Last, HI contends that the fact that it refers to itself and its
subsidiaries as a unitary company is irrelevant to the question of agency
and should be given no weight. See Bright v. Primary Source Media, 1998
WL 671247 at *5 (N.D. Cal. 1998) (reference to the subsidiary as part of
the parent corporation not sufficient to establish agency for purposes of
jurisdiction). HI similarly argues that overlapping corporate boards are
a typical incident of a parent/subsidiary relationship and this fact,
therefore, is not probative of whether the subsidiary is the parent's
agent. "It is entirely appropriate for directors of a parent corporation
to serve as directors of its subsidiary, and that fact alone may not
serve to expose the parent corporation to liability for its subsidiary's
acts." Doe v. Unocal Corp., 248 F.3d 915, 926 (9th Cir. 2001) (quoting
United States v. Bestfoods, 524 U.S. 51, 69 (1988)).
Although it is true that a unitary corporate structure, including the
use of overlapping board members, is not alone sufficient to establish
agency, several courts have found such overlapping control structures to
be probative of a broader principal/agent relationship. See e.g., Modesto
City Sch., 157 F. Supp.2d at 1135 (exercising personal jurisdiction where
subsidiary's board members were directors of parent corporation); Bulova
Watch Co. v. K. Hattori & Co., 508 F. Supp. 1322, 1342 (E.D.N.Y. 1981)
(existence of overlapping directors and officers is one of many factors
relevant to finding of general agency).
Viewing the totality of the circumstances here, the Court concludes
that Plaintiffs have established the necessary prima facie case for the
exercise of personal jurisdiction over HI based on the contacts of its
subsidiaries in the State.
1. Motion to Compel
Section 2 of the Federal Arbitration Act (FAA) provides that "an
agreement in writing to submit to arbitration an existing controversy
arising out of . . . a contract . . . shall be valid, irrevocable and
enforceable save upon such grounds as exist at law or in equity for the
revocation of any contract." 9 U.S.C. § 2. The parties do not dispute
that they are signatories to a written arbitration agreement. The issue
here "is whether there are grounds `at law or in equity' for not
enforcing" that agreement. Teledyne, Inc. v. Kone Corp., 892 F.2d 1404,
1410 (9th Cir. 1990).
In determining whether an agreement to arbitrate is valid, federal
courts must "apply ordinary state-law principles that govern the
formation of contracts." Circuit City Stores v. Adams, 279 F.3d 889, 892
(9th Cir. 2002) (quoting First Options of Chicago. Inc. v. Kaplan,
514 U.S. 938, 944 (1995)). "General contract defenses such as fraud,
duress or unconscionability, grounded in state contract law, may operate
to invalidate arbitration agreements. . . ." Id. (citing Doctor's
Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)); see also Ticknor
v. Choice Hotels Int'l, Inc., 265 F.3d 931 (9th Cir. 2001) (applying
Montana contract law to determine validity of arbitration agreement). In
the absence of a generally applicable State law rendering the agreement
to arbitrate invalid, federal courts have "little discretion to deny an
arbitration motion, since the Act is phrased in mandatory terms."
Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 475 (9th Cir.
In the present case, Plaintiffs contend that under California law, the
arbitration provisions are unenforceable as unconscionable. "Because
unconscionability is a
defense to contracts generally and does not single
out arbitration agreements for special scrutiny, it is also a valid
reason not to enforce an arbitration agreement under the FAA." Circuit
City, 279 F.3d at 895.
Under California law, unconscionability has both a procedural and a
The procedural element focuses on two factors:
oppression and surprise. Oppression arises from an
inequality of bargaining power which results in no real
negotiation and an absence of meaningful choice.
Surprise involves the extent to which the supposedly
agreed-upon terms of the bargain are hidden in a prolix
printed form drafted by the party seeking to enforce
the disputed terms.
