[00:00:05] Speaker 03:
Good morning, your honors, and may it please the court.

[00:00:07] Speaker 03:
My name is James Nelson and I represent the defendants.

[00:00:10] Speaker 03:
I'd like to reserve two minutes for rebuttal.

[00:00:13] Speaker 03:
This court should reverse the district court's refusal to enforce the arbitration agreement.

[00:00:18] Speaker 03:
The decision below has two fundamental errors.

[00:00:21] Speaker 03:
First, the court found a lack of mutual assent to arbitrate.

[00:00:25] Speaker 03:
That holding is wrong because it impermissibly considered parole evidence to contradict the terms of the contract.

[00:00:32] Speaker 03:
California law says that courts must enforce integration clauses unless there are allegations of fraud, duress, or illegality, and there are none here.

[00:00:43] Speaker 03:
The district court also found a lack of mutual assent based on a phrase in the franchise disclosure document saying a clause may not be enforceable.

[00:00:51] Speaker 03:
But the court ignored the document's state cover pages.

[00:00:54] Speaker 03:
Plaintiffs don't dispute that they clearly say the contract requires binding arbitration.

[00:01:01] Speaker 03:
and no court has held a lack of mutual assent when such language is present.

[00:01:06] Speaker 03:
Second, the court's unconscionability holding is wrong.

[00:01:10] Speaker 03:
At most, there is only minimal procedural unconscionability here, so plaintiffs have to prove a high degree of substantive unconscionability, but they did not.

[00:01:20] Speaker 03:
The court found three aspects unconscionable, a carve-out provision from arbitration, a shortened limitations period, and liquidated damages.

[00:01:29] Speaker 03:
But California law holds the first two are permissible.

[00:01:32] Speaker 03:
Narrow non-mutual exceptions to arbitration to protect trademarks and intellectual property are permissible if the business reason is in the contract, and it is here.

[00:01:42] Speaker 03:
And shortening of time to sue is also permissible, whereas here it applies mutually to both parties.

[00:01:49] Speaker 03:
The third aspect, the liquidated damages clause, should have been severed.

[00:01:54] Speaker 03:
The court did not apply the California standard for severance.

[00:01:58] Speaker 03:
A clause can and should be severed if it's collateral to the central purpose of the contract, which is legal, in this case, arbitrating claims.

[00:02:07] Speaker 03:
So even if unconscionable, all three provisions should have been severed because they're plainly collateral to the arbitration itself, which would be unaffected by just deleting these provisions.

[00:02:18] Speaker 03:
So for these reasons, we believe the court should reverse.

[00:02:21] Speaker 03:
Turning first to mutual assent, Your Honors.

[00:02:23] Speaker 01:
the court relied entirely for its... I want to ask you to address them in a different order because I think my colleagues may view this differently but I see the unconscionability issue is a larger problem for you so it would be helpful to me if you focus at least your initial comments on that issue so

[00:02:41] Speaker 01:
We know there's two components, the procedural and the substantive, and the sliding scale, and that an adhesion contract is procedurally inconstitutable, although it's just a slight factor.

[00:02:56] Speaker 01:
egregious unconscionability.

[00:02:58] Speaker 01:
But you have three components that you've acknowledged with respect to substantive unconscionability, one of which I think you are just flat out agreeing was unconscionable, which was the $10,000 liquidated damages clause.

[00:03:09] Speaker 01:
I haven't seen anything in your briefing or what you've said this morning to suggest that you're trying to defend that.

[00:03:14] Speaker 03:
Correct, Your Honor.

[00:03:15] Speaker 03:
Under California law, because it's not mutual, we're not disputing that it was unconscionable, but it clearly is severable.

[00:03:20] Speaker 01:
So the district court seemed concerned by the disparity in power between the parties and that you have the largest distributor of baked goods up against very small sort of mom and pop operations, people who

[00:03:37] Speaker 01:
don't have a lot of sophistication, wealth, resources at their disposal to be in a dispute with a major company.

[00:03:46] Speaker 01:
So the district court seemed to think that the problem with these provisions and this contract was that it was a larger company just sort of taking advantage of and beating up on the little guy.

[00:03:56] Speaker 01:
So then the district court decided not to sever.

[00:03:59] Speaker 01:
And I am struggling to see how that was an abusive discretion.

[00:04:03] Speaker 03:
Well, yes, your honor, I think on the big company versus little company aspect that goes to procedural unconscionability and adhesion that that is not relevant at all to the substantive unconscionability analysis.

