New Congress Can Reshape Antitrust Policy: Antitrust Organization

With new Democratic majorities in both Houses, the New Year presents Congress with an opportunity to reshape the direction of antitrust policy, according to a paper issued December 19 by the American Antitrust Institute (AAI). However, the White House’s veto potential and control over the enforcement agencies suggest that 2007 should be year “to build a record rather than to focus on the passage of new legislation.”

“An Antitrust Agenda for Congress in 2007,” written by AAI President Albert Foer, recommends that Congress hold hearings on antitrust policy and consider an economic summit or special study commission “designed to place antitrust within a national economic policy rather than as a microeconomic specialty.”

The Senate antitrust subcommittee will likely be able to hold about eight hearings (compared to approximately three last year). The House, lacking an antitrust subcommittee, will be able to conduct only “a handful of full committee hearings.” The paper suggested the following hearings topics:

Remedies against cartels. The Justice Department’s leniency program has been a great success and is being replicated around the world. It should be reviewed in a positive way. Important research has shown that sanctions against cartels were based on data substantially understating the magnitude of harm caused by the cartels. Moreover, the Class Action Fairness Act’s impact on class actions to recover cartel overcharges should be examined.

Enforcement of antimonopolization statutes. Congress should decide whether it wants Section 2 of the Sherman Act more vigorously enforced. The federal agencies have almost eliminated monopolization enforcement. Another issue is how effective the remedies in the Microsoft case have proven to be. The growth of “power buyers” (such as Wal-Mart), and the potential antitrust problems caused by such parties, should be studied.

Current merger policies. In light of the new merger wave, the effectiveness of current merger policies should be evaluated. Controversial mergers that have been approved (Whirlpool/Maytag, Wal-Mart/Amigo Supermarkets) should be reviewed, as well as mergers in the telecommunications and airline industries. “We are in an unprecedented period of merger non-enforcement by the agencies,” according to Foer, who pointed out that neither the FTC nor the Department of Justice has litigated a case in almost three years.

Intellectual property. “The misuse of the Intellectual Property laws at the expense of competition has become of increasing concern,” the agenda states. Hearing could “tease out” the difference of opinion between the DOJ (which tends to take a pro-property position) and the FTC (which has criticized the IP laws and institutions).

Petroleum industry. Congress could examine whether the FTC has adequately developed the case for antitrust intervention” in the refining portion of the petroleum industry.

Information to improve enforcement. Hearings could address how the FTC and DOJ can better obtain relevant data to assist in antitrust enforcement.

Text of the antitrust agenda is available on the AAI web site.

Antitrust Division Shows Increased Enforcement Activity in 2006

The year 2006 saw the Department of Justice Antitrust Division obtain its second highest amount of criminal fines in its history, experience a drastic increase in merger filings and challenges, implement an improved merger review process, pursue civil non-merger conduct, participate in a number of U.S. Supreme Court antitrust cases, and remain active in international enforcement and cooperation, according to an announcement issued December 21.

“The Division’s achievements reflect the hard work of its staff, who are committed to aggressive, yet balanced, antitrust enforcement,” said Thomas O. Barnett, Assistant Attorney General in charge of the Antitrust Division.

Cartel Enforcement

The Division continues to give the highest enforcement priority to challenging anticompetitive conduct by criminal cartels. For the fiscal year ending on September 30, 2006, the Division obtained criminal fines totaling more than $473,445, 000. This amount represented a 40 percent increase over the previous year. The Division filed 33 criminal cases, many involving multiple defendants. In fiscal year 2006, there were 5,383 jail days imposed for price fixing, bid rigging, obstruction, fraud, and related anticompetitive conduct.

Merger Enforcement

Premerger transaction filings under the Hart-Scott-Rodino Act increased 8.9 percent over fiscal year 2005 to 1860 filings. Ten merger enforcement actions were initiated, and another six transactions were restructured in response to Division investigations. The percentage in Hart-Scott-Rodino transactions resulting in a “second request” dropped from 1.5 percent to 1 percent, with the duration of the “second request” investigations continuing to decline.

Improved efficiency and transparency in reviewing mergers was attributed to the issuance of the DOJ/FTC joint Commentary on the Horizontal Merger Guidelines (CCH Trade Regulation Reporter ¶50,208) and the amendments to the 2001 Merger Review Process Initiative, which was announced December 15.

