Appeals Court: Courts Decide Enforceability of Franchise Arbitration Provision

The facts and procedure of the case are common in franchise circles. Mailcoups sued its franchisee Connie Nagrampa in arbitration for breach of contract after she failed and terminated the agreement. Although initially filed in Los Angeles, the American Arbitration Association transferred venue to Boston in accordance with the forum selection clause in the agreement. Nagrampa objected to arbitration and brought an action against Mailcoups in California state court alleging fraud and statutory violations as well as attacking the arbitration provisions. Mailcoups removed the case to federal court and moved to compel arbitration and to stay or dismiss the case. Nagrampa opposed the motion to compel on state law grounds of unconscionability. The district court found that the arbitration agreement was valid and granted Mailcoups' motion to dismiss. Nagrampa appealed, and the three-judge panel of the court of appeals (Nagrampa I), 401 F.3d 1024, affirmed, holding that the unconscionability of an arbitration provision contained in the franchise agreement is a question for the arbitrator to decide. The underpinning of that conclusion was that where an adhesion contract contains an arbitration clause, the arbitrator must decide unconscionability because the issue of adhesion (and thus the procedural prong of unconscionability) pertains to the making of the agreement as a whole and not to the arbitration clause specifically.