FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRIDGE FUND CAPITAL
CORPORATION, a California
corporation; BIG BAD 1, LLC, a
California limited liability
No. 08-17071
company,
Plaintiffs-Appellees, D.C. No.
v. 2:08-cv-00767-
MCE-EFB
FASTBUCKS FRANCHISE
OPINION
CORPORATION, a Nevada
corporation; CHARLES HORTON, an
individual,
Defendants-Appellants.
Appeal from the United States District Court
for the Eastern District of California
Morrison C. England, District Judge, Presiding
Argued January 14, 2010
Submitted September 16, 2010
San Francisco, California
Filed September 16, 2010
Before: Myron H. Bright,* Michael Daly Hawkins and
Milan D. Smith, Jr., Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
*The Honorable Myron H. Bright, Senior United States Circuit Judge
for the Eighth Circuit, sitting by designation.
14201
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14205
COUNSEL
Peter C. Lagarias, Lagarias & Boulter, LLP, San Rafael, Cali-
fornia, for the plaintiffs-appellees.
Margaret C. Toledo, Mennemeier, Glassman & Stroud LLP,
Sacramento, California; Steven L. Solomon, Fastbucks Fran-
chise Corp., Dallas, Texas, for the defendants-appellants.
OPINION
M. SMITH, Circuit Judge:
In this case, we consider whether the “crux of the com-
plaint” rule requires the question of arbitrability to be deter-
mined by the arbitrator when a plaintiff’s challenge to the
arbitration clause does not appear in his complaint. We hold
that, as long as the plaintiff’s challenge to the validity of an
arbitration clause is a distinct question from the validity of the
contract as a whole, the question of arbitrability is for the
court to decide regardless of whether the specific challenge to
14206 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
the arbitration clause is raised as a distinct claim in the com-
plaint.
Plaintiff-Appellees Bridge Fund Capital Corp. and Big Bad
1, LLC (collectively, Plaintiffs) filed suit against Defendant-
Appellant Fastbucks Franchise Corp. (Fastbucks, or Franchi-
sor) in California state court, alleging various claims sounding
in contract. One of the claims alleged was the unconsciona-
bility of certain provisions of the franchise agreement, but
through apparent clerical error, Plaintiffs neglected to include
in the complaint the list of the specific provisions of the fran-
chise agreement they claimed were unconscionable. Fast-
bucks removed to federal court, and moved to compel
arbitration. The district court declined to order the parties to
arbitrate their dispute, agreeing with Plaintiffs, based on their
motion papers, that the arbitration clause is unconscionable
under California law. This appeal followed.
We address first Fastbucks’s argument that the question of
arbitrability was itself a question for the arbitrator to decide,
and affirm the district court’s decision that it was not. We also
affirm the district court’s determination that California law
governs the unconscionability question, and that under that
law the arbitration clause of the franchise agreement is uncon-
scionable. Finally, we affirm the district court’s decision to
invalidate the entire arbitration clause rather than sever its
offending provisions.
FACTS AND PROCEDURAL BACKGROUND
Bridge Fund, a California corporation, and Big Bad, a Cali-
fornia LLC, entered into franchise agreements with Fastbucks
for the operation of “payday loan” franchises in California.1
1
“Payday” loans are short-term consumer loans (usually less than 31
days) secured by a consumer’s post-dated check. The payday industry tar-
gets low to medium income consumers as well as individuals who have
no savings, and live paycheck to paycheck. Fastbucks specifically targets
those individuals with low credit scores.
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14207
Fastbucks is a Nevada corporation with its principal place of
business in Texas. The franchise agreements include a Texas
choice-of-law clause, as well as an arbitration provision
directing that “any and all disputes between [the parties] and
any claim by either party that cannot be amicably settled shall
be determined solely and exclusively by arbitration under the
rules of the American Arbitration Association,” In addition,
the five-paragraph arbitration clause provides, in pertinent
part, that (1) the arbitrator, a Texas bar member, shall hear the
dispute in Dallas County, Texas; (2) the claims subject to
arbitration shall not be arbitrated on a class-wide basis; (3)
while the Franchisor may institute an action for temporary,
preliminary, or permanent injunctive relief, the franchisee is
not afforded the same remedy; (4) there is a one year statute
of limitations for all claims; and (5) the parties are limited to
recovery of actual damages, and waive any right to conse-
quential, punitive or exemplary damages. In addition, the
franchise agreement included an “Addendum” which men-
tioned that certain provisions of the franchise agreement may
not be consistent with California law, and that “[i]f the Fran-
chise Agreement contains provisions that are inconsistent
with the law, the law will control.”
