Connie A. NAGRAMPA, Plaintiff-Appellant, v. MAILCOUPS, INC.; The American Arbitration Association, Defendants-Appellees, 469 F.3d 1257

Opinion by Judge WARDLAW; Partial concurrence and Partial Dissent by Judge CLIFTON; Dissent by Judge O’Scannlain; Dissent by Judge KOZINSKI OPINION WARDLAW, Circuit Judge, with whom Chief Judge SCHROEDER, Judges REINHARDT, THOMAS, GRABER, FISHER, and GOULD join, and with whom Judge CLIFTON joins as to

Part II-A and II-B. The question before us is whether a provision to submit to arbitration in a written franchise agreement is valid and enforceable, therefore requiring the district court to stay proceedings and refer the disputed franchise agreement to arbitration under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16 (2000). In a now-withdrawn opinion, a three-judge panel of our court held that the unconsciona-bility of an arbitration provision contained in the franchise agreement is a question for the arbitrator to decide.

Here, however, the plaintiff did not seek invalidation of the franchise agreement as a whole on grounds of unconscionability; instead she challenged the unconscionability of solely the arbitration provision. Therefore, it was error to hold that consideration of the unconscionability of the arbitration provision was to be determined by the arbitrator.

We review this case en banc to clarify, as the Supreme Court has recently reiterated, that when the crux of the complaint challenges the validity or enforceability of the agreement containing the arbitration provision, then the question of whether the agreement, as a whole, is unconscionable must be referred to the arbitrator. See Buckeye Check Cashing, Inc. v. Cardegna, — U.S. -, 126 S.Ct. 1204, 1209, 163 L.Ed.2d 1038 (2006); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).

When the crux of the complaint is not the invalidity of the contract as a whole, but rather the arbitration provision itself, then the federal courts must decide whether the arbitration provision is invalid and unenforceable under 9 U.S.C. § 2 of the FAA. The federal courts .cannot shirk their statutory obligation to do so simply because controlling substantive state law requires the court to consider, in the course of analyzing the validity of the arbitration provision, the circumstances surrounding the making of the entire agreement. See Buckeye, 126 S.Ct. at 1209-10; Doctor’s Assocs., Inc. v.

Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801. Judge O’Seannlain’s dissent mistakenly argues that holding the arbitration agreement unconscionable based partly on a finding that the franchise agreement is a contract of adhesion — the required California law analysis — is a “ground that directly affects the entire agreement.” Buckeye, 126 S.Ct. at 1208.

Judge O’Scannlain’s dissent fails to recognize a further aspect of California law that provides for striking unconscionable provisions, while leaving the remainder of the agreement intact, valid, and enforceable. One must closely examine Nagram-pa’s complaint and apply California legal principles to understand why striking the arbitration provision does not. affect the validity of. the franchise agreement at issue. Nagrampa asserts six separate causes of action in her (since removed) state complaint, none of which seeks to invalidate the contract as a whole.

Her fifth and sixth causes of action specifically and exclusively challenge the validity of the arbitration provision. Although she argues appropriately under California law that the arbitration provision is procedurally unconscionable based, in part, on its inclusion in a contract of adhesion, Na-grampa does not assert that the entire agreement is unconscionable or invalid; nor does she seek any form of relief from the agreement as a whole. To the contrary, the other four causes of action provide relief only if the franchise agreement is valid and binding upon the parties.

Because § 2 of the FAA provides that arbitration agreements are generally valid and enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract,” we are required to turn to California law to address Na-grampa’s arguments regarding the uncon-scionability of the arbitration provision. California law holds that unconscionable provisions generally are unenforceable. Such unenforceable provisions may, however, be severed from any valid and enforceable provisions, even those also contained within the arbitration provision.

The district court correctly proceeded to an analysis of unconscionability under California law as a defense to enforcement of the arbitration provision included in Nagrampa’s franchise agreement. Because the district court failed to properly apply California law, which has continued to evolve since the district court ruled, we reverse and remand for further proceedings in accordance with this opinion. I In June 1998, Connie Nagrampa received an offering circular from Mail-Coups, Inc.

On August 24, 1998, Na-grampa entered into an agreement with MailCoups to establish and operate a direct mail coupon advertising franchise under Mail Coups’s Super Coups system. The franchise agreement contains a provision requiring the parties to arbitrate, in accordance with the rules of the American Arbitration Association (“AAA”), any dispute that arises out of or relates to the franchise agreement.

The arbitration provision further provides: [T]his clause shall not be construed to limit MailCoups’ right to obtain any provisional remedy, including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoups’ sole subjective judgment, to protect its Service Marks and proprietary information. The decision of the arbitrator shall be binding upon the parties and judgment upon the award may be entered in any court having jurisdiction thereof.

The situs of the arbitration proceedings shall be the regional office of the American Arbitration Association which is located in Boston, Massachusetts. The costs of arbitration shall be borne equally by MailCoups and Franchisee. Each party shall be responsible for the fees and expenses of its respective attorneys and experts. In September 2000, after two years of unprofitable operation of her MailCoups franchise, Nagrampa unilaterally terminated the franchise agreement.

This contract dispute arose in December 2001 when Ma-ilCoups initiated arbitration proceedings by filing a Demand for Arbitration with the AAA, claiming that at the time Na-grampa terminated the agreement, she owed MailCoups in excess of $80,000 in fees. Nagrampa, in turn, charged that rather than making a forty-one percent profit per year, as MailCoups had promised, she incurred over $180,000 in personal debt and had to pay over $400,000 in various fees to MailCoups.

Nagrampa states that the forty-one percent profit figure was orally communicated to her by MailCoups and that this was not a figure that she had calculated herself. Furthermore, in a letter sent to MailCoups on September 22, 2000, Nagrampa agreed to pay only the amount due on the mailings, which would be reduced by unused Advertising Funds and CoolSavings charges. MailCoups’s initial arbitration demand designated Los Angeles, California, as the hearing locale. In a letter dated February 6, 2002, Nagrampa’s attorney objected to the arbitration proceeding.

He clearly stated, “We are not ready or willing to proceed with arbitration.” He also asserted “serious concerns about the validity of the arbitration clause” and disagreed that Nagrampa was “in fact compelled by the alleged clause to arbitrate.” He further objected to the venue selection, requesting that the venue for the arbitration be Contra Costa, California, the county in which Nagrampa operated her MailCoups franchise. He also objected to the arbitration fee clause. Based on those objections, Na-grampa’s counsel refused to file a response to the arbitration.

Following further procedural skirmishes, on September 11, 2002, the AAA case manager notified the parties that the arbitration hearing would take place in Boston, Massachusetts, in accordance with the forum selection clause in the arbitration provision. On October 16, 2002, the arbitrator suggested that arbitration proceed in Fresno, California, as a more cost-efficient and convenient venue. MailCoups vigorously objected to the Fresno venue, and the AAA case manager confirmed that the arbitration would take place in Boston, Massachusetts.

After Nagrampa failed to obtain a fee waiver from the AAA, Na-grampa sent a letter indicating that she would not participate in the arbitration proceedings. Instead, Nagrampa filed this action against MailCoups and AAA in the Superi- or Court of the State of California, Contra Costa County. Because Buckeye instructs that we examine the crux of the complaint to determine whether it is a challenge to the contract as a whole or to the arbitration provision, 126 S.Ct. at 1208, we describe the complaint at length.

The first three causes of action allege common law torts: first, Nagrampa claims relief for intentional misrepresentation; second, she claims relief for negligent misrepresentation; and third, she claims relief for fraud and deceit and suppression of fact. For these three causes of action, Nagrampa prays for damages, costs of suit, legal interest, attorney’s fees, and any other relief the court might deem proper.

The fourth cause of action sets forth allegations that MailCoups violated' the California Franchise Law, and Nagrampa again prays for damages, cost of suit, legal interest, attorney’s fees, and any other relief deemed proper. Nagrampa’s fifth and sixth causes of action specifically challenge the validity and enforceability of the arbitration provision. The fifth cause of action, for violation of the California Consumer Legal Remedies Act, Cal.

Civ.Code §§ 1750-1785, alleges that the arbitration provision is substantially one-sided, does not fall within the reasonable expectations of Na-grampa, and is unduly oppressive, unlawful, unfair, fraudulent, and unconscionable. Nagrampa further alleges that the arbitration provision is contained within a contract of adhesion, that the AAA has a strong incentive to be biased, and that the arbitration provision denies her and other franchisees due process. For this cause of action, Nagrampa prays for damages, costs of suit, legal interest, attorney’s fees, and any other relief that the court might deem proper.

