Nagrampa v. Mailcoups, Inc.
| Citation | 469 F.3d 1257 |
| Decision Date | 04 December 2006 |
| Docket Number | No. 03-15955.,03-15955. |
| Parties | Connie A. NAGRAMPA, Plaintiff-Appellant, v. MAILCOUPS, INC.; The American Arbitration Association, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Kate Gordon & Leslie A. Bailey, Trial Lawyers for Public Justice, Oakland, CA; F. Paul Bland, Trial Lawyers for Public Justice, Washington, D.C.; Sanford M. Cipinko, Law Offices of Sanford M. Cipinko, San Francisco, CA, for the plaintiff-appellant.
Glenn J. Plattner and Christine S. Oh, Jenkens & Gilchrist, LLP, Los Angeles, CA, for the defendant-appellee MailCoups, Inc.
John S. Warnlof, Warnlof & Sumnick, Walnut Creek, CA; Shirley M. Hufstedler, Morrison & Foerster, LLP, Los Angeles, CA, for the defendant-appellee, American Arbitration Association.
Appeal from the United States District Court for the Northern District of California; Martin J. Jenkins, District Judge, Presiding. D.C. No. CV-03-00208-MJJ.
Before SCHROEDER, Chief Judge, REINHARDT, KOZINSKI, O'SCANNLAIN, THOMAS, GRABER, WARDLAW, FISHER, GOULD, TALLMAN, and CLIFTON, Circuit Judges.
Opinion by Judge WARDLAW; Partial concurrence and Partial Dissent by Judge CLIFTON; Dissent by Judge O'Scannlain; Dissent by Judge KOZINSKI
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 In a now-withdrawn opinion, a three-judge panel of our court held that the unconscionability of an arbitration provision contained in the franchise agreement is a question for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 provision, then the question of whether the agreement, as a whole, is unconscionable must be referred to the arbitrator. See Buckeye Check Cashing, Inc. v. Cardegna, ___ U.S. ___, 126 S.Ct. 1204, 1209, 163 L.Ed.2d 1038 (2006); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). When the crux of the complaint is not the invalidity of the contract as a whole, but rather the arbitration provision itself, then the federal courts must decide whether the arbitration provision is invalid and unenforceable under 9 U.S.C. § 2 of the FAA.1 The federal courts cannot shirk their statutory obligation to do so simply because controlling substantive state law requires the court to consider, in the course of analyzing the validity of the arbitration provision, the circumstances surrounding the making of the entire agreement. See Buckeye, 126 S.Ct. at 1209-10; Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801. Judge O'Scannlain's dissent mistakenly argues that holding the arbitration agreement unconscionable based partly on a finding that the franchise agreement is a contract of adhesion—the required California law analysis—is a "ground that directly affects the entire agreement." Buckeye, 126 S.Ct. at 1208. Judge O'Scannlain's dissent fails to recognize a further aspect of California law that provides for striking unconscionable provisions, while leaving the remainder of the agreement intact, valid, and enforceable.
One must closely examine Nagrampa'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 action2 in her (since removed) state complaint, none of which seeks to invalidate the contract as a whole. Her fifth and sixth causes of action specifically and exclusively challenge the validity of the arbitration provision. Although she argues appropriately under California law that the arbitration provision is procedurally unconscionable based, in part, on its inclusion in a contract of adhesion, Nagrampa does not assert that the entire agreement is unconscionable or invalid; nor does she seek any form of relief from the agreement as a whole. To the contrary, the other four causes of action provide relief only if the franchise agreement is valid and binding upon the parties.
Because § 2 of the FAA provides that arbitration agreements are generally valid and enforceable, "save upon such grounds as exist at law or in equity for the revocation of any contract," we are required to turn to California law to address Nagrampa's arguments regarding the unconscionability of the arbitration provision. California law holds that unconscionable provisions generally are unenforceable. Such unenforceable provisions may, however, be severed from any valid and enforceable provisions, even those also contained within the arbitration provision. The district court correctly proceeded to an analysis of unconscionability under California law as a defense to enforcement of the arbitration provision included in Nagrampa's franchise agreement. Because the district court failed to properly apply California law, which has continued to evolve since the district court ruled, we reverse and remand for further proceedings in accordance with this opinion.
In June 1998, Connie Nagrampa received an offering circular from Mail-Coups, Inc. On August 24, 1998, Nagrampa 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 MailCoups initiated arbitration proceedings by filing a Demand for Arbitration with the AAA, claiming that at the time Nagrampa 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, California, 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 the arbitration clause" and disagreed that Nagrampa was "in fact compelled by the alleged clause to arbitrate." He further objected to the venue selection, requesting that the venue for the arbitration be Contra Costa, California, the county in which Nagrampa operated her MailCoups franchise. He also objected to the arbitration fee clause. Based on those objections, Nagrampa's counsel refused to file a response to the arbitration.
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 costefficient 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, Nagrampa sent a letter indicating that she would not participate in the arbitration proceedings.
Instead, Nagrampa filed this action against MailCoups and AAA in the...
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