On February 28, 2008, Plaintiffs filed a complaint in Cali-
fornia state court, alleging breach of the franchise agreements,
fraud and deceit, negligent misrepresentation, violation of the
California Franchise Investment Law (CFIL), Cal. Corp. Code
§ 31000 et seq., declaratory relief, and unfair trade practices
under California state law. Generally, Plaintiffs allege that
Fastbucks made numerous material misrepresentations in its
Uniform Franchise Offering Circular (UFOC), such as repre-
senting that: Fastbucks offered a unique system of training;
Fastbucks would provide a manual for its business system;
and that Fastbucks provided a system for ensuring the collec-
tion of loans. Plaintiffs also asserted that certain provisions of
the franchise agreement were unconscionable, but apparently
neglected to insert into the complaint the list of specific provi-
sions being challenged on that ground. Plaintiffs sought
14208 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
rescission of the franchise agreement, damages (including
punitive or exemplary damages), declaratory relief, costs, and
attorney’s fees.
On April 9, 2008, Fastbucks removed the action to federal
court based on diversity of citizenship. Thereafter, Fastbucks
moved to dismiss, or in the alternative, stay the action pend-
ing arbitration pursuant to the Federal Arbitration Act, 9
U.S.C. § 3. Plaintiffs opposed the motion, arguing that the
arbitration clause within the franchise agreement is uncon-
scionable and unenforceable, pursuant to 9 U.S.C. § 2, which
permits a court to refuse to enforce an arbitration agreement
based on “generally applicable contract defenses such as
fraud, duress, or unconscionability.” Doctor’s Assocs., Inc. v.
Casarotto, 517 U.S. 681, 687 (1996). Additionally, Plaintiffs
argued that the arbitration provision within the franchise
agreement was both procedurally and substantively uncon-
scionable; namely, that the agreement was not mutually
entered into; it improperly limits Plaintiffs’ damages; it
impermissibly shortens the statute of limitations; it contains
invalid place and manner restrictions; it seeks to negate Plain-
tiff’s unwaivable rights under the CFIL; and it wrongly bans
class and consolidated actions.
The district court agreed with the Plaintiffs, and denied
Fastbucks’s motion. On appeal, Fastbucks argues that the dis-
trict court committed three errors: (1) it failed to apply the
“crux of the complaint” rule, pursuant to which it was for the
arbitrator to decide the threshold issue of arbitrability; (2) it
erred in applying California rather than Texas law; and (3) it
abused its discretion in refusing to sever the portions of the
arbitration provision it held to be unconscionable under Cali-
fornia law.
JURISDICTION AND STANDARD OF REVIEW
Fastbucks removed the case to federal court on the basis of
diversity, 28 U.S.C. § 1332. We have jurisdiction pursuant to
9 U.S.C. § 16(a)(1)(A).
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14209
“The validity and scope of an arbitration clause are
reviewed de novo.” Nagrampa v. MailCoups, Inc., 469 F.3d
1257, 1267 (9th Cir. 2006) (en banc). We review de novo the
district court’s choice of law analysis. Abogados v. AT&T,
Inc., 223 F.3d 932, 934 (9th Cir. 2000). We review a district
court’s choice not to sever unconscionable portions of an arbi-
tration agreement governed by California law for abuse of
discretion. See Omstead v. Dell, Inc., 594 F.3d 1081, 1087
(9th Cir. 2010); see also Armendariz v. Found. Health Psych-
care Services, Inc., 6 P.3d 669, 695 (Cal. 2000); Cal. Civil
Code § 1670.5(a).
DISCUSSION
I. Abritrability
[1] “The arbitrability of a particular dispute is a threshold
issue to be decided by the courts,” Nagrampa, 469 F.3d at
1268, unless that issue is explicitly assigned to the arbitrator,
see Rent-A-Ctr., W., Inc. v. Jackson, ___ U.S. ___, 130 S. Ct.
