Bolter v. Superior Court
104 Cal. Rptr. 2d 888, 87 Cal. App. 4th 900 (2001)
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Rule of Law:
An arbitration agreement's forum selection clause is unenforceable if it is found to be unconscionable. Unconscionability requires both a procedural element, such as a contract of adhesion, and a substantive element, such as terms so one-sided they impose an unduly harsh or oppressive burden on the weaker party. A court may sever the unconscionable forum clause while enforcing the remainder of the agreement to arbitrate.
Facts:
- In the early 1980s, Florence Bolter, Sandra Valdez, and Stephen R. Knight each purchased Chem-Dry carpet cleaning franchises from Harris Research, Inc. and operated them as small businesses in Orange County, California.
- At the time of the initial purchases, Harris was headquartered in California, and the franchise agreements did not contain an arbitration provision.
- Over the years, as franchise agreements were renewed, Harris, now a large international corporation headquartered in Utah, introduced new agreements.
- Harris required the franchisees to execute the newer agreements or face termination of their franchises.
- The new agreements mandated that all disputes be submitted to arbitration in Salt Lake City, Utah.
- The agreements also prohibited the consolidation of arbitration proceedings and precluded arbitrators from awarding exemplary or punitive damages.
- The franchisees operated as small 'mom and pop' or 'one-man' businesses with limited financial resources, making travel to and litigation in Utah a significant financial and logistical hardship.
Procedural Posture:
- The franchisees (Bolter, Valdez, and Knight) filed a lawsuit against the franchisor, Harris Research, Inc., in California state court for breach of contract.
- In response, Harris commenced separate arbitration proceedings against each franchisee in Utah and removed the franchisees' lawsuit to federal court.
- The franchisees subsequently dismissed their federal action and filed an identical lawsuit in state court.
- AAA arbitrators, in proceedings the franchisees objected to, issued rulings that the disputes were arbitrable in Utah.
- Harris filed a motion in the California trial court to confirm the arbitration awards and compel arbitration in Utah.
- The trial court granted Harris's motion, confirmed the arbitration awards, ordered the parties to arbitrate in Utah, and stayed the lawsuit.
- The franchisees (petitioners) filed a writ petition in the California Court of Appeal seeking relief from the trial court's order.
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Issue:
Is a mandatory arbitration clause in a franchise agreement that requires small, California-based franchisees to arbitrate all disputes in Utah unconscionable and therefore unenforceable?
Opinions:
Majority - O'Leary, J.
Yes, the forum selection clause is unconscionable and unenforceable. To be unconscionable, a contract provision must be both procedurally and substantively unconscionable. The procedural element is met because the franchise agreement is a contract of adhesion; it was drafted by Harris, the party with superior bargaining strength, and presented to the franchisees on a 'take it or leave it' basis. The substantive element is met because the 'place and manner' restrictions—requiring arbitration in Utah, prohibiting consolidation, and limiting damages—are so one-sided as to be unduly oppressive. These terms impose a substantial burden on the small California franchisees, effectively precluding them from pursuing any claims against Harris. However, the unconscionable forum provision can be severed from the agreement, allowing the remainder of the arbitration clause to be enforced.
Analysis:
This case illustrates a critical limitation on the enforceability of arbitration clauses in contracts of adhesion. It reaffirms that while there is a strong public policy favoring arbitration, arbitration agreements are not immune from general contract defenses like unconscionability. The court's application of a 'sliding scale' approach—where a high degree of substantive unfairness requires less evidence of procedural unfairness—provides a flexible standard for challenging oppressive terms. The decision to sever the offending clause rather than invalidate the entire arbitration agreement demonstrates a judicial preference for modifying rather than voiding contracts, thereby preserving the core agreement to arbitrate while correcting the inequitable terms.
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