CS Anaheim Hotel Investments LLC v. Choice Hotels International, Inc.

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8 United States District Court

9 Central District of California

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11 CS ANAHEIM HOTEL INVESTMENTS Case № 8:24-cv-02131-ODW (ADSx)

LLC,

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Plaintiff, ORDER GRANTING

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v. DEFENDANT’S MOTION TO

14 COMPEL ARBITRATION [15]

CHOICE HOTELS INTERNATIONAL,

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INC.,

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Defendant.

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18 I. INTRODUCTION

19 Plaintiff CS Anaheim Hotel Investments LLC (“CS Anaheim”) brings this

20 action concerning a franchise dispute against Defendant Choice Hotels International,

21 Inc. (“Choice”). (Compl., ECF No. 1.) Choice now moves to compel arbitration.

22 (Mot. Compel Arb. (“Motion” or “Mot.”), ECF No. 15.) For the reasons below, the

23 Court GRANTS Choice’s Motion.1

24 II. BACKGROUND

25 Choice is a hotel franchisor that owns more than twenty brands and grants hotel

26 franchisees the right to use its brands. (Compl. ¶¶ 33–35.) Curtis Olson, the indirect

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28 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the

matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15.

1 controlling member and sole manager of CS Anaheim, is the owner and CEO of

2 Nexus Companies (“Nexus”). (Id. ¶ 37.) Olson and Nexus executives develop and

3 own hotels operating under franchisor-licensed brands. (Id. ¶¶ 38–39.) On April 15,

4 2016, CS Anaheim and Choice entered into a Franchise Agreement, under which CS

5 Anaheim agreed to and does operate a hotel under Choice’s Cambria hotels & suites

6 brand (the “Hotel”). (Decl. Jeff Gross ISO Mot. (“Gross Decl.”) ¶ 10, Ex. A

7 (“Franchise Agreement” or “FA”), ECF No. 15-1.)

8 Prior to entering into the Franchise Agreement, Choice provided CS Anaheim a

9 Financial Disclosure Document (“FDD”), including an addendum (the “Addendum”)

10 for the State of California. (Decl. Cory W. Alder ISO Opp’n (“Alder Decl.”) ¶ 10,

11 ECF No. 19-2; Gross Decl. ¶ 5, Ex. B at 34–109 (“FDD”), Ex. B at 110–11

12 (“Addendum”), ECF No. 15-1.) The Addendum states, among other things, that

13 “[t]he Franchise Agreement requires venue to be limited in Maryland. This provision

14 may not be enforceable under California law.” (Addendum ¶ 17.4.)

15 Before executing the Franchise Agreement, Olson, Nexus, and its executives

16 conducted “a thorough due diligence process,” including reviewing the FDD and

17 negotiating the terms of the Franchise Agreement. (Alder ¶ 13.) Choice initially

18 presented CS Anaheim “with a standardized form contract, consisting of twenty-eight

19 single-spaced pages,” which ultimately became the Franchise Agreement. (Id. ¶ 29.)

20 Although the parties negotiated deal- and project- specific provisions, (id. ¶ 34; Gross

21 Decl. ¶¶ 8–9), they did not negotiate the arbitration clause, (Alder ¶ 32). According to

22 a Nexus executive, besides “certain deal- or project-specific provisions, the

23 [F]ranchise [A]gremeent was offered on a take it or leave it basis.” (Id. ¶ 35.)

24 The Franchise Agreement has a provision that, excluding certain intellectual

25 property claims, requires arbitration of “any controversy or claim arising out of or

26 relating to th[e] Agreement . . . including any claim that th[e] Agreement or any part

27 of th[e] Agreement or any related agreements is invalid, illegal, or otherwise voidable

28 or void.” (FA § 21.) Such claims must “be sent to final and binding arbitration in the

1 state of Maryland,” and the arbitrator must apply “the substantive laws of Maryland,

2 without reference to its conflict of laws provision.” (Id.) Thus, this arbitration

3 provision includes a delegation clause and a forum selection clause.