2772, 2775 (2010) (holding that arbitrability is a question for
the arbitrator “where the agreement explicitly assigns that
decision to the arbitrator”). While the validity of an arbitration
clause can be a question for the arbitrator where the “crux of
the complaint is that the contract as a whole (including its
arbitration provision)” is invalid, the court determines the
validity of the clause where the challenge is “specifically [to]
the validity of the agreement to arbitrate.” Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006).
[2] In other words, when a plaintiff’s legal challenge is that
a contract as a whole is unenforceable, the arbitrator decides
the validity of the contract, including derivatively the validity
of its constituent provisions (such as the arbitration clause).
See Buckeye, 546 U.S. at 445-46 (explaining that “as a matter
of substantive federal arbitration law, an arbitration provision
is severable from the remainder of the contract. [U]nless the
challenge is to the arbitration clause itself, the issue of the
14210 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
contract’s validity is considered by the arbitrator in the first
instance.”). However, when a plaintiff argues that an arbitra-
tion clause, standing alone, is unenforceable—for reasons
independent of any reasons the remainder of the contract
might be invalid—that is a question to be decided by the
court. See Cox v. Ocean View Hotel Corp., 533 F.3d 1114,
1120 (9th Cir. 2008) (“[O]ur case law makes clear that courts
properly exercise jurisdiction over claims raising (1) defenses
existing at law or in equity for the revocation of (2) the arbi-
tration clause itself.”).
[3] After Buckeye, we have applied the “crux of the com-
plaint” rule as a method for differentiating between challenges
to the arbitration provision alone and challenges to the entire
contract. Nagrampa, 469 F.3d at 1268. In Buckeye, the Court
held that “because [the plaintiffs] challenge[d] the Agreement,
but not specifically its arbitration provisions, those provisions
are enforceable apart from the remainder of the contract. The
challenge should therefore be considered by an arbitrator, not
a court.” 546 U.S. at 446. In Nagrampa, we distinguished
Buckeye because “the complaint in Buckeye, unlike Nagram-
pa’s complaint, did not contain claims that the arbitration pro-
vision alone was void and unenforceable, but rather alleged
that the arbitration provision was unenforceable because it
was contained in an illegal usurious contract which was void
ab initio.” Nagrampa, 469 F.3d at 1268. Fastbucks contends
that Buckeye, and not Nagrampa, applies here because Plain-
tiffs’ complaint does not contain a specific challenge to the
arbitration clause.2
2
Of course, had there been no clerical error on Plaintiffs’ part, it seems
likely there would have been a specific challenge to the arbitration clause.
Nagrampa’s holding would then clearly apply, and Fastbucks’s efforts to
invoke some of Nagrampa’s isolated language would have been frivolous.
Although the error does not ultimately affect Bridge Fund’s position in
this case, it goes without saying that counsel should carefully proofread
documents upon which their clients’ claims depend before filing them.
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14211
[4] We disagree. This case presents a third scenario not
described in either Buckeye or Nagrampa; namely, a specific
challenge to the arbitration clause that is not raised as a sepa-
rate claim in the complaint. See Winter v. Window Fashions
Prof’ls, Inc., 83 Cal. Rptr. 3d 89, 93 (Ct. App. 2008) (distin-
guishing Buckeye and Nagrampa and holding that arbitrability
was for the court to decide where the plaintiff’s specific
“challenge to the arbitration clause was [raised] in response to
[a] petition to compel arbitration” rather than in the com-
plaint). Because the material question is whether the chal-
lenge to the arbitration provision is severable from the
challenge to the contract as a whole, Buckeye, 546 U.S.
444-45; Rent-A-Ctr., 130 S. Ct. at 2778, the inclusion of, or
failure to include, a specific challenge in the complaint is not
determinative. See Winter, 83 Cal. Rptr. 3d at 93. What mat-
ters is the substantive basis of the challenge.
