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Htay Htay Chin v. Advanced Fresh Concepts Franchise Corp. et al

April 20, 2011


Los Angeles County Super. Ct. No. BC427303 APPEAL from an order of the Superior Court of Los Angeles County, Mary Ann Murphy, Judge. Reversed.

The opinion of the court was delivered by: Epstein, P. J.


Appellants Advanced Fresh Concepts Franchise Corp. and Advanced Fresh Concepts Corp. (collectively AFC or franchisor) appeal from an order denying their motion to compel arbitration of a lawsuit brought by a franchisee, respondent Htay Htay Chin (Chin or franchisee). AFC contends the arbitrator rather than the trial court must determine the validity of the arbitration provision in the franchise agreement that specifically delegates this task to the arbitrator in a clause. (We will refer to this as the delegation clause.) Chin argues the arbitration provision is unconscionable and hence unenforceable in an adhesion contract such as the one in this case. We conclude that, even if the delegation clause by itself is unconscionable, none of the other terms of the arbitration provision is, rendering moot the question about the delegation clause. Because the trial court erred in finding other terms of the arbitration provision unconscionable, we reverse its order denying the motion to compel arbitration.


AFC, a California corporation, is a sushi franchisor. Chin was a franchisee operating food service counters in Missouri under a 2002 franchise agreement with AFC. In 2007, the parties entered into a new franchise agreement, which is the subject of this appeal. The 2007 agreement contained a multi-page arbitration provision (section 16.8), which begins with the following delegation clause: "Any dispute that arises out of or relates directly or indirectly to this Agreement or the relationship of the parties hereto, including, without limitation, any claimed breach of this Agreement or any claim that any part of this Agreement (including this Section 16.8 or any part thereof) is invalid, illegal, voidable or void, shall be resolved by arbitration .. . ."

On December 3, 2009, Chin filed a lawsuit against AFC in the Los Angeles Superior Court, alleging breach of contract and other causes of action. AFC moved to compel arbitration. Chin opposed on the ground that the arbitration provision was unconscionable. The trial court denied the motion to compel, ruling that "[t]he arbitration agreement is unconscionable as it limits damages to actual or compensatory damages and elimination of [sic] equitable claims and defenses." The order is appealable. (Code Civ. Proc., § 1294, subd.(a).)


The parties proceeded below under California state law, and neither side argues the dispute is subject to federal preemption under the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.), which applies to contracts in interstate commerce. Section 16.7 of the franchise agreement is a choice-of-law provision, specifying that California law shall govern all but one (here inapplicable) section of the agreement. We resolve their dispute under state law standards generally applicable to contracts. (See Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971.)

In general, arbitration agreements are enforceable, except when legal or equitable grounds exist to void a contract. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 98, citing 9 U.S.C. § 2; Code Civ. Proc., § 1281 (Armendariz).) In California, petitions to compel arbitration are resolved in a summary proceeding. (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413, citing Code Civ. Proc., §§ 1281.2 & 1290.2.) The petitioner bears the burden of proving that an agreement to arbitrate exists, and the opponent has the burden of proving the facts of any defense to enforceability. (Id. at pp. 413-414.)

Since unconscionability is a contract defense, the party opposing arbitration bears the burden of proving that an arbitration provision is unenforceable on that ground. (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1099.) Unconscionability is ultimately a question of law, which we review de novo when no meaningful factual disputes exist as to the evidence. (Civ. Code, § 1670.5; Parada v. Superior Court (2009) 176 Cal.App.4th 1554, 1567 (Parada).) We review the court's resolution of disputed facts for substantial evidence. (Ibid.) When the trial court makes no express findings, we infer that it made every implied factual finding necessary to support its order and review those implied findings for substantial evidence. (Ibid.)