The sixth cause of action, for violation of the California Unfair Competition Law, Cal. Bus. & Prof.Code §§ 17200-17208, alleges that Nagrampa is acting as a private attorney general to contest Mail-Coups’s requirement that its franchisees resolve disputes through arbitration. The relief Nagrampa seeks for the sixth cause of action is that “this court preliminarily and permanently enjoin MailCoups Inc. from unilaterally imposing its Arbitration Provision on plaintiff Connie A. Nagram-pa” and that she be awarded attorney’s fees, costs of suit, and any other relief that the court might deem proper.

Nagrampa nowhere in her complaint seeks to have the franchise agreement as a whole invalidated or declared unenforceable. On January 14, 2003, invoking jurisdiction on the basis of diversity of citizenship, MailCoups removed this action to the United States District Court for the Northern District of California. MailCoups thereafter filed a motion to compel arbitration and dismiss or stay Nagrampa’s action, alternatively seeking transfer to the United States District Court for the District of Massachusetts, which Nagrampa opposed principally upon the ground that the arbitration provision is unconscionable.

Although the choice of law clause in

article 36.17 of the franchise agreement provides that the governing law is that of the State of Massachusetts, both parties have proceeded throughout the district court and on appeal on the assumption that the franchise agreement is governed by California law. As a result, the district court applied California law in determining whether the arbitration provision is unconscionable. We will follow suit because the parties through their course of conduct have waived the provision of the agreement that specifies the application of Massachusetts law.

See 13 Williston on Contracts § 39:27 (4th ed.2005) (stating that parties to a contract impliedly waive a term through a course of conduct clearly manifesting an intention to waive the term). This principle is recognized both in California, Daugherty Co. v. Kimberly-Clark Corp., 14 Cal.App.3d 151, 158, 92 Cal.Rptr. 120 (1971), and in Massachusetts, see Porter v. Harrington, 262 Mass. 203, 159 N.E. 530, 531 (Mass.1928). In ruling on the motion, the district court, quoting Bischoff v.

DirecTV, Inc., 180 F.Supp.2d 1097, 1107 (C.D.Cal.2002), and citing Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801, properly recognized: “On a motion to compel arbitration, a court cannot consider whether the contract as a whole is unconscionable. Instead, a court is limited to considering whether the arbitration clause in the agreement is unconscionable.” Misapplying California law, the district court glossed over the question of whether the arbitration provision is procedurally unconscionable and concluded that procedural unconscionability was not a “dispositive” issue for the motion to compel.

The district court addressed only whether the arbitration provision is substantively unconscionable and found that the arbitration provision is both valid and enforceable and that the contract issues were for the arbitrator to decide. Finally, because it found that the parties had agreed to arbitrate in Boston, Massachusetts, not the district in which the court presides, see 9 U.S.C. § 4, it dismissed the action, permitting MailCoups to move in the District Court for the District of Massachusetts to compel arbitration. Nagrampa timely appealed.

On March 21, 2005, in a now-withdrawn opinion, a three-judge panel of our court affirmed the district court on grounds different from those upon which the district court relied. Nagrampa v. MailCoups, Inc., 401 F.3d 1024 (9th Cir.2005). We now address en banc the validity and enforceability of the arbitration provision in Nagrampa’s franchise agreement. II The validity and scope of an arbitration clause are reviewed de novo. See Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 936 (9th Cir.2001). Whether a party has waived the right to sue by agreeing to arbitrate is reviewed de novo. See Kummetz v.

Tech Mold, Inc., 152 F.3d 1153, 1154 (9th Cir.1998). A dismissal without leave to amend also is reviewed de novo. See Smith v. Pac. Props. & Dev. Corp., 358 F.3d 1097, 1100 (9th Cir.2003), cert. denied, 543 U.S. 869, 125 S.Ct. 106, 160 L.Ed.2d 116 (2004) (noting underlying legal determination requires de novo review). We review for clear error the factual findings underlying the district court’s decision. Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir.1996). A. The arbitrability of a particular dispute is a threshold issue to be decided by the courts. See Howsam v.

Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (“The question whether the parties have submitted a particular dispute to arbitration, ie., the ‘question of arbitrability,’ is ‘an issue for judicial determination [ujnless the par ties clearly and unmistakably provide otherwise.’ ” (alteration in original) (quoting AT & T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986))); John Wiley & Sons, Inc. v.

Livingston, 376 U.S. 543, 547, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964) (“The duty to arbitrate being of contractual origin, a compulsory submission to arbitration cannot precede judicial determination that the ... agreement does in fact create such a duty.”). Under the FAA, arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

In analyzing whether an arbitration agreement is valid and enforceable, “generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2.” Doctor’s Assocs., 517 U.S. at 687, 116 S.Ct. 1652.

In Buckeye, the United States Supreme Court recognized that challenges to arbitration agreements fall into two categories: (1) those “challeng[ing] specifically the validity of the agreement to arbitrate;” and (2) those “challeng[ing] the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” 126 S.Ct. at 1208.

The Court held that “unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.” Id. at 1209. The complaint in Buckeye, unlike Nagrampa’s complaint, did not contain claims that the arbitration provision alone was void and unenforceable, but rather alleged that the arbitration provision was unenforceable because it was contained in an illegal usurious contract which was void ab initio. Id. at 1208.

The opinion by the Florida Court of Appeal describes the claims of the plaintiff class in Buckeye: Appellees do not challenge the validity of the arbitration provision. Rather, they contend that the underlying contract is void ab initio because it is criminally usurious and, therefore, never existed at all. They further argue ... that a trial court must determine the legal validity of the underlying contract before compelling arbitration. Buckeye Check Cashing, Inc. v. Cardegna, 824 So.2d 228, 230 (Fla.Dist.CtApp.2002).

The Supreme Court in Buckeye examined the claims alleged in the complaint to determine the nature of the challenge to the validity of the arbitration agreements under § 2 of the FAA. 126 S.Ct. at 1208. It noted that “[t]he crux of the complaint [was] that the contract as a whole (including its arbitration provision) [was] rendered invalid by the usurious finance charge.” Id.

A conclusion that the agreement was usurious or violated Florida’s public policy necessarily would invalidate the entire contract because “Florida public policy and contract law ... permit no severance] or salvage[ ][of] parts of a contract found illegal and void under Florida law.” Id. at 1209 (internal quotation marks omitted). The Buckeye Court rejected the application of state severability rules, holding that enforceability of the arbitration agreement cannot turn on state public policy and contract law. Id.

The Supreme Court further reasoned, that Pri-ma Paint had established the proposition that, as a matter of substantive federal arbitration law, “an arbitration provision is severable from the remainder of the contract.” Id. The Court concluded that “because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract.” Id.

Thus, the Supreme Court in Buckeye held that the claim that the contract as a whole, including the arbitration provision, was rendered void ab initio by the usurious finance charges, was for the arbitrator to decide. Id. at 1208-09. Similarly, in Prima Paint, the plaintiff did not include a claim challenging the validity of the arbitration provision, but rather alleged that the contract as a whole was fraudulently induced, rendering the arbitration provision unenforceable. 388 U.S. at 398-400, 87 S.Ct. 1801.

The Court in Prima Paint made clear that “no claim ha[d] been advanced by Prima Paint that F & C fraudulently induced it to enter into the agreement to arbitrate ‘(a)ny controversy or claim arising out of or relating to this Agreement, or the breach thereof.’” Id. at 406, 87 S.Ct. 1801 (alteration in original). Because “the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally,” the Court held that the dispute was for the arbitrator to decide. Id. at 404, 87 S.Ct. 1801.

However, the Court also held that challenges specifically to the arbitration agreement were for the court to decide: [T]he federal court is instructed to order arbitration to proceed once it is satisfied that “the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue.” Accordingly, if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the “making” of the agreement to arbitrate — the federal court may proceed to adjudicate it. Id. at 403-04, 87 S.Ct. 1801 (footnotes omitted) (quoting 9 U.S.C. § 4 of the FAA).