[00:04:15] Speaker 03:
And so whether these provisions are substantively unconscionable or not, we just have to look at the terms of the contract and California cases deciding these terms.

[00:04:24] Speaker 03:
And we have cases that we've cited, Your Honor, on the first two provisions saying that they are not substantively unconscionable, let alone a high degree of substantive unconscionability, which is required here.

[00:04:34] Speaker 03:
And the district court actually never even held that there was a high degree of substantive unconscionability under the sliding scale approach.

[00:04:41] Speaker 01:
Why wouldn't we consider limiting the period to bring a claim from what could be between one and four years to 30 or 60 days to be a high degree of unconscionability?

[00:04:52] Speaker 03:
Well, Your Honor, this court in Tompkins and in Sultani and both of those cases held that a mutual shortening of a statute of limitations is not unconscionable.

[00:05:02] Speaker 03:
The primary factor under California case law for unconscionability is whether something is unfairly one sided.

[00:05:09] Speaker 03:
It's undisputed that that provision that you're talking about is not one sided at all.

[00:05:13] Speaker 04:
Well, except for if you look at it from a practical point of view.

[00:05:16] Speaker 04:
in light of the provision that talks about the claims that are carved out from arbitration and those are the claims that are more likely to be brought by your client, then the 30 days while facially is not one-sided, practically it looks like it is more one-sided because it's only going to apply to the claims that are more likely to be brought by the other side of this case.

[00:05:39] Speaker 03:
Yes, sir.

[00:05:39] Speaker 03:
I thank you for bringing that up because I think that there was clear error here and holding that that there is the arbitration agreement and what claims have to be arbitrated or not is somehow lopsided here.

[00:05:52] Speaker 03:
The covered disputes that have to go to arbitration are any and all disputes between the parties.

[00:05:57] Speaker 03:
And there's a long list of about eight examples.

[00:05:59] Speaker 03:
almost all of which apply to both parties.

[00:06:02] Speaker 03:
The district court below focused on one aspect of that list, which was employment claims, and then focused on two carve-outs in the excluded disputes.

[00:06:10] Speaker 03:
But there are actually four other excluded disputes that apply to both plaintiffs and defendants.

[00:06:16] Speaker 03:
One of those is specific performance.

[00:06:19] Speaker 03:
And Beanbow Bakeries was just sued by an independent contractor for specific performance, and that claim went to court because it's one of the carved-out claims.

[00:06:27] Speaker 03:
in the excluded disputes.

[00:06:28] Speaker 03:
And so here we just have a very narrow carve out for IP and trademark claims.

[00:06:33] Speaker 00:
That's pretty significant though, isn't it?

[00:06:35] Speaker 00:
It's the company's ability to protect the family jewels in terms of how it operates and how it presents itself.

[00:06:43] Speaker 00:
And suddenly, instead of having that arbitrated as well, it's in arbitration.

[00:06:50] Speaker 00:
Isn't there an argument to be made that here you have these three provisions that carve out the statute of limitations restrictions and the liquidated damages and one can view the combination of the three as demonstrating the power that the earth grains had in

[00:07:15] Speaker 00:
shoving and pushing this agreement on these distributors.

[00:07:22] Speaker 03:
Well, Your Honor, on the IP and trademark claims, we agree that there are business justifications for the business to protect those claims, but this Court in Tompkins specifically held that businesses are entitled to have protection for their IP and trademarks.

[00:07:34] Speaker 00:
But because they have a, they're entitled to protect their IP, does that then justify an arbitration agreement that looks like this, that has these three provisions that skew in favor of the, of earth grains?

[00:07:51] Speaker 03:
Two responses to that.

[00:07:53] Speaker 03:
First, I believe the answer is yes.

[00:07:55] Speaker 03:
The California Supreme Court in Balthazar, this court in Topkins, the California Supreme Court in Sanchez, all held that such a provision was not unconscionable.

[00:08:02] Speaker 03:
And if that provision is not unconscionable.

[00:08:03] Speaker 03:
Across the board, ever?

[00:08:05] Speaker 03:
Well, when it's so narrow and limited, like in this case.

[00:08:08] Speaker 00:
Although that requires a determination that it's narrow and limited, and Judge Battaglia appears to have concluded that it was more than just kind of a limited little sliver.

[00:08:18] Speaker 00:
It was more substantial than that.

[00:08:20] Speaker 03:
I believe your honor is referring to the fact that there are three separate provisions, but I think you have to look at each provision individually to decide if it is substantively unconscionable.