Ellis v. McKinnon Broad. Co., 18 Cal.App.4th 1796, 1803 (1993); see also
American Software, Inc. v. Ali, 46 Cal.App.4th 1386, 1390 (1996)
("Indicia of procedural unconscionability include oppression . . . and
surprise . . .") (internal citations omitted). Substantive
unconscionability, on the other hand, focuses on "overly harsh" or
"one-sided" terms within the contract. Armendariz v. Found. Health
Psychcare Servs., 24 Cal.4th 83, 114 (2000) (citing A & M Produce Co. v.
FMC Corp., 135 Cal.App.3d 473, 486-87 (1982)). Although both procedural
and substantive unconscionability must be present before a court will
refuse to enforce a contract, "they need not be present to the same
degree." Id. "[T]he more substantively oppressive the contract terms, the
less evidence of procedural unconscionability is required to come to the
conclusion that the term is unenforceable, and vice versa." Id.
a) Procedural Unconscionability
A contract or clause is procedurally unconscionable if it is a contract
of adhesion. Circuit City, 279 F.3d at 893 ("The [arbitration agreement]
is procedurally unconscionable because it is a contract of adhesion.");
see also Flores v. Transamerica Homefirst. Inc., 93 Cal.App.4th 846, 853
(2002) ("A finding of a contract of adhesion is essentially a finding of
procedural unconscionability."). A contract of adhesion, in turn, is a
"standardized contract, which, imposed and drafted by the party of
superior bargaining strength, relegates to the subscribing party only the
opportunity to adhere to the contract or reject it." Armendariz, 24
Cal.4th at 113 (quoting Neal v. State Farm Ins. Co., 188 Cal.App.2d 690,
Defendants do not dispute that the arbitration agreements at issue here
meet this definition of a contract of adhesion. Defendants argue,
however, that form contracts like the ones here challenged are not
adhesive if "the complaining party had reasonably available alternative
sources of supply from which to obtain the desired goods or services free
of the terms claimed to be unconscionable." Dean Witter Reynolds, Inc.
v. Superior Court, 211 Cal.App.3d 758, 768 (1989).
Even if the availability of alternative sources of supply could be, in
certain circumstances, probative of the level of procedural oppression
incident to the contract, the circumstances in this case do not warrant
such a finding.
In Dean Witter, in fact, the court specifically held that a claim of
procedural unconscionability could not be defeated by "any showing of
competition in the marketplace as to the desired goods and services." 211
Cal.App. at 772.
Rather, in that case, the court specifically noted that
the party challenging the fee as unconscionable was "a sophisticated
investor" and "the record establishes without conflict that other
financial institutions offered competing IRAs which lacked the challenged
provision." Id. at 771. The evidence in the record here, however,
indicates that Defendants market their services to customers "who have
limited credit histories, modest income, high debt to income ratios, or
have experienced credit problems . . . ." Barnhill Dec., Ex. A at 5.
These consumers are unlikely to refuse one of their few sources of credit
because of the inclusion of an arbitration clause.
The circumstances facing the Court here are analogous to those that
faced the California Supreme Court in Armendariz. In Armendariz, the
court rejected the contention that the availability of alternative
sources of supply affected the procedural unconscionability analysis. The
Armendariz court found an arbitration clause in an employment agreement
to be adhesive and, therefore, procedurally unconscionable. 24 Cal.4th at
114-15. Although the court acknowledged the existence of alternative
sources of employment that were not conditioned on the acceptance of an
arbitration clause, the court found this fact irrelevant to the
procedural unconscionability inquiry.
