A California appellate court held that an arbitration agreement in a franchising contract was not validly formed where one of the documents provided during negotiation contained language warning of the potential lack of enforceability under California law of a forum selection and choice of law clause providing for arbitration outside of California.

In Winter v. Window Fashions Professionals, Inc., No. F053691, 2008 WL 3845229 (Cal. Ct. App.5d Aug. 19, 2008), the Winters bought a window coverings franchise from Window Fashion Professionals (WFP). The franchise agreement contained an arbitration agreement with a forum selection and choice of law clause providing for the application of Texas law and arbitration to take place in Texas.

A franchise offering circular provided to the Winters by WFP notified potential franchisees that arbitration provisions, choice of law, and forum selection clauses providing for arbitration outside of California, and not applying California law, may not be binding under California law.

Shortly after entering into the franchise agreement, the Winters learned that they were required to obtain a separate license to operate the franchise under California law, which they were not qualified to obtain.

The Winters filed suit against WFP for a variety of claims, among them rescission, unjust enrichment and fraud. WFP moved to compel arbitration. The trial court denied the motion, finding there had been no meeting of the minds to arbitrate. WFP appealed.

The Court held that the trial court did not err in its ruling. The Court found that the trial court correctly relied on Laxmi, a Ninth Circuit decision, to hold that there was no meeting of the minds to form the arbitration agreement. See Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095 (9th Cir. 1999). In that case, as in this case, a franchise offering circular warned that requiring arbitration to take place outside of California may not be enforceable under California law. Given this warning, there was no clear agreement made by the parties to arbitrate in a forum outside of California.

The Court rejected WFP's argument that under Bradley v. Harris Research, Inc., 275 F.3d 884 (9th Cir. 2001), the Federal Arbitration Act preempted California law invalidating arbitration agreements in this manner. Instead, it found, as in Laxmi, that the parties never agreed to a forum outside of California because the language in the franchise offering circular regarding the choice of law clause warned of a potential lack of enforceability in California. This warning was sufficient to render the agreement unenforceable, and the Court thus affirmed the trial court's denial of WFP's motion to compel arbitration.