United States 9th Circuit Court of Appeals Reports

NAGRAMPA v. MAILCOUPS INC., 03-15955 (9th Cir. 12-4-2006)
CONNIE A. NAGRAMPA, Plaintiff-Appellant, v.MAILCOUPS, INC.;
No. 03-15955. United States Court of Appeals, Ninth
Circuit. Argued and Submitted September 27, 2005 —
San Francisco, California. Filed December 4, 2006.

Appeal from the United States District Court for the
Northern District of California Martin J. Jenkins, District
Judge, Presiding.

Kate Gordon & Leslie A. Bailey, Trial Lawyers for Public
Justice, Oakland, California; F. Paul Bland, Trial Lawyers
for Public Justice, Washington, D.C.; Sanford M. Cipinko,
Law Offices of Sanford M. Cipinko, San Francisco,
California, for the plaintiff-appellant.

Glenn J. Plattner and Christine S. Oh, Jenkens & Gilchrist,
LLP, Los Angeles, California, for the defendant-appellee
MailCoups, Inc.

John S. Warnlof, Warnlof & Sumnick, Walnut Creek,
California; Shirley M. Hufstedler, Morrison & Foerster,
LLP, Los Angeles, California, for the defendant-appellee,
American Arbitration Association.

Before: Mary M. Schroeder, Chief Judge, Stephen Reinhardt,
Alex Kozinski, Diarmuid F. O’Scannlain, Sidney R. Thomas,
Susan P. Graber, Kim McLane Wardlaw, Raymond C. Fisher,
Ronald M. Gould, Richard C. Tallman, and Richard R.
Clifton, Circuit Judges.

Opinion by Judge Wardlaw; Partial Concurrence and Partial
Dissent by Judge Clifton; Dissent by Judge O’Scannlain;
Dissent by Judge Kozinski


WARDLAW, Circuit Judge

WARDLAW, Circuit Judge, with whom Chief Judge SCHROEDER,
and with whom Judge CLIFTON joins as to Part II-A and II-B:

The question before us is whether a provision to submit to
arbitration in a written franchise agreement is valid and
enforceable, therefore requiring the district court to stay
proceedings and refer the disputed franchise agreement to
arbitration under the Federal Arbitration Act (“FAA”), 9
U.S.C. § § 1-16 (2000). In a now-withdrawn
opinion, a three-judge panel of our court held that the
unconscionability of an arbitration provision contained in
the franchise agreement is a question for the arbitrator to
decide. Here, however, the plaintiff did not seek
invalidation of the franchise agreement as a whole on
grounds of unconscionability; instead she challenged the
unconscionability of solely the arbitration provision.
Therefore, it was error to hold that consideration of the
unconscionability of the arbitration provision was to be
determined by the arbitrator.

We review this case en banc to clarify, as the Supreme
Court has recently reiterated, that when the crux of the
complaint challenges the validity or enforceability of the
agreement containing the arbitration provision, then the
question of whether the agreement, as a whole, is
unconscionable must be referred to the arbitrator. See
Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204,
1209 (2006); Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395, 403-04 (1967). When the crux of the complaint
is not the invalidity of the contract as a whole, but
rather the arbitration provision itself, then the federal
courts must decide whether the arbitration provision is
invalid and unenforceable under 9 U.S.C. § 2 of the
FAA.[fn1] The federal courts cannot shirk their statutory
obligation to do so simply because controlling substantive
state law requires the court to consider, in the course of
analyzing the validity of the arbitration provision, the
circumstances surrounding the making of the entire
agreement. See Buckeye, 126 S. Ct. at 1209-10; Doctor’s
Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); Prima
Paint, 388 U.S. at 403-04. Judge O’Scannlain’s dissent
mistakenly argues that holding the arbitration agreement
unconscionable based partly on a finding that the franchise
agreement is a contract of adhesion — the required
California law analysis — is a “ground that directly
affects the entire agreement.” Buckeye, 126 S. Ct. at 1208.
Judge O’Scannlain’s dissent fails to recognize a further
aspect of California law that provides for striking
unconscionable provisions, while leaving the remainder of
the agreement intact, valid, and enforceable.

One must closely examine Nagrampa’s complaint and apply
California legal principles to understand why striking the
arbitration provision does not affect the validity of the
franchise agreement at issue. Nagrampa asserts six separate
causes of action[fn2] in her (since removed) state
complaint, none of which seeks to invalidate the contract
as a whole. Her fifth and sixth causes of action
specifically and exclusively challenge the validity of the
arbitration provision. Although she argues appropriately
under California law that the arbitration provision is
procedurally unconscionable based, in part, on its
inclusion in a contract of adhesion, Nagrampa does not
assert that the entire agreement is unconscionable or
invalid; nor does she seek any form of relief from the
agreement as a whole. To the contrary, the other four
causes of action provide relief only if the franchise
agreement is valid and binding upon the parties.

Because § 2 of the FAA provides that arbitration
agreements are generally valid and enforceable, “save upon
such grounds as exist at law or in equity for the
revocation of any contract,” we are required to turn to
California law to address Nagrampa’s arguments regarding
the unconscionability of the arbitration provision.
California law holds that unconscionable provisions
generally are unenforceable. Such unenforceable provisions
may, however, be severed from any valid and enforceable
provisions, even those also contained within the
arbitration provision. The district court correctly
proceeded to an analysis of unconscionability under
California law as a defense to enforcement of the
arbitration provision included in Nagrampa’s franchise
agreement. Because the district court failed to properly
apply California law, which has continued to evolve since
the district court ruled, we reverse and remand for further
proceedings in accordance with this opinion.