4 In December 2019, CS Anaheim opened the Hotel. (Compl. ¶¶ 48–49.) In late

5 2023, CS Anaheim discovered that Choice was not complying with its obligations

6 under the Franchise Agreement. (Id. ¶ 59.) For instance, under the Franchise

7 Agreement, CS Anaheim is required to buy certain products from Choice’s chosen

8 qualified vendors. (Id. ¶¶ 66–67.) Choice represented that it would only limit the

9 number of qualified vendors if such vendors provided franchisees with certain

10 benefits, including volume-discounted pricing. (Id.) However, Choice limits the

11 number of qualified vendors in exchange for kickbacks from those vendors. (Id.

12 ¶ 83.) Qualified vendors pass on the cost of the kickbacks to franchisees, leading to

13 franchisees like CS Anaheim paying above-market prices for goods and services. (Id.

14 ¶¶ 78–83, 86.) Choice’s kickback scheme caused CS Anaheim to spend millions of

15 dollars on goods and services from qualified vendors without the benefit of Choice’s

16 promised volume-discounted pricing. (Id. ¶ 104.) CS Anaheim also alleges that

17 Choice improperly uses system fees that CS Anaheim pays to fund Choice’s own

18 business development activities, when those system fees should have been spent on

19 marketing and advertising. (Id. ¶ 119.) Finally, CS Anaheim claims that Choice has

20 charged fees not previously disclosed and failed to provide adequate systems in

21 violation of the Franchise Agreement. (Id. ¶¶ 134, 143.)

22 Based on these allegations, CS Anaheim brings claims for breach of contract

23 and of the implied covenant of good faith and fair dealing and fraud. (Id. ¶¶ 156–78.)

24 CS Anaheim also seeks declaratory judgment that it may terminate the Franchise

25 Agreement without paying liquidated damages. (Id. ¶¶ 179–84.) Choice now moves

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1 the Court to compel arbitration and stay the case pending completion of arbitration.

2 (Mot.) The Motion is fully briefed. (Opp’n, ECF No. 19; Reply, ECF No. 20.)2

3 III. LEGAL STANDARD

4 The Federal Arbitration Act (“FAA”) is meant to “ensur[e] that private

5 arbitration agreements are enforced according to their terms.” AT&T Mobility LLC v.

6 Concepcion, 563 U.S. 333, 344 (2011) (alteration in original). Section 2 of the FAA

7 creates a policy favoring enforcement, stating that arbitration clauses in contracts

8 “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or

9 in equity for the revocation of any contract.” Cox v. Ocean View Hotel Corp.,

10 533 F.3d 1114, 1119 (9th Cir. 2008) (quoting 9 U.S.C. § 2). Under the FAA, a party

11 to such an agreement may petition an appropriate federal district court to compel

12 arbitration. 9 U.S.C. § 4.

13 The FAA governs a contract dispute relating to an arbitration provision if the

14 contract affects interstate commerce. Allied-Bruce Terminix Cos., Inc. v. Dobson,

15 513 U.S. 265, 273–74 (1995). When it applies, the FAA restricts a court’s arbitration

16 inquiry to two threshold questions: (1) whether there was an agreement to arbitrate

17 between the parties; and (2) whether the agreement covers the dispute. Cox, 533 F.3d

18 at 1119. A delegation provision further limits a court’s review by assigning these

19 gateway questions to an arbitrator. Bielski v. Coinbase, Inc., 87 F.4th 1003, 1009

20 (9th Cir. 2023). If an arbitration agreement contains a delegation provision, a party

21 opposing arbitration must specifically challenge the delegation provision. Rent-A-

22 Center, West, Inc. v. Jackson, 561 U.S. 63, 72 (2010). If the party fails to do so, a

23 court must treat the provision as valid, order arbitration and leave “any challenge to

24 the validity of the Agreement as a whole for the arbitrator.” Id. The FAA “permits

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26 2 Eleven days after Choice filed its Reply and three days after the Court took the matter under

submission, CS Anaheim sought leave to file a sur-reply. (Mot. Sur-Reply, ECF No. 25.) The Court

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denied the request, ruling that “additional briefing [is] unnecessary for decision on the Motion.”

28 (Order Den. Mot. Sur-Reply, ECF No. 27.) As discussed in this Order, the issue CS Anaheim

sought to address—which law the Court should apply, (Mot. Sur-Reply 2)—is not dispositive.

