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Court Watch

By Darryl A. Hart, Charles G. Miller, and Griffith C. Towle
May 26, 2005

Ninth Circuit Opinion Might Shift Many Unconscionability Claims to Arbitrator

In Nagrampa v. Mailcoups, Inc., 40 F.3d 1024 (9th Cir. 2005), Bus. Fran. Guide (CCH) '13,034 (March 21, 2005), the Ninth Circuit decided a case of first impression involving a franchise agreement with a standard arbitration clause: whether the arbitrator or the court decides the question of unconscionability. The answer depends on the nature of the challenge. The arbitration clause in Nagrampa was contained on the 25th page of a 30-page franchise agreement and covered all disputes, although there was a carve-out for intellectual property injunctive relief actions brought by the franchisor.

The agreement also contained a forum selection clause choosing Boston as the venue. Nonetheless, Mailcoups initiated an arbitration in California, which arbitration was thereafter moved, at the franchisee's request, to Boston. After almost a year of arbitrating in Los Angeles and Boston, the franchisee decided she had enough and sued Mailcoups in California, along with the American Arbitration Association (“AAA”), claiming that the franchise agreement was induced by fraud. Mailcoups moved to compel arbitration or dismiss. The franchisee opposed the motion on the basis that the arbitration clause was unconscionable. The district court ruled in favor of the franchisor, and dismissed the case rather than compel arbitration due to the Boston venue clause (see, 9 U.S.C. '4).

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