Opinion
B329181
09-24-2024
THOMAS ANDERSON, Plaintiff and Respondent, v. THRIVE SOCIAL EQUITY MANAGER VII, LLC et al., Defendants and Appellants.
Allen Matkins Leck Gamble Mallory & Natsis, Scott J. Leipzig and Rachel M. Sanders for Defendants and Appellants. Dapeer, Rosenbilt & Litvak, William Litvak, Eric P. Markus, and Aria Guilani for Plaintiff and Respondent.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County. No. 22STCV29432 Barbara Marie Scheper, Judge. Affirmed.
Allen Matkins Leck Gamble Mallory & Natsis, Scott J. Leipzig and Rachel M. Sanders for Defendants and Appellants.
Dapeer, Rosenbilt & Litvak, William Litvak, Eric P. Markus, and Aria Guilani for Plaintiff and Respondent.
ASHMANN-GERST J.
Following a breakdown in their business relationship, plaintiff and respondent Thomas Anderson (Anderson) filed this action against defendants and appellants Thrive Social Equity Manager VII, LLC (Thrive Manager); Thrive Social Equity Management, LLC; Secured Holdings I, LLC (Secured Holdings); Kyle Suffolk (Suffolk); and Charles Kimble Cannon (Cannon) (collectively appellants). Appellants moved to compel arbitration. The trial court denied the motion, finding the alleged agreements illegal and unconscionable. Appellants appeal.
We agree that the parties' agreements are unconscionable and thus unenforceable. Accordingly, we affirm.
FACTUAL BACKGROUND
I. General Regulatory Background
In 2017, the City of Los Angeles (the City) established the Social Equity Cannabis Program (the Program). (L.A. Ord. No. 185343.) The Program aims to "promot[e] equitable ownership and employment opportunities in the [c]annabis industry[,]" "decrease disparities in life outcomes for marginalized communities[,]" and "address disproportionate impacts of [c]annabis prohibition in adversely-impacted and lower income communities." (Ibid.)
To that end, the Program provides preferential commercial cannabis licenses (licenses), funding, and other benefits to aspiring cannabis retailers from low-income communities that were negatively or disproportionately impacted by cannabis criminalization. (L.A. Mun. Code, § 104.20(a)(1) [eligibility requirements], (f) [benefits].)
All further references are to the Los Angeles Municipal Code unless otherwise indicated. Section 104.20 refers to section 30 of Ordinance No. 186703, which amended section 104.20 effective July 10, 2020. Section 104.21 refers to section 31 of that Ordinance, which was amended effective the same day.
Eligible participants (applicants) may apply for a license from the City's Department of Cannabis Regulations (DCR). (§ 104.20(c)(4).) A license may be held by a person other than the applicant (licensee). (See § 104.20(a)(2)(i) [distinguishing between an applicant and a person to whom the license is issued].) For example, an applicant may obtain a license for the corporate entity under which his cannabis business will be organized.
Additionally, an applicant or licensee may hire an outside management company to run the operations of the cannabis business, in accordance with applicable regulations. (§ 104.21(e).)
II. Anderson Goes into Business with Appellants
Thrive Manager serves as a management company for applicants and/or licensees under the Program. Cannon and Suffolk are both members, managers, or agents of Thrive Manager; Cannon is an attorney and cannabis law expert, and Suffolk is a real estate salesman.
Thrive Social Equity Management, LLC is the managing member of Thrive Manager.
In July 2019, Anderson responded to an internet advertisement claiming that appellants could help applicants obtain licenses through the Program.
On July 22, 2019, Cannon e-mailed Anderson and informed him that appellants could "do all the hard work" to secure Anderson a license, "including pledging funds to build out the [cannabis] store and operate it." "In exchange," appellants would "get a long term contract to manage the license and get an option to buy part of the license in the future," although Anderson would be "guaranteed to get both an ownership interest and a cut of the profits of at least 1/3 of the license, and in some cases as much as 51%."
Cannon asked Anderson to provide documentation to establish his eligibility for the Program. On July 27, 2019, he urged Anderson to provide the documents as soon as possible, telling him that "[t]his is a once in a lifetime opportunity and if we win you are highly likely to make a great deal of money, as is our business group frankly, but the deadline is" in two days. Cannon did not explain the origin of this deadline.
The following day, Anderson delivered the requested documents. Cannon told Anderson that appellants would "make [Anderson] wealthy" if he did business with them. Suffolk echoed this sentiment.