1 agreements to arbitrate to be invalidated by ‘generally applicable contract defenses,

2 such as fraud, duress, or unconscionability,’ but not by defenses that apply only to

3 arbitration or that derive their meaning from the fact that an agreement to arbitrate is

4 at issue.” Concepcion, 563 U.S. at 339.

5 IV. DISCUSSION

6 Based on the Franchise Agreement’s arbitration and delegation provisions, (FA

7 § 21), Choice asks the court to compel arbitration and stay the case. (Mot.). CS

8 Anaheim does not contest that the Franchise Agreement contains arbitration and

9 delegation provisions. (See Opp’n.) Instead, CS Anaheim argues that these

10 provisions are unenforceable because the forum selection clause is unenforceable, the

11 delegation clause is unconscionable, and the arbitration clause in its entirety is

12 unconscionable. (Opp’n 5–26.) Before turning to these arguments, the Court first

13 considers the parties’ disagreement as to what state’s law to apply.

14 A. Choice of Law

15 As a threshold issue, the parties argue over which law the Court must apply.

16 Choice contends that the Franchise Agreement calls for the Court to apply Maryland

17 law. (Opp’n 9 n.4; see FA § 20.f (“The Agreement . . . will be interpreted under the

18 substantive laws of Maryland, not including its conflict of laws provisions or such

19 provisions of any other jurisdiction . . . .”).) CS Anaheim argues that this choice-of-

20 law provision is unenforceable and the Court must apply California law.3

21 In its opposition brief, CS Anaheim does not cite any Maryland law or contest

22 that if Maryland law governed, the Court must compel arbitration. (See Opp’n.) In

23 fact, CS Anaheim admits that it “did not address why the arbitration clause is

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25 3 In opposing Choice’s argument for Maryland law, CS Anaheim does not specifically reference the

choice-of-law provision in section 20 of the Franchise Agreement. (See Opp’n.) Rather, CS

26 Anaheim argues against the choice-of-law provision in section 21, the arbitration provision, which

requires the arbitrator to apply Maryland law. (Id. at 23–25.) However, CS Anaheim’s arguments

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apply equally to both choice-of-law provisions, in sections 20 and 21. As CS Anaheim cites only

28 California law, the Court construes CS Anaheim as arguing which law the Court should apply to the

Motion.

1 unenforceable under Maryland law.” (Mot. Sur-Reply ¶ 1.) CS Anaheim only argues

2 that the delegation and arbitration clauses are unenforceable under California law.

3 (See Opp’n; Mot. Sur-Reply.) Therefore, if Maryland law applies, the Court must

4 compel arbitration here. See Shakur v. Schriro, 514 F.3d 878, 892 (9th Cir. 2008)

5 (holding that opposing party waives arguments by not raising them in an opposition);

6 Lloyd v. Niceta, 255 Md. App. 663, 686 (2022), aff’d, 485 Md. 422 (2023) (“The

7 burden of establishing [unconscionability] is on the party challenging the . . .

8 agreement.” (second alteration in original)). As the Court determines that the

9 Franchise Agreement’s delegation clause is also enforceable under California law, the

10 Court need not resolve the parties’ dispute over which law applies. Either way, the

11 outcome is the same—CS Anaheim must arbitrate its claims against Choice.

12 B. Mutuality

13 CS Anaheim argues that the Court cannot compel arbitration because the

14 arbitration clause is unenforceable for lack of mutuality. (Opp’n 8–11.) The

15 Franchise Agreement states that applicable claims “will be sent to final and binding

16 arbitration in the state of Maryland.” (FA § 21.) CS Anaheim acknowledges this, (see

17 Opp’n 8), but argues that the parties did not mutually agree to a Maryland forum

18 because the Addendum warns that the forum selection “provision may not be

19 enforceable under California law,” (Addendum ¶ 17.4; see Opp’n 8–9). CS Anaheim

20 contends that this lack of mutuality as to the forum selection clause extends to the

21 arbitration clause as a whole, including the delegation clause. (Opp’n 9–11.) That the

22 lack of mutuality over the forum invalidates the delegation clause is essential to CS

23 Anaheim’s argument because, as discussed above, if the delegation clause is

24 enforceable, the Court must compel arbitration without addressing the enforceability

25 of the Franchise Agreement’s other terms. See Rent-A-Center, 561 U.S. at 72.

