CHAPTER 13: CAPACITY AND LEGALITY 257
does not depend on the factual record developed below, or the pertinent record has been fully developed.”
Cold Mountain
v. Garber,
375 F.3d 884, 891 (9th Cir.2004) (internal quotation marks and citation omitted). Here, we exercise our
discretion and review CCI’s argument under exceptions one and three.
*1287 [10][11] A contract may bind non-parties such as an intended third party beneficiary, an agent, or an assignee.
See Benasra
an example, it is not reasonable to preclude from gainful competition in the comedy club sphere relatives of ex-spouses of the CCI
principals who were not in an agency relationship with those principals. Similarly, the arbitrator did not have authority to enjoin a
non-party grandmother of a CCI partner from opening a restaurant with live stand up comedy performance until the year 2019.
Under California law, the arbitrator lacked the authority to enjoin these non-parties from owning or operating comedy-related
businesses or restaurants.
Moreover, precluding non-party relatives or ex-spouses from opening or operating improv-comedy-related businesses or
restaurants violates CBPC § 16600. CBPC § 16600 provides, in relevant part, that “every contract by which anyone is restrained
from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
Id.
This is a codification of “the general
rule in California [that] covenants not to compete are void.”
Hill Med. Corp. v. Wycoff,
86 Cal.App.4th 895, 901, 103 Cal.Rptr.2d
779 (2001). By restricting*1288 non-party relatives and ex-spouses from engaging in a lawful business, the injunctions, with
CBPC § 16600 and the principle that non-parties generally are not bound in arbitration. Such non-parties can only be restrained to
the extent permitted by Rule 65(d).
C
[13] CCI next contends that the partial arbitration award is irrational because it simultaneously revokes CCI’s license to open
Improv clubs and prevents CCI from opening or operating any other comedy clubs anywhere in the United States until 2019 or the
termination of the Trademark Agreement.
461-62 (8th Cir.2001). This is a view that we adopt.
Under the partial arbitration award, CCI lost its exclusive right to open and operate any new Improv clubs using Improv West’s
license. And because the arbitrator found the § 9.j. covenant not to compete of the Trademark Agreement valid, CCI also lost the
right to open and operate any other new comedy clubs or restaurants under any other license or name anywhere in the contiguous
FN12. The general rule is that if the breach is a material breach, it may give grounds for the non-breaching party to cancel
FN13. “ ‘Termination occurs when either party pursuant to a power created by agreement or law puts an end to the
contract otherwise than for its breach.’ ”
See
Witkin,
Summary of California Law
§ 925 (internal quotation marks omitted).
At the time of arbitration, Improv West had not cancelled, nor had the parties terminated, the contract. In the arbitration Improv
West did not seek to terminate the contract. By the arbitrator’s own award, the arbitrator did not modify the party’s contractual
relationship, including the required payment of royalties, on the seven Improv clubs that CCI had opened or bought and was
caused by improper competition. Because we cannot say that there is no basis in the record for the arbitrator’s decision, we hold
that the arbitrator’s award is not completely irrational.
See NF & M,
524 F.2d at 760.
D
[19] Finally, we address CCI’s claim that the partial arbitration award should be vacated because it is in violation of CBPC § 16600.
CCI argues that the arbitrator’s validation of § 9.j. is in manifest disregard of the law. Improv West counters that after the recent
Supreme Court case,
Hall Street Associates,
— U.S. —-, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008), manifest disregard of the law is
128 S.Ct. at 1404. Instead, it listed several possible readings of the doctrine, including our own.
Id.
(“Or, as some courts have
thought, ‘manifest disregard’ may have been shorthand for § 10(a)(3) or § 10(a)(4), the subsections authorizing vacatur when the
arbitrators were ‘guilty of misconduct’ or ‘exceeded their powers.’ ”) (
citing Kyocera,
341 F.3d at 997). We cannot say that
Hall
Street Associates
is “clearly irreconcilable” with
Kyocera
and thus we are bound by our prior precedent.
See Miller v. Gammie,
335
F.3d 889, 900 (9th Cir.2003) (en banc). Therefore, we conclude that, after
Hall Street Associates,
manifest disregard of the law
Cir.1995).
[20] Under CBPC § 16600, it is well established that broad covenants not to compete are void unless they involve a situation
where “a person sells the goodwill of a business [or] where a partner agrees not to compete in anticipation of dissolution of a
FN14. Because Improv West revoked CCI’s rights to the Improv marks for almost the entire contiguous United States, the
Improv West-CCI licensing relationship has ended except as to the existing Improv clubs. Bearing this in mind, it might be
possible to view § 9.j., with respect to the majority of the United States, functionally as if it were a post-term covenant not
(1975), in which the California Court of Appeal, addressed an in-term “exclusive dealing clause” in a franchise agreement.
Id.
at 6,
124 Cal.Rptr. 678.The exclusive dealing clause provided in part that “during the life of this contract, … [Dayton Time Lock Service,
Inc. (‘DTLS’) ] will not sell or lease any locks, devices or service of any kind in competition with the business of[Silent Watchman
FN15. Similar to
Dayton Time Lock,
the District Court for the Northern District of Illinois in
Great Frame Up Systems, Inc.
v. Jazayeri Enterprises,
789 F.Supp. 253 (N.D.Ill.1992), stated, while interpreting California law on CBPC § 16600, that
California courts support the position “that preventing defendants from competing only during the term of [an] existing
franchise agreement, would not be void.”