[5] The “crux of the complaint” matters when the com-
plaint itself makes clear that the challenge to the arbitration
clause is the same challenge that is being made to the entire
contract. Cf. Nagrampa, 469 F.3d at 1271 (“Where, as here,
no claim threatens to invalidate or otherwise directly affect
the entire contract, the federal court must decide claims
attacking the validity of the arbitration provision[.]”). The
“crux of the complaint” rule, and our language in Nagrampa,
did not create a pleading rule whereby the plaintiff must plead
a separate and distinct challenge to the arbitration clause in
order to have the court determine arbitrability. See Winter, 83
Cal. Rptr. 3d at 93; see also Rent-A-Ctr., 130 S. Ct. at 2778
(explaining that the law requires “the basis of [the] challenge
to be directed specifically to the agreement to arbitrate before
the court will intervene,” not that the complaint must be so
directed). The rule was instead designed to be an analytical
tool for use by courts in determining the nature of the plain-
tiff’s challenge to the arbitration clause. Indeed, in cases in
which the arbitration clause’s invalidity is an entirely distinct
issue from the contract claims in the case—the clearest cases
in which arbitrability is to be decided by the court—we would
14212 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
not generally expect the plaintiff to raise claims against the
validity of the arbitration clause in the complaint, because
such claims generally would be unrelated to plaintiff’s princi-
ple prayer for relief. An independent challenge to the arbitra-
tion clause would become relevant only at the point plaintiff
is required to oppose a motion to compel. In such a case, like
the present one, the challenge to the validity of the arbitration
provision would usually appear not in the complaint, but in
the pleadings resisting a motion to compel arbitration. Indeed,
in Rent-A-Center, the Court specifically looked to the argu-
ments the plaintiff made in his opposition to the motion to
compel, rather than strictly to the claims contained in the
complaint. See 130 S. Ct. at 2779; see also, e.g., Burden v.
Check Into Cash of Ky., LLC, 267 F.3d 483, 487 (6th Cir.
2001) (involving challenge to arbitration clause raised in
opposition to motion to stay pending arbitration, not com-
plaint); Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260,
262-65 (5th Cir. 2004) (same). Accordingly, we look not only
to the complaint, but to Plaintiffs’ motion papers, to deter-
mine if Plaintiffs’ objections to the arbitration clause are sev-
erable from Plaintiffs’ challenge to the validity of the
franchise agreement as a whole.
[6] Contrary to Fastbucks’s assertions, Plaintiffs’ argument
that the arbitration provision contained in the franchise agree-
ment was both procedurally and substantively unconsciona-
ble, because the arbitration agreement (1) was not mutually
entered into; (2) improperly limits Plaintiffs’ damages; (3)
impermissibly shortens the statute of limitations; (4) contains
invalid place and manner restrictions; (5) seeks to negate
Plaintiffs’ unwaivable rights under the CFIL; and (6) wrongly
bans class and consolidated actions, are clearly arguments
marshaled against the validity of the arbitration clause alone,
and separate from Plaintiffs’ fraudulent inducement claims.
The question of arbitrability, therefore, was properly decided
by the district court.
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14213
II. Choice of Law
Fastbucks next argues that the district court erred in apply-
ing California law on the question of unconscionability
because the franchise agreement contains a Texas choice of
law clause.
[7] A federal court sitting in diversity applies the forum
state’s choice of law rules. Hoffman v. Citibank (S.D.), N.A.,
546 F.3d 1078, 1082 (9th Cir. 2008) (per curiam). Therefore,
since this lawsuit was brought in California, we must apply
California’s choice of law rules to determine whether to apply
California or Texas law to the unconscionability issue.
“When an agreement contains a choice of law provision,
California courts apply the parties’ choice of law unless the
analytical approach articulated in § 187(2) of the Restatement
(Second) of Conflict of Laws . . . dictates a different result.”
Id. Under the Restatement approach, the court must first
determine “whether the chosen state has a substantial relation-
ship to the parties or their transaction, . . . or whether there is
any other reasonable basis for the parties’ choice of law.”
Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1152
(Cal. 1992). “If . . . either test is met, the court must next
determine whether the chosen state’s law is contrary to a fun-
damental policy of California.” Id. If the court finds such a
conflict, it “must then determine whether California has a
‘materially greater interest than the chosen state in the deter-
mination of the particular issue.’ ” Id. (quoting Restatement
(Second) of Conflict of Laws § 187, subd. (2)). If California
possesses the materially greater interest, the court applies Cal-
ifornia law despite the choice of law clause.