U.S. Supreme Court Advocacy

The Division assisted the Solicitor General in submitting the views of the United States as amicus curiae in several cases. In all three antitrust opinions handed down earlier this year, the Supreme Court reached the decision advocated by the United States: Texaco v. Dagher (applying the rule of reason to pricing decisions by joint venturers); Illinois Tool Works Inc. v. Independent Ink, Inc. (holding that market power is not presumed in a patented product for tying purposes); and Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. (clarifying standards for secondary-line price discrimination under the Robinson-Patman Act).

The Division also assisted in briefs filed in pending Supreme Court cases: Weyerhaeuser Co. v. Ross Simmons Hardwood Lumber Co. Inc. (the standard for predatory pricing claims); Bell Atlantic Corp. v. Twombly (pleading standards for antitrust conspiracy claims); and Credit Suisse First Boston Ltd. v. Billing (the standard for implying antitrust immunity to conduct in the securities industry).

International

The Division continues to be active on the international front by participating in international cooperative efforts in competition law, according to the announcement.

United Gets Tentative Antitrust Immunity for Alliances with Foreign Air Carriers

United Airlines and a number of its international Star Alliance partners received tentative approval on December 19 from the Department of Transportation(DOT) to add three carriers to their immunized alliance and to permit expanded cooperation between United and alliance member Air Canada.

The action, if made final, will provide the carriers with immunity from U.S. antitrust laws to the extent necessary to enable them to plan and coordinate services over their entire international route systems, as well as pave the way for implementation of the U.S.-Canada Open Skies air transport agreement.

The DOT tentatively decided to allow Swiss International Air Lines, LOT Polish Airlines, and TAP Air Portugal to join the alliance with antitrust immunity. It also would expand the current grant of immunity between United and Air Canada to all of their international operations. The European members of the Star Alliance with imunity are Austrian Airlines, Lufthansa German Airlines, and Scandanavian Airlines. All of the airlines will contune to be independent companies and retain their separate coporate and national identities.

In its December 19 show-cause order, the DOT tentatively concluded that the proposed alliance was in the public interest because the partners' increased ability to cooperate would allow them to provide consumers with additional service options, such as more nonstop flights, expanded code-sharing, and new online services. Interested parties were given 21 days to show why the tentative decision should not be made final, with replies due seven days afterward. After a review of these filings, the DOT will issue a final decision.

Purchaser of Janitorial Business Franchise Was “Employee”

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

The purchaser of a janitorial business franchise, whose relationship with a franchisor differed in key respects from the typical franchise relationship, was not an independent contractor or even a franchisee, but was an “employee” under the meaning of the Massachusetts unemployment compensation law, the Massachusetts Supreme Court has ruled. Thus, the franchisor, Coverall North America, Inc., was required to pay contributions for the purchaser’s reported earnings, pursuant to the unemployment insurance statute. A Massachusetts trial court’s ruling—upholding a determination by what was then the Massachusetts Division of Employment and Training’s Review Board—was affirmed.

BACKGROUND

In the “start-up phase” of a franchise relationship, Coverall typically provided new franchisees with extensive training. In addition, new franchisees were given an initial customer base and allowed to solicit prospective customers directly, according to the court. If a franchisee established a new customer, that customer was required to sign a contract with Coverall. Every month, Coverall directly billed all customers and paid its franchisees for the services rendered to those customers, taking deductions for finance charges, royalties, and management fees.

The claimant originally began working at a Massachusetts nursing home under the direction of another of Coverall’s franchisees. Shortly thereafter, the franchisee lost its account with the nursing home, although Coverall retained its contract with the home. The claimant then inquired into the possibility of becoming a franchise owner with Coverall in order to continue her position there and became a franchise owner. The claimant purchased a franchise from Coverall, paying the franchisor $3,800 in cash and agreeing to pay an additional $6,700 towards the cost of the franchise. The claimant was then given the nursing home’s account, which required her to work at the home for 25 hours each week and for which she would receive $1,485 per month, subject to deductions for management fees, royalties, and costs.

Pursuant to its usual practices, the franchisor negotiated the contract with the nursing home directly and billed it directly, without any involvement of the claimant. If the nursing home had a complaint about the claimant’s service, it would be submitted directly to the franchisor. The claimant lacked any of her own business cards and failed to solicit any new customers of her own, the court noted. Additionally, the claimant’s daily tasks were given to her by a representative of the nursing home who closely supervised both her work and her arrivals and departures. In addition, the claimant was supervised by one of the franchisor’s field consultants.