III. The First Set of Contracts and License Application
At 6:41 p.m. on August 30, 2019, appellants' representative, Priya Singh Saluja (Saluja), e-mailed Anderson a timeline for their business arrangement. She would e-mail Anderson two contracts later that night, and he would have to sign both by "end of day" on September 1. On September 3, Anderson would apply for a license from the Program, which Cannon and Suffolk had said would only consider applications from the first 100 applicants.
Saluja did not send the first contract, a management agreement totaling 41 pages, until 12:00 noon on August 31, 2019. That night, Anderson sent Saluja an e-mail with questions about several provisions. In response, Cannon called and told Anderson not to worry because the terms of the agreement had been approved by the DCR. He also stressed that "due to the pressing time concerns," the parties would have to "re-do the contracts after [Anderson] submitt[ed] [his] application" for a license "so as not to miss the application deadline." Cannon made "some small changes" to the management agreement and e-mailed Anderson "a slightly revised version" at 11:15 p.m. that night.
On September 2, 2019, Anderson signed both the management agreement and a seven-page operating agreement. These contracts established that Anderson would be the sole member of a company called Hempki LLC (Hempki), which would hold any license obtained by Anderson and be comprehensively managed by Thrive Manager.
Hempki was registered with the state one week earlier; its articles of organization identify Cannon as the organizer and Suffolk as its designated agent for service of process.
On September 3, 2019, Anderson met with Cannon and Suffolk to electronically submit his application to the Program. The application software malfunctioned, delaying the filing process. Accordingly, Cannon and Suffolk told Anderson that he was not one of the first 100 applicants that day and would not receive a license. Neither Cannon nor Suffolk responded to subsequent messages from Anderson.
A few months after this incident, Cannon unilaterally cancelled Hempki's registration as a limited liability company without informing Anderson. Cannon reorganized and reregistered the business shortly after reconnecting with Anderson.
IV. The Amended Agreements
A. Anderson is pressured into signing amended agreements
In June 2020, Cannon called Anderson and told him that his application was being reconsidered and that the Program would likely issue him a license. Anderson met with Cannon and Suffolk the next day; they "urged [him] to act fast to move forward with the licensing process, saying we should 'get this done so we can make a lot of money.'" Anderson reluctantly agreed.
In July 2020, Cannon and Suffolk prevailed upon Anderson to transfer a 49 percent ownership interest in Hempki to Secured Holdings, a holding company controlled by Cannon and Suffolk. Cannon and Suffolk also instructed Anderson to sign an amended operating agreement (the Amended Operating Agreement) and an amended management agreement (the Amended Management Agreement) (collectively the Agreements). Anderson quickly signed the Agreements "under Cannon and Suffolk's pressure and the extreme time constraints they presented to" him.
B. Basic structure of the operative agreements, including the arbitration provisions
As is relevant to the issues raised in this appeal, the Amended Operating Agreement provides that Anderson, as the manager of Hempki, would apply for a license which Hempki would hold and maintain. It also specifies that one of Hempki's principal purposes was to "engage" Thrive Manager "to manage any commercial cannabis [business] associated with the [l]icense."
The Amended Management Agreement followed through with that obligation; Hempki hired Thrive Manager to provide comprehensive management services for a term of 15 years, with an automatic renewal for another 15 years if neither party terminated the agreement.
Both of the Agreements contain substantially similar arbitration clauses, which each provides that "[a]ny claim or controversy arising out of or in any way relating to th[ese] Agreement[s] or any breach thereof between the Parties will be submitted to final and binding arbitration ...." (Capitalization omitted.)
V. The Business Relationship Ends
In the summer of 2021, Anderson consulted with "an individual with experience in the commercial cannabis industry[,]" who advised that various provisions in the Agreements "guaranteed [that Anderson] would receive very little, if any, money" from the cannabis business and effectively "stripped [Anderson] of any control at all over the way the business would be run[.]" The expert further opined that Anderson "would almost certainly lose his ownership interest in the business because Cannon and Suffolk had characterized any money they invested in the business as a loan that would have to [be] repaid with interest, and the business would likely fail because it would never be able to make the required loan payments[.]" Shocked, Anderson "cut off any further contact with" appellants.
Appellants eventually became frustrated with Anderson's "refus[al] to respond to [their] inquiries . . . about issues relevant to the license application[.]" Appellants concluded they were "at risk of not being able to move forward with the application process, and [could] entirely los[e] out on the ability to obtain a license" from the Program. Appellants also learned that Anderson had changed Hempki's electronic credentials to access the Program's Web portal, effectively blocking appellants from "managing or obtaining any information about Hempki's license application."