Id.
at 255. The court reasoned, however, that the in-term contractual provisions
still cannot prevent a party from engaging in an entire profession, business or trade.
See id.
at 256.
FN16. The covenant not to compete provided that Kelton agreed not to operate any warehouses and Stravinski agreed
not to design or build any warehouses.
Kelton,
138 Cal.App.4th at 945, 41 Cal.Rptr.3d 877.
Dayton Time Lock
and
Kelton
make evident that under CBPC § 16600 an in-term covenant not to compete in a franchise-like
agreement will be void if it “foreclose[s] competition in a substantial share” of a business, trade, or market.
Dayton Time Lock,
52
Cal.App.3d at 6, 124 Cal.Rptr. 678;
Kelton,
138 Cal.App.4th at 948, 41 Cal.Rptr.3d 877. Also, California courts are less willing to
business.
Dayton Time Lock,
52 Cal.App.3d at 6, 124 Cal.Rptr. 678;
see also Gen. Commercial,
126 F.3d at 1134 (reasoning that
a contract cannot place “a substantial segment of the market off limits”).
In ruling on CCI’s motion for reconsideration the arbitrator reasoned as follows:
Dayton Time Lock
… is inapplicable. That case involved an attack on an exclusive dealing contract under the
antitrust laws.
The
cases cited in the portion of the
Dayton
opinion ... involved validity of exclusive dealing contracts under the federal Sherman Act.
Gen. Commercial,
126 F.3d at 1134. Even under the permissive standard with which we view arbitral decisions, the economic
restraint of § 9.j. on competition is too broad to be countenanced in light of the clear prohibition of § 16600, as interpreted by the
California courts. The grounds given by the arbitrator for disregarding
Dayton Time Lock
are fundamentally incorrect.FN17 We hold
that the arbitrator’s ruling that § 9.j. is a valid covenant not to compete ignores CBPC § 16600 and thus is in manifest disregard of
the law. To comply with § 16600, the covenant not to compete must be more narrowly tailored to relate to the areas in which CCI is
FN17. First, the arbitrator reasoned that
Dayton Time Lock
was inapplicable because it involved an assessment of
antitrust laws. However,
Dayton Time Lock
made clear that it was assessing the requirements of CBPC § 16600, and its
plain language applied standards from antitrust cases in aid of its application of § 16600. Second, the arbitrator thought §
16600 was inapplicable because California in the Cartwright Act had a separate antitrust statute distinct from § 16600, but
the arbitrator’s notice of the Cartwright Act does not detract from what
Dayton Time Lock
held in assessing an issue under
614-15, 12 P.2d 990 (1932))). Nationwide CCI may open and operate non-Improv comedy clubs in all those counties where it does
not currently operate an Improv club. However, CCI *1294 may not open or operate any non-Improv clubs in those counties where
it currently owns or operates Improv clubs.
IV
FN18. Improv West contends, without opposition from CCI, that the arbitration section in the Trademark Agreement
entitles it to attorneys’ fees and costs associated with this appeal and the confirmation proceedings of the arbitration
awards. The arbitration agreement does award “costs, including reasonable attorneys fees” to “[t]he prevailing party.” And
we have upheld such an award for a party who successfully confirmed an arbitration award.
See A.G. Edwards & Sons,
Case 13.3
Cal.App. 1 Dist.,2010.
Lhotka v. Geographic Expeditions, Inc.
181 Cal.App.4th 816, 104 Cal.Rptr.3d 844, 10 Cal. Daily Op. Serv. 1434, 2010 Daily Journal
D.A.R. 1689 Court of Appeal, First District, Division 3, California.
the clause in its entirety rather than severing the objectionable provisions and enforcing the remainder. We find neither point is
persuasive, and therefore affirm the order.
BACKGROUND
Jason Lhotka was 37 years old when he died of an altitude-related illness while on a GeoEx expedition up Mount Kilimanjaro with
his mother, plaintiff Sandra Menefee.FN1 GeoEx’s limitation of liability and release form, which both Lhotka and Menefee signed as
FN1. The other plaintiffs and respondents are Elena Lhotka, individually and as executor of the estate, and Nicholas
Lhotka by his guardian ad litem (also Elena Lhotka).
A letter from GeoEx president James Sano that accompanied the limitation of liability and release explained that the form was
(2000) 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669 (
Armendariz
), and on that basis denied the motion. It ruled: “The agreement
at issue is both procedurally and substantively unconscionable…. The Sano letter establishes that the agreement was presented
as a Take It Or Leave It proposition and was also represented to be consistent with industry practice. As a consequence[,] if the
plaintiff and decedent wished to go on this trip, they could do so only on these terms. Unconscionability also permeates the
substantive terms of the agreement to arbitrate. The problematic terms are the limitation on damages, the indemnity of GeoEx, the
(2000) 83 Cal.App.4th 677, 686, 99 Cal.Rptr.2d 809; see
Armendariz, supra,
at p. 97, 99 Cal.Rptr.2d 745, 6 P.3d 669.)