After a dispute arose over the amount of work assigned to the claimant and the lack of additional pay for additional duties, the claimant refused to perform additional tasks that were periodically assigned to her. An examiner from the Division of Employment and Training subsequently found that the franchisor “discharged” the claimant over this dispute and the claimant filed for unemployment benefits.

UNEMPLOYMENT LAW

In order to be exempted from the requirement of contributions to the unemployment compensation fund, an employer was required to establish under Massachusetts law that the individual providing services was an independent contractor. To meet that burden, the employer was required to show “that the services at issue are performed: (a) free from control or direction of the employing enterprise; (b) outside of the usual course of business, or outside of all the places of business, of the enterprise; and (c) as part of an independently established trade, occupation, profession, or business of the worker."

ANALYSIS AND DECISION

Coverall could not satisfy its burden of proving the third prong of the test because the claimant did not operate an independent business apart from Coverall, the court ruled. Therefore, it was not necessary to determine whether or not Coverall could satisfy the first two prongs of the test.

The parties’ agreement required the claimant to allow Coverall to negotiate contracts and pricing directly with clients, bill clients, and provide a daily cleaning plan to which the claimant was required to adhere, the court commented. Thus, the claimant was compelled to rely heavily on Coverall, the court decided.

In support of its conclusion that the claimant did not operate a business independent from Coverall, the Review Board found that the claimant cleaned only at locations specified by Coverall and was given a plan and directions by Coverall supervisors. The franchisor contended that the agency incorrectly focused on what the claimant actually did with her franchise instead of what she was capable of doing. Essentially, Coverall argued that, even though the claimant did not take advantage of the entrepreneurial opportunities afforded her by her agreement such as soliciting new customers and hiring employees, she was still an independent contractor by virtue of her capability to expand her business.

However, even if the claimant was capable of expanding her business, it was undisputed that the growth of her business inevitably expanded Coverall’s business, as each new client became a Coverall client, the court observed. Even though Coverall argued that the claimant was not compelled to depend on it because she had been in the cleaning business for six years prior to becoming a “franchise owner,” the claimant testified that her business subsequently ended once Coverall “discharged” her. Because the agency’s decision incorporated all of these facts, there was substantial evidence supporting its conclusion that the franchisor failed to establish that claimant’s business was independent of it under the third prong of the test, the court held.

Finally, although the Supreme Court specifically stated in a footnote that the claimant was not a franchisee, it added in another footnote that its conclusion did not reflect a determination concerning the nature of other Coverall contracts beyond the agreement at issue between the parties in the instant dispute.

The December 12, 2006 opinion in Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance, will appear in a forthcoming issue of the CCH Business Franchise Guide.

FTC Extends Forbearance Policy for Prerecorded Telemarketing Calls

This positng was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

The FTC has extended its previously-announced forbearance policy in enforcement of the prohibition of prerecorded calls in the Telemarketing Sales Rule (16 CFR Part 310, CCH Trade Regulation Reporter ¶38,058). The policy had been set to expire January 2, 2007.

The Direct Marketing Association and three other organizations petitioned the government for an extension of the revocation date. In response, the Commission determined that the forbearance policy should remain in effect until the conclusion of proceedings on a proposed new safe harbor to the call-abandonment provision of the rule, which would have permitted telemarketers to deliver prerecorded messages to consumers with whom the seller had an “established business relationship.” As a result, telemarketers may continue to use prerecorded messages to consumers with whom the seller had “an established business relationship,” until the proceedings are completed.

In October, the FTC denied a request for creation of the new safe harbor. The agency instead proposed an amendment to the rule that would make explicit the prohibition of prerecorded calls that is now implicit in the rules “call abandonment” provisions. The amendment would explicitly prohibit sellers and telemarketers from delivering a pre-recorded message when the person answers the telemarketing call, except in the very limited circumstances permitted in the call-abandonment safe harbor or when a consumer has consented in writing to receive such calls. At that time, the Commission also announced the revocation of its policy of refraining from enforcement of the call-abandonment prohibition.

DOJ Attempts to Streamline Merger Review Process, Reduce Burdens

The Department of Justice Antitrust Division has amended its 2001 Merger Review Process Initiative in order to streamline its investigation process, improve efficiency, reduce costs, and lessen burdens on parties to transactions, according to the December 15 announcement by the Department of Justice.