[00:08:30] Speaker 03:
If you agree that all three by themselves are substantively unconscionable, then you move on to the separability analysis.

[00:08:36] Speaker 03:
But the first point I'm trying to make is that the California Supreme Court has held that a narrow carve out like this.

[00:08:42] Speaker 03:
And Your Honors, don't have to defer to Judge Battaglia on what the carve-out actually says.

[00:08:46] Speaker 03:
You can go and look at the covered disputes, excluded disputes, see that they're perfectly mutual except for the IP and trademark carve-outs, and that is just not unconscious.

[00:08:55] Speaker 00:
Well, there's an additional carve-out or two, isn't there?

[00:08:58] Speaker 00:
There's one regarding injunctive relief.

[00:09:01] Speaker 03:
And they apply to both parties, Your Honor.

[00:09:02] Speaker 03:
And I just brought up the example of independent contractors suing us for injunctive relief and specific performance.

[00:09:07] Speaker 03:
Those apply both to contractors and to the company.

[00:09:11] Speaker 03:
So the only two that are not mutual are the IP.

[00:09:13] Speaker 03:
And again, Your Honor, the California Supreme Court a few years ago in Balthazar said that's not unconscionable when it's that narrow.

[00:09:23] Speaker 01:
is something that will forgive all unconscionability in these contract terms.

[00:09:27] Speaker 01:
So you made that point with respect to the limited claim period, taking it down from years, literally, to 30 or 60 days, depending on the plaintiff.

[00:09:37] Speaker 01:
And it's like a 98% reduction in the limitations period.

[00:09:43] Speaker 01:
But doesn't California case law say that you can reduce or limit the limitations period, but it has to be reasonable?

[00:09:49] Speaker 01:
And I think it was

[00:09:50] Speaker 01:
Martinez where they found six months wasn't reasonable your honor how does 30 days how is even 60 days let's take the longest period in these contracts how is that reasonable

[00:10:00] Speaker 03:
Yes, Your Honor.

[00:10:01] Speaker 03:
So I first start by saying that that is a unilateral reduction of a statute of limitations case.

[00:10:06] Speaker 03:
All of the cases that the other side cited were unilateral reductions of statute of limitations.

[00:10:11] Speaker 03:
They haven't cited any mutual reductions that were held unconscionable.

[00:10:15] Speaker 03:
But even setting that aside, in this context, you have 30 days to provide notice to earth grains, and then you have 30 days to try to resolve the dispute informally, and then you have 30 days after that to file an arbitration claim.

[00:10:30] Speaker 03:
So it's actually 90 days to file the claim from when the dispute arises.

[00:10:34] Speaker 03:
But it's perfectly reasonable because this is a fresh bread distribution business.

[00:10:38] Speaker 03:
This contract is about delivering fresh bread every week to grocery stores, retail stores, and if there's a dispute about stale bread in the store or not getting enough bread or not being able to deliver to certain retail stores.

[00:10:49] Speaker 01:
What does it have to do with, for example, the claims here, which were I think that the employees were mis-categorized or mis-characterized as independent contractors rather than employees.

[00:11:00] Speaker 01:
That has nothing to do with what they're delivering or if a loaf of bread is stale.

[00:11:03] Speaker 03:
Well, Your Honor, we're looking at the contract when it was entered.

[00:11:06] Speaker 03:
And the contract when it was entered, the main focus of this contract is about bread distribution, which is what the contract is for.

[00:11:12] Speaker 03:
But even looking at these claims, if the plaintiffs believe that they were misclassified, it's perfectly reasonable to expect them to tell Earthgrains or Beanbow within 60 days that they believe that they're misclassified.

[00:11:23] Speaker 03:
This isn't a case of entering an employment agreement.

[00:11:26] Speaker 03:
This is a case of entering a distribution agreement and paying over $100,000 to buy a distribution route.

[00:11:32] Speaker 03:
And the essence of the agreement in Article 2 is that they are independent contractors, not employees.

[00:11:38] Speaker 00:
You haven't said anything based upon the nature of this agreement, this contract, that would suggest that this different treatment is 30 and 60-day statute of limitations.

[00:11:52] Speaker 00:
made sense, maybe it should be upheld as it applied in this case.

[00:11:57] Speaker 00:
You could say that as to any contract that, oh, well, you should know within 30 days or 60 days if there's a problem or an issue in your employment and wage and hour issues.

[00:12:07] Speaker 00:
And so that's just the way it is.

