Franchising: Preemption of State Law

Article excerpt

A divided panel of the 9th Circuit held that a Montana law that makes unconscionable arbitration clauses in adhesion contracts unenforceable is not preempted by the Federal Arbitration Act.

James Ticknor and Ticknor Lodging Corporation executed a pre-printed, standard-form franchise agreement drafted by Choice Hotels pertaining to the use of the Econo-Lodge mark on a hotel in Montana. The agreement called for arbitration of all claims relating to the agreement or the breach thereof. But it reserved judicial remedies for claims by Choice against Ticknor for indemnification, to collect money owed under the agreement, and to enjoin trademark infringement. The arbitration clause called for the substantive law of Maryland to apply without reference to its conflict of law rules. The franchise agreement provided for Maryland law to apply to interpret its terms, including Maryland's conflict of law rules.

After disputes arose, Ticknor ceased to pay the franchise fee. Choice filed a demand for arbitration. Ticknor obtained a temporary restraining order in state court enjoining the arbitration. The case was removed to federal court where Choice unsuccessfully moved to dismiss or to compel arbitration. Choice appealed.

The 9th Circuit upheld the order denying the motion to compel arbitration. First, the court agreed with the district court that under Montana's choice-of-- law rules, Montana had a materially greater interest in the transaction. It also agreed with the lower court's application of Montana law to determine whether the arbitration clause was unconscionable. …