On the other hand, the Court in Buckeye noted approvingly that the claims advanced by the plaintiff class in Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), were of the type “challenging] specifically the validity of the agreement to arbitrate,” 126 S.Ct. at 1208, and thus were for the court to decide. The plaintiff class in Southland alleged violation of the disclosure requirements of the California Franchise Investment Law, Cal. Corp.

Code § 31512, arguing that claims brought under the Franchise Investment Law required judicial consideration and, therefore, the arbitration agreement was unenforceable as to such claims. 465 U.S. at 4, 104 S.Ct. 852. The Southland Court held that the claims were arbitra-ble because it “s[aw] nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under State law.” Id. at 11, 104 S.Ct. 852.

The Court concluded that “the defense to arbitration found in the California Franchise Investment Law is not a ground that exists at law or in equity’ for the revocation of any contract’ but merely a ground that exists for the revocation of arbitration provisions in contracts subject to the California Franchise Investment Law.” Id. at 16 n. 11, 104 S.Ct. 852 (quoting 9 U.S.C. § 2 of the FAA).

We must “remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds for the revocation of any contract.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (internal quotation marks omitted). Examining the “crux of the complaint” makes it abundantly clear that Nagram-pa’s challenge goes specifically, and only, to the arbitration clause. Nagrampa’s complaint does not allege a single ground for invalidation of the entire agreement.

To the contrary, the very first request Nagrampa makes in paragraph six of her complaint is that “this court decide that the arbitration requirements unilaterally imposed on its franchisees by MailCoups Inc. are each unlawful, unfair, deceptive and unenforceable, and enjoin MailCoups Inc. from unilaterally imposing these requirements on its franchisees.” The two arbitration-related claims, her fifth and sixth causes of action, seek to invalidate the arbitration agreement only on the basis of unconscionability.

Although Na-grampa makes an allegation in support of her fifth cause of action that the contract is one of adhesion, her contract of adhesion allegation is not a separate cause of action for which Nagrampa seeks independent relief, such as rescission or invalidation of the entire contract. Nor does this allegation, though necessary to establish uncon-scionability of the arbitration provision, serve as a ground that directly affects the entire agreement, unlike the usurious finance ground in Buckeye.

Prevailing on the fifth or sixth cause of action means only that the arbitration provision is not enforceable; there is absolutely no effect, direct or indirect, on the contract as a whole. In addition, forty-one of the forty-eight General Allegations in Nagrampa’s complaint state facts supporting the causes of action challenging arbitration. Although Nagrampa also includes four other causes of action not targeting the arbitration provision, California’s strict pleading requirements and rules restricting the splitting of causes of action provided a strong incentive for her to do so.

Furthermore, the genesis of Nagrampa’s complaint can be found in the arbitration proceedings: Nagrampa filed suit only after MailCoups successfully moved the arbitral venue for the contract claims at issue to Boston and the AAA rejected her petition to waive the arbitral fees. In other words, Nagrampa filed suit only after the very issues rendering the provision unconscionable against her had been resolved. Thus, the crux of Nagrampa’s complaint is a challenge to the arbitration provision itself.

Where, as here, no claim threatens to invalidate or otherwise directly affect the entire contract, the federal court must decide claims attacking the validity of the arbitration provision, even if substantive state law requires an examination of the making of the entire contract as part of that analysis. Our sister circuits also examine the nature of claims to determine whether they are arbitrable. They hold that, where the causes of action or claims within a complaint are, in essence, an effort to invalidate the entire contract, then the federal court will send the dispute to arbitration.

They also hold that where, as here, there are separate and independent claims specifically challenging enforcement of the arbitration provision, then the federal court will proceed to consider the challenge to arbitrability of the dispute. The plaintiff in the First Circuit case, Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 16 (1st Cir.1999), alleged that the arbitration provision contained in the Uniform Application For Securities Industry Registration Or Transfer (“U-4 Form”), a prerequisite to work as a securities broker, was unenforceable because it was adhesive.

The plaintiff did not seek to invalidate the entire U-4 agreement, but rather argued that the arbitration clause was adhesive and invalid because signing the U-4 was a condition of employment and excision of the arbitration provision was not permitted. Id. at 17. The First Circuit did not find it necessary to address whether the plaintiffs contract of adhesion argument was precluded by Prima Paint; to the contrary, it proceeded without comment to consider the contract of adhesion argument in determining whether the plaintiff had satisfied the requirements for uneon-scionability. Id.

The First Circuit ultimately found the arbitration clause enforceable because the plaintiff failed to satisfy the additional requirements for un-conscionability in demonstrating “both a lack of meaningful choice about whether to accept the provision in question, and that the disputed provisions were so onesided as to be oppressive.” Id. (internal quotation marks omitted). Similarly, the Second Circuit considered a plaintiffs claim that the arbitration provisions of the London Metal Exchange Rules were unenforceable because the contracts which incorporated them were contracts of adhesion. David L.

Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245, 249 (2d Cir.1991). Like Nagrampa, the plaintiff there did not seek to invalidate the entire contract on the basis of adhesion but to strike its arbitration clause. Id. The Second Circuit considered the contract of adhesion claim and ultimately rejected it because, “[f]or an arbitration provision to be stricken as a contract of adhesion there must be a showing of unfairness, undue oppression, or uncon-scionability.” Id. (internal quotation marks omitted).

The Third Circuit examined a contract of adhesion allegation while analyzing the procedural unconscionability of an arbitration provision in a wrongful discharge and employment discrimination suit. Alexander v. Anthony Int’l, L.P., 341 F.3d 256, 265 (3d Cir.2003). The complaint filed by the plaintiff class contained five causes of action under Virgin Islands law. Id. at 261.

The plaintiffs alleged that the arbitration provision in the employment agreement was unenforceable as a contract of adhesion presented to them on a “take-it-or-leave-it” basis as a condition of employment, unconscionable, and offensive to public policy by forcing plaintiffs to arbitrate statutory claims. Id. at 261-62. Like Nagrampa, the plaintiffs did not allege that the entire employment contract was an invalid contract of adhesion. Id.

The Third Circuit found that because an “agreement to arbitrate may be unenforceable based on a generally applicable contractual defense, such as unconseionability,” the court had the authority to consider plaintiffs’s arguments that the arbitration provision was invalid. Id. (citing Doctor’s Assoc., 517 U.S. at 687, 116 S.Ct. 1652).

The Third Circuit then proceeded to hold that the arbitration provision was procedurally unconscionable under Virgin Islands law because “[a] multinational corporation presented [the plaintiffs] with an agreement to arbitrate without providing any opportunity to negotiate its terms,” and thus, the agreement was one of adhesion. Id. at 265, 270. The court further ruled that the arbitration provision was substantively unconscionable because it limited the time in which to bring a claim, limited the damages and fees awardable to plaintiffs, and required the losing party to bear the costs of arbitration.

Id. at 266-71. Because unconscionability permeated the agreement to arbitrate, the Third Circuit refused to sever the unconscionable provisions or to enforce the arbitration clause, and remanded the case to the district court for resolution of plaintiffs’s claims.' Id. at 270-72. The Fifth Circuit likewise has considered defenses to arbitration provisions that implicate the entire contract, but has limited its consideration to claims which challenge the enforceability and validity of the arbitration provision. In Washington Mutual Finance Group, LLC v.

Bailey, 364 F.3d 260 (5th Cir.2004), the plaintiffs, who were illiterate, filed suit against Washington Mutual, alleging primarily that they had been sold and charged for insurance that they did not need or want. Id. at 262. In defense to a motion to compel arbitration, plaintiffs claimed that Washington Mutual had fraudulently induced them into entering into the agreements to arbitrate by misrepresenting the nature of the documents that they were signing. Id. at 265.

The district court denied Washington Mutual’s motion to compel arbitration, finding that the arbitration provision was procedurally unconscionable and thus unenforceable. Id. at 268. On appeal, the Fifth Circuit rejected Washington Mutual’s argument that plaintiffs’s fraudulent inducement claim was for an arbitrator to decide under Prima Paint and Primerica Life Insurance Co. v. Brown, 304 F.3d 469, 472 (5th Cir.2002).

The Fifth Circuit explained that in both Prima Paint and Primerica Life Insurance Co., the claims asserted applied to the entire contract and were therefore part of the underlying dispute, whereas, the Washington Mutual plaintiffs’s claim “relates specifically to the arbitration agreement, [and therefore] a federal court may consider the [claim] as it relates to the making and performance of the agreement to arbitrate.” Wash. Mut. Fin. Group, 364 F.3d at 266 n. 4 (internal quotation marks omitted).