[00:12:11] Speaker 00:
I don't understand the argument about how something about this business model supports this restriction

[00:12:20] Speaker 00:
to 30 days or to 60 days.

[00:12:23] Speaker 00:
In 30 days, an employee is barely getting an understanding of their job, an understanding of the people that they work with, what they're required to do.

[00:12:33] Speaker 00:
And ultimately, it just seems like a restrictive period of time or overly restrictive.

[00:12:41] Speaker 03:
Well, one other point that I'll make, Your Honor, is California law actually incorporates tolling doctrines into contractual shortening of statute of limitations.

[00:12:50] Speaker 03:
And so in this case, for instance, that reasonableness and actually becoming aware of all the circumstances in your legal rights would all be incorporated in.

[00:12:57] Speaker 03:
So there's no argument here that they would have had to have let us know 30 days into their contract that they thought that they were misclassified.

[00:13:04] Speaker 03:
It's when they discovered it.

[00:13:05] Speaker 03:
And in this case, they waited

[00:13:07] Speaker 03:
six months to two years after ending their relationship with Memo and EarthGrain to bring up these claims.

[00:13:13] Speaker 03:
But Your Honor, turning to the severability point, many cases, including cases cited by plaintiffs like Pereira, have severed three or four provisions that were held unconscionable that are related to the provision here, such as fee-shifting provisions and cost-sharing provisions and carve-outs from arbitration.

[00:13:33] Speaker 03:
This Pereira

[00:13:33] Speaker 03:
Pereira case from 2019 severed four unconscionable provisions.

[00:13:37] Speaker 03:
And the reason it did that was because those provisions were collateral to the main purpose of the contract, which was arbitrating claims.

[00:13:45] Speaker 03:
And none of the rules of the arbitration itself were unfair or one-sided.

[00:13:50] Speaker 03:
So Armendariz, the California Supreme Court case, laid out five things that have to be true for arbitrations to be fair and not one-sided.

[00:13:58] Speaker 03:
And they haven't disputed that all five things are true about the arbitration provision here.

[00:14:02] Speaker 04:
I guess I'm wondering, based on that line of reasoning, why wouldn't it be true that provisions related to arbitration or even dispute resolution generally would always be collateral under your reasoning?

[00:14:15] Speaker 03:
Well, Your Honor, I mean, I can imagine a situation where they wouldn't be such as if it said one side has to arbitrate all their claims and the other side never has to arbitrate, something like that.

[00:14:24] Speaker 03:
is clearly not mutual and there's other, you know, that's obviously an extreme example.

[00:14:29] Speaker 04:
Based on the line of reasoning that you were just going through, they would still be collateral to the idea of this contract is about delivering bread.

[00:14:36] Speaker 03:
Well, it wouldn't, Your Honor, because there's nothing that you could delete and still have a mutual arbitration agreement between the parties.

[00:14:43] Speaker 03:
And so the other line of theories in California cases is if you can just delete the provision and you don't have to rewrite the contract at all,

[00:14:50] Speaker 03:
then it's severable and it's collateral.

[00:14:52] Speaker 03:
Here, you could easily delete section 13.11, for example, and still have a valid arbitration agreement that's bound by AAA rules, which this court has held are perfectly fair and neutral.

[00:15:04] Speaker 03:
And none of the five fairness factors from Armendariz are violated.

[00:15:13] Speaker 03:
I see my time is up unless you have any other questions.

[00:15:17] Speaker 01:
No.

[00:15:17] Speaker 01:
All right.

[00:15:17] Speaker 01:
Thank you.

[00:15:18] Speaker 01:
And unfortunately, we you went through your rebuttal time, but I'll give you a couple of minutes.

[00:15:24] Speaker 03:
Thank you.

[00:15:25] Speaker 02:
Good morning, Your Honor.

[00:15:35] Speaker 02:
I'm Sean Markley.

[00:15:36] Speaker 02:
I represent the plaintiffs below and respondents here on appeal.

[00:15:40] Speaker 02:
We believe the court should affirm for both of the reasons that the lower court found, given the focus on substantive unconscionability.

[00:15:48] Speaker 02:
I'll just go ahead and start there and try to address some other topics if I'm able to.

[00:15:54] Speaker 02:
Let me start with this notice provision.

[00:15:56] Speaker 02:
And I do think that all of these things are related and that we can't necessarily look at them independently.