[T]he economic pressure exerted by employers on all but
the most sought-after employees may be particularly
acute, for the arbitration agreement stands between the
employee and necessary employment and few employees are
in a position to refuse a job because of an arbitration
Id. at 115; see also Szetela v. Discover Bank, 118 Cal.Rptr.2d 862, 867
(Ct. App. 2002) (availability of substitute goods not "the relevant test
The Court therefore rejects Defendants' contention that the
availability of competition in the market for consumer loans defeats
Plaintiffs' claims that the arbitration agreements were contracts of
adhesion. However, an adhesion contract, although satisfying the
requirement of procedural unconscionability, may nevertheless be
enforceable if the substantive terms are reasonable. See Craig v. Brown &
Root, Inc., 84 Cal.App.4th 416, 422-23 (2000) (contract of adhesion to
arbitrate disputes enforceable).
b) Substantive Unconscionability
Substantive unconscionability focuses on the harshness and one-sided
nature of the substantive terms of the contract. See A & M Produce, 135
Cal.App.3d at 486-87. An adhesive agreement to arbitrate will satisfy
this general standard for substantive unconscionability if the agreement
lacks a "modicum of bilaterality." Armendariz, 24 Cal.4th at 117.
"Although parties are free to contract for asymmetrical remedies and
arbitration clauses of varying scope . . . the doctrine of
unconscionability limits the extent to which a stronger party may through
a contract of adhesion, impose the arbitration forum on the weaker party
without accepting that forum for itself." Id. at 118.
Whether an arbitration agreement is sufficiently bilateral is
determined by an examination of the actual effects of the challenged
provisions. Ellis, 18 Cal.App.4th at 1803-04. ("substantive
unconscionability . . . refers to an overly harsh allocation of risks or
costs which is not justified by the circumstances under which the
made"). Therefore, an arbitration agreement that is facially
neutral nevertheless may be substantively unconscionable. See Ting v.
AT&T, 182 F. Supp.2d 902, 931 (N.D. Cal. 2002) (bilateral ban on class
actions "effectively one-sided since it is hard to conceive of a class
action suit that [the defendant] would file against its customers"); id.
at 932 (confidentiality provision applicable to both parties relevant to
finding of unconscionability because provision put the defendant, a
repeat player in arbitrations, "in a vastly superior legal posture");
Mercuro v. Superior Court, 96 Cal.App.4th 167, 179 (2002) (arbitration
forum, though equally applicable to both parties, relevant to finding of
unconscionability because "repeat player effect" rendered provision
disadvantageous to weaker party).
Plaintiffs contend that three provisions of the arbitration agreements
render them excessively one-sided and substantively unconscionable.
First, Plaintiffs contend that the prohibition on class actions, although
facially neutral, in reality benefits Defendants and restricts
Plaintiffs' ability to secure any remedy at all. Second, Plaintiffs
contend that the requirement that any arbitration award remain
confidential works to the benefit of Defendants and the detriment of
their customers. Third, Plaintiffs contend that the remedy of foreclosure
is specifically excluded from the arbitration provision, to the obvious
advantage of Defendants.
Finally, Plaintiffs argue that the cost-splitting provisions of the
arbitration agreements are unconscionable as a matter of law.
i. Class Action Provision
In Szetela v. Discover Bank, the California Court of Appeal held that a
provision of an arbitration agreement that prohibited class actions was
substantively unconscionable. The court struck the offending provision
from the agreement. 118 Cal.Rptr.2d at 867-68. Recognizing that a
provision is substantively unconscionable when it is excessively
one-sided, the court held, "The manifest one-sidedness of the no class
action provision at issue here is blindingly obvious." Id. at 867. The
court looked beyond the facial neutrality of the provision — which
prohibited both the consumer and the credit card company from seeking
class status — to the purpose and effect of the provision.
Although styled as a mutual prohibition on
representative or class actions, it is difficult to
envision the circumstances under which the provision
might negatively impact Discover, because credit card
companies typically do not sue their customers in
class action lawsuits. This provision is clearly meant
to prevent customers from seeking redress for
relatively small amounts of money.
The Clause is not only harsh and unfair to Discover
customers who might be owed a relatively small sum of
money, but it also serves as a disincentive for
Discover to avoid the type of conduct that might lead
to class action litigation in the first place.
While the advantages to Discover are obvious, such a
practice . . . provides the customer with no benefit
whatsoever; to the contrary, it seriously jeopardizes
customers' consumer rights by prohibiting any effective
means of litigating Discover's business practices.