A California federal court has declared a wireless franchise contract's arbitration agreement unconscionable, specifically noting "oppressive" notice, limitation, fee-splitting, and confidentially terms.

In AT & T Mobility II, LLC v. Pestano, No. C 07-05463 WHA, 2008 WL 682523 (N.D. Cal. Mar. 7, 2008), a dispute arose between franchisor AT & T and franchisee Pestano over monies owed after the termination of the parties' franchise agreement. The last version of the contract contained an arbitration agreement encompassing all of the parties' claims.

AT & T filed suit against Pestano for the return of certain funds after the termination of the franchise contract. Pestano answered with affirmative defenses, as well as her own counterclaims against AT & T. AT & T then moved to compel arbitration of Pestano's counterclaims.

Noting the tendency of California courts to recognize franchise agreements as contracts of adhesion, the Court found the arbitration agreement procedurally unconscionable. It found that the parties had inherently unequal bargaining power during formation, and that there was no evidence that any terms of the contract were negotiable.

The Court then found the notice and limitation terms to be substantively unconscionable. The notice term required notification within 120 days of the events giving rise to a claim, and the limitation term required submission to arbitration within 180 days. To the Court, the benefit of these time limitations flowed disproportionately to AT & T, rendering them unconscionable.

The Court also found the fee-splitting term to be substantively unconscionable. Since one of Pestano's counterclaims were statutory, compelling arbitration of that claim would "impede her efforts to vindicate an unwaivable right" by requiring payment of fees in excess of court fees. Furthermore, the fee-splitting provision allowed a party to seek litigation of a claim if the other did not pay its portion of the split fees. This, to the Court, was a "backdoor and one-sided way around the arbitration agreement," allowing the party better able to pay fees to avoid arbitration against less able parties.

Finally, the Court was troubled by the confidentiality provision in the agreement. The Court found its operation to be non-mutual, affording the repeat participants in arbitration to place themselves in a superior legal posture by having access to precedent while denying that access to opposing parties.

Together, the Court found these substantively unconscionable terms to so permeate the agreement that severance was impossible. Therefore, it declared the entire arbitration agreement invalid.