26 CS Anaheim relies primarily on three cases for its argument.

27 First, in Laxmi, the franchise agreement circular required under California law

28 disclosed, “The [f]ranchise [a]greement also requires binding arbitration. The

1 arbitration will occur in Oklahoma County, State of Oklahoma . . . This provision may

2 not be enforceable under California law.” Laxmi Invs., LLC v. Golf USA, 193 F.3d

3 1095, 1096 (9th Cir. 1999) (third alteration in original). The franchise agreement

4 itself stated that all arbitration must be done in Oklahoma. Id. Because of the

5 franchisor’s warning in the circular that the forum selection provision “may not be

6 enforceable under California law,” the Ninth Circuit concluded that the parties did not

7 have a meeting of the minds that the arbitration take place in Oklahoma and remanded

8 to the district court to compel arbitration in California. Id. at 1096, 1098.

9 Next, nearly a decade later, in Winter, the California Court of Appeal examined

10 a nearly identical franchise agreement circular, which stated, “The franchise

11 agreement requires binding arbitration. The arbitration will occur at Dallas County,

12 Texas with the costs being borne by the losing party. This provision may not be

13 enforceable under California law.” Winter v. Window Fashions Pros., Inc., 166 Cal.

14 App. 4th 943, 946 (2008). There, the court extended Laxmi’s holding and found no

15 mutual assent as to the entire arbitration clause, not just the forum selection clause.

16 Id. at 950–51.

17 Last, more than a decade after Winter, in an unpublished opinion of a divided

18 panel, the Ninth Circuit in Nygaard rejected a defendant’s argument that a lack of

19 mutual assent as to the forum meant that only the forum selection clause was

20 unenforceable, and that the lack of mutual assent did not reach the entire arbitration

21 provision. Nygaard v. Prop. Damage Appraisers, Inc. (Nygaard II), 779 F. App’x

22 474, 476 (9th Cir. 2019). In ruling that the parties’ absence of mutual assent as to the

23 forum selection clause invalidated the entire arbitration clause, the Ninth Circuit held

24 that it was bound by Winter. Nygaard II, 779 F. App’x 474 at 476.

25 However, the Addendum in this case differs in a critical way to the circulars in

26 Laxmi, Winter, and Nygaard. In those cases, the relevant clause in the circular

27 explicitly referenced arbitration. See Laxmi, 193 F.3d at 1096 (“The Franchise

28 Agreement also requires binding arbitration. The arbitration will occur in Oklahoma

1 County, State of Oklahoma . . . This provision may not be enforceable under

2 California law.” (emphasis added)); Winter, 166 Cal. App. 4th at 946 (“The franchise

3 agreement requires binding arbitration. The arbitration will occur at Dallas County,

4 Texas with the costs being borne by the losing party. This provision may not be

5 enforceable under California law.” (emphasis added)); Nygaard v. Prop. Damage

6 Appraisers, Inc. (Nygaard I), No. 16-cv-02184-VC, 2017 WL 8793228, at *2

7 (E.D. Cal. Dec. 28, 2017), aff’d, 779 F. App’x 474 (9th Cir. 2019) (“[1] The

8 Agreement requires binding arbitration. [2] The arbitration will occur . . . in Fort

9 Worth, Texas, before a sole arbitrator . . . [3] This provision may not be enforceable

10 under California law.” (number alterations in original) (emphasis added)). As the

11 district court in Nygaard I held, where the disclosure explicitly referenced arbitration,

12 “the best reading of th[e] paragraph is one in which ‘[t]his provision’ refers to the

13 arbitration provision in its entirety, not merely one aspect of it.” 2017 WL 8793228,

14 at *2 (alteration in original).

