James L. Ticknor Janet Ticknor Larry Ticknor Tickco Holding, L.L.C. Ticknor Lodging Corporation v. Choice Hotels International, Inc.

Citations: 265 F.3d 931; 2001 Cal. Daily Op. Serv. 8080; 2001 Daily Journal DAR 9905; 2001 U.S. App. LEXIS 20318; 2001 WL 1044623Docket: 00-35048

Court: Court of Appeals for the Ninth Circuit; September 12, 2001; Federal Appellate Court

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The case involves James L. Ticknor, Janet Ticknor, Larry Ticknor, Tickco Holding, LLC, and Ticknor Lodging Corporation (plaintiffs-appellees) against Choice Hotels International, Inc. (defendant-appellant) regarding the Econo Lodge Franchise Agreement. The Ninth Circuit Court of Appeals reviewed whether the Federal Arbitration Act preempts state law on the unconscionability of adhesion contracts, concluding it does not and affirming the district court's denial of arbitration.

In 1998, Ticknor and his company entered into a Franchise Agreement with Choice to operate a hotel in Bozeman, Montana, providing them with a license to use the Econo Lodge mark in exchange for franchise fees. The agreement included an arbitration clause stipulating that disputes would be settled via binding arbitration under Maryland law, excluding its conflict of laws provisions. A separate Guaranty Agreement signed by Ticknor’s parents and Tickco Holding LLC did not contain arbitration or choice of law clauses but guaranteed performance of the Franchise Agreement obligations.

The parties later signed two addendums drafted by Choice: one reducing potential liquidated damages and another mandating facility improvements while allowing continued motel operations. Ticknor claimed that Choice promised assistance for renovations through its "Signature Exterior Renovation Program."

Disputes arose immediately after the Franchise Agreement was signed, with Choice canceling the "Signature Exterior Renovation Program," which Ticknor claims was a key reason for his agreement. Ticknor also alleged that flaws in Choice's reservation system led to overbookings, prompting him to suspend franchise fee payments. In response, Choice suspended the Franchise Agreement and sought arbitration through the American Arbitration Association (AAA). Ticknor obtained a temporary restraining order from state court to halt arbitration, leading Choice to remove the case to federal court and file a motion to dismiss or compel arbitration. The district court denied Ticknor's restraining order, and Choice later withdrew its arbitration request. Following an evidentiary hearing, the district court denied Choice’s motions. The appeal addresses the court's decision to deny arbitration, with a de novo review of both the order and the interpretation of the arbitration clause. The review emphasizes the federal policy favoring arbitration and the standard for assessing factual findings. The Federal Arbitration Act (FAA) mandates that written arbitration agreements in interstate commerce are valid and enforceable unless legally revocable. The FAA preempts conflicting state laws, although state laws governing general contract validity can still apply. Importantly, state laws cannot specifically target arbitration agreements for invalidation; they must be treated like other contracts.

The federal courts' role is limited to assessing the validity and enforceability of the arbitration clause under § 2 of the Federal Arbitration Act, without evaluating the overall contract's validity. Ticknor has invoked the state law defense of unconscionability against Choice's motion to compel arbitration, necessitating a determination of applicable state law. Federal courts in diversity cases refer to the law of the forum state—in this case, Montana. Montana utilizes the Restatement (Second) of Conflict of Laws § 187(2) to evaluate contractual choice of law provisions, allowing the chosen state's law to apply unless it contradicts a fundamental policy of a state with a materially greater interest in the issue. 

For Montana to override the parties' chosen law of Maryland, it must demonstrate a materially greater interest in the transaction and that Maryland's law contradicts Montana's public policy regarding the arbitration clause's validity. To identify which state has a materially greater interest, Montana considers five factors from Restatement (Second) of Conflict of Laws § 188, including the places of contracting, negotiation, performance, subject matter location, and the parties' domiciles. The district court concluded that Montana has a materially greater interest based on findings that the contract was signed in both states, negotiations occurred in Montana, most obligations were performed there, the motel's location is in Butte, Montana, and the Ticknors reside and work in Montana.