The Fifth Circuit ultimately held that the arbitration provision was enforceable, but only because the Washington Mutual plaintiffs had not fulfilled their legal obligation to read the contract or have someone read it to them, and thus could not advance a claim of oral misrepresentation or fraudulent inducement under Mississippi law. Id. at 266. In the Sixth Circuit case, Burden v.

Check Into Cash of Kentucky, LLC, 267 F.3d 483, 486 (6th Cir.2001), the plaintiff class alleged that defendants loaned money at usurious interest rates through a scheme where the defendants would provide cash in exchange for a check written for a higher amount. If the customer did not have sufficient funds to cover the check at the payment date, defendants would permit the borrower to “roll-over” the debt and execute a new loan agreement, paying an additional service fee. Id.

Plaintiffs’s complaint alleged violations of the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601-1667Í, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968, and several consumer protection statutes under Kentucky law. Burden, 267 F.3d at 486. In defense to a motion to compel arbitration, plaintiffs alleged that the arbitration provision'was unenforceable because the initial loan agreements that they had signed did not include an arbitration provision. Id. at 487.

Plaintiffs became aware of the provision, which defendants had added to the reverse side of the “roll-over” loan agreements, only when defendants attached it to their motion to compel. Id. The Sixth Circuit, however, rejected this claim because the “[pjlaintiffs offer[ed] no legal authority for the position that Defendants had a duty to inform them of their insertion of the arbitration clauses.” Id. at 491 n. 2.

Plaintiffs additionally alleged that the arbitration provision was used to further defendants’ overall fraudulent scheme and, alternatively, that the provision would impose burdensome costs on unsophisticated consumers of limited education, deny statutory rights, and constitute an uninformed waiver of jury trial rights. Id. at 491-92. The Sixth Circuit rejected the fraudulent scheme defense to arbitration because “[pjlaintiffs failfed] to identify, in connection with the alleged fraudulent scheme, any misrepresentation particular to the arbitration .agreements, separate from the loan agreements.” Id. at 491.

However, the Sixth Circuit held that the alternative grounds offered by the plaintiffs attacked the enforceability of the arbitration clause itself, separate from the underlying loan agreements, and thus required a remand to the district court to decide in the first instance. Id. at 492-93. The Sixth Circuit employed similar reasoning in Stout v. J.D.

Byrider, 228 F.3d 709, 713-15 (6th Cir.2000), where the plaintiff class alleged that the defendant vehicle sales and leasing company engaged in a standard practice of misrepresenting the quality and value of the used vehicles sold and the cost and value of warranties purchased. Plaintiffs’s complaint alleged Violations of the TILA, the Ohio Consumer Sales Practices Act (“OCSPA”), Ohio Rev. Code § 1345.01, and common law fraud. Stout, 228 F.3d at 713-14. In defense to arbitration, plaintiffs claimed that the arbitration agreements were unconscionable and unenforceable because they were against Ohio public policy.

Id. at 715-16. The Sixth Circuit found that Ohio public policy could not mandate judicial resolution of the claims because there is “nothing in the [FAA] indicating that the broad principle of enforceability is subject to any additional limitations of state law.” Id. at 716 (internal quotation marks omitted). The court further found that plaintiffs’s claims for fraud and for violations of the OCSPA and the TILA arose under the purchase and finance contracts as a whole and, thus, were arbitrable absent a showing under Ohio law that the arbitration provision itself was unconscionable. Id.

However, the Sixth Circuit asserted that had plaintiffs alleged that the contract was one of adhesion, the court could address it. Id. But, “[ijn the absence of any factual evidence that these agreements were entered into fraudulently or mistakenly, and absent any showing by Plaintiffs that the arbitration arrangements are themselves one-sided or unfair,” the plaintiffs’s claims were arbitrable. Id.

The Eighth Circuit has also required federal courts to examine claims made by a party seeking to invalidate an arbitration clause in order to determine whether the claims of invalidity go to the contract as a whole or relate specifically to the arbitration provision. In Madol v. Dan Nelson Automotive Group, 372 F.3d 997, 998 (8th Cir.2004), the plaintiff class alleged that in the course of selling and financing vehicles, defendants had violated Iowa consumer protection statutes and the federal TILA, and committed common-law fraud.

In response to a motion to compel arbitration, plaintiffs argued that the dispute resolution agreement (“DRA”) that they had signed was invalid because the vehicle transactions as a whole were unconscionable. Id. The plaintiffs argued that they were given no choice as to what they signed, and that they were overwhelmed by the sheer magnitude of the paperwork and number of clauses per document. Id.

Unlike Nagrampa, the plaintiffs in Madol made no independent challenges to the DRA itself, and “plaintiffs acknowledged in a hearing before the district court that they were not arguing that the DRA [was] ‘in and of itself invalid,’ but that their theory was that ‘the transactions as a whole from start to finish’ were unconscionable.” Id. at 1000. The Eighth Circuit thus held that “plaintiffs’ arguments that their vehicle purchase transactions were generally unconscionable were subject to resolution by an arbitrator, absent a showing by the plaintiffs that the DRA, standing alone, was invalid.” Id.

The only circuit that appears to be at odds with this approach is the Eleventh. In Jenkins v. First American Cash Advance of Georgia, LLC, 400 F.3d 868, 877 (11th Cir.2005), cert. denied, — U.S.-, 126 S.Ct. 1457, 164 L.Ed.2d 132 (2006), the plaintiffs, like the putative plaintiff classes in Buckeye and Burden, had entered into a series of “payday loans” — small-dollar, short-term loans with high interest rates used to obtain cash advances. Id. at 871.

Each time the plaintiff had obtained a loan, she was required to sign a promissory note and an arbitration agreement that obligated her to submit all disputes between the parties to binding arbitration under the FAA. Id. at 871-72. As in Buckeye, the plaintiff filed a complaint challenging the contract as a whole. Id. at 872-73. The Jenkins plaintiff alleged that the payday loan agreements violated Georgia’s usury statutes, Ga.Code Ann. §§ 7-4-2, 7-4-18 (2004), and that the loans violated the Georgia Racketeer Influenced and Corrupt Organizations Act, Ga.Code Ann. § 16 14 4. Id. at 873.

When the defendants removed the case to federal court and sought to enforce the arbitration agreement, the plaintiff asserted that the FAA did not apply to the loan agreements at issue, that the arbitration agreements were unconscionable, and that the arbitration agreements were unenforceable because the underlying payday loans were illegal and void ab initio under Georgia law. Id. at 873-74.

In assessing the unconscionability of the arbitration provision, the Eleventh Circuit concluded that the plaintiffs contract of adhesion claim challenged the validity of the loan agreements as a whole, not the arbitration agreements specifically. Id. at 877. The “adhesion arguments were (1) that the consumers lacked bargaining power because these type[s] of consumer loans ... would only appeal to extremely desperate consumers, and (2) that the consumers were allegedly unable to negotiate the terms and conditions of the preprinted agreements.” Id. (internal quotation marks omitted and alteration in original).

The Eleventh Circuit applied Prima Paint and Benoay v. Prudential-Bache Securities., Inc., 805 F.2d 1437, 1441 (11th Cir.1986), which holds that if the unconsciona-bility claims “ ‘pertain to the contract as a whole, and not to the arbitration provision alone,’ ” then those claims should be decided by the arbitrator. Jenkins, 400 F.3d at 877 (quoting Benoay, 805 F.2d at 1441) (emphasis added). In Jenkins, the Eleventh Circuit therefore held that “the FAA does not permit a federal court to consider claims alleging the contract as a whole was adhesive.” Jenkins, 400 F.3d at 877.

The Eleventh Circuit may have applied Prima Paint too broadly by requiring that the contract of adhesion claim pertain specifically and exclusively to the arbitration agreement. The Supreme Court has clarified that to decide whether the federal court or the arbitrator will hear the claims, we are to determine whether the crux of the complaint is a challenge to the arbitration clause itself or the validity of the contract as a whole. Buckeye, 126 S.Ct. at 1208-09. The Supreme Court did not require that the claims in the complaint address the arbitration agreement alone. Id.

