Granting a motion to compel arbitration of a commercial dispute, a California federal court rejected arguments alleging an arbitration agreement was unconscionable. The court upheld the agreement, finding it mutually bound both parties and established procedures equally applicable to both sides.

In Smith v. Sara Lee Fresh, Inc., No. Civ. S0701374WBSEFB, 2007 WL 4356725 (E.D. Cal. Dec. 11, 2007), Smith became a distributor of Sara Lee's baked products for Sacramento County in 2001. The parties' distribution agreement contained an arbitration provision. In February 2003, Sara Lee sent Smith a letter informing him that he was breaching the agreement and asking him to cure the breach. After Smith allegedly failed to cure the breach, Sara Lee terminated Smith's distribution rights.

Smith sued for breach of contract and conversion resulting from the alleged breach. Sara Lee moved to compel arbitration pursuant to the parties' arbitration agreement. Smith responded, arguing the arbitration agreement was unenforceable because it was unconscionable.

The Court held the arbitration agreement was not unconscionable, as it mutually bound both parties. California law requires that a contract be procedurally and substantively unconscionable for a court to void it. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power whereas substantive unconscionability focuses on overly harsh or one-sided terms. California law applies a "sliding scale" approach whereby the more one type of unconscionability is present, the less the other type is required.

Although the Court noted the arbitration agreement appeared in an adhesion contract, Smith failed to offer evidence showing surprise or oppression sufficient to establish procedural unconscionability. The Court also concluded the arbitration agreement was not substantively unconscionable, as it was not one sided and did not lack mutuality. The arbitration agreement's express terms were equally binding on both parties and established procedures equally applicable to both sides. Finally, the Court found the arbitration providers mentioned in the arbitration agreement were "respected alternative dispute organizations judicially-noted for providing neutral and fair environments."