15 Here, in contrast to CS Anaheim’s cases, the disclosure about enforceability of

16 the forum selection provision does not even mention arbitration. Rather, the

17 Addendum states, “The Franchise Agreement requires venue to be limited to

18 Maryland. This provision may not be enforceable under California law.” (Addendum

19 ¶ 17.4.) Unlike in Laxmi, Winter, and Nygaard, there can be no ambiguity that the

20 Addendum’s “[t]his provision” refers to the forum selection requirement only, and not

21 the entire arbitration provision. See Streedharan v. Stanley Indus. & Auto., LLC

22 (Streedharan I), 630 F. Supp. 3d 1244, 1266–67 (C.D. Cal. 2022) (distinguishing

23 Winter and Nygaard on similar basis), rev’d on other grounds, No. 22-55999,

24 2023 WL 9067587 (9th Cir. Jan. 4, 2023).4 Therefore, even if the parties did not

25 mutually agree to the selected forum, they did mutually assent to the remainder of the

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4 In an unpublished opinion, the Ninth Circuit affirmed Streedharan I’s finding of mutual assent as

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to the arbitration clause on other grounds. Streedharan v. Stanley Indus. & Auto., LLC (Streedharan

28 II), No. 22-55999, 2023 WL 9067587, at *1 (9th Cir. Jan. 4, 2023). Under Streedharan II’s

alternative reasoning, the result would be the same—the parties assented to the arbitration clause.

1 arbitration provision. Accordingly, to the extent the forum selection clause is not

2 enforceable, it does not invalidate the remainder of the arbitration provision.5

3 CS Anaheim argues that this Court should invalidate the entire arbitration

4 clause because to do otherwise would be “at odds with” Salinas v. Cornwell Quality

5 Tools Co., No. 5:19-cv-02275-JGB (SPx), 2020 WL 4258788 (C.D. Cal. Mar. 20,

6 2020). (Opp’n 10.) But that case concerned a disclosure similar to the ones in Laxmi,

7 Winter, and Nygaard, not like the one here. See Salinas, 2020 WL 4258788, at *3

8 (“The Franchise Agreement requires binding arbitration. The arbitration will occur at

9 the location that you and Cornwell agree, or, in the absence of any agreement, in

10 Akron, Ohio. . . . This provision may not be enforceable under California law.”

11 (emphasis added)). Therefore, Salinas does not conflict with the Court’s conclusion

12 above, that any lack of mutuality as to the forum does not extend to the arbitration

13 clause as a whole.

14 Accordingly, the Court finds that even if the forum selection provision is

15 unenforceable, it does not invalidate the entire arbitration clause.

16 C. Unconscionability

17 Choice argues the Court must compel arbitration because the Franchise

18 Agreement contains a delegation clause that delegates the question of arbitrability to

19 the arbitrator in the first instance. (Mot. 15–17.) CS Anaheim does not contest the

20 presence of the delegation clause and instead contends the delegation clause is

21 unenforceable as it is unconscionable. (Opp’n 5–7.)

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5 While not necessary to its analysis, the Court notes that section 20.a of the Franchise Agreement

24 contains a severability clause that sates:

25 If any section of this Agreement is held to be illegal, invalid or unenforceable, both

parties agree that (i) the section will be removed; (ii) this Agreement will be

26 understood and enforced as if the illegal, invalid, or unenforceable section had never

been in this Agreement; and (iii) the remaining sections will remain in full force and

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effect and will not be affected by the illegal, invalid, or unenforceable section or by

28 its removal. A section similar to the removed section will be automatically added as a

part of this Agreement to the maximum extent enforceable.

1 “Because a court must enforce an agreement that, as here, clearly and

2 unmistakably delegates arbitrability questions to the arbitrator, the only remaining

3 question is whether the particular agreement to delegate arbitrability . . . is itself

4 unconscionable.” Brennan v. Opus Bank, 796 F.3d 1125, 1132 (9th Cir. 2015). In

5 such circumstances, a party challenging the enforceability of the delegation provision

6 must specifically argue that the delegation clause itself is unenforceable, as opposed to

7 the arbitration provision as a whole. Rent-A-Center, 561 U.S. at 71. CS Anaheim

8 challenges the delegation clause in particular. (Opp’n 5–7.) Therefore, because CS

9 Anaheim “specifically challenges the delegation provision,” the Court “must consider

10 the challenge before ordering compliance.” Bielski, 87 F.4th at 1009. “[C]onsidering

11 the delegation provision in context,” the Court “evaluate[s] whether it is

12 unconscionable.” Id. at 1013.