[00:16:02] Speaker 02:
To Judge Forrest's point, if you start with the premise that

[00:16:06] Speaker 02:
the claims most valuable to franchisees, which are misclassification, employment, and unfair competition claims, are all directly called out in the covered claims section, whereas the claims most important to BIMBO, being intellectual property, proprietary business information, are all reserved for court with the usual rights and remedies, usual statutory periods.

[00:16:29] Speaker 04:
I think the other side, I mean, your friend across the aisle does bring up a reasonable point that

[00:16:34] Speaker 04:
at least the specific performance, it's written to be mutual.

[00:16:37] Speaker 04:
And he says that there is a claim right now that is being brought against BIMBO that's not going through the arbitration process.

[00:16:45] Speaker 04:
So it only goes so far.

[00:16:48] Speaker 02:
Some of the excluded disputes, I think there are five in total.

[00:16:52] Speaker 02:
Three are mutual for specific performance and a few other things, but the two that are non-mutual are very important.

[00:17:00] Speaker 02:
And this is somewhat a recurring issue of businesses basically saying,

[00:17:03] Speaker 02:
I need to protect my IP, so I want my usual rights and remedies.

[00:17:06] Speaker 02:
I want to be in court.

[00:17:07] Speaker 02:
I want the right to appeal and be in front of a panel if the lower court gets it wrong.

[00:17:11] Speaker 02:
These are things you don't have when you go to arbitration and you go through a more abbreviated proceeding.

[00:17:15] Speaker 02:
You don't get full discovery that you'd get under the federal rules and so for, you know, if these guys drive around using

[00:17:22] Speaker 02:
Bimbo's business system, their confidential business information.

[00:17:26] Speaker 02:
If my clients violate that, which is highly important to Bimbo, then we have the normal statute of limitations.

[00:17:32] Speaker 02:
You could bring a four-year claim there.

[00:17:34] Speaker 02:
Same thing for intellectual property.

[00:17:35] Speaker 02:
Those claims usually range two to three years.

[00:17:37] Speaker 02:
They could wait all the time they wanted to.

[00:17:39] Speaker 02:
They'd have all their normal rights and remedies.

[00:17:41] Speaker 02:
And so we think that it's, you know, that colors the waiver and the notice period, especially when you look at BIMBO's franchise disclosure document, they list all of the prior litigation that's been brought against them.

[00:17:55] Speaker 02:
And there's dozens of these misclassification employment claims brought against them.

[00:17:59] Speaker 02:
They specifically call those out to be covered disputes and send those to this 30 to 60 day notice period, which is, you know, especially for workers who are making their livelihood.

[00:18:10] Speaker 02:
I know they're getting a check from Bimbo every single week during the course of their, you know, employment with them and to make them say, I will raise all your issues and basically sue your

[00:18:21] Speaker 02:
current employer who's providing for your family and your livelihood is quite unrealistic.

[00:18:25] Speaker 02:
And I think they know that the reality is they're going to duck out.

[00:18:28] Speaker 02:
A lot of these employment came through that notice requirement.

[00:18:32] Speaker 00:
How does this case compare to the other cases that Mr. Nelson was referring to, that there's three, four carve-outs and they were upheld after the carve-outs?

[00:18:43] Speaker 02:
I think the carve-outs depend on the severity of the clauses and how much overreach is going on.

[00:18:48] Speaker 00:
In some of these other cases, what types of

[00:18:52] Speaker 00:
I guess, what types of provisions were carved out that weren't serious?

[00:19:01] Speaker 02:
So in terms of the carve out, you know, if, for example, if I could see a case where there's, you know, a two year statute of limitations instead of four and, you know, I do want to touch on that point a little bit, but to directly answer your question, I think Judge Battaglia below even said, I couldn't find a single other case that even tried a 30 or 60 day window.

[00:19:18] Speaker 02:
And so these aren't the types of provisions that have been carved out.

[00:19:23] Speaker 00:
And those reference, I think, to a case called, I think, Pereira or something like that, that involved four carve-outs, or are you familiar with that case, and can you distinguish it?

[00:19:31] Speaker 02:
Yes, I'm not sure exactly what substantive provisions were at issue there.

[00:19:35] Speaker 02:
I do know that cases like Limb v. T-Force Logistics, that's the Ninth Circuit case, I believe there were two to three unconscionable provisions in that case, and they upheld the

[00:19:46] Speaker 02:
lower courts determination not to sever under those circumstances and you could also look at the daily own case which held that as few as two unconscionable provisions depending on their severity would support not severing here and so you know I think when you look at

[00:20:02] Speaker 02:
the attempt to force the claims most important to franchisees into an unfair arbitration process that limits a notice period to 30 to 60 days.