The 2001 Merger Review Process Initiative was intended to help the Division identify critical legal, factual, and economic issues regarding proposed mergers more quickly; to facilitate more efficient and focused investigative discovery; and to provide an effective process for the evaluation of evidence.

The new amendments include a voluntary option enabling companies to reduce the duration and costs of merger investigations. The option would limit the document search required by a Division information request (known as a “second request”) to particular files and a targeted list of 30 employees whose files must be searched for responsive documents. This option will be conditioned on timing and procedural agreements that protect the Division’s ability to obtain appropriate discovery should it decide to challenge the deal in district court.

The Antitrust Division is also changing its model second request to reduce compliance burdens further by (1) reducing the default search period to two years prior to the date of the issuance of an information request and (2) limiting the volume of materials that companies must collect, review, and produce in response to a second request.

“The amendments to the Division’s already successful Merger Review Process Initiative are part of our ongoing efforts to reduce enforcement burdens, while at the same time preserve our ability to conduct thorough investigations and protect consumers from anticompetitive transactions,” said Thomas O. Barnett, Assistant Attorney General in charge of the Antitrust Division.

The 2001 initiative has resulted in an average decrease in the number of days that pass from the opening of a preliminary investigation to the early termination or closing of the investigation from 93 days to 57 days.

The amended initiative and a model second request appear on the Division’s web site.

Failure to Disclose Payment for Word-of-Mouth Marketing Can Violate FTC Act

This posting was written by William Zale, editor of CCH Advertising Law Guide

A marketer could violate the Federal Trade Commission Act by paying a consumer to praise a product or service to others, if the consumer’s relationship with the marketer is undisclosed or otherwise unclear from the context, according to a Federal Trade Commission Staff Opinion Letter dated December 7.

The practice could be deceptive because those hearing the consumer’s favorable comments are likely to give them greater weight and credibility than would be the case if the marketer’s sponsorship were disclosed. The relationship between the “word-of-mouth” marketer and the endorser should be disclosed if consumers hearing the message would not reasonably expect the existence of the relationship, according to the FTC staff.

Because children and teens are more vulnerable to marketing messages than adults, the Commission would consider consumer expectations from the standpoint of an “ordinary child or teenager” in determining whether to launch an enforcement action in cases of marketing to children, the FTC staff added.

The staff letter was issued in response to a letter from Commercial Alert, a nonprofit marketing watchdog group, requesting that the FTC investigate companies that engage in “buzz marketing” and that the FTC issue new guidelines requiring disclosure of paid marketing relationships. FTC staff concluded that issuance of guidelines was unnecessary at this time and that the staff would determine on a case-by-case basis whether law enforcement action is appropriate. Members of the public were encouraged to submit information and recommend that the Commission take law enforcement action.

As an example of conduct viewed as improper, Commercial Alert’s letter referred to a 2002 Sony/Ericsson marketing campaign in which 60 trained actors reportedly were employed to prowl tourist attractions in New York and Seattle, behaving like tourists and asking passersby to take their pictures with a camera phone. In another example, Procter & Gamble reportedly assembled in 2004 a marketing task force of 250,000 teens compensated with coupons, product samples, and other items.

The FTC Staff Opinion Letter and the petitioning letter from Commercial Alert will be published in the December report of the CCH Advertising Law Guide.

Franchisor Barred from Making Unregistered Franchise Sales in California

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

A franchisor of edible fruit bouquet businesses was preliminarily enjoined from making further franchise sales in California until it registered a fully-compliant Uniform Franchise Offering Circular with the state.

The federal district court in Los Angeles found a likelihood that the franchisor violated the California Unfair Competition Law through its violations of California franchise laws and regulations. The franchisor, which did not oppose the motion for injunctive relief, was alleged to have (1) failed to disclose in its UFOC that there was a lawsuit pending in Connecticut against one of its principal; (2) misrepresented in its California franchise registration application that an independent auditor prepared the financial statements, and (3) offered to sell franchises in California before registering.

Although a franchise disclosure/registration law claim is usually brought by a franchisee or prospective franchisee, this action was maintained by a competing franchisor, who contended that the alleged violations caused it irreparable harm by giving the franchisor an unfair competitive advantage in the market for edible fruit bouquet business franchises.

