Metropolitan News-Enterprise


Thursday, August 8, 2019


Page 1


Ninth Circuit:

California Law Precludes Ordering Arbitration in Dispute

Majority: Declaration in Agreement That Provision for Dispute Resolution in Texas ‘May Not Be Enforceable Under California Law’ Requires Denial of Motion to Arbitrate; R. Smith Dissents


By a MetNews Staff Writer


A majority of a Ninth U.S. Circuit Court of Appeals three-person panel yesterday held that an agreement that any disputes would be arbitrated in Texas is void because it contains the words, “This provision may not be enforceable under California law.”

In the California Court of Appeal’s 2008 opinion in Winter v. Window Fashions Professionals, Inc., it was held that inclusion of that phrase in a venue selection clause meant there was no meeting of the minds because the parties did not unequivocally agree to arbitrate outside California. The Ninth Circuit’s majority—comprised of Senior Justice Dorothy W. Nelson and Judge Carlos T. Bea—said in yesterday’s decision that it is bound by that state decision in a diversity case in which California law is being applied.

Yesterday’s decision relates to a franchise agreement specifying that arbitration is to be conducted at the franchisor’s headquarters in Fort Worth. The franchisor appealed the denial of its motion to compel arbitration.

Smith Dissents

Senior Judge Randy Smith dissented, arguing:

“Even if Winter did require us to conclude that a lack of ‘meeting of the minds’ on the forum selection provision negates the agreement to arbitrate altogether, the majority cannot write the severability clause out of the franchise agreement….The impact of the severability provision could not be clearer: even if Winter requires us to excise the term providing for arbitration in Texas, we must preserve the parties’ agreement to arbitrate their disputes. If we must perform any necessary surgery on the Agreement, the severability clause requires to use a scalpel, not a hacksaw.”

The majority noted that in Winter, the phrase in question was contained in an offering circular, and the inclusion was mandated by law.

Voluntary Inclusion

Nelson and Bea observed:

“In the instant case, the language was not provided to the parties in a pre-contract offering circular; rather, it was included in an addendum to the franchise agreement itself that was signed and executed on the same date as the franchise agreement. The fact that the parties included the language voluntarily, rather than as required by law, makes the case to follow Winter that much stronger.”

Smith countered:

“Contrary to the majority’s argument, that the case for following Winter is stronger because the ‘may not be enforceable language’ was included voluntarily in the addendum (rather than being required by state law in to appear in the precontract offering circular), the fact that the parties voluntarily included the language suggests there was a meeting of the minds.”

Case Inapposite

The party seeking to enforce an arbitration agreement pointed to the state Court of Appeal’s decision in MKJA, Inc. v. 123 Fit Franchising, LLC as authority that is contrary to Winter. The Ninth Circuit panel’s majority responded that the case was decided on the basis of a lack of jurisdiction and does not pass on whether Winter was correctly decided, but merely recites a party’s contention that it was not.

Smith insisted that the court in MKJA “characterized Winter as ‘wrongly decided.’ ”

(He’s wrong. The footnote says, in part: “In light of our conclusion that the trial court lacked jurisdiction to declare the provisions unenforceable and/or unconscionable, we need not address the defendants’ argument that the trial court erred in relying on Winter because that case is distinguishable and was wrongly decided.”)

State High Court

The majority’s opinion says:

“We are not ‘convinced that the California Supreme Court would reject’ Winter; therefore, we are bound to follow it.”

Smith drew attention to the Ninth Circuit’s 1999 decision in Laxmi Investments, LLC v. Golf USA. The court found that in light of the declaration that “[t]his provision may not be enforceable under California law,” there was no meeting of the minds that Oklahoma would be the forum for arbitration but, unlike the court in Winter, did not conclude that no arbitration would be conducted.

It said: “We REVERSE the decision of the district court and REMAND for the entry of an order that arbitration shall proceed in California.”

Smith commented:

“The California Supreme Court will see Winter for what it is: a preempted misapplication of Laxmi.”

At the District Court level, Judge Vince Chhabria of the Northern District of California, sitting on assignment in the Eastern District, said:

“This Court’s disagreement with the rationale embodied in Winter and Laxmi is not enough, on its own, to justify a finding that the California Supreme Court would come out differently.”

The case is Nygaard v. Property Damage Appraisers, 18-15055.


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