[00:20:12] Speaker 02:
And then you look at that.

[00:20:14] Speaker 02:
I mean, the $10,000 liquidated damages clause is one of the worst things I've read in a employment or franchising agreement.

[00:20:19] Speaker 02:
And I've seen many of them to basically, you know, as Jeff Battaglia found, threaten and kind of coerce your workers into avoiding challenging this clause and succeeding on overcoming that.

[00:20:31] Speaker 02:
you know, is pretty abhorrent.

[00:20:34] Speaker 02:
And so I think to, you know, look at heavily truncated statute of limitations, an outright waiver of certain claims like the Paga representative action here would be waived under the agreement at section 13.8.

[00:20:46] Speaker 00:
There are California Supreme Court cases that have approved these, if not limited carve-outs, these carve-outs for IP and related issues.

[00:20:57] Speaker 02:
Yes, I actually and I plan to send the court a letter on this case that the California Supreme Court just issued a case called Ramirez versus charter communications that said a 551 P 3d 520 and the This takes up the exact issue presented here.

[00:21:13] Speaker 02:
They had a one-way carve-out for intellectual property claims and proprietary business information and the California Supreme Court held that

[00:21:21] Speaker 02:
That that lacked mutuality and was in fact unconscionable And so again, I'll send a letter accord the letter on that.

[00:21:28] Speaker 04:
It's a very new case I think it came out about two weeks ago in that case Did they sever or did they just say that the whole arbitration provision was unconscionable?

[00:21:36] Speaker 02:
I think there was three unconscionable clauses at issue there and the The they upheld the decision not to sever and

[00:21:46] Speaker 01:
So your opposing counsel argues that these provisions could have been severed and that California law would support that and presumably they're arguing it was an abuse of discretion for the district court not to sever.

[00:22:04] Speaker 01:
How do you respond to that?

[00:22:06] Speaker 02:
Yes, your honor.

[00:22:07] Speaker 02:
So initially, there is an abuse of discretion standard applied here.

[00:22:10] Speaker 02:
I think the district court, in seeing all the cases before him, likely knows what cases are going to be brought by franchisors and what cases are more likely brought by franchisees.

[00:22:19] Speaker 02:
I think he made a common sense determination on these things and found that at the end of the day, given the mix here of both procedural and substantive uncomfortability, where we do have a

[00:22:30] Speaker 02:
you know, industry-leading franchisor that's $11 billion in revenue every year, and you have, you know, blue-collar workers who are essentially looking for a paycheck that, given that procedural posture, that it's incumbent upon the bimbos of the world to write at least a somewhat fair contract.

[00:22:47] Speaker 02:
And when they don't do that, if we just kind of clean it up for them, we say, oh, the $10,000 liquidated damages or the notice period or the disparity of claims that are in and out of arbitration, if we simply rewrite that for them, you encourage these defendants to overreach time and time again.

[00:23:01] Speaker 02:
And there's good discussion of that in the Lim v. T-Force Logistics case.

[00:23:05] Speaker 02:
That's another Ninth Circuit decision that, again, upheld the lower court's decision not to sever on an abusive discretion standard.

[00:23:17] Speaker 02:
I also want to note that while mutuality is certainly relevant to substantive unconscionability, this is not the only way to prove substantive unconscionability.

[00:23:26] Speaker 02:
You can look at overly harsh terms, and basically, as Armand Dars framed it, this is the California Supreme Court, they said, you know, is arbitration an alternative

[00:23:37] Speaker 02:
forum where you maintain your same rights, your same remedies, your same statutory periods, or is this being used as sort of not just arbitration, but also a waiver of rights clause, a waiver of statutory periods clause.

[00:23:51] Speaker 02:
And when you start to bundle these things in with arbitration, you're not simply sending someone to an alternative, faster, more efficient forum, you're sending them to a less favorable forum that's meant to advantage you.

[00:24:01] Speaker 02:
I think that's exactly what's happened here.

[00:24:11] Speaker 02:
I did want to touch briefly on procedural unconscionability.

[00:24:14] Speaker 02:
I believe Judge Bade had mentioned that there was perhaps a minimal degree here based on the adhesive nature of the contract and the respective bargaining power of the parties, given the kind of franchising and employment context we have here.

[00:24:28] Speaker 02:
So I do agree, of course, with that, that that creates some amount of procedural unconscionability.

