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Go to Arbitration. Go Directly to Arbitration.

A Williamson County Chancellor recently gave this instruction to a plaintiff franchisee in a case the firm handled on behalf of a defendant franchisor in the golf retail industry.  In that case, GJ Golf Performance Studio, LLC, et al. v. Golf, Etc. of America, Inc., the franchisee sought to escape arbitration of its claims against the franchisor because the arbitration clause in the parties’ agreement allowed certain claims to be litigated in court. 

The provision at issue provided, in pertinent part:

Except for controversies or claims relating to the ownership of any of Golf Etc.’s Proprietary Marks or the unauthorized use or disclosure of Golf Etc.’s Trade Secrets or other Confidential Information, covenants against competition and other claims for injunctive relief, all disputes arising out of or relating to this Agreement or to any other agreements between the parties, or with regard to interpretation, formation or breach of this or any other agreement between the parties, shall be settled by binding arbitration conducted in Granbury, Hood County, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect.

The franchisee argued that such a provision was unconscionable, relying upon Tennessee precedent involving consumer transactions, such as Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004).  In response, our client noted the general rule of Taylor was that an arbitration provision is unconscionable and void if it is contained in a consumer contract of adhesion and reserves a right of access to the courts only for the merchant, but requires the consumer to submit all claims to arbitration. Taylor, 142 S.W.3d at 286-88.  In Taylor, an arbitration provision in an auto-sale agreement between a consumer and a used car dealer was unconscionable because the auto dealer reserved the right to rescind the sale of the vehicle and to immediately re-take possession of the vehicle thereby reserving a judicial forum for “practically all claims” it would have against the plaintiff.  Id. at 287 (emphasis added).

In our case, the parties’ agreement was clearly not a consumer contract relating to any consumer transaction; it was a franchise agreement that reflected a commercial transaction.  Moreover, although Tennessee courts have naturally hesitated to conclude that a substantively unconscionable adhesion contract can never be found between commercial parties, the context in which the parties’ agreement was entered into in this case was not in any way similar to those circumstances: “transactions between relatively uneducated or powerless members of the public on one side, and knowledgeable professionals or powerful companies on the other.” Ross Products Div. Abbott Labs. v. State, 2007 WL 4322016, at *4 (Tenn. Ct. App. Dec. 5, 2007) (citing Taylor, supra, 142 S.W.3d 277 (arbitration clause in sale by used car dealer)); Alcazar v. Hayes, 982 S.W.2d 845 (uninsured motorist clause in insurance contract); Russell v. Bray, 116 S.W.3d 1 (Tenn. Ct. App. 2003) (exculpatory clause in home inspection contract); Howell v. NHC Healthcare-Fort Sanders, 109 S.W.3d 731 (Tenn. Ct. App. 2003) (arbitration clause in contract between nursing home and illiterate and gravely ill patient)).  See also  Skelton v. Freese Const. Co., 2013 WL 6506937, at *8 (Tenn. Ct. App. Dec. 9, 2013).  Therefore, the general legal principles of Taylor were simply inapplicable here and constituted obiter dicta.

“Unconscionability may arise from a lack of a meaningful choice on the part of one party (procedural unconscionability) or from contract terms that are unreasonably harsh (substantive unconscionability).”  Trinity Industries, Inc. v. McKinnon Bridge Co., Inc., 77 S.W.3d 159, 170 (Tenn. Ct. App. 2001) (citations omitted).  Generally, however, procedurally unconscionable contracts – id est contracts of adhesion – are not per se unenforceable.  Id.  Adhesion contracts are only unenforceable if there is some level of substantive unconscionability and the “inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and where the terms are so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.”  Taylor, at 285. (citations omitted).