II AFC contends that when an arbitration provision contains a delegation clause, as this one does, it is the arbitrator who decides whether the arbitration provision is unconscionable. AFC points to the recent United States Supreme Court decision in Rent-A-Center, West, Inc. v. Jackson (2010) __ U.S. __ , [130 S.Ct. 2772, 2778-2779] (Rent-A-Center), which, it argues, holds that the arbitrator must decide whether an arbitration provision is enforceable in cases where the parties have delegated that task to the arbitrator. The holding of Rent-A-Center is narrower than AFC suggests. Rent-A-Center was decided under the FAA, and its holding rests on the fact that the plaintiff had not challenged the unconscionability of the delegation provision of an arbitration agreement in any of the courts below. (Id. at pp. 2779-2780.) The superior court specifically declined to consider whether the delegation provision was unconscionable because the plaintiff brought this challenge too late. (Id. at 2781 & fn. 5.) It did not hold that the enforceability of a delegation provision was to be determined by the arbitrator in all cases. The California Supreme Court has declined to consider whether Rent-A-Center applies in state courts or whether California would adopt its narrow rule of severability as a matter of state law. (See Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, 688, fn. 12.) Whatever its applicability in general, Rent-A-Center does not aid us in this case.

Normally, the court decides the scope and validity of an arbitration agreement, including whether it is unconscionable. (Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 171.) When the parties "clearly and unmistakably" delegate issues of arbitrability to the arbitrator, the arbitrator, not the court, decides such issues as the scope of the arbitration agreement. (Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 552.) (See Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1286 (Bruni); Murphy v. Check 'N Go of California, Inc. (2007) 156 Cal.App.4th 138, 144 (Murphy); but see Parada, supra, 176 Cal.App.4th at p. 1565 [expressing concern about arbitrator's conflict of interest without deciding whether parties have right to delegate this task to the arbitrator].) However, courts have declined to uphold such delegation clauses when they appear in contracts of adhesion. (Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 504 (Ontiveros) [employment contract]; Murphy, supra, 156 Cal.App.4th at p. 144 [employment contract]; Bruni, supra, 160 Cal.App.4th at p. 1295 [home construction warranty].)

The judicially created doctrine of unconscionability, now codified in Civil Code section 1670.5, has both a procedural and a substantive element. They are applied on a sliding scale: "the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." (Armendariz, supra, 24 Cal.4th at p. 114.) The procedural element focuses on the contracting parties' unequal bargaining power and on the weaker party's lack of notice of hidden or oppressive terms; the substantive element focuses on the actual presence of one-sided or oppressive terms. (Ibid.) An adhesion contract is indicative of procedural unconscionability because it is a standardized contract drafted by the party with greater bargaining power and offered to the weaker party on a take-it-or-leave-it basis. (Id. at p. 113.) Such a contract will not be enforced if its provisions are not within the reasonable expectations of the weaker party or if they are oppressive. (Ibid.) A franchise agreement may have the characteristics of an adhesion contract because of the franchisor's greater bargaining power. (Postal Instant Press, Inc. v. Sealy (1996) 43 Cal.App.4th 1704, 1716.) But because a franchise agreement is made in a commercial context where arbitration "is quite common, and reasonably to be anticipated," absent "some special element of unfair advantage" an arbitration provision in a franchise agreement may be enforced though the agreement is adhesive. (Keating v. Superior Court (1982) 31 Cal.3d 584, 595, overruled on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1, 17 [arbitration provision enforceable where franchisee was aware of it and of pamphlet referencing applicable rules].)

The trial court in this case did not expressly find the franchise agreement was a contract of adhesion or procedurally unconscionable even though the parties submitted declarations on this issue. Nevertheless, since procedural unconscionability is an element of unconscionability (see Armendariz, supra, 24 Cal.4th at p. 114) and the trial court found the arbitration provision to be unconscionable, it implicitly found at least some procedural unconscionability. (See Parada, supra, 176 Cal.App.4th at p. 1567.) Chin's claim that the 2007 franchise agreement was presented to her on a take-it-or-leave-it-basis is based on AFC's regional managers telling her in substance that she had to execute it "as is" or lose the franchise. AFC did not dispute that it drafted the standardized franchise agreement or that it was in a superior bargaining position. AFC's vice president asserted that regional managers were not responsible for procuring franchise agreements, and no one at AFC's headquarters presented the agreement to Chin on a take-it-or-leave-it basis. These assertions do not create a meaningful conflict in the evidence because they do not affirmatively establish that Chin was made aware of any right she may have had to negotiate or opt out of the arbitration provision, nor do they establish that she had such a right. There is no evidence ...

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