[00:24:34] Speaker 02:
But I think there are other enhancing factors here that Judge Battaglia accurately pointed out.

[00:24:40] Speaker 02:
Because we also look at surprise in addition to the bargaining power and adhesion factors and here.

[00:24:47] Speaker 02:
We haven't spent much time on the contract formation issue, but even if we're the court were to disagree with our position on that, at the very least that language is quite confusing to represent to someone that a provision may not be enforceable.

[00:24:58] Speaker 02:
and then to turn around and attempt to enforce that provision, we think that creates additional amounts of surprise here.

[00:25:04] Speaker 02:
This is also a very long, dense legal contract where arbitration does not appear until page 20 out of 34, and there's no special attention or special heading or signature requirement on that that would draw the franchisee's attention to this very important, not just arbitration regime, but waiver of rights regime and waiver of statutory periods regime.

[00:25:25] Speaker 01:
Is that required?

[00:25:27] Speaker 02:
That's a good point.

[00:25:28] Speaker 02:
So I understand their argument on that front that you don't have to.

[00:25:32] Speaker 02:
In other words, you can have an enforceable arbitration agreement that doesn't require a separate signature or a separate acknowledgement, but that doesn't eliminate the fact that that does create some procedural unconscionability that adds more weight to the procedural unconscionability scale.

[00:25:46] Speaker 02:
If you're going to alter the party's rights through an important provision in a contract,

[00:25:51] Speaker 02:
whether that's you don't get your day in court, you don't have your normal statutory periods, your outright waives, certain claims like representative actions, you're going to be threatened with $10,000 in liquidated damages.

[00:26:03] Speaker 02:
If you're going to have a provision like that to not highlight it or to call the franchisee's attention to that specifically, I do believe that increases procedural unconscionability, even though the contract, if it were fair, could still be enforced even in the absence of that.

[00:26:17] Speaker 02:
So I think those are discrete issues there and that does enhance procedural unconscionability.

[00:26:21] Speaker 04:
The mutuality can be part of the consideration for procedural unconscionability.

[00:26:26] Speaker 04:
So I'm just curious, all of the arguments that the parties have made regarding the mutuality or lack of mutuality just for formation purposes.

[00:26:34] Speaker 04:
Do we think about that in terms of the procedural unconscionability?

[00:26:38] Speaker 02:
I've always viewed mutuality as a substantive issue.

[00:26:41] Speaker 02:
I think, procedurally, you look more at how the agreement's presented.

[00:26:45] Speaker 02:
Is it clear?

[00:26:47] Speaker 02:
Is it adhesive?

[00:26:48] Speaker 02:
Is there a discrepancy in bargaining powers?

[00:26:50] Speaker 02:
I think mutuality goes exclusively to substantive unconscionability in my mind.

[00:27:01] Speaker 00:
Going back to Ramirez versus Charter Communications that you mentioned a moment ago, I thought you provided that case in response to a question of whether or not you were familiar with a case that had

[00:27:15] Speaker 00:
found that these types of carve-outs are not permitted.

[00:27:21] Speaker 00:
And I don't see that there's any reference there.

[00:27:23] Speaker 00:
There are four unconscionable provisions in the case that were raised and that the Supreme Court found, in fact, that exist.

[00:27:34] Speaker 00:
And then there was a determination to remand for further proceedings.

[00:27:40] Speaker 00:
Are you familiar with a case that does address this issue head on about these carve outs for IP?

[00:27:55] Speaker 02:
Yeah, so the Armandara's case by the California Supreme Court addresses that, and in that case, they discuss that the burden is on the defendant to provide adequate justifications for those clauses, that it's possible that those can be enforced.

[00:28:08] Speaker 02:
But as Judge Battaglia found here and in the lower court, they provided

[00:28:11] Speaker 02:
no justification, there was no declaration saying here's why we need to do this and here's why IP claims or proprietary business information claims are unique that they cite here on appeal essentially to their own contract which says that.

[00:28:26] Speaker 00:
So Bimbo hasn't presented a case that stands for the proposition that these IP carve-outs are across the board always justified?

[00:28:35] Speaker 02:
I'm not aware of any cases as they're always justified.

[00:28:37] Speaker 02:
My understanding from the Armandara's case, which is a California Supreme Court case- Or usually justified.

[00:28:43] Speaker 02:
I think they can be justified is probably how I would frame it.

[00:28:46] Speaker 02:
And I think here there was a lack of them justifying that.