Texas is Fastbucks’s principle place of business and the
place it receives royalties and franchise fees. The franchise
agreements were formed in Texas and the franchisees
received their training there. Accordingly, the parties do not
14214 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
dispute that Texas has a substantial relationship to the parties
and the transaction.
At the second step of the Restatement analysis, we ask
whether application of Texas law concerning the uncons-
cionability question would be contrary to a fundamental pub-
lic policy of California. See Nedlloyd, 834 P.2d at 1152. In
Oestreicher v. Alienware Corp., the district court held that
California had a fundamental policy against enforcing class
action waivers contained in arbitration agreements, so Califor-
nia law applies to the unconscionability question in such cases
— notwithstanding a contrary choice of law. 544 F. Supp. 2d
964 (N.D. Cal. 2008), aff’d 322 F. App’x 489 (9th Cir. 2009);
see also Omstead, 594 F.3d at 1086-87 (same).3 By analogy,
the question here is whether California has a fundamental pol-
icy against enforcing arbitration agreements that provide that
(1) the arbitrator shall hear the dispute in Dallas County,
Texas; (2) the claims subject to arbitration shall not be arbi-
trated on a class-wide basis; (3) while the franchisor may
institute an action for temporary, preliminary, or permanent
injunctive relief, the franchisee is not afforded the same rem-
edy; (4) there is a one year statute of limitations for all claims;
and (5) the parties are limited to recovery of actual damages
and waive any right to consequential, punitive or exemplary
damages.
[8] Enforcement of the arbitration clause in the franchise
agreements in this case would contravene the fundamental
California public policy in favor of protecting franchisees
from unfair and deceptive business practices, as established
by the CFIL. See Wimsatt v. Beverly Hills Weight Loss Clinics
Int’l, Inc., 38 Cal. Rptr. 2d 612, 618 (Ct. App. 1995). In cases
involving claims under the CFIL, California has an estab-
3
Fastbucks relies on the district court decision in Omstead v. Dell, Inc.,
473 F. Supp. 2d 1018, 1025 (N.D.Cal. 2007), for its argument that Texas
law should apply. However, since the parties briefed and argued this case,
we reversed Omstead. 594 F.3d at 1086-87.
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14215
lished public policy against arbitration clauses that force fran-
chisees to waive the limitations period, bar class actions, or
limit punitive and consequential damages in violation of the
statute’s anti-waiver provisions. See id., see also Indep. Ass’n
of Mailbox Ctr. Owners, Inc. v. Superior Court, 34 Cal. Rptr.
3d 659, 672 (Ct. App. 2005) (“[T]o the extent the arbitration
clauses purport to deny the arbitrators the ability to award full
relief . . . , the arbitration clauses run contrary to statute and
are unduly restrictive, possibly amounting to unconscionable
waivers of statutory rights. The arbitration agreements should
not be interpreted as written to deprive the arbitrators of
authority to award punitive, consequential, or incidental dam-
ages[.]”). The parties do not dispute that the arbitration clause
is enforceable under Texas law, which favors arbitration
agreements and has no counterpart to the CFIL, and that
Texas law therefore is in conflict with California law on this
issue. See Carter v. Countrywide Credit Indus., Inc., 362 F.3d
294, 301 n.5 (5th Cir. 2004) (noting that California law is
more hostile than Texas law to arbitration agreements, and the
application of one law instead of the other is often determina-
tive on the question of the enforceability of the agreement).
[9] The final question, then, is which state has the materi-
ally greater interest in having its law regarding unconsciona-
bility of arbitration agreements enforced in this case. We
agree with the district court that California has the greater
interest. In assessing which state has a materially greater
interest, California courts “consider which state, in the cir-
cumstances presented, will suffer greater impairment of its
policies if the other state’s law is applied.” Brack v. Omni
Loan Co., 80 Cal. Rptr. 3d 275, 287 (Ct. App. 2008).
Although Texas certainly has a significant general interest in
enforcing contracts executed there and by its citizens, see
Woods Motor Co. v. Nebel, 238 S.W.2d 181, 185 (Tex. 1951),
and protecting its franchisors from significant liabilities, Cali-
fornia has a substantial, case-specific interest in protecting its
resident franchisees from losing statutory protections against
fraud and unfair business practices, see Wimsatt, 38 Cal. Rptr.