The franchisor’s failure to disclose the litigation in Connecticut was material because the lawsuit involved allegations of deceptive practices and was premised on claims that representatives of the defending franchisor posed as prospective franchise purchasers in order to gain access to competitor’s proprietary information, the court held. A prospective purchaser of a franchise would consider information regarding the suit— and the defending franchisor’s alleged use of the competitor’s proprietary information to create a competing franchise system—important.

The financial statements that the franchisor submitted with its franchise registration application were not prepared by an independent auditor, as required by California Code of Regulations Title 10, Section 310.111.2(a), according to the court. Evidence showed that the accounting firm preparing the statements was run by the father of the franchisor’s principal and employed the principal for 10 years prior to his entering the franchise business. Furthermore, the defending franchisor was shown to have offered to sell franchises in California prior to completing the franchise registration process.

The decision is Edible Arrangements International, Inc. v. Notaris, U.S. District Court for the Central District of California, Case No. CV 06-5945 FMC (PJWx), filed October 19, 2006, CCH Business Franchise Guide ¶13,487.

Acquisition of Manufacturer, Rebranding Was Not Cause for Dealership Termination

A jury in the federal district court in Chicago has awarded $2.1 million to a construction equipment dealer whose dealership was terminated pursuant to the acquisition of its manufacturer and the rebranding of the acquired product line.

The dealer, FMS, Inc., sold Samsung construction equipment products, including excavators, in the State of Maine. In 1998, Volvo Construction Equipment of North America purchased Samsung and assumed its dealership agreement with FMS. In 1999, Volvo notified FMS that it would terminate its dealership as part of an initiative to rebrand the Samsung excavators as Volvo.

FMS and six other dealers filed suit in Arkansas state court in March 2000, alleging breach of contract and violation of various state franchise and trade practice laws. Eventually, the case was transferred to the federal district court in Chicago.

In January 2005, the parties filed cross motions for summary judgment on a claim that Volvo terminated the dealership without cause in violation of the Maine power equipment, machinery, and appliances dealer law. The court denied the motions and required the case to proceed to trial, since issues of fact existed about whether the rebranding constituted a discontinuation of the excavator product law—an enumerated cause for termination under the law (CCH Business Franchise Guide ¶13,011).

After a six-day trial, the jury found that the rebranding did not constitute a discontinuation of the excavator product line because there was no substantial change in the excavators. In a special verdict, the jury found that Volvo “had not discontinued the manufacture or distribution of the franchise goods,” that Volvo’s termination of the franchise relationship “proximately caused damages to FMS,” and that FMS was entitled to $2.1 million in damages.

Scott Korzenowski, counsel for FMS, said the jury verdict awarded the dealer every dollar it sought.

The case is FMS, Inc. v. Volvo Construction Equipment of North America, Inc., U.S. District Court for the Northern District of Illinois, Case No. 00 C 8143, November 30, 2006.

High Court to Consider Resale Price Maintenance, Implied Antitrust Immunity

This posting was written by Jeffrey May, editor of the CCH Trade Regulation Reporter

The U.S. Supreme Court on December 7 agreed to review two plaintiff-friendly antitrust decisions. The Court will review an unpublished decision of the U.S. Court of Appeals in New Orleans (2006-1 Trade Cases ¶75,166) upholding a multi-million-dollar award to a retailer that was terminated by a manufacturer of women’s accessories for refusing to comply with the manufacturer’s resale pricing policy. Citing the High Court’s 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co. (220 U.S. 373), the appellate court said that it was bound by precedent to apply the per se rule to the agreement. The manufacturer calls on the Court to overturn the “anachronistic per se rule and to bring the law of resale price maintenance into step with the law governing other vertical restraints.” The case is Leegin Creative Leather Products, Inc. v. PSKS, Inc., Dkt. 06-480.

The Court also agreed to consider the appropriate standard for implying antitrust immunity in an action involving conduct in the securities industry. At issue is a decision of the U.S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,943), holding that an antitrust action against the nation’s leading underwriters for engaging in anticompetitive conduct with respect to initial public offerings (IPOs) should not have been dismissed on implied immunity grounds. The U.S. Solicitor General had asked the U.S. Supreme Court to grant the petition by investment banks that underwrite IPOs to “resolve the continuing confusion in the lower courts about the proper manner in which to reconcile the antitrust laws and the securities laws.”