[00:28:48] Speaker 00:
The lower court, I think here on- And it's fact-dependent on them.

[00:28:53] Speaker 02:
Exactly.

[00:28:53] Speaker 02:
I'm not sure of the ins and outs on the courts of why they've upheld those in certain circumstances.

[00:28:59] Speaker 02:
I think on appeal, they also tried to emphasize that they may need injunctive relief or temporary or I guess fast relief from a court for intellectual property claims or for the proprietary business claims.

[00:29:12] Speaker 02:
I will just note that the carve-outs for those claims don't limit them to injunctive relief.

[00:29:17] Speaker 02:
You don't need to go file a preliminary injunction to get into court for your IP rights.

[00:29:21] Speaker 02:
They could file a garden variety case with no injunctive.

[00:29:24] Speaker 02:
So their excuse of sort of needing a faster response from the court kind of falls flat to me.

[00:29:29] Speaker 02:
Additionally, there are expedited procedures through AAA.

[00:29:33] Speaker 02:
As we had noticed, you can go get a temporary restraining order through an arbitration provider the same way you can in court.

[00:29:38] Speaker 02:
So we feel those justifications fall flat and also weren't even raised in the lower court.

[00:29:43] Speaker 04:
If we were to conclude that only the liquidated damages provision was unlawful, do you agree that that could be severed?

[00:29:52] Speaker 02:
Again, just given the

[00:29:54] Speaker 02:
I guess massive overreach on that provision and the fact that we think Judge Katalia appropriately determined that to not even accept the same $10,000 for yourself as liquidated damages, let alone to force a blue collar worker who makes not a lot of wages, $10,000 is a huge disincentive for them to challenge this provision.

[00:30:17] Speaker 02:
And so I think given the severity of that and the overreach there, I would say that that really colors the rest of this agreement and would be

[00:30:24] Speaker 02:
sufficiently egregious enough, I guess, to not suffer that and to refuse to enforce the agreement.

[00:30:33] Speaker 02:
I see I'm basically out of time here, so thank you.

[00:30:36] Speaker 01:
Thank you.

[00:30:38] Speaker 01:
Mr. Nelson.

[00:30:42] Speaker 03:
Thank you, Your Honor.

[00:30:43] Speaker 03:
I appreciate it.

[00:30:44] Speaker 03:
Just make two points, Your Honor.

[00:30:46] Speaker 03:
First, on the IP carve-outs, we cited several cases that have held that if there is justification in the contract for an IP or trademark carve-out, that it is not unconscionable.

[00:30:58] Speaker 03:
One is this court's case in Tompkins.

[00:31:00] Speaker 03:
Another is the California Supreme Court case in Balthazar.

[00:31:04] Speaker 03:
And another is a Southern District of California case called Smith versus Metadata.

[00:31:08] Speaker 03:
And Your Honor, I'll also point out, Judge Curiel, that your decision in HESA versus SPRINT is another decision

[00:31:15] Speaker 03:
that did the exact same thing as the cases that we cited in our brief.

[00:31:18] Speaker 03:
On the Ramirez case, the carve out was much broader than just IP and trademark.

[00:31:22] Speaker 03:
And I offer to submit supplemental briefs on that case.

[00:31:25] Speaker 03:
The other side has never brought up that case before, but I'm familiar with it and it is a much broader carve out.

[00:31:30] Speaker 03:
And in that case, the court did not affirm the decision not to sever.

[00:31:34] Speaker 03:
In fact, it remanded and said, you applied the wrong severance analysis.

[00:31:39] Speaker 03:
And so my second point, Your Honor, on severance,

[00:31:41] Speaker 03:
is the court here did the same thing.

[00:31:43] Speaker 03:
It abused its discretion because it applied the wrong standard.

[00:31:47] Speaker 03:
It never asked whether the central purpose was illegal.

[00:31:50] Speaker 03:
It never asked whether these provisions are collateral to that central purpose.

[00:31:53] Speaker 03:
In this court's decision in Pau Blanc, it said that all cases deciding severability have to engage with that analysis.

[00:32:00] Speaker 03:
And I think if this court engages in that analysis, it's clear that these provisions are severable here.

[00:32:07] Speaker 03:
So unless your honors have any other questions, I urge this court to reverse.

[00:32:11] Speaker 01:
Thank you very much.

[00:32:12] Speaker 01:
Council, thank you both for your arguments this morning.

[00:32:14] Speaker 01:
They were very helpful.

[00:32:16] Speaker 01:
And this case is submitted.