Judge O’Scannlain’s dissent misconstrues the holdings of our sister circuits. The dissent asserts that the Second Circuit in JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 170 (2d Cir.2004), refused to consider a contract of adhesion claim that did not apply to “the arbitration clause alone.” However, the dissent disregards the significant fact that JLM’s sole challenge to arbitration was that the contract as a whole was one of adhesion. Indeed, JLM did not assert any independent claim specifically directed to the invalidity of the arbitration clause contained in the contract. Id. at 170.

As the Second Circuit itself noted, “[although JLM’s brief is not wholly clear on this point, we understand its argument to be that the [standard form charter contract] as a whole amounts to a contract of adhesion, rather than that the arbitration clause alone so qualifies.” Id. at 169. The Second Circuit further explained that “there is no indication [in JLM’s arguments] that the arbitration clause itself is an unconscionable or oppressive term of adhesion.” Id. at 170 n. 5.

The Second Circuit, distinguished between a claim that the entire contract was invalid as a contract of adhesion, as opposed to a claim that the arbitration clause itself was adhesive. ‘ “For an arbitration provision to be stricken as a contract of adhesion there must be a showing of unfairness, undue oppression, or unconscionability.’ ” Id. (quoting David L. Threlkeld, 923 F.2d at 249).

Here, Nagrampa, unlike JLM, argues that the arbitration provision itself is procedurally and substantively unconscionable because she was unaware of its existence and that it was hidden on page twenty-five of a thirty-page agreement. If Nagrampa, like JLM, had made only a claim that the entire contract was invalid because it was a contract of adhesion, we certainly would agree with our dissenting colleagues that it would be a question for the arbitrator to decide. Nor can Rojas v. TK Communications, Inc., 87 F.3d 745, 749 & n. 3 (5th Cir.1996), bear the weight that Judge O’Scannlain’s dissent assigns to it.

In Rojas, the Fifth Circuit found that the plaintiffs contract of adhesion claim was solely a challenge to the entire contract and not specifically directed to the arbitration clause. Id. at 749 n. 3. While the court acknowledged that Rojas had attacked the arbitration clause in her brief, the Rojas court did not indicate whether she had made a claim challenging the procedural or substantive unconscionability of the arbitration clause itself. Id. Therefore, when the Rojas court held that the claim was for the arbitrator to resolve, it was discussing a claim that challenged the validity of the contract as a whole.

Judge O’Scannlain’s dissent also misreads the Sixth Circuit’s statement in Burden, that “ ‘the grounds for revocation must relate specifically to the arbitration clause and not just to the contract as a whole.’” 267 F.3d at 492-93 (quoting Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938 (4th Cir.1999)). However, the Burden court did not say that the grounds for revocation must relate only to the arbitration clause; it said that the grounds for revocation must be asserted separately as to the arbitration clause “and not just to the contract as a whole.” Id. (emphasis added).

Unlike the plaintiffs’s claims in Burden, Nagrampa’s claims of procedural and substantive unconscionability attack the arbitration provision itself, separate and apart from the underlying contract. Furthermore, the Eighth Circuit holdings in Houlihan v. Offerman & Co., 31 F.3d 692, 695 (8th Cir.1994) and Madol, 372 F.3d at 1000, are consistent with our majority opinion, not with Judge O’Scann-lain’s dissent.

In Houlihan, the plaintiffs’s sole argument was that they had been fraudulently induced to enter into the contract; none of their claims separately and independently challenged the arbitration clause. 31 F.3d at 695. Similarly, in Madol, the claims of invalidity , went only to the contract as a whole, as the plaintiffs themselves acknowledged. 372 F.3d at 1000. We do not construe either Buckeye or Prima Paint to stand for the principle that if plaintiffs challenge an arbitration provision as unenforceable due to unconscionability, they may not include additional contractual or statutory claims in their complaint.

An argument that the arbitration agreement itself is procedurally unconscionable may be informed, as required by California state substantive law, by a determination of whether it is contained within a larger contract of adhesion. If the district court decides that the arbitration provision is unenforceable, then the remaining claims that address the contract as a whole were never properly arbitrable; a claim such as fraud in the inducement would lie within the jurisdiction of the district court.

The district court also has the discretion under federal arbitration law, Buckeye, 126 S.Ct. at 1209, as well as under California law,. Cal. Civ.Code § 1670.5, to sever the unconscionable arbitration provision and enforce the remainder of the contract. If, on the other hand, the district court decides that the arbitration agreement is valid and enforceable, then it should stay or dismiss the action pending arbitration proceedings to allow the arbitrator to decide the remaining claims, including those relating to the contract as a whole.

Finally if, after examining the crux of the complaint, the district court concludes that the challenge is not to the arbitration provision itself but, rather, to the validity of the entire contract, then the issue of the contract’s validity should be considered by an arbitrator in the first instance. Buckeye, 126 S.Ct. at 1208-09. Throughout the course of these proceedings — before the AAA, the district court, and on appeal — Nagrampa has continuously challenged the validity of the arbitration provision separate from any litigation over the entire contract.

Unlike the complaints in Jenkins and Buckeye, Nagrampa’s complaint asserts two causes of action specifically challenging only the arbitration provision. Nagrampa’s first, second, third, and fourth causes of action are claims for relief under the contract and, thus, are not before us. However, Nagrampa’s fifth and sixth causes of action are directed specifically to the arbitration provision, placing these challenges squarely within the category of claims that must be decided by a federal court. Buckeye, 126 S.Ct. at 1208-10.

In addition, Nagrampa, in her appellate brief, further emphasizes the substantively unconscionable aspects, of the arbitration provision, arguing that the arbitration provision is one-sided and that the venue and cost provisions are unfair. While Nagrampa argues that the arbitration provision is procedurally unconscionable because it is contained in a contract of adhesion, nowhere in her complaint does she seek rescission or invalidation of the entire contract based on it being a contract of adhesion.

Therefore, Nagrampa’s contract of adhesion argument may be addressed insofar as it bears on the question of procedural unconscionability of the arbitration provision. B. Before we reach the question of whether the arbitration agreement is unconscionable under California law, we detour to address MailCoups’s argument that Nagrampa “voluntarily participat[ed] in arbitration proceedings ... without objecting to the arbitration” and therefore waived her right to challenge the arbitrability of the dispute. As a factual matter, MailCoups is wrong.

Nagrampa’s counsel’s first act was to object to proceeding with arbitration, stating: “We are not ready or willing to proceed with arbitration.” He also asserted “serious concerns” about the validity of the arbitration provision and his disagreement with the notion that “we are in fact compelled by the alleged clause to arbitrate.” He further specifically objected to the venue and fee provisions, although he left open the possibility of negotiating those issues.

Nagrampa’s “participation” in the arbitration proceedings thereafter was minimal, limited to procedural issues and undertaking certain actions to preserve her rights. Nagrampa’s “participation” consisted of a letter to seek a ninety-day continuance, a letter objecting to the validity of the arbitration provision (specifically its venue and fee clauses), one conference call that resulted in a scheduling order, an unsuccessful attempt to file a counter-demand, that was not accepted when she could not afford to pay the fee demanded by the arbitrator, and one set of discovery requests.

Both the counter-demand and discovery requests were filed to avoid losing her right to do so in the event the venue, fee, and costs issues were amicably resolved before the proceeding reached the merits of the contract dispute. The record clearly demonstrates that only two telephonic preliminary hearing conferences were held, and that Nagrampa was present during only one of the two. On June 20, 2002, the arbitrator scheduled the first conference call for the first week of July 2002. On June 23, 2002, Nagram-pa notified the arbitrator that her attorney would not be available.

On July 2, 2002, the hearing took place in the absence of both Nagrampa and her attorney. Na-grampa was present during a second preliminary conference call held on July 30, 2002. On August 15, 2002, AAA sent Nagram-pa and MailCoups the arbitrator’s scheduling order outlining deadlines that would be “strictly enforced.” The deadline for discovery requests was August 30, 2002, the day on which Nagrampa filed her discovery request. The deadline for filing a counterclaim was August 19, 2002; Na-grampa attempted to file her counterclaim on August 15, 2002.

In the scheduling order, the arbitrator made clear that the parties were “awaiting a final decision with regard to the venue” and that the Notice of Hearing would be issued only once venue had been determined. Thus, Nagram-pa acted reasonably by filing her discovery request and counterclaim to preserve her rights on the chance that AAA and Mail-Coups would relent in their efforts to impose the one-sided and onerous fee, venue and associated costs clauses upon Nagram-pa. Indeed, venue remained an open issue through October 16, 2002.

