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A recent decision in the California Court of Appeals has impaired the ability of some companies to enforce provisions of their arbitration agreements. Independent Association of Mailbox Center Owners, Inc. v. Superior Court (Mail Boxes, Etc.) (2005) ___Cal.App.4th___(05 C.D.O.S. 9006) involved a franchisor, Mail Boxes, Etc. (MBE) and several of its franchise owners and their professional association, Independent Association of Mailbox Center Owners. The franchisees appealed a decision by the trial court which ruled their claims against their franchisor must be arbitrated on an individual basis, and cannot be brought on a classwide or group basis. The ban on classwide arbitration was expressly provided for in the arbitration agreements between the franchisor and the franchisees. The Court of Appeals held that this and other provisions in the franchise agreements regarding arbitration are unconscionable.
The Court of Appeals based its decision in part on the adhesive nature of certain franchise agreements, stating "there is a clear disparity in bargaining power of franchisors versus franchisees." The Court acknowledged that classwide arbitration is well accepted under California law as workable and appropriate in some cases, especially when, as in this case, the franchisees made a statutory showing that consolidation was permitted under §1281.3 of the California Code of Civil Procedure. The franchisees showed that there were separate arbitration agreements, the disputes arose from the same facts or series of related transactions, and there were common issues of law or fact. Thus, the franchisees argued, among other things, that the ban on classwide arbitration would lead to costly and duplicative proceedings.
The Court also scrutinized the limit on remedies that were available to franchisees under the arbitration agreements. The arbitration clauses provided that the arbitrator was restricted from awarding punitive damages, consequential and incidental damages, including lost wages and attorneys fees. Additionally, some of the agreements stated, "in no event shall any monetary damages be recovered by a franchisee in excess of the amount of the franchise fee and the cost of building out the MBE Center." The Court stated that it was not within the scope of its opinion to address the substantive relief requested under the statutory claims by the franchisees, including punitive and compensatory claims, but it did warn the arbitrators that to the extent they were restricted from making these awards when it was clearly warranted by the statute, the arbitration clause was unduly restrictive and possibly an unconscionable waver of statutory rights.
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