13 Under California law, “[u]nconscionability has both a procedural and a

14 substantive element.” Ramirez v. Charter Commc’ns, Inc., 16 Cal. 5th 478, 492

15 (2024). Procedural unconscionability “addresses the circumstances of contract

16 negotiation and formation, focusing on oppression or surprise due to unequal

17 bargaining power.” Id. (quoting Pinnacle Museum Tower Ass’n v. Pinnacle Mkt. Dev.,

18 LLC, 55 Cal. 4th 223, 246 (2012)). Substantive unconscionability focuses on whether

19 the contract’s terms are “unfair” or “one-sided.” Id. at 493. “Both procedural and

20 substantive elements must be present to conclude a term is unconscionable, but these

21 required elements need not be present to the same degree.” Id. Instead, “[c]ourts

22 apply a sliding scale analysis under which ‘the more substantively oppressive [a] term,

23 the less evidence of procedural unconscionability is required to come to the

24 conclusion that the term is unenforceable, and vice versa.’” Id. (second alteration in

25 original) (quoting Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83,

26 114 (2000)). “The ultimate issue in every case is whether the terms of the contract are

27 sufficiently unfair, in view of all relevant circumstances, that a court should withhold

28 enforcement.” Id. at 495 (quoting Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237, 1245

1 (2016)). “The party resisting enforcement of an arbitration agreement has the burden

2 to establish unconscionability.” Id. at 492.

3 CS Anaheim argues that the delegation clause is procedurally unconscionable

4 because Choice offered the clause on a take-it-or-leave-it basis. (Opp’n 6.) “Where a

5 franchise agreement is a contract of adhesion, courts have found “minimal procedural

6 unconscionability.” Smith v. Paul Green Sch. of Rock Music Franchising, LLC,

7 No. 08-cv-00888-DDP (MANx), 2008 WL 2037721, at *3 (C.D. Cal. May 5, 2008);

8 see Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006) (noting that

9 defendant had “overwhelming bargaining power, drafted the contract, and presented it

10 to [plaintiff] on a take-it-or-leave-it basis” amounted to only minimal evidence of

11 procedural unconscionability). Therefore, even if the Franchise Agreement is an

12 adhesion contract, there would be, at most, minimal procedural unconscionability.

13 The Court need not reach this issue because, as discussed below, CS Anaheim fails to

14 show the delegation clause is substantively unconscionable. See Ramirez, 16 Cal. 5th

15 at 492 (“Both procedural and substantive elements must be present to conclude a term

16 is unconscionable . . . .”).

17 CS Anaheim asserts that the delegation clause is substantively unconscionable

18 for two reasons: (1) there was no “meeting of the minds as to venue,” so the parties

19 “have not agreed on what arbitrator will decide” arbitrability, and (2) “the arbitrator is

20 precluded from applying California unconscionability standards.” (Opp’n 6.)

21 As to the first issue, the Court has already concluded that, even if there was no

22 meeting of the minds as to forum, that does not invalidate the arbitration provision.

23 Further, if the forum selection clause is unenforceable, then it is not part of the

24 Franchise Agreement and should not be considered in determining whether the

25 delegation clause is unconscionable. See Marin Storage & Trucking, Inc. v. Benco

26 Contracting & Eng’g, Inc., 89 Cal. App. 4th 1042, 1049 (2001) (explaining that there

27 can be no unconscionability defense if there was no mutual assent because a finding of

28 unconscionability “presupposes an existing contract”). Accordingly, CS Anaheim’s

1 argument that the delegation clause is unconscionable due to lack of mutual assent as

2 to the forum fails.

3 As to the second argument, CS Anaheim contends the delegation clause is

4 unconscionable because it prohibits the arbitrator from applying California

5 unconscionability standards. (Opp’n 6–7.) In support, CS Anaheim relies on the

6 California Court of Appeal’s decision in Pinela v. Neiman Marcus Group, Inc.,

7 238 Cal. App. 4th 227 (2015), which concerned claims California employees brought

8 against their employer. (Id.) There, the arbitration agreement had a delegation clause

9 that delegated questions of the agreement’s enforceability to the arbitrator. Pinela,

10 238 Cal. App. 4th at 240. It also had a choice of law provision that provided:

11 This Agreement shall be construed, governed by, and enforced in

accordance with the laws of the State of Texas (except where specifically

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stated otherwise herein), except that for claims or defenses arising under

13 federal law, the arbitrator shall follow the substantive law as set forth by

14 the United States Supreme Court and the United States Court of Appeals

for the Fifth Circuit. The arbitrator does not have the authority to

15 enlarge, add to, subtract from, disregard, or . . . otherwise alter the

16 parties’ rights under such laws, except to the extent set forth herein. The

parties recognize that [Neiman Marcus Group] operates in many states in

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interstate commerce. Therefore, it is acknowledged and agreed that the

18 Federal Arbitration Act, 9 U.S.C. § 1, et seq., shall govern this

Agreement and the arbitration.