14216 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
2d at 618. Because the relevant franchises in this case were
operated in California, by California citizens, California
would suffer a significant impairment of its public policy if
this arbitration clause were enforced against its citizens. On
the other hand, we have seen no evidence in this case suggest-
ing that Texas has a significant policy of protecting its
franchisors from the impacts of the laws of other states in
which those franchisors have franchise outposts. Further,
Texas does recognize unconscionability as a contract defense
—even if such a defense rarely succeeds in that state, and
would not succeed here. See AutoNation USA Corp. v. Leroy,
105 S.W.3d 190, 198 (Tex. Ct. App. 2003). Accordingly,
applying California law to determine that the arbitration pro-
vision is unconscionable, even though Texas law would lead
to a different result in this case, would not contravene a fun-
damental Texas public policy.
III. Unconscionability and Severability
[10] To defeat an arbitration clause, the litigant must show
both procedural and substantive unconscionability, although
“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, 6 P.3d at 690. Procedural unconsciona-
bility involves “ ‘oppression’ or ‘surprise’ due to unequal bar-
gaining power” while substantive unconscionability focuses
“on ‘overly harsh’ or ‘one-sided’ results.” Id.
[11] California law treats contracts of adhesion, or at least
terms over which a party of lesser bargaining power had no
opportunity to negotiate, as procedurally unconscionable to at
least some degree. Armendariz, 6 P.3d at 690. The district
court determined that in this case there was “an absence of
real negotiation and a disparity of bargaining power . . .
between the parties.” Indeed, “California courts have long
recognized that franchise agreements have some characteris-
tics of contracts of adhesion because of the ‘vastly superior
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14217
bargaining strength’ of the franchisor.” Nagrampa, 469 F.3d
at 1282. We conclude that procedural unconscionability has
been established in this case.
[12] Next, as already described, California law holds that
mandatory waivers of non-waivable statutory rights granted
under the CFIL are the sort of one-sided and overly-harsh
terms that render an arbitration provision substantively uncon-
scionable. See Wimsatt, 38 Cal. Rptr. 2d at 618; Indep. Ass’n
of Mailbox Ctr. Owners, 34 Cal. Rptr. 3d at 672. In addition,
class action waivers are usually considered substantively
unconscionable, see Omstead, 594 F.3d at 1086-87, as are
terms granting the party of greater bargaining power the right
to seek injunctive relief in court while denying such relief to
the weaker party (at least in the absence of a valid business
justification for such non-mutuality), see Mercuro v. Superior
Court, 116 Cal. Rptr. 2d 671, 677-78 (Ct. App. 2002). The
only business justification offered by Fastbucks for the non-
mutual judicial remedy provision was its need to seek provi-
sional remedies, which is insufficient under California law to
justify non-mutuality (because California law protects parties’
rights to seek provisional remedies in court regardless of any
arbitration clause that may cover the parties’ dispute). See
Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138, 148 (Ct. App.
1997) (citing Cal. Civ. Proc. Code § 1281.8). The class action
and injunctive relief waivers are accordingly substantively
unconscionable.
Moreover, “if the ‘place and manner’ restrictions of a
forum selection provision are ‘unduly oppressive,’ or have the
effect of shielding the stronger party from liability, then the
forum selection provision is unconscionable.” Nagrampa, 469
F.3d at 1287 (citations omitted). Because the selection of
Texas as the forum (which is inherently intertwined with the
choice of Texas law, see Hall v. Superior Court, 197 Cal.
Rptr. 757, 761 (Ct. App. 1983)) makes the arbitration clause
primarily a tool that Fastbucks may employ to evade Califor-
nia statutory protections for franchisees, the provision would
14218 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
have the effect of shielding the stronger party from liability,
and is thus likely unconscionable. In any event, because the
Plaintiffs understandably expected, based on the “Adden-
dum,” that the forum selection clause might not be enforce-
able in California (and that California law would control in
the event of a conflict between the law and the franchise
agreement), Fastbucks has not shown that this provision was
a product of a meeting of the minds between the parties. See
Engalla v. Permanente Med. Grp., Inc., 938 P.2d 903, 916-17
(Cal. 1997) (“The [party seeking arbitration] bears the burden
of proving the existence of a valid arbitration agreement by
the preponderance of the evidence, and a party opposing the
petition bears the burden of proving by a preponderance of the
evidence any fact necessary to its defense.”).
