## Facts

- Connie A. Nagrampa, a California resident, entered a standard-form franchise agreement with MailCoups, Inc. to operate a direct-mail coupon advertising franchise in California.
- The agreement required arbitration of any dispute “arising out of or relating to” the contract under AAA rules in Boston, Massachusetts.
- The arbitration clause was presented on a take-it-or-leave-it basis, with no meaningful opportunity for the franchisee to negotiate.
- After Nagrampa incurred losses, she terminated the franchise; MailCoups then demanded AAA arbitration in Boston seeking fees and damages.
- Nagrampa sued, asserting various claims and contending the arbitration provision was unconscionable under California law due to the imposed forum and alleged one-sided terms.
- The district court compelled arbitration and dismissed the case, reasoning the arbitrator had to decide unconscionability; the Ninth Circuit reheard the matter en banc.

## Issues

1. Whether the court or the arbitrator decides a claim that an arbitration provision itself is unconscionable under the Federal Arbitration Act.
2. Whether the arbitration provision is procedurally and substantively unconscionable under California law and therefore unenforceable.
3. If unconscionable, whether the provision’s offending terms can be severed or whether the arbitration clause must be invalidated in full.

## Decision

- The Ninth Circuit (en banc) reversed the order compelling arbitration and remanded for further proceedings.
- The court held that when the challenge is directed specifically at the arbitration provision (not the contract as a whole), the court must decide enforceability.
- Applying California law, the court held the arbitration clause was procedurally unconscionable because it was imposed in an adhesive contract amid a significant disparity in bargaining power.
- The court held the clause was substantively unconscionable because it lacked mutuality and imposed a Boston forum that would impose substantial costs and practical barriers on the franchisee.
- The court declined to sever terms, concluding the arbitration provision was permeated by unconscionability.

## Legal Principles

- Under FAA § 2 severability doctrine, a court decides defenses aimed specifically at the arbitration clause; a challenge to the contract as a whole is for the arbitrator.
- Under California law, unconscionability requires procedural and substantive elements assessed on a sliding scale.
- Procedural unconscionability may be shown by oppression and surprise, including adhesive contracting and meaningful disparity in bargaining power.
- Substantive unconscionability may be shown by overly harsh or one-sided terms, including lack of mutuality and carve-outs favoring the drafter.
- A forum-selection requirement within an arbitration clause may be substantively unconscionable when it imposes costs and obstacles that effectively prevent a weaker party from pursuing claims.
- Severance is inappropriate where unconscionability infects the arbitration clause’s structure rather than isolated terms.

## Conclusion

The Ninth Circuit held that courts, not arbitrators, decide unconscionability challenges aimed at an arbitration provision itself, and it invalidated the franchise arbitration clause under California law because it was imposed in an adhesive setting and structured in a one-sided manner, including a distant forum requirement that would likely bar effective pursuit of the franchisee’s claims.


Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006) (en banc)