James Ticknor executed a contract while vacationing in Mexico, not in Montana, and he was a Colorado resident at that time. Larry and Janet Ticknor were South Dakota residents, and the motel is located in Bozeman, not Butte. Despite these inaccuracies, the district court's conclusion that Montana has a materially greater interest than Maryland in the transaction remains valid. The contract aimed to govern a motel franchise in Montana, where the motel operates, and where the only in-person meeting with Choice representatives took place. Ticknor has never been to Maryland, which only provided a payment address, lacking any substantial role in the contract's execution.

The second consideration is whether applying Maryland law would conflict with Montana's fundamental public policy. If Maryland law differs from Montana’s, its application would contradict Montana's public policy, which is defined by its legislative and judicial rules. The Montana Supreme Court has expressed resistance to enforcing non-Montana choice of law provisions that contravene public policy, as established in precedent cases. In adhesion contracts, Montana courts will not enforce arbitration clauses that lack mutuality and are excessively favorable to the drafter. Consequently, the district court correctly concluded that Montana law should determine the unconscionability of the arbitration clause.

Federal courts, in diversity actions, aim to closely approximate state law to ensure state rights are upheld without federal bias. They must adhere to the rulings of the state’s highest court and, in the absence of such rulings on an issue, predict how that court would decide. Federal courts rely on existing state law without speculating on potential future changes.

The district court determined that the arbitration provision in the Franchise Agreement is unenforceable under Montana law due to its unconscionable nature, relying on the Montana Supreme Court's decision in Iwen, which invalidated a similar arbitration agreement. According to Iwen, a court must first assess if the contract is a contract of adhesion. If it is, the provision will not be enforced against the weaker party if it is either outside the party's reasonable expectations or, if within those expectations, it is unduly oppressive or against public policy. The district court found the Franchise Agreement to be a contract of adhesion, as it was a standardized form that Ticknor had to accept without negotiation. 

Choice's argument that the presence of two addenda indicated negotiability was rejected; the record showed that the addenda were presented in a "take it or leave it" manner, with no evidence that Ticknor negotiated them. Testimony indicated Ticknor did not request one addendum and was not present during discussions related to the other. Choice's claim of negotiated changes was undermined by the lack of evidence and the fact that the individual who affirmed it had not participated in any negotiations. 

While being a contract of adhesion is not conclusive for unenforceability, the district court found the arbitration clause unconscionable because it imposed binding arbitration on the weaker party while granting the stronger party the right to seek judicial remedies. Montana law does not require that arbitration agreements contain identical rights and obligations; however, the imbalance must not be excessively favorable to the drafter. The court concluded that the arbitration clause was unconscionable due to the significant disparity in the parties' rights.

The arbitration clause in this case permitted Choice to pursue claims against Ticknor in court while obligating Ticknor to submit all claims to binding arbitration at Choice's headquarters in Maryland. This lack of mutual obligation led the Montana Supreme Court, in a similar case (Iwen), to rule the clause unenforceable, deeming it one-sided and favoring the drafter. Choice argued that its initial request for arbitration regarding franchise fees created mutuality, but the enforceability of the clause is determined by its written terms, not subsequent actions. Additionally, Choice's withdrawal of its arbitration request undermined its claim of mutuality.

There is debate about whether Montana law, as interpreted in Iwen, applies solely to consumer contracts or also to commercial transactions between knowledgeable parties. Although some precedents suggest that unconscionability can be assessed in commercial contexts, the Iwen ruling is not limited to consumer agreements and broadly addresses general contract defenses. The Montana Supreme Court has recognized that disparities in bargaining power can indicate unconscionability even in transactions between business professionals.

Consequently, the district court concluded that the Montana Supreme Court would likely find the arbitration provision unenforceable under state law. However, the inquiry extends to whether this interpretation is preempted by the Federal Arbitration Act (FAA). According to the Supreme Court decision in Doctor's Associates, state laws that invalidate arbitration agreements must be general contract defenses applicable to all contracts, not just arbitration provisions. Montana's approach to unconscionability, as detailed in Iwen, aligns with this principle, indicating that its unconscionability standards for arbitration clauses do not conflict with the FAA.

