California Holds Out-of-State Arbitration and Choice-of-Law Clauses Unenforceable

The California Court of Appeal has once again declined to enforce several one sided franchise agreement clauses in Winter v. Window Fashions Professionals, Inc., 2008 WL 3845229, Cal. App. 4th (2008).  Earlier California decisions, many of which were cited, had made similar rulings including:  Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006); Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095 (9th Cir. 1999); Independent Association of MailBox Center Owners v. Mail Boxes Etc., U.S.A., Inc., 133 Cal.App.3d 396 (2005); and McGuire v. CoolBrands Smoothies Franchise, LLC, 2007 WL 2381545.

Ron and Rochelle Winter had purchased a window covering franchise from Window Fashions Professionals, Inc.  Their franchise agreement, as is not untypical, had out of state choice of law and arbitration venue provisions both specifying Texas the home of the franchisor.  Their franchise offering circular, however, stated that the arbitration provisions and the choice of law provisions “may not be enforceable under California law.”  Because of this contradictory language to the franchise agreement terms, the California Court of Appeal found the provisions unenforceable (pdf):

“Similarly, there was no meeting of the minds as to the choice of law provision.  As with the arbitration provision, the UFOC advised that the Franchise Agreement’s requirement that Texas law be applied may not be enforceable under the California law.  Therefore the trial court correctly applied California law.”

The California Court of Appeals also found that arbitration agreements may also be challenged as unconscionable under the Federal Arbitration Act (“FAA”).  Under federal law such unconscionability challenges are not limited to California franchisees.  The decision also reiterated that such challenges will be reviewed by the court not the arbitrator.  Here the unconscionability challenge was made, but not necessary as no meeting of the minds denied enforcement of the arbitration and choice of law clauses.

These cases recognize that carefully crafted challenges to one sided franchise agreements can succeed.  In California this is especially appropriate regarding venue and choice of law clauses.  The California Legislature passed the seminal California Franchise Investment in the early 1970s, which contains unwaivable public policy protections to franchisees.  Moreover, in 1996 the Legislature enacted a provision voiding out of state venue clauses in California franchise agreements.  Nonetheless such clauses still are used by franchisors, but careful representation can trump these provisions as in the Winter case.