Although the arbitrator’s August 15, 2002 order noted that a third preliminary conference call was scheduled, there is no evidence that this conference occurred. Thus, Nagram-pa never participated in any proceedings which even touched the merits of the contractual claims that were to be the subject of arbitration. Although Nagrampa withdrew from arbitration in October 2002, she never withdrew her original objections to the arbitration agreement. She elected instead to include them in her state court complaint filed November 12, 2002.

The Supreme Court has defined waiver as the “intentional relinquishment or abandonment of a known right.” United States v. Olano, 507 U.S. 725, 733, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993) (internal quotations omitted). There is no evidence that Na-grampa intentionally relinquished or abandoned her right to object to arbitration. Judge Kozinski attempts to twist Nagram-pa’s limited participation in preliminary matters — while she maintained her-objection to proceeding by way of arbitration at all — into conduct that would constitute a waiver. The evidence simply does not support Judge Kozinski’s conclusion.

Nagrampa’s limited involvement in preliminary matters does not preclude her from challenging arbitrability. The Supreme Court, in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), considered whether an objecting party had consented to arbitration. The plaintiffs “denied that their disagreement ... was arbitrable and filed written objections to that effect with the arbitration panel.” Id. at 941, 115 S.Ct. 1920. After the arbitrator rejected the plaintiffs’s objections, they participated in the arbitration on the merits and lost.

The Court allowed the plaintiffs to challenge arbitrability because “merely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness to arbitrate that issue.” Id. at 946, 115 S.Ct. 1920. Even though the issue in First Options was consent, the reasoning is applicable to waiver because the considerations are essentially the same. Our decision in Textile Unlimited, Inc. v. A..BMH & Co., 240 F.3d 781 (9th Cir.2001), makes it even more clear that Na-grampa did not waive her right to object to arbitration.

In Textile Unlimited, Textile failed to object to arbitration within the time period provided by the AAA, but eventually objected by sending a letter claiming that the arbitration provision was not part of the contract. We held that there was no valid arbitration agreement, and also made clear that “Textile only participated in the arbitration to contest the arbitration itself [and][i]n so doing, Textile did not waive its objection to the arbitration.” Id. at 788. In cases where we have found waiver, the objecting party has participated far more extensively than Nagrampa did before resorting to the courts.

In Nghiem v. NEC Electronic, Inc., 25 F.3d 1437, 1440 (9th Cir.1994), we held that the plaintiff, a terminated employee, could not challenge the authority of the arbitrator because the plaintiff had “initiated the arbitration, attended the hearings with representation, presented evidence, and submitted a closing brief of fifty pages” before filing suit in state court. Similarly, in Fortune, Alsweet & Eldridge, Inc. v.

Daniel, 724 F.2d 1355 (9th Cir.1983) (per curiam), on which Mail-Coups bases its waiver argument, the plaintiff objected to arbitration after attending two hearings on the merits and after his employer had presented all of its evidence. Id. at 1356-57. In Textile Unlimited, we distinguished Fortune on the basis that “the [Fortune ] plaintiff participated in the arbitration proceedings on the merits of the dispute and did not like the final results.” 240 F.3d at 788 (second emphasis added). Similarly, in Ficek v.

Southern Pacific Co., 338 F.2d 655, 656-57 (9th Cir.1964), we held that the claimant, an injured former employee, waived his right to contest arbitrability because he voluntarily participated in arbitration and waited until after an unfavorable decision had been handed down before challenging the authority of the arbitrators. Unlike in the arbitration cases where we have found waiver, Nagrampa forcefully objected to arbitrability at the outset of the dispute, never withdrew that objection, and did not proceed to arbitration on the merits of the contract claim.

Thus, she did not waive her right to challenge the arbitrability of the dispute. C. It is well-established that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable. See Doctor’s Assocs., 517 U.S. at 686-87, 116 S.Ct. 1652. California courts have extended the doctrine of unconscionability to embrace franchise agreements. See Indep. Ass’n of Mailbox Ctr. Owners, Inc. v.

Superior Court, 133 Cal.App.4th 396, 407, 34 Cal.Rptr.3d 659 (2005) (“Franchise agreements are not per se unenforceable, but their provisions can be examined to see if the characteristics of unconscionability are present in part or in whole.”). Because we exercise our diversity jurisdiction to entertain this contract dispute, we must apply California law to determine whether the arbitration provision in the MailCoups contract is unconscionable. See Ferguson v. Countrywide Credit Industries, Inc., 298 F.3d 778, 782-83 (9th Cir.2002); see also Abramson v.

Juniper Networks, Inc., 115 Cal.App.4th 638, 651, 9 Cal.Rptr.3d 422 (2004) (“Employing general contract law principles, [California] courts will refuse to enforce arbitration provisions that are unconscionable or contrary to public policy.” (internal quotation marks omitted)). California courts analyze contract provisions for both procedural and substantive unconscionability. See Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 (2000).

In California, the “prevailing view” is that procedural unconscionability and substantive uncon-scionability need not both be present to the same degree: “ ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation ... in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ ” Id. (quoting 15 Williston on Contracts § 1763A, at 226-27 (3d ed.1972)). “In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Id; see also Mercuro v.

Superior Court, 96 Cal. App.4th 167, 175, 116 Cal.Rptr.2d 671 (2002) (“Given Countrywide’s highly oppressive conduct in securing Mercuro’s consent to its arbitration agreement, he need only make a minimal showing of the agreement’s substantive unconscionability.”). Procedural unconscionability analysis focuses on “ ‘oppression’ or ‘surprise.’ ” Flores v.

Transamerica Home-First, Inc., 93 Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001). “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” Id (citing A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 486, 186 Cal.Rptr.114 (1982)).

An arbitration provision is substantively unconscionable if it is “ ‘overly harsh’ ” or generates “ ‘one-sided’ results.” Armendariz, 24 Cal.4th at 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 (quoting A & M Produce, 135 Cal.App.3d at 486-87, 186 CaLRptr. 114). “[T]he paramount consideration in assessing conscionability is mutuality.” Abramson, 115 Cal.App.4th at 657, 9 Cal.Rptr.3d 422.

California law requires an arbitration agreement to have a “modicum of bilaterality,” see Armendariz, 24 Cal.4th at 117, 99 Cal.Rptr.2d 745, 6 P.3d 669, and arbitration provisions that are “unfairly one-sided” are substantively unconscionable, see Little v. Auto Stiegler, Inc., 29 Cal.4th 1064, 1071, 130 Cal.Rptr.2d 892, 63 P.3d 979 (2003). The district court sidestepped the requisite procedural unconscionability analysis, erroneously finding it “nondispositive.” Instead, it proceeded directly to the substantive analysis.

The district court’s failure to analyze the evidence of procedural unconscionability in proportion to the evidence of substantive unconscionability was error. Because California courts employ a sliding scale in analyzing whether the entire arbitration provision is unconscionable, even if the evidence of procedural unconscionability is slight, strong evidence of substantive unconscionability will tip the scale and render the arbitration provision unconscionable. Armendariz, 24 Cal.4th at 114, 99 Cal.Rptr.2d 745, 6 P.3d 669. 1.

The threshold inquiry in California’s unconscionability analysis is “whether the arbitration agreement is adhesive.” Armendariz, 24 Cal.4th at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669. A contract of adhesion is defined as “a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms.” Flores, 93 Cal.App.4th at 853, 113 Cal.Rptr.2d 376. The California Court of Appeal has held that “[a] finding of a contract of adhesion is essentially a finding of procedural unconscionability.” Id.; see also Circuit City Stores, Inc. v.

Adams, 279 F.3d 889, 893 (9th Cir.2002) (“The DRA is procedurally unconscionable because it is a contract of adhesion: a standard-form contract .... ”); Aral v. EarthLink, Inc., 134 Cal.App.4th 544, 557, 36 Cal.Rptr.3d 229 (2005) (finding “quintessential procedural unconscionability” where “the terms of the [arbitration] agreement were presented on a ‘take it or leave it’ basis ... with no opportunity to opt out”). However, the California courts have also held that though “adhesion contracts often are procedurally oppressive, this is not always the case.” Morris v.