The Supreme Court's ruling in Doctor's Associates necessitates a reevaluation of the Ninth Circuit's previous decisions in Cohen v. Wedbush and Bayma, which stated that state law adhesion contract principles could not prevent arbitration under the Arbitration Act. These decisions are overruled to the extent they conflict with the Supreme Court's directive. The district court's decision to deny the motion to dismiss or compel arbitration is affirmed, as the arbitration clause in the Franchise Agreement is deemed unenforceable based on unconscionability under Montana law, which is not overridden by the Federal Arbitration Act.

In dissent, Circuit Judge Tashima argues that the contract is not an adhesion contract and its arbitration clause is not unconscionable, asserting that it does not contravene Montana's public policy and should be governed by Maryland law. He believes that Maryland law would allow enforcement of the arbitration clause, advocating for a reversal of the district court's decision.

The concept of adhesion, initially identified in insurance contexts, has been extended to other areas, including consumer transactions, where consumers often have no meaningful choice. However, the plaintiffs, Ticknor Lodging Corp., are not considered unsophisticated consumers; they operate multiple hotel properties and have experience in franchise agreements. The plaintiffs willingly chose to affiliate with Econo Lodge, believing it would enhance profitability, demonstrating that they had real alternatives and were not coerced into accepting the arbitration clause. Thus, the contract does not meet the criteria of an adhesion contract.

The document highlights a critical distinction between the case at hand and the precedent set in Iwen, where the plaintiff had no choice but to accept a contract to advertise in the Yellow Pages or forfeit advertising altogether. This scenario illustrates a Hobson's choice, making Iwen less applicable in the current context. It argues that even if the contract is categorized as one of adhesion, it does not automatically imply unconscionability. Unlike Iwen, where the weaker party was confined to arbitration while the stronger party could pursue court remedies, the current contract exhibits mutual obligations to arbitrate any disputes, indicating that it is not one-sided.

The analysis of unconscionability involves two prongs: procedural unconscionability, concerning the formation of the contract, and substantive unconscionability, regarding the terms of the agreement. Following the framework established in Soltani v. West, the document concludes that the contract does not exhibit either form of unconscionability and should be enforceable. 

Furthermore, as the arbitration clause complies with Montana law, it asserts that Maryland law should apply to this dispute, as Maryland courts recognize mutual promises to arbitrate as valid contracts. The mutual exchange of promises to arbitrate confirms the enforceability of the arbitration clause under Maryland law.

The district court's order should be reversed, and the case remanded to grant Choice's motion to compel arbitration. While there are uncertainties regarding the applicability of Montana's rule against one-sided arbitration clauses in adhesion contracts, the dissent accepts the majority's stance for argument's sake. The dissent also questions the majority's claim that Montana has a greater interest in this case, given that none of the parties are based in Montana. Furthermore, the majority's application of the adhesion doctrine to this commercial contract is acknowledged as anomalous. 

The dissent notes that negotiations between Ticknor and a Choice representative occurred in Montana, a finding upheld by the majority. The dissent argues that under the majority's rule, any contract between parties of unequal bargaining power could be deemed a contract of adhesion, which the Montana Supreme Court did not intend. 

Regarding mutuality, the dissent explains that Choice's right to sue for indemnity, trademark enforcement, and collection of moneys does not create unfairness, as Ticknor lacks certain rights that would necessitate arbitration. Indemnification claims typically arise from third-party litigation, making arbitration impractical, and federal court injunctions are necessary for trademark claims. Ticknor cannot pursue monetary claims under the agreement since Choice has no obligations to them. 

The dissent concludes that all of Choice's claims under the agreement must be arbitrated, while any breach by Ticknor unrelated to payments would also be subject to arbitration. Notably, it is Choice that seeks arbitration, while plaintiffs attempt to evade it.