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Court Rules for Consumers in Arbitration Challenges

December 11, 2006

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A victim of a corporate contract that restricted her access to the courts will now get the opportunity to tell her stories to a judge, thanks to a decision won by Trial Lawyers for Public Justice (TLPJ) in the U.S. Court of Appeals for the Ninth Circuit.

An 11-judge panel ruled that a one-woman franchise operator's challenge to the validity of a national company's mandatory arbitration clause must be decided by a court, not through the arbitration system she was challenging.

The court also held that the company's arbitration clause -- which would have required franchise operator Connie Nagrampa to travel from California to Boston to assert her claims and defend herself against the company -- is unconscionable and unenforceable under California law.

This decision overturns an earlier decision by a three-judge panel of the court and clears the way for Nagrampa's lawsuit against direct-mail coupon company MailCoups, Inc.

"This decision is important because it properly gives the courts a role in calling balls and strikes on any arbitration clause that a company writes into a contract," said Michael Quirk, who briefed and argued Nagrampa's case before the 11-judge panel while an attorney at TLPJ, and who is now an attorney with Philadelphia's Williams Cuker Berezofsky.

"Under the court's prior decision, Ms. Nagrampa would have to travel 3,000 miles just to challenge the contract term that required her to travel 3,000 miles. If that were the law, then companies could run roughshod over the rights of consumers, workers, and franchise owners like Ms. Nagrampa."

"Unconscionable"

In striking down the clause as unenforceable, Judge Kim McClane Wardlaw, writing for the majority, explained that the arbitration clause -- which was non-negotiable and appeared on the 25th page of a 30-page contract -- was "unconscionable" or unfair partly because "MailCoups had overwhelming bargaining power, drafted the contract, and presented it to Nagrampa on a take-it-or-leave-it basis."

The court further held that the arbitration clause was unconscionable and enforceable for two additional reasons.

First, the clause required Nagrampa to submit her claims to arbitration, while reserving the corporation's right to go to court, and was thus "clearly one-sided."

Second, the clause, which "would require a one-woman franchisee who operates from her home to fly across the country to arbitrate a contract signed and performed in California," was "unduly oppressive and harsh" given the respective bargaining positions of the parties.

The Ninth Circuit's decision is especially important because it makes clear that the question of whether an arbitration clause is unconscionable must be decided by a court, even if some of the factors that make the clause unconscionable also apply to the contract as a whole.

"This is a hugely important victory for anyone victimized by an abusive corporate arbitration clause," added TLPJ's F. Paul Bland, Jr., co-counsel for Nagrampa. "To say that an arbitrator is the only person who can decide whether an arbitration clause is unfair would make no sense. The court clearly realized what is at stake here."

The MailCoups Case

Ms. Nagrampa entered into a franchise agreement with MailCoups in 1998. After two years of unprofitable operation, Nagrampa terminated the contract. MailCoups filed a demand for arbitration against Nagrampa, claiming that she owed several thousands of dollars in unpaid fees.

When the arbitration was ordered to take place in Boston, Massachusetts, Nagrampa could not afford the fees and travel expenses to defend herself, and did not participate in the arbitration except to object to it. Meanwhile, Nagrampa brought suit against MailCoups in court, alleging that the company defrauded her and violated California franchise and consumer protection laws.

MailCoups moved to compel Nagrampa to arbitrate her claims, and the district court granted the motion. The Ninth Circuit's decision will now permit Nagrampa to pursue her claims in court and will likely prevent MailCoups from enforcing a $160,000 arbitration award against her.

"The court's decision reinforces the principle that, under the Federal Arbitration Act, state law controls on pivotal issues such as unconscionability and public policy," said Kate Gordon, who briefed and argued Nagrampa's case before the three-judge panel and is lead counsel on the appeal. Gordon, formerly TLPJ's Baron-Brayton Fellow, is now with the Center on Wisconsin Strategy in Madison, Wisconsin.

In addition to Bland, Quirk, and Gordon, the Nagrampa legal team includes trial counsel Stanford Cipinko and Douglas Oh-Keith of San Francisco. The challenge to the arbitration clause in Nagrampa is part of TLPJ's Mandatory Arbitration Abuse Prevention Project ("MAAPP") and Access to Justice Campaign, a nationwide initiative to keep America's courthouse doors open to all.

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