In Taylor, the arbitration provision reserved a judicial forum for “practically all claims” that it could have against the consumer while requiring the consumer to arbitrate “any claim that she might have” against the auto dealer.  Id. at 286.  (emphasis added)  Thus, the Court naturally held that the arbitration provision was oppressive to a weaker consumer party and unreasonably favored a stronger party and was therefore unconscionable and unenforceable.  Id.  The Tennessee Court of Appeals has voided arbitration provisions based on Taylor in consumer contexts that reserve for one party a judicial forum for the resolution of “primary and significant claims.” See Berent v. CMH Homes, Inc., 2014 WL 813874, *4 (Tenn. Ct. App. Feb. 28, 2014) (an arbitration provision in a mobile home sale and finance agreement was void where it reserved defendant’s right to a judicial forum for “primary and significant claims,” such as claims to enforce the security interest granted by the contract, for injunctive relief to secure the existence of the loan’s collateral, and to any counterclaim brought by the plaintiff in an action exempted from the arbitration provision); McGregor v. Christian Care Center of Springfield, LLC, 2010 WL 1730131 (Tenn. Ct. App. April 29, 2010) (an arbitration provision in a nursing home admission agreement was void where it was contained in an adhesion contract related to necessary medical services and reserved the nursing home’s right to a judicial forum for disputes regarding plaintiff’s nonpayment for services); Brown v. Tennessee Title Loans, Inc., 216 S.W.3d 780, 781 (Tenn. Ct. App. 2006) (class action case where an arbitration provision in consumer title loan contracts that required borrowers to arbitrate all claims while reserved the lender’s right to a judicial forum “to enforce . . . payment obligations in the event of default” was void).

Our client noted that the franchisee cited no Tennessee authority addressing the specific issue in this case.  However, a review of the law in other jurisdictions readily revealed that arbitration provisions in the franchise context which reserve a judicial forum for certain provisional remedies – like injunctive relief for claims related to intellectual property and/or unfair competition – are certainly not unconscionably one-sided because they do not provide “a choice of forums [solely] for the claims of the stronger party.”  Htay Htay Chin v. Advanced Fresh Concepts Franchise Corp., 194 Cal. App. 4th 704, 712 (Cal. App. 2nd Div. 2011)See also Evergreen Media Holdings v. Warner Bros. Entm’t, 2014 WL 5681852, at *8 (S.D. Tex. Nov. 4, 2014) (arbitration provision which allowed the parties to seek injunctive relief does not “sweep as broadly” as other arbitration provisions that reserve a judicial for more substantive claims and are unconscionable); Lara v. Onsite Health, Inc., 896 F. Supp. 2d 831 (N.D. Cal. 2012) (arbitration provision in an employment contract excluding injunctive relief claims is not so one-sided that it is unconscionable); Daniels v. Virginia Coll. at Jackson, 478 F. App’x 892, 893 (5th Cir. 2012) (language that allows college to seek a preliminary injunction to halt a student’s ongoing breach of an enrollment agreement but requires college to seek all other relief through arbitration is an asymmetric exception that is so limited in scope that it does not make an arbitration clause unconscionable); Singh v. Choice Hotels Int’l, Inc., 2007 WL 2012432, at *5 (N.D. Tex. July 11, 2007) (arbitration provision that is broad and submits to arbitration any controversy or claim arising out of or relating to a franchise agreement, other than certain provisional remedies, to arbitration is not unconscionable). 

In our case, although Tennessee has “tended to lump [procedural and substantive unconscionability] together,” and procedural unconscionability is not necessarily a dispositive issue, the parties’ agreement was not procedurally unconscionable or a contract of adhesion – a primary issue raised in Taylor.  In fact, the franchisee provided no evidentiary support showing a lack of a reasonable opportunity to bargain over the terms of the agreement, including the arbitration provision.  Taylor, at 286.  Indeed, it did not even make any such allegations in its Complaint.  Moreover, there was no support that the parties’ agreement was somehow presented on a “take it or leave it” basis – and even if the franchisee was to make such an allegation, doing so is clearly insufficient to create an adhesion contract.  See Skelton v. Freese Const. Co., 2013 WL 6506937, at *8 (Tenn. Ct. App. Dec. 9, 2013).  Accordingly, the parties’ agreement in this case was not procedurally unconscionable.  See McKay v. Louisville & Nashville R. R., 182 S.W. 874, 876 (Tenn. 1916).

Following a hearing, the Chancellor agreed with our client’s position and stayed the case pending arbitration in Granbury, Texas.  As the foregoing discussion demonstrates, even routine arbitration demand provisions can be complicated.  If you need to draft such a provision for your contract or you are faced with a similar issue in litigation, please contact us.