PROCEDURAL BACKGROUND
I. Initial Demand for Arbitration
On July 1, 2022, Thrive Manager and Secure Holdings filed an arbitration demand against Anderson to resolve their disputes under the Agreements. Anderson filed an answering statement and counterclaim. Among other things, he argued that "[b]oth the [d]emand and . . . [c]ounterclaim should not be arbitrated because each of the Parties' purported agreements is illegal and violates public policy . . . [and is] also substantively and procedurally unconscionable[.]" Anderson insisted that "[t]he question of the legality and conscionability of a contract are judicial questions appropriately determined by courts, not arbitrators."
II. The Instant Lawsuit
A. The Complaint
In September 2022, while the demand for arbitration was pending, Anderson brought this lawsuit. He filed the operative first amended complaint. The FAC alleges eight claims against appellants: (1) violation of the provisions of the Los Angeles Municipal Code governing the Program; (2) declaratory relief that the Agreements are void and unenforceable; (3) injunctive relief staying arbitration and rescinding the Agreements; (4) breach of fiduciary duty; (5) fraud; (6) promissory estoppel; (7) breach of written and oral contracts; and (8) unlawful and unfair business practices.
B. Appellants' Motion to Compel Arbitration
In response, appellants moved to compel arbitration per the arbitration clauses in the Agreements. Anderson opposed the motion, arguing that the Agreements were both illegal and unconscionable.
In April 2023, the matter proceeded to a hearing. After hearing argument from both parties, the trial court denied appellants' motion to compel arbitration.
The appellate record does not contain a reporter's transcript of this or any other hearing.
The trial court ruled that the Agreements were illegal. Specifically, it found that several provisions in the Agreements violate section 104.20(a)(2), which requires an applicant to maintain a certain degree of ownership and control over the business. The court further determined that "[b]ecause the central purposes of the [Agreements] are tainted with illegality, the contracts cannot be enforced, including their arbitration and severability provisions."
Alternatively, the trial court "f[ound] that the Agreements are unenforceable due to unconscionability." The court explained that "[t]he circumstances surrounding the formation of the [A]greements support a finding of procedural unconscionability, given the unequal bargaining power between the parties and the presence of oppression and surprise." Additionally, "[t]he terms of the [A]greements also evidence substantive unconscionability[,]" not only because they violate the Los Angeles Municipal Code, but also because "the arbitration [clauses] preclude recovery of punitive damages, though [Anderson] may be entitled to recover such damages for his tort claims against" appellants.
C. Appeal
Appellants timely appealed.
DISCUSSION
I. Standards of Review
When no evidentiary conflict exists, we review de novo an order denying a motion to compel arbitration. (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126 (OTO).) A trial court's determination of whether a contract is unenforceable because of illegality is a question of law that we review de novo. (McIntosh v. Mills (2004) 121 Cal.App.4th 333, 343.) To the extent the determination of unconscionability turns on the resolution of conflicting evidence or on factual inferences to be drawn from the evidence, we consider the evidence in the light most favorable to the trial court's ruling and review the trial court's factual findings for substantial evidence. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 892.)
II. Relevant Law
The party seeking to compel arbitration bears the burden of proving that a valid agreement to arbitrate exists. If that burden is met, the party opposing arbitration must prove a defense to the enforcement of the agreement. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236 (Pinnacle).)
If a contract is illegal or unconscionable, a court may decline to enforce the entire contract. (Agam v. Gavra (2015) 236 Cal.App.4th 91, 112 ["[I]llegal contracts are not enforceable"]; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 ["If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract ...."])
A. Unconscionability
1. Relevant law
Unconscionability is a distinct concept from illegality. "A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party." (OTO, supra, 8 Cal.5th at p. 125.) Unconscionability has both procedural and substantive elements. (Ibid.)
The procedural element of unconscionability focuses on how the contract was formed. (Pinnacle, supra, 55 Cal.4th at p. 246.) The "analysis 'begins with an inquiry into whether the contract is one of adhesion.' [Citation.] An adhesive contract is standardized, generally on a preprinted form, and offered by the party with superior bargaining power 'on a take-it-or-leave-it basis.'" (OTO, supra, 8 Cal.5th at p. 126.) If a contract is adhesive, "[t]he pertinent question . . . is whether circumstances of the contract's formation created such oppression or surprise that closer scrutiny of its overall fairness is required." (Ibid.)
