Commercial Litigation and Arbitration

Unconscionability of Arbitration Clause — Like Arbitrability Generally — Is Issue for Court, Even If Other Portions of Contract Are Also Challenged, As Long As Crux of Complaint Is Not Challenge to Contract As a Whole

Smith v. JEM Grp., 737 F.3d 636 (9th Cir. 2013):

JEM argues that an arbitrator, rather than the district court, should have determined whether the arbitration clause is unconscionable.  JEM argues under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006), and Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006) (en banc), that because the "crux" of Smith's complaint is that the contract as a whole is invalid, and the complaint does not specifically attack the arbitration clause in the ARA as unconscionable, an arbitrator rather than the court should have decided whether the arbitration clause was unconscionable. We disagree.

We have held that "the question of arbitrability is for the court to decide regardless of whether the specific challenge to the arbitration clause is raised as a distinct claim in the complaint" so 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 . . . ." Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 998 (9th Cir. 2010).  JEM does not contest that Smith separately challenged the arbitration clause as unconscionable, but it argues that her challenge to the clause could not have been the "crux of the complaint" because the challenge was made for the first time not in Smith's complaint but in her opposition to the motion to compel arbitration. We specifically rejected such an argument in Bridge Fund Capital. JEM contends that our decision in Bridge Fund Capital is fatally inconsistent with Buckeye and Nagrampa.

Even if Bridge Fund Capital were incorrectly decided, we would, of course, be bound to follow it. But we have no doubt about its correctness. In Buckeye, the Supreme Court considered whether a challenge to the validity of an arbitration agreement was a challenge "specifically [to] the validity of the agreement to arbitrate" or a challenge to "the contract as a whole, either on a ground that directly affects the entire agreement . . . or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid." 546 U.S. at 444. The Court held that because the "crux of the complaint" filed by the plaintiffs was a challenge to the contract as a whole, the district court could not properly consider the argument; rather, arbitrability should be considered by the arbitrator in the first instance. Id. at 444-46. In Nagrampa, we construed Buckeye to mean that "challenges specifically to the arbitration agreement were for the court to decide," even if these were not the sole or predominant challenges in the complaint. 469 F.3d at 1269.

In Bridge Fund Capital we considered "a third scenario not described in either Buckeye or Nagrampa; namely, a specific challenge to the arbitration clause that is not raised as a separate claim in the complaint." 622 F.3d at 1001. The relevant facts in Bridge Fund Capital were the same as in the case before us. Plaintiffs had entered into a franchise agreement that contained an arbitration clause. Id. at 999. Plaintiffs filed suit, alleging breach of the agreement, fraud and deceit, negligent misrepresentation, and violation of California law. Id. They alleged that provisions of the agreement were unconscionable, but they did not specify the particular provisions. Id. Defendant moved to compel arbitration. Id. Plaintiffs opposed the motion, specifically contending for the first time that the arbitration clause was unconscionable. Id. After carefully analyzing Buckeye and Nagrampa, we concluded that the district court had the authority to decide whether the arbitration clause was unconscionable. Id. at 1000-02. We held that it did not matter that plaintiffs had not specifically alleged unconscionability of the clause in their complaint. Id. at 1001. It was sufficient that they raised that issue in their response to the motion to compel. Id. at 1002.

Our decision in Bridge Fund Capital rests on a recognition of the nature of arbitration agreements. Many contracts, including those at issue in Bridge Fund Capital and in the case before us, provide for compulsory arbitration at the choice of one or both of the parties; if neither party asks for arbitration, any dispute that arises under the contract may be brought to a court. Under such a contract, a challenge to the arbitration clause would not be a proper part of a complaint if the plaintiff prefers a decision from a court. As we observed in Bridge Fund Capital,

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 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 principal prayer for relief.

Id. at 1001-02.

We therefore hold that the district court properly considered the validity of the arbitration clause.

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