Ninth Circuit Holds that Arbitrator Must Decide Whether Contract is One of Adhesion (Web)
March 28, 2005
In Nagrampa, the Ninth Circuit Court considered an appeal from a decision compelling arbitration of a dispute arising from a franchise agreement. MailCoups initiated arbitration proceedings against Nagrampa with the American Arbitration Association, as provided for in the arbitration clause of the franchise agreement. After participating in initial pre-hearing procedures, Nagrampa withdrew from the process when the arbitrator designated Boston as the location for hearings. The proceedings continued without her participation.
Nagrampa brought a suit in California against MailCoups and the AAA, claiming that MailCoups was liable for common-law misrepresentation and fraud, and for violations of the California Consumer Legal Remedies Act and California’s franchise and unfair competition laws. Nagrampa sought money damages and an injunction barring enforcement of the arbitration clause. MailCoups removed the case to federal court and moved to compel arbitration. Finding that a valid arbitration clause existed, the district court granted MailCoup’s motion to dismiss.
On appeal, Nagrampa claimed the arbitration clause was procedurally unconscionable because the franchise agreement in which it was found was a contract of adhesion. The Ninth Circuit Court of Appeals invoked the Supreme Court’s holding in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). In Prima Paint, the Court explained that, where an agreement includes an arbitration clause, a party’s claim that it has been fraudulently induced to enter into that agreement must be referred to an arbitrator unless the claim pertains specifically to the making of the arbitration clause. Relying on that decision, the Ninth Circuit Court limited its inquiry to issues pertaining specifically to arbitration clause’s validity, leaving issues relating to the making of the franchise agreement as a whole to be decided by the arbitrator.
Although no Ninth Circuit decision had previously applied the Prima Paint reasoning to answer this specific question, the Court considered decisions by other federal courts refusing to decide whether agreements containing arbitration clauses were invalid contracts of adhesion. The Court found that the arbitrator must make this decision because the issue pertains to the making of the agreement as a whole and not to the arbitration clause specifically.
The Court went on to find that the Prima Paint decision did not preclude consideration of additional procedural unconscionability arguments pertaining specifically to the validity of the arbitration clause. The Court considered Nagrampa’s claim that the clause was procedurally unconscionable because it was found on page twenty-five of the thirty-page franchise agreement and because she was not informed about the costs of arbitration. Reviewing California case law, the Court found that MailCoups had no obligation to inform Nagrampa of the existence of the arbitration clause or the associated costs and that her failure to read the agreement or to consult a lawyer did not exclude her from complying with its terms.
Finding that a valid arbitration clause existed and that the question of unconscionability of the franchise agreement itself should be decided by the arbitrator, the Ninth Circuit Court of Appeals affirmed the district court decision dismissing Nagrampa’s suit and compelling arbitration.
The opinion is available on Westlaw.