A California federal court partially granted a motion to compel arbitration by car care franchisor Spiffy Franchising. However, the court invalidated provisions in the franchise agreement providing for dispute resolution in North Carolina and North Carolina governing law. The court severed some provisions from the arbitration clause in the franchise agreement, finding that the parties lacked mutual assent to them.
The franchisee alleged that Spiffy engaged in fraudulent business practices and misrepresentations in providing promised supervision, training, and supplies, access to nationwide accounts and assistance with the franchisee’s business model using existing infrastructure and resources.
After mediation did not resolve the dispute, Spiffy filed a motion to compel arbitration of the franchisee’s complaint in North Carolina. The franchisee opposed on the grounds that there was no valid agreement to arbitrate, that the arbitration provision was unconscionable, and that if the arbitration provision was enforceable, it was waived.
The court held that Spiffy failed to demonstrate mutual assent to arbitrate disputes in North Carolina under North Carolina law because the California Addendum to the franchise agreement provided that the North Carolina forum selection and choice of law clauses “may not be enforceable under California law.” The court also noted a lack of evidence that Spiffy indicated an intention to enforce the North Carolina provisions.
However, the court did not render the entire arbitration clause unenforceable.
Recognizing that franchise agreements have some characteristics of adhesion contracts, the court determined that there was no procedural unconscionability. There was no oppression because the franchisee had over two weeks to review the franchise agreement, during which her attorney reviewed, red-lined, and commented on many terms, and Spiffy promptly responded to and incorporated most of their proposed changes. Subsequent emails demonstrated the parties continued to negotiate and the franchisee actively participated, which negated franchisee’s allegations of unequal bargaining power.
The court also rejected the franchisee’s argument that Spiffy waived arbitration by taking too long to respond to the franchisee’s written notice of intent to arbitrate after a failed mediation. The court found that Spiffy responded to the franchisee attorney’s notice in under a month, provided an explanation of case load, and tried to further discuss resolution. The court did not find such conduct inconsistent with Spiffy’s right to arbitration.
Franchisees should be mindful of the impact that mandatory state addenda in franchise disclosure documents and franchise agreements can have on enforcing arbitration in franchise registration states. Even when arbitration is compelled, courts can play a significant role in shaping the parameters of arbitration. Franchise counsel should be called upon to assess the extent a court will maintain the integrity of the franchisor’s chosen dispute resolution procedures.