Redwood Empire Bancorp, 128 Cal.App.4th 1305, 1320, 27 Cal.Rptr.3d 797 (2005); see also Dean Witter Reynolds, Inc. v. Superior Court, 211 Cal.App.3d 758, 769, 259 Cal.Rptr. 789 (1989) (“While we recognize significant overlap between the two concepts [adhesion and oppression], we are not prepared to hold that they are identical.”). Under current California law, it is unclear whether a contract of adhesion is inherently oppressive, and therefore automatically procedurally unconscionable, or whether oppression is a separate element that must be present.

However, both standards for procedural unconscionability are satisfied by a finding that the arbitration provision was presented on a take-it- or-leave-it basis and that it was oppressive due to “an inequality of bargaining power that resulted] in no real negotiation and an absence of meaningful choice.” Flores, 93 Cal.App.4th at 853, 113 Cal.Rptr.2d 376. MailCoups concedes that the contract was non-negotiable and that Nagrampa’s only choice was to sign it as written or to opt out.

However, MailCoups argues that there was no oppression because Nagrampa had meaningful choice and bargaining power, specifically the freedom to continue to work for ValPak, her then employer, or to enter into a contract with another direct mail company. In addition, MailCoups posits that there was no surprise because Nagrampa is a sophisticated party who could have read and understood the terms and thus had at least constructive notice.

In addition, Nagrampa signed a declaration under penalty of perjury that she had read the entire Franchise Agreement and accepted and agreed to all of its provisions, including the arbitration provision. Under California law, the critical factor in procedural unconscionability analysis is the manner in which the contract or the disputed clause was presented and negotiated: Procedural unconscionability focuses on the manner in which the disputed clause is presented to the party in the weaker bargaining position.

When the weaker party is presented the clause and told to “take it or leave it” without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present. Szetela v. Discover Bank, 97 Cal.App.4th 1094, 1100, 118 Cal.Rptr.2d 862 (2002); see also Martinez v. Master Prot.

Corp., 118 Cal.App.4th 107, 114, 12 Cal.Rptr.3d 663 (2004) (“An arbitration agreement that is an essential part of a ‘take it or leave it’ employment condition, without more, is procedurally unconscionable.”); Mercuro, 96 Cal.App.4th at 174, 116 Cal.Rptr.2d 671 (“Procedural unconscionability turns on adhesiveness — a set of circumstances in which the weaker or ‘adhering’ party is presented a contract drafted by the stronger party on a take it or leave it basis.”).

California courts have long recognized that franchise agreements have some characteristics of contracts of adhesion because of the “vastly superior bargaining strength” of the franchisor. See Keating v. Superior Court, 31 Cal.3d 584, 593, 183 Cal.Rptr. 360, 645 P.2d 1192 (1982), overruled on other grounds by Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). As the California Court of Appeal stated in Postal Instant Press, Inc. v.

Sealy, 43 Cal.App.4th 1704, 1715-16, 51 Cal.Rptr.2d 365 (1996): Although franchise agreements are commercial contracts they exhibit many of the attributes of consumer contracts. The relationship between franchisor and franchisee is characterized by a prevailing, although not universal, inequality of economic resources between the contracting parties. Franchisees typically, but not always, are small businessmen or businesswomen or people like the Sealys seeking to make the transition from being wage earners and for whom the franchise is their very first business.

Franchisors typically, but not always, are large corporations. The agreements themselves tend to reflect this gross bargaining disparity. Usually they are form contracts the franchisor prepared and offered to franchisees on a take-[it-] or leave-it basis. ... Franchising involves the unequal bargaining power of franchisors and franchisees and therefore carries within itself the seeds of abuse. Before the relationship is established, abuse is threatened by the franchisor’s use of contracts of adhesion presented on a take-it-or-leave-it basis. Internal quotation marks and citations omitted.

Here, Nagrampa was in a substantially weaker bargaining position than Mail-Coups. As reported in the franchise offering circular attached to Nagrampa’s complaint, Advo, MailCoups’s parent company, is a large corporation which in 1997 had $208,553,000 in assets and $1,016,492,000 in revenues. Nagrampa, on the other hand, had a yearly salary of approximately $100,000 and had never owned her own business. As the district court noted, Ma-ilCoups conceded that it presented the contract on a take-it-or-leave-it basis.

Na-grampa’s complaint specifically alleges that she attempted to negotiate the “line-charges” cost calculation to be “lump-sum,” but was rebuffed by MailCoups, who responded only that the base rate “line-charges” would be reduced by “credits.” The California Court of Appeal has rejected the notion that the' availability in the marketplace of substitute employment, goods, or services alone can defeat a claim of procedural unconscionability.

See, e.g., Martinez, 118 Cal.App.4th at 114, 12 Cal.Rptr.3d 663 (finding employment contract adhesive where arbitration agreement was presented as a specific “condition of employment”); Villa Milano Homeowners Ass’n v. IL Davorge, 84 Cal.App.4th 819, 827, 102 Cal.Rptr.2d 1 (2000) (“[I]n a given case, a contract might be adhesive even if the weaker party could reject the terms and go elsewhere.”); Stirlen v.

Supercuts, Inc., 51 Cal.App.4th 1519, 1533-34, 60 Cal.Rptr.2d 138 (1997) (noting that even though sophisticated corporate executive “was not a person desperately seeking employment,” the employment contract was procedurally unconscionable because it was presented on a “take it or leave it basis”). But see Dean Witter, 211 Cal.App.3d at 771, 259 Cal.Rptr. 789 (noting that “even though a contract may be adhesive, the existence of ‘meaningful’ alternatives available to such contracting party in the form of other sources of supply tends to defeat any claim of unconscionability”).

Dean Witter, on which Judge Kozinski’s dissent relies, is factually distinguishable. There, the California Court of Appeal held that the combination of the plaintiffs sophistication and “a meaningful choice of available alternative sources of supply” defeated his claim of procedural unconsciona-bility in a dispute over the assessment of fees on an individual retirement account. Id. at 772, 259 Cal.Rptr. 789. The Dean Witter plaintiff was an investor-attorney who specialized in class action litigation involving financial institutions, and who had a great degree of experience with financial service contracts.

Id. at 762, 259 Cal.Rptr. 789. Whereas Nagrampa, who was a first-time franchise owner and, despite having been a sales manager in the direct marketing industry, apparently had no specialized education or training in the field. Therefore, the potential availability of other franchise opportunities alone does not defeat Nagrampa’s claim of procedural unconscionability. Moreover, the sophistication of a party, alone, cannot defeat a procedural unconscionability claim. See Graham v.

Scissor-Tail, Inc., 28 Cal.3d 807, 818-19, 171 Cal.Rptr; 604, 623 P.2d 165 (1981) (finding procedural unconscionability where successful and prominent music producer Bill' Graham was required by the “realities of his business as a concert promoter to sign [union] form contracts”); A & M Produce Co., 135 Cal.App.3d at 489-90, 186 Cal.Rptr. 114 (commenting that the California Supreme Court is among the many courts that “have begun to recognize that experienced but legally unsophisticated businessmen may be unfairly surprised by unconscionable contract terms”); Nyulassy v.

Lockheed Martin Corp., 120 Cal.App.4th 1267, 1283-84, 16 Cal.Rptr.3d 296 (2004) (finding procedural unconscionability even where employee was represented by a lawyer in settlement negotiations). Nagrampa argues that the element of surprise was present because the contract was adhesive and she was not informed of the existence of the arbitration provision, which appeared on page twenty-five of a thirty-page agreement. See Wheeler v. St. Joseph Hosp., 63 Cal.App.3d 345, 359-60, 133 Cal.Rptr. 775 (1976) (citing Smith v. Westland Life Ins.

Co., 15 Cal.3d 111, 122-23, 123 Cal.Rptr. 649, 539 P.2d 433 (1975)) (“Where the contract is one of adhesion, conspicuousness and clarity of language alone may not be enough to satisfy the requirement of awareness. Where a contractual provision would defeat the ‘strong’ expectation of the weaker party, it may also be necessary to call his attention to the language of the provision.”). However, under California law, surprise need not be demonstrated if the court determines that the arbitration provision of an adhesive contract is oppressive.

See Armendariz, 24 Cal.4th at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669 (“[A] contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or unconscionable.” (internal quotation marks omitted)); Nyulassy, 120 Cal.App.4th at 1281, 16 Cal.Rptr.3d 296 (“ ‘Where an adhesive contract is oppressive, surprise need not be shown.’ ” (quoting Abramson, 115 Cal.App.4th at 656, 9 Cal.Rptr.3d 422)); Mercuro, 96 Cal.App.4th at 174, 116 Cal.Rptr.2d 671 (“[PJrocedural unconseion-ability focuses on the oppressiveness of the stronger party’s conduct.”).

