MAURA ESCOBAR V. NAT'L MAINT. CONTRACTORS, LLC

• Court: Court of Appeals for the Ninth Circuit
• Decided: December 21, 2022
• Docket: 21-35765
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS DEC 21 2022 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

MAURA ESCOBAR; et al., No. 21-35765

Plaintiffs-Appellants, D.C. No. 3:20-cv-01695-SB

v. MEMORANDUM* NATIONAL MAINTENANCE CONTRACTORS, LLC, a Delaware limited liability company; et al.,

Defendants-Appellees.

MAURA ESCOBAR; et al., No. 21-35780

Plaintiffs-Appellees, D.C. No. 3:20-cv-01695-SB

v.

NATIONAL MAINTENANCE CONTRACTORS, LLC, a Delaware limited liability company; et al.,

Defendants-Appellants.

Appeal from the United States District Court for the District of Oregon Stacie F. Beckerman, Magistrate Judge, Presiding

Argued and Submitted December 6, 2022

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. Seattle, Washington

Before: McKEOWN, MILLER, and MENDOZA, Circuit Judges.

Appellants are individuals who either signed franchise agreements to

provide janitorial services or are family members of a signatory. They brought this

action against National Maintenance Contractors, LLC; NMC Franchising, LLC;

Marsden Services, LLC; and eight individual directors or officers (collectively

“NMC”) asserting various claims predicated on the theory that they are actually

employees, not franchisees. Appellants appeal from the district court’s order

compelling arbitration of their claims. NMC cross-appeals, challenging the district

court’s holding that the arbitration agreement’s forum-selection clause is

unenforceable. We have jurisdiction under 28 U.S.C. § 1291. We conclude that the

arbitration clause in the franchise agreement is unenforceable, and we affirm in

part, reverse in part, and remand for further proceedings.

“We review de novo the district court’s decision to grant or deny a motion to

compel arbitration.” Balen v. Holland Am. Line Inc., 583 F.3d 647, 652 (9th Cir.

2009). We review the underlying factual findings for clear error. Id.

The parties agree that all of the agreements are governed by either Oregon or

Washington law. No party argues that the Federal Arbitration Act, 9 U.S.C. §§ 1–

16, preempts state law in this case. In Oregon and Washington, substantive

unconscionability, by itself, can be a sufficient basis for invalidating a contract. See

2 Hatkoff v. Portland Adventist Med. Ctr., 287 P.3d 1113, 1118 (Or. Ct. App. 2012);

Hill v. Garda CL Northwest, Inc., 308 P.3d 635, 638 (Wash. 2013). We conclude

that three provisions of the arbitration agreement are substantively unconscionable:

the limit on punitive damages, the forum-selection clause, and the cost-sharing

provision.

First, the district court held that the arbitration agreement’s limit on punitive

damages is unconscionable, and NMC does not challenge that determination on

appeal.

Second, the arbitration agreement’s forum-selection clause is

unconscionable. The district court held that the clause is unconscionable because

of Appellants’ “geography and respective financial situations.” NMC argues that

Atlantic Marine Construction Co. v. United States District Court for the Western

District of Texas, 571 U.S. 49, 63–64 (2013), prohibits considering private-interest

factors such as geography and income. But the Court’s analysis in Atlantic Marine

concerned whether a “contractually valid forum-selection clause” could be

enforced. Id. at 62 & n.5. An unconscionable forum-selection clause is invalid, so

the analysis in Atlantic Marine is inapplicable here. See DePuy Synthes Sales, Inc.

v. Howmedica Osteonics Corp., 28 F.4th 956, 967 (9th Cir. 2022). Accordingly,

the district court did not err in considering private-interest factors in its

unconscionability analysis.

3 Third, the arbitration agreement’s cost-sharing provision is unconscionable.

In Oregon and Washington, a cost-sharing provision is unconscionable if it denies

parties the opportunity to vindicate their rights because of their inability to pay. See

Vasquez-Lopez v. Beneficial Oregon, Inc., 152 P.3d 940, 951–52 (Or. Ct. App.

2007); Hill, 308 P.3d at 639. The provision in question provides that the “expenses

of the arbitration . . . shall be born equally by the parties, unless they agree

otherwise or unless the arbitrator in the award assesses such expenses or any part

thereof against any specified party or parties.” The district court erred in

concluding that “[t]he risk that [Appellants] may have to pay arbitration expenses

does not support a finding of unconscionability here.” For that conclusion, the

court relied on cases in which incomplete factual records required courts to

speculate about how a cost-sharing provision would affect a party’s ability to

access an arbitral forum. No such speculation is necessary here. Instead,

Appellants have provided undisputed evidence about the costs of arbitration and

how those costs would prevent them from bringing their claims. NMC provides no

evidence to the contrary. On this record, the cost-sharing provision is substantively

unconscionable.

Although the agreement contains a severability clause, severance is

inappropriate here because the arbitration agreement is permeated with

unconscionable provisions. See McKee v. AT&T Corp., 191 P.3d 845, 860–61

4 (Wash. 2008). Oregon and Washington courts have held that severance is

inappropriate for arbitration agreements with two or three unconscionable

provisions. See Vasquez-Lopez, 152 P.3d at 949–54; Gandee v. LDL Freedom

Enters., 293 P.3d 1197, 1200–02 (Wash. 2013). In addition, we cannot sever an

unconscionable provision if doing so would require us to rewrite the contract.

Severing the cost-sharing provision would require exactly that because, in the

absence of the provision, it would fall to us to decide who should bear the costs of

arbitration. See Vasquez-Lopez, 152 P.3d at 954. We therefore conclude that the

entire arbitration agreement is substantively unconscionable and unenforceable, so

we need not reach the remaining issues briefed by the parties.

The motion to become an amicus (Dkt. No. 27) and motions to file

supplemental briefs (Dkt. Nos. 62, 68) are granted.

Costs shall be taxed against appellees/cross-appellants.

AFFIRMED in part, REVERSED in part, and REMANDED.