforded the same remedy; (4) there is a one year statute of limitations for all claims; and (5) the parties are limited to recovery of actual damages, and waive any right to consequential, punitive or exemplary damages. In addition, the franchise agreement included an " Addendum" which mentioned that certain provisions of the franchise agreement may not be consistent with California law, and that " [i]f the Franchise Agreement contains provisions that are inconsistent with the law, the law will control."

On February 28, 2008, Plaintiffs filed a complaint in California state court, alleging breach of the franchise agreements, fraud and deceit, negligent misrepresentation, violation of the California Franchise Investment Law (CFIL), Cal. Corp.Code § 31000 et seq. , declaratory relief, and unfair trade practices under California state law. Generally, Plaintiffs allege that Fastbucks made numerous material misrepresentations in its Uniform Franchise Offering Circular (UFOC), such as representing that: Fastbucks offered a unique system of training; Fastbucks would provide a manual for its business system; and that Fastbucks provided a system for ensuring the collection of loans. Plaintiffs also asserted that certain provisions of the franchise agreement were unconscionable, but apparently neglected to insert into the complaint the list of specific provisions being challenged on that ground. Plaintiffs sought rescission of the franchise agreement, damages (including punitive or exemplary damages), declaratory relief, costs, and attorney's fees.

On April 9, 2008, Fastbucks removed the action to federal court based on diversity of citizenship. Thereafter, Fastbucks moved to dismiss, or in the alternative, stay the action pending arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 3. Plaintiffs opposed the motion, arguing that the arbitration clause within the franchise agreement is unconscionable and unenforceable, pursuant to 9 U.S.C. § 2, which permits a court to refuse to enforce an arbitration agreement based on " generally applicable contract defenses such as fraud, duress, or unconscionability." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). Additionally, Plaintiffs argued that the arbitration provision within the franchise agreement was both procedurally and substantively unconscionable;

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namely, that the agreement was not mutually entered into; it improperly limits Plaintiffs' damages; it impermissibly shortens the statute of limitations; it contains invalid place and manner restrictions; it seeks to negate Plaintiff's unwaivable rights under the CFIL; and it wrongly bans class and consolidated actions.

The district court agreed with the Plaintiffs, and denied Fastbucks's motion. On appeal, Fastbucks argues that the district court committed three errors: (1) it failed to apply the " crux of the complaint" rule, pursuant to which it was for the arbitrator to decide the threshold issue of arbitrability; (2) it erred in applying California rather than Texas law; and (3) it abused its discretion in refusing to sever the portions of the arbitration provision it held to be unconscionable under California law.

JURISDICTION AND STANDARD OF REVIEW

Fastbucks removed the case to federal court on the basis of diversity, 28 U.S.C. § 1332. We have jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(A).

" The validity and scope of an arbitration clause are reviewed de novo." Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1267 (9th Cir.2006) (en banc). We review de novo the district court's choice of law analysis. Abogados v. AT& T, Inc., 223 F.3d 932, 934 (9th Cir.2000). We review a district court's choice not to sever unconscionable portions of an arbitration agreement governed by California law for abuse of discretion. See Omstead v. Dell, Inc., 594 F.3d 1081, 1087 (9th Cir.2010); see also Armendariz v. Found. Health Psychcare Services, Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 695 (2000); Cal. Civil Code § 1670.5(a).

DISCUSSION

I. Arbitrability

...

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