The California Court of Appeal recently extended these principles to a franchise agreement, reversing a trial court’s ruling that the arbitration provisions of the franchise agreements at issue were not unconscionable. Indep. Ass’n of Mailbox Ctr. Owners, 133 Cal.App.4th at 410, 34 Cal.Rptr.3d 659.

The Court of Appeal there held that the trial court’s findings regarding sophistication of the franchisees, alternative business opportunities, and ability of the franchisees to read and understand the terms of the agreement “beg the question of whether the nature of these franchise agreements and the business relationship between the parties fell within accepted criteria for adhesion contracts.” Id. Judge O’Scannlain’s dissent mistakenly asserts that Brookwood v.

Bank of America, 45 Cal.App.4th 1667, 1672, 53 Cal.Rptr.2d 515 (1996), stands for the proposition that MailCoups had no duty to apprise Nagrampa of the existence of the arbitration clause or the costs of arbitration. In Brookwood, the plaintiff did not argue that the arbitration clause was invalid because it was proeedurally or substantively unconscionable, but rather that the arbitration clause should not be enforced because of unilateral mistake. Id. at 1673, 53 Cal.Rptr.2d 515.

The analysis of procedural uneonscionability under California law focuses on the manner in which the contract or the disputed clause was presented and negotiated and the disparity in bargaining power, not on whether the party claiming procedural uneonscionability should have known of the arbitral provision. Therefore, regardless of whether Mail-Coups had a duty to inform Nagrampa of the clause, it remains true that MailCoups had overwhelming bargaining power, drafted the contract, and presented it to Nagrampa on a take-it-or-leave-it basis.

While we acknowledge that the evidence of procedural uneonscionability appears minimal, it is sufficient to require us, under California law, to reach the second prong of the uneonscionability analysis. We therefore next examine the extent of substantive uneonscionability to determine, whether based on the California courts’ sliding scale approach, the arbitration provision is unconscionable. 2.

Nagrampa argues that the arbitration provision is substantively unconscionable because it is “one-sided,” contains unconscionable feersplitting and arbitral forum provisions, and does not counteract the “repeat player effect,” thus failing to ensure an impartial arbitrator. We reject Nagrampa’s contentions that the fee-splitting provision and the “repeat player effect” render the arbitration provision substantively unconscionable. First, the fee-splitting provision is not per ■ se substantively unconscionable under California law.

See Cal.Civ.Proc.Code § 1284.2 (mandating default rule of arbitration that administrative costs be split equally and legal costs be borne individually). However, as discussed infra, to the extent the fee-splitting provision may impede Nagrampa from vindicating statutory rights, it would be unenforceable and illegal under California law as contrary to public policy.. Second, merely raising the “repeat player effect” claim, without presenting more particularized evidence demonstrating impartiality, is insufficient under California law to support an unconsciona-bility finding. See McManus v. CIBC World Mkts.

Corp., 109 Cal.App.4th 76, 94-95, 134 Cal.Rptr.2d 446 (2003) (holding that an arbitration provision was not unconscionable because the plaintiff produced no specific evidence of “repeat player effect” or that the arbitrator would not be impartial, where arbitration rules allowed each party one peremptory challenge and an unlimited number of challenges for cause); Mercuro, 96 Cal.App.4th at 178, 116 Cal.Rptr.2d 671 (“While óur Supreme Court has taken notice of the ‘repeat player effect,’ the court has never declared this factor renders the arbitration agreement unconscionable per se.”); cf.

Sheet Metal Workers Int’l Ass’n v. Kinney Air Conditioning Co., 756 F.2d 742, 746 (9th Cir.1985) (holding that to challenge an arbitral award in a collective bargaining dispute, “[t]he party alleging evident partiality must establish specific facts which indicate improper motives on the part of the [arbitrators]”). Nagrampa has not specifically pointed to evidence of bias on the part of the AAA or its arbitrators. Two other provisions set forth in the arbitration clause, however, exhibit a lack of mutuality supporting a finding of substantive unconscionability.

First, the contract gives MailCoups access to a judicial forum to obtain provisional remedies to protect its intellectual property, while it provides Nagrampa with only the arbitral forum to resolve her claims. Second, the arbitral forum is designated as Boston, Massachusetts, a location considerably more advantageous to MailCoups. Where the party with stronger bargaining power has restricted the weaker party to the arbitral forum, but reserved for itself the ability to seek redress in either an arbitral or judicial forum, California courts have found a lack of mutuality supporting substantive unconscionability.

As the California Supreme Court held in Armendariz, substantive unconsciona-bility may manifest itself in the form of “an agreement requiring arbitration only for the claims of the weaker party but a choice of forums for the claims of the stronger party.” 24 Cal.4th at 119, 99 Cal.Rptr.2d 745, 6 P.3d 669; see also Martinez, 118 Cal.App.4th at 115, 12 Cal.Rptr.3d 663 (holding that an arbitration agreement requiring employees to arbitrate all claims, but reserving the right of employer to obtain injunctive or other equitable relief in a judicial forum for certain causes of action, lacks mutuality). In O’Hare v.

Municipal Resource Consultants, 107 Cal.App.4th 267, 277, 132 Cal.Rptr.2d 116 (2003), the California Court of Appeal was called upon to analyze the unconscionability of an arbitration clause in an employment contract that required the employee to arbitrate all claims against the employer, but expressly permitted the employer to file a lawsuit seeking injunctive and equitable relief against the employee and remained silent as to the employer’s obligation to arbitrate claims.

The Court of Appeal there recognized that “unconscionability turns not only on a one-sided result, but also on an absence of justification for it.” Id. at 273, 132 Cal.Rptr.2d 116 (internal quotation marks omitted). Therefore, the Court of Appeal rejected the ■ employer’s contention that it had a legitimate business justification in the “highly confidential and proprietary nature” of its auditing and consulting work for allowing it, but not the employee, to seek injunctive relief in court. Id. at 277, 132 Cal.Rptr.2d 116.

Citing the California Supreme Court’s Armendariz opinion, the Court of Appeal noted that to constitute a reasonable business justification, the justification must be “ ‘something other than the employer’s desire to maximize its advantage based on the perceived superiority of the judicial forum.’ ” Id. at 277, 132 Cal.Rptr.2d 116 (quoting Armendariz, 24 Cal.4th at 120, 99 Cal.Rptr.2d 745, 6 P.3d 669). Reasoning that the arbitration rules themselves permit such relief, the Court of Appeal held that there was no justification for the one-sided provision. Id. at 278, 132 Cal.Rptr.2d 116.

Because the one-sided clause permeated the entire arbitration provision, the Court of Appeal refused to enforce it on grounds of unconscionability.

Id. at 277-78, 132 Cal.Rptr.2d 116; see also Flores, 93 Cal.App.4th at 854, 113 Cal.Rptr.2d 376 (finding lack of mutuality of remedies where a debtor was forced to arbitrate any controversy arising out of a loan, but the lender could “proceed by judicial or non-judicial foreclosure, by self-help remedies such as setoff, and by in-junctive relief to obtain appointment of a receiver”); Stirlen, 51 Cal.App.4th at 1539-42, 60 Cal.Rptr.2d 138 (finding an arbitration provision unconscionable where employment disputes were required to be submitted to arbitration, but breach of noncompete or confidentiality clause claims could be brought in court).

The MailCoups arbitration provision lacks mutuality.

Like the contract in O’Hare, it requires that Nagrampa submit to arbitration any controversy related to the franchise agreement, “or any breach thereof, including without limitation, any claim that this Agreement or any portion thereof is invalid, illegal or otherwise voidable or void,” while reserving MailCoups’s right to obtain any provisional remedy “including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoups’s sole subjective judgment to protect its Service Marks and proprietary information.” This language, read plainly, means that Mail-Coups could go to court to obtain “any provisional remedy,” even if it related to a claim for breach of contract, as long as the claim also implicated MailCoups’s Service Marks or proprietary information.

Moreover, it is far more likely that Nagrampa— and not MailCoups — would assert claims related to the invalidity or unenforceability of the non-negotiable contract written by MailCoups. Thus, this provision is clearly one-sided, effectively giving MailCoups the right to choose a judicial forum

[…]