II.
Unconscionability
[5][6][7][8] We turn first to GeoEx’s contention that the court erred when it found the arbitration agreement unconscionable.
Although the issue arises here in a relatively novel setting, the basic legal framework is well established. “ ‘[U]nconscionability has
generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract
FN2. This is the clear import of Sano’s letter and, in any event, it is also the trial court’s interpretation, which we accept
because it is supported by substantial evidence. (
Murphy v. Check ‘N Go of California, Inc., supra,
156 Cal.App.4th at p.
144, 67 Cal.Rptr.3d 120.)
GeoEx also contends its terms were not oppressive, apparently as a matter of law, because Menefee and Lhotka could have
418.) The focus of procedural unconscionability in
Szetela,
rather, was on the manner in which the disputed clause was presented.
Faced with the options of either closing his account or accepting the credit card company’s “take it or leave it” terms, Szetela
established the necessary element of procedural unconscionability despite the fact that he could have simply taken his business
elsewhere. (
Szetela, supra,
at p. 1100, 118 Cal.Rptr.2d 862.)
(1963) 60 Cal.2d 92, 96-97 & fn. 6, 32 Cal.Rptr. 33, 383 P.2d 441; Civ.Code, § 1668.) In this specific context, our courts
consistently hold that recreation does not implicate the public interest, and therefore approve exculpatory provisions required for
participation in recreational activities. (See, e.g.,
Randas v. YMCA of Metropolitan Los Angeles
(1993) 17 Cal.App.4th 158, 161-
162, 21 Cal.Rptr.2d 245 [swim class];
Saenz v. Whitewater Voyages, Inc.
(1990) 226 Cal.App.3d 758, 764, 276 Cal.Rptr. 672 [river
(2007) 151 Cal.App.4th 1224, 1246, 60 Cal.Rptr.3d 631 [dictum that availability of other cable providers defeated claim of
unconscionability].) But we must also consider the other circumstances surrounding the execution of the agreement. GeoEx
presented its limitation of liability and release form as mandatory and unmodifiable, and essentially told plaintiffs that any other
travel provider would impose the same terms. “Oppression arises from an inequality of bargaining power which results in no real
negotiation and an absence of meaningful choice….” (
Crippen v. Central Valley RV Outlet
(2004) 124 Cal.App.4th 1159, 1165, 22
contractor allegedly broke a sewer pipe, causing concrete to infiltrate the plaintiffs’ soil, plumbing and sewer and wreak havoc on
their backyard drainage system. Unfortunately for the Harpers, the arbitration provision in the construction contract limited the
remedies against their contractor to a refund, completion of work, costs of repair or any out-of-pocket loss or property damage-and
then capped any compensation at $2,500 unless the parties agreed otherwise in writing.
In the words of Justice Sills, substantive unconscionability was “so present that it is almost impossible to keep from tripping” over it.
surprisingly, it did not. (
Harper v. Ultimo, supra,
at p. 1407, [7 Cal.Rptr.3d 418].)
The arbitration provision in GeoEx’s release is similarly one-sided as that considered in
Harper.
It guaranteed that plaintiffs could
not possibly obtain anything approaching full recompense for their harm by limiting any recovery they could obtain to the amount
they paid GeoEx for their trip. In addition to a limit on their recovery, plaintiffs, residents of Colorado, were required to mediate and
arbitrate in San Francisco-all but guaranteeing both that GeoEx would never be out more than the amount plaintiffs had paid for
FN3. The requirement that the parties share the cost of mediation does not factor into our analysis that the agreement is
substantively unconscionable. Whether such cost sharing is appropriate depends on a number of issues that we need not
consider. (See
D.C. v. Harvard-Westlake School
(2009) 176 Cal.App.4th 836, 860-864, 98 Cal.Rptr.3d 300.)
FN4. GeoEx is wrong when it claims the trial court erred “in even considering clauses outside the arbitration provision,”
266 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
such as the limitation of liability and indemnification provisions, “etc.” It is unclear which “etc.” provisions GeoEx contends
are “outside” the arbitration clause, but the limitation of liability clause GeoEx specifically identifies appears as subdivision
(d) of the paragraph that requires arbitration, while the indemnification provision that immediately follows it is substantively
statute to refuse to enforce an entire agreement if the agreement is “permeated” by unconscionability. (
Armendariz, supra,
24
Cal.4th at p. 122, 99 Cal.Rptr.2d 745, 6 P.3d 669;
Murphy v. Check ‘N Go of California, Inc., supra,
156 Cal.App.4th at p. 149, 67
Cal.Rptr.3d 120.) An arbitration agreement can be considered permeated by unconscionability if it “contains more than one
unlawful provision…. Such multiple defects indicate a systematic effort to impose arbitration … not simply as an alternative to
litigation, but as an inferior forum that works to the [stronger party’s] advantage.” (
Armendariz, supra,
at p. 124, 99 Cal.Rptr.2d 745,