A California federal court granted a motion to compel arbitration by retail franchisor Batteries Plus and its two executives, and dismissed a franchisee’s action alleging violations of the California Franchise Investment Law, breach of the implied covenant of good faith and fair dealing, and misrepresentation. The court also struck some of the arbitration terms in the franchise agreement because they were unconscionable.
The franchisee’s complaint alleged that Batteries Plus underestimated new franchise operating costs in its FDD, provided false and inflated revenue projections, permitted another franchisee to encroach on its territory, failed to provide support, and created a hostile work environment. After the franchisee filed suit in state court, Batteries Plus removed the action to federal court, then moved to compel arbitration and to dismiss or stay the action. The franchisee opposed this motion 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 did not extend to the two executive defendants.
The court held the two executives were entitled to the benefits of the arbitration provision and to move to compel arbitration, because they were agents of Batteries Plus and their alleged conduct was related to and connected with the franchise agreement. The court also agreed with Batteries Plus that the franchisee validly agreed to arbitrate his claims, and presumed that the franchisee read and understood the agreement before he signed, regardless of whether he did not have the benefit of counsel.
Recognizing that franchise agreements have some characteristics of adhesion contracts, the court determined that there was minimal procedural unconscionability. The court saw some oppression to the extent Batteries Plus drafted the agreement, had the greater bargaining power, presented the agreement on a take-it-or-leave-it basis, and first mentioned the arbitration provision at page 32 of the 57-page agreement without a table of contents. The court nevertheless found that the franchisee had ample time to review and understand the agreement.
However, the court found there was some substantive unconscionability because only Batteries Plus, not the franchisee, could seek injunctive relief in a judicial forum. The arbitration provision also imposed a restriction on punitive damages and exemplary damages, which the court found to be contrary to California law. The court severed those provisions as unconscionable.
Other unconscionability challenges to the arbitration clause, such as the Wisconsin venue provision and the class action/joinder waiver, were rejected. Mere inconvenience or additional expense would not make a forum selection clause unduly oppressive or unreasonable, and the franchisee could have reasonably anticipated arbitration in a different state given the disclosures Batteries Plus presented before the franchisee signed.
Even when arbitration is compelled, courts can play a significant role in shaping the parameters of arbitration. Franchisors should consider addressing potential unconscionability issues in their agreements with counsel to minimize the risk of courts scrutinizing overly oppressive terms. Such a proactive approach can help maintain the integrity of the franchisor’s chosen dispute resolution method.
Singh v. Batteries Plus, LLC., No. 2:24-cv-00223-KJM-DB (E.D. Cal. May 10, 2024)
