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March 30, 2005
Arbitrator, not court, decides unconscionability issue - sometimes
A franchise agreement contains an arbitration clause. The franchisee claims that both the arbitration clause and the whole agreement are unconscionable. Who decides these two issues? The court or the arbitrator?
The better rule is that the court decides whether the arbitration clause is a valid agreement, including issues of unconscionability. And the arbitrator decides whether the whole contract, in which the arbitration clause is embedded, is unconscionable.
So the 9th Circuit got it right in Nagrampa v. MailCoups, Inc (9th Cir 03/21/2005).
It all goes back to Prima Paint v. Flood & Conklin, 388 US 395 (1967), where Prima Paint claimed it was not bound by an agreement because it had been fraudulently induced. The US Supreme Court drew a clear line between (1) claims that the arbitration clause was fraudulently induced and (2) claims that the whole agreement was fraudulently induced.
Citing Federal Arbitration Act Section 4, the Supreme Court said "a federal court may consider only issues relating to the making and performance of the agreement to arbitrate," and must leave for an arbitrator the question of whether the agreement as a whole was unlawfully obtained.
So the 9th Circuit steered away from the question of whether the franchise agreement as a whole was unconscionable, and left that for the arbitrator.
As for the unconscionability of the arbitration clause, the court did decide that issue. The clause was on page 25 of a 30 page agreement and nobody told the franchisee it was there. But the franchisee was experienced in business and had ample opportunity to read the clause and consider its implications. Conclusion: the arbitration clause was valid.
Employees trying to escape from arbitration agreements can get the court to resolve unconscionability issues if they are dealing with a stand-alone arbitration agreement. If the agreement to arbitrate is embedded in a larger agreement (such as an employment agreement), then the employee needs to focus on the issue of whether the arbitration clause is unconscionable. They better argue and present proof on both, however, because if the arbitration clause is unlawful then the court will decide the whole case.
Posted by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