The underwriters asked the Court whether— in a private damages action under the antitrust laws challenging conduct that occurs in a highly regulated securities offering—the standard for implying antitrust immunity is the potential for conflict with the securities laws, or a specific expression of congressional intent to immunize such conduct and a showing that the Securities Exchange Commission (SEC) has power to compel the specific practice.

In its brief, the government contended that, although “the court of appeals failed to give adequate protection to collaborative conduct that is permitted under the securities laws, the district court and petitioners are also wrong in their view that all conduct connected with initial public offerings is impliedly immune from antitrust liability because the SEC exercises ‘pervasive’ regulatory authority over it.” The case is Credit Suisse First Boston Ltd., Dkt. 05-1157.

Arbitration Clause in Franchise Agreement Unconscionable Under California Law

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

In a long-awaited en banc decision, the U.S. Court of Appeals in San Francisco has ruled that an arbitration provision in a franchise agreement was both procedurally and substantively unconscionable under California law and was therefore unenforceable. A federal district court ruling that the provision was valid and enforceable (Business Franchise Guide 2002-2004 New Developments Transfer Binder ¶12,559) was reversed.

The arbitration provision at issue in the agreement between the Massachusetts franchisor and the California franchisee provided in part:

35.1 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, including, without limitation, any claim that this Agreement or any portion thereof is invalid, illegal, or otherwise voidable or void, shall be submitted to arbitration before and in accordance with the rules of the American Arbitration Association (AAA) or successor organization.

After two years of unprofitable operation, the franchisee unilaterally terminated the parties’ agreement. The franchisor sought arbitration of its claim for more than $80,000 in unpaid fees it claimed the franchisee owed. The franchisee then brought suit against the franchisor in a California state court (later removed to federal court by the franchisor), alleging violations of California franchise law, misrepresentation, and challenging the validity of the arbitration provision.

Validity for Court, Not Arbitrator, to Determine

The appellate court reached its conclusion that the provision was unenforceable after first determining that a court, not an arbitrator, was required to decide the issue of whether the arbitration provision in the parties’ agreement was valid and enforceable. In an earlier, now-withdrawn opinion (Business Franchise Guide 2004-2005 New Developments Transfer Binder ¶13,034), a three-judge panel of the appellate court determined that the unconscionability of the arbitration provision was for an arbitrator to decide. However, considering the issue en banc, the appellate court decided that the franchisee did not seek invalidation of the parties’ agreement as a whole on the grounds of unconscionability; instead, the franchisee challenged only the arbitration provision. In light of the recent ruling of the U.S. Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna (126 S. Ct. 1204, 2006), a court was required to determine the provision’s enforceability.

The franchisee’s complaint made it “abundantly clear” that the franchisee challenged only the arbitration provision, according to the appellate court. The franchisee did not allege a single ground for invalidation of the entire agreement. Although the franchisee did contend that the provision was procedurally unconscionable, based in part on the fact that the entire agreement was a contract of adhesion, the franchisee did not allege that the entire agreement was invalid or seek any relief from the agreement as a whole. Indeed, the franchisee’s four other causes of action provided relief only if the agreement between the parties was a valid and binding one, the court observed.

Unconscionability

The federal district court erred when it “sidestepped the requisite procedural unconscionability analysis” under California law, finding it “nondispositive.” Under California law, the critical factor in procedural unconscionability was the manner in which the disputed provision was presented and negotiated, according to the appellate court. In the instant dispute, the franchisee was in a substantially weaker bargaining position than the franchisor. The franchisor drafted the franchise agreement, and presented it to the franchisee on a take-it-or-leave-it basis. Although the evidence of procedural unconscionability appeared minimal, it was sufficient to require an analysis of whether, under the sliding scale approach employed under California law in a weighing of procedural and substantive unconscionability, the provision was unconscionable.

Two particulars in the arbitration provision exhibited a lack of mutuality supporting a finding of substantive unconscionability, the appellate court ruled. First, the provision gave the franchisor access to a judicial forum to obtain provisional remedies for the protection of its intellectual property, while affording the franchisee only the arbitral forum to resolve her claims. Second, the designation of Boston as the arbitral forum was a location considerably more advantageous to the franchisor than to the franchisee.

The December 4, 2006 opinion in Nagrampa v. Mailcoups, Inc., is posted at the Ninth Circuit web site:

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The decision will appear in a forthcoming issue of the CCH Business Franchise Guide.