A California federal district court has refused to enforce a franchise-related arbitration agreement, finding substantive unconscionability in its provisions regarding injunctive relief, availability of remedies, statutes of limitations, forum selection, and class action waivers.

In Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., No. 2:08-cv-00767-MCE-EFB, 2008 WL 3876341 (E.D. Cal. Aug. 20, 2008), Bridge Fund executed a contract for the operation of a Fastbucks payday lending franchise. The contract contained an arbitration agreement, a choice of law provision, and a forum selection clause. The contract required arbitration of all disputes in Texas under Texas law, but Bridge Fund alleged that a later addendum for California franchisees provided for arbitration in California under California law.

Bridge Fund later sued Fastbucks for breach of contract, fraud, deceit, misrepresentation, and violations of the California Franchise Investment Law ("CFIL"). Fastbucks moved to dismiss the action and compel arbitration in accordance with the agreement in Texas and under Texas law.

While the Court acknowledged that the parties had a "reasonable basis" under which to choose Texas law, the Court found that the application of Texas law was in conflict with fundamental California public policy as expressed in the CFIL. Specifically, the Court noted that unwaivable statutory rights and remedies afforded franchisees under the CFIL "would be effectively waived if Texas law were applied." Also, the protections offered to California franchisee-citizens under the CFIL evinced California’s "materially greater interest" than Texas in this particular dispute.

Another California federal district court had enforced Pennsylvania choice of law and forum provisions against a California franchisee in Smith v. Paul Green School of Rock Music Franchising, LLC, 2008 WL 2037721, at * 5 (C.D. Cal. 2008). However, the Court found this case distinguishable, noting that Pennsylvania law allowed for enforcement of the CFIL in its forum, and that the forum selection clause was the only arguably burdensome provision of the arbitration agreement. Because Texas law had no such directive, the Court refused to permit the application of Texas law here.

After finding a minimal level of procedural unconscionability in the adhesive nature of the agreement, the Court pointed to substantive unconscionability in five of the agreement’s provisions.

First, the Court noted the non-mutuality of the provision regarding injunctive relief, which allowed Fastbucks alone to seek injunctions from a court of law. The Court determined that the unilateral right of Fastbucks to retain the right to litigate these matters "cannot be justified by the need for provisional remedies" provided to all arbitral parties in Cal. Civ. Proc. Code § 1281.8(b).

Second, the Court determined that the unilateral limitation of Bridge Fund’s remedies to actual damages was substantively unconscionable, citing the "undisputed" proposition that such limitations on statutory remedies – such as those provided for in the CFIL – are not permitted.

Third, the Court was troubled by the unilateral shortening of the statutes of limitations for Bridge Fund’s claims. While the CFIL provided for two-year or four-year limitation periods on various causes of action, the agreement required Bridge Fund to commence arbitration within one year of the occurrence of facts giving rise to a claim. The non-mutual shortening of Bridge Fund’s opportunity to bring claims, while preserving the full statutory limitations period for Fastbucks, was clearly unconscionable, according to the Court.

Fourth, the Court agreed that the place and manner provisions – requiring arbitration in Texas – may be permissible standing alone, but was unconscionable here because "it is only one of many" oppressive factors.

Finally, the Court observed that Bridge Fund did not seek class action status for its lawsuit, but nevertheless held that the arbitration agreement’s "ban on class and consolidated actions adds further weight to a finding of substantive unconscionability."

Accordingly, the Court held that the arbitration agreement was "permeated with unconscionability" and refused to enforce any of its provisions.