In sum, four of the five paragraphs of the arbitration clause
are unconscionable, or at least unenforceable, in California.
See Indep. Ass’n of Mailbox Ctr. Owners, 34 Cal. Rptr. 3d at
672. Fastbucks essentially concedes this. Fastbucks instead
concentrates its energies on arguing that the district court
abused its discretion by declining to sever the offending pro-
visions. See id. (“To the extent that the arbitration clauses . . .
seek to deprive plaintiffs of statutorily authorized remedies, or
relief in court that would otherwise be allowable to them, they
are unconscionable, and the trial court should have stricken
them from the arbitration clause.”).
California Civil Code § 1670.5(a) provides that,
[i]f the court as a matter of law finds the contract or
any clause of the contract to have been unconsciona-
ble at the time it was made the court may refuse to
enforce the contract, or it may enforce the remainder
of the contract without the unconscionable clause, or
it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.
The California Supreme Court has construed § 1670.5(a) as
giving “a trial court some discretion as to whether to sever or
BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE 14219
restrict the unconscionable provision or whether to refuse to
enforce the entire agreement.” Armendariz, 6 P.3d at 695. In
addition, it has identified two reasons for severing an uncon-
scionable provision rather than voiding the entire contact: (1)
“to prevent parties from gaining undeserved benefit or suffer-
ing undeserved detriment as a result of voiding the entire
agreement”; and (2) because “the doctrine of severance
attempts to conserve a contractual relationship if to do so
would not be condoning an illegal scheme.” Id. at 696. “The
overarching inquiry is whether ‘the interests of justice . . .
would be furthered’ by severance.’ ” Id. (quoting Beynon v.
Garden Grove Med. Grp., 161 Cal. Rptr. 146, 155 (Ct. App.
1980)).
Having found the major part of the arbitration provision
substantively unconscionable, and imposed on Plaintiffs with-
out any opportunity to negotiate, the district court determined
that unconscionability “permeated” the entire arbitration
agreement and was “overwhelming.” “Such multiple defects
indicate a systematic effort to impose arbitration . . . not sim-
ply as an alternative to litigation, but as an inferior forum that
works to [Fastbucks’s] advantage.” Armendariz, 6 P.3d at
697. Following Armendariz, then, the court determined that
the arbitration agreements as a whole should not be enforced.
See id. at 669 (finding severability inappropriate where the
lack of mutuality permeated the agreement and removal of
“the unconscionable taint” would require reforming the agree-
ment, as opposed to striking a single provision); see also
Nagrampa, 469 F.3d at 1293-94.
[13] We cannot find this was an abuse of discretion. For
the district court to have severed the offending provisions
would have left almost nothing to the arbitration clause. Fast-
bucks contends that the forum selection clause alone, com-
bined with the one remaining unchallenged provision
subjecting the arbitrator to the forum’s legal ethics rules,
could be enforced. But because the forum selection clause
requires Texas arbitration, the district court could not have
14220 BRIDGE FUND CAPITAL v. FASTBUCKS FRANCHISE
simply severed it; the district court would have had to rewrite
that paragraph in order to enforce it consistently with its (cor-
rect) unconscionability rulings. We find nothing to suggest
that Plaintiffs will obtain an undeserved benefit from being
able to avoid arbitration in this case; indeed, application of
California law, and avoidance of the Texas arbitral forum, is
consistent with the “Addendum” the Plaintiffs received as part
of the franchise agreement and were entitled to rely upon.
Similarly, Fastbucks would not suffer any undeserved detri-
ment by being forced to litigate this case in California court.
Although Fastbucks’s arbitration scheme is not illegal, it is
inconsistent with California public policy concerning the
rights of California franchisees. The district court acted well
within its discretion in concluding that under the circum-
stances of this case, the interests of justice favored refusal to
enforce the arbitration provision in its entirety.
CONCLUSION
We AFFIRM the district court’s determination that the
question of arbitrability was for it to decide, and we AFFIRM
the district court’s holding that California law applies and ren-
ders the arbitration agreement unconscionable and accord-
ingly, unenforceable. The case is REMANDED to the district
court for further proceedings.