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20 Id. at 243–44 (first alteration in original). In holding that the delegation provision was

21 substantively unconscionable, the Pinela court found that the agreement’s choice of

22 law provision did not allow the arbitrator to “(1) apply California law to determine

23 whether the Agreement is unconscionable, or even (2) limit the application of the

24 choice of law provision to the extent necessary to prevent substantial injustice, as

25 California law would require.” Id. at 248.

26 CS Anaheim argues that the Franchise Agreement has the same problem as the

27 agreement in Pinela. (Opp’n 6–7.) But the Franchise Agreement’s choice of law

28 clause is nothing like the one in Pinela and does not prevent an arbitrator from

1 applying California unconscionability law. In Pinela, in finding the clause

2 unconscionable, the court relied on the language of the agreement that “states the

3 arbitrator would not have authority to alter the rights the parties have under Texas

4 law.” Pinela, 238 Cal. App. 4th at 248. This language is absent from the Franchise

5 Agreement. (See FA.) The Court joins other courts that have declined to expand

6 Pinela outside of its context; CS Anaheim “is free to argue in arbitration that

7 California law applies and renders the choice-of-law or any other provision

8 unconscionable.” Rodrigue v. Ctr. for the Advancement of Sci. in Space, Inc.,

9 No. 5:22-cv-00485-SB (KKx), 2022 WL 3012214, at *4 (C.D. Cal. May 10, 2022);

10 see e.g., Gountoumas v. Giaran, Inc., No. 18-cv-07720-JFW (PJWx), 2018 WL

11 6930761, at *9 (C.D. Cal. Nov. 21, 2018) (“[A]s this Court would be required to do if

12 [p]laintiff’s claims remained in this Court, the arbitrator will be required to conduct

13 the choice-of-law analysis.”); Wainwright v. Melaleuca, No. 2:19-cv-02330-JAM-DB,

14 2020 WL 417546, at *6 (E.D. Cal. Jan. 24, 2020), aff’d, 844 F. App’x 958 (9th Cir.

15 2021) (explaining that Pinela’s choice-of-law provision “materially differs from the

16 one at issue here,” because the Pinela agreement “not only set forth a choice-of-law,

17 but also prohibited the arbitrator from finding that choice unenforceable”).

18 Accordingly, CS Anaheim’s argument that the delegation clause is unconscionable

19 because the arbitrator cannot apply California unconscionability laws fails.

20 CS Anaheim fails to show substantive unconscionability, so, as noted, the Court

21 need not consider CS Anaheim’s arguments as to procedural unconscionability. See

22 Ramirez, 16 Cal. 5th at 492. As the delegation clause is enforceable, the

23 enforceability of the arbitration provision is a question for the arbitrator. See Fli-Lo

24 Falcon, LLC v. Amazon.com, Inc., 97 F.4th 1190, 1201 (9th Cir. 2024) (rejecting

25 challenge to delegation provision and leaving remaining unconscionability challenges

26 to the arbitrator). Accordingly, the Court compels arbitration.

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1 Vv. CONCLUSION

2 For the forgoing reasons the Court GRANTS Choice’s Motion to Compel

3 || Arbitration. (ECF No. 15.) The parties are hereby COMPELLED to arbitrate the

4|| clams CS Anaheim asserts in the Complaint. This action is stayed pending

5 || completion of the arbitration.

6 Starting on August 15, 2025, and by the fifteenth of the month every

7 || three (3) months thereafter, the parties shall file a Joint Status Report informing the

8 | Court of the status of arbitration. Furthermore, the parties shall file a Joint Status

9 || Report no later than ten (10) days following the conclusion of arbitration.

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11 IT IS SO ORDERED.

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13 May 9, 2025

spare ae

15 Gil: Yip

16 OTIS D. WRIGHT, II

4 UNITED STATES DISTRICT JUDGE

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