Stated differently, "[p]rocedural 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. To put it another way, procedural unconscionability focuses on the oppressiveness of the stronger party's conduct." (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174, fn. omitted.)
The substantive element of unconscionability "examines the fairness of a contract's terms." (OTO, supra, 8 Cal.5th at p. 129.) It "is concerned not with 'a simple old-fashioned bad bargain' [citation], but with terms that are 'unreasonably favorable to the more powerful party' [citation]." (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145 (Sonic).) "'[T]he paramount consideration in assessing [substantive] conscionability is mutuality.'" (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1281.)
We evaluate procedural and substantive unconscionability on a sliding scale. Both elements must be present, but the greater the degree of one type of unconscionability, the less of the other type is required to establish overall unconscionability. (OTO, supra, 8 Cal.5th at pp. 125-126.)
2. The Agreements are procedurally unconscionable
Applying these legal principles, we readily conclude that the circumstances under which Anderson signed the Agreements were highly oppressive. Anderson, who had no experience in the cannabis industry, was in a substantially weaker bargaining position than appellants, who were experts. (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329 (Kinney) ["an inequality of bargaining power of the parties to the contract" indicates oppressiveness].)
And appellants consistently pressured Anderson to sign contracts quickly, with little time for review or meaningful negotiation. (Kinney, supra, 70 Cal.App.4th at p. 1329.) When Anderson expressed concern about the terms of the original management agreement, appellants did not explain the contract or attempt to negotiate with Anderson. Instead, Cannon rebuffed Anderson's concerns, telling him not to worry about the individual terms because they would have to "re-do" the contracts later anyway. After making minor edits to the agreement, appellants pressured Anderson to sign it so that they would not miss the Program's application deadline two days later.
Appellants argue that any pressure Anderson felt was externally generated by the Program's "extremely quick turnaround times (meaning that all parties faced the same . . . pressure)." The record suggests otherwise. Of the multiple times that appellants pressured Anderson into quickly signing a contract, only one-the original managing agreement-was demonstrably motivated by a specific Program deadline. Every other time, Cannon and Suffolk pushed Anderson to move quickly without explaining what deadline they were all rushing to meet.
Even in the case of the original managing agreement, the pressure to sign fast seems to have been generated by appellants rather than by the Program's upcoming application window. Although Anderson delivered eligibility documents to appellants on July 28, 2019, they did not send him the first agreement until after 12:00 noon on the day before their proposed signing deadline. Appellants cannot explain why, despite having over a month to enter into the necessary contracts with Anderson, they did not begin that process until just three days before a vital Program deadline.
Absent a reasonable justification, these types of delays permit the inference that appellants rushed Anderson into signing the Agreements, artificially generating a sense of time pressure to avoid giving him adequate time to review the Agreements or to seek competent advice about them. The "absence of real negotiation or a meaningful choice on the part of the weaker party" is a textbook indication of procedural unconscionability. (Kinney, supra, 70 Cal.App.4th at p. 1329.)
Appellants raise three additional arguments against our conclusion. First, they contend that the disparity in bargaining power between the parties cannot be an indication of unconscionability because the Program specifically anticipates inexperienced applicants entering into management agreements with experienced professionals. If such arrangements were always procedurally unconscionable, appellants claim that "almost every license awarded under the [Program] would be in jeopardy."
Appellants overstate the point. Even if these types of agreements are always marked by a slight degree of procedural unconscionability, that would not automatically void all such agreements. Unless an inequality in bargaining power exists alongside other strong indicators of procedural or substantive unconscionability, as here, it generally will not render a contract unenforceable. (OTO, supra, 8 Cal.5th at pp. 125-126.)
Second, appellants insist that the Agreements are not procedurally unconscionable because Anderson read them, and, in one case, asked questions before signing. But "[w]hen a contract is oppressive," as here, the weaker party's "awareness of its terms does not preclude a finding of procedural unconscionability." (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 663.)
Lastly, appellants speculate that Anderson has received a better offer from another management company and is only attacking the Agreements because he now "believes that he made a bad bargain[,]" which is not an adequate basis to void a contract. (See Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 911 (Sanchez); Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1245.) Appellants' conjecture, which is unsupported by the record, is unpersuasive in light of the multiple indicia of procedural unconscionability described above.
3. The Agreements are substantively unconscionable
Notwithstanding appellants' argument that "nothing in the[] Agreements [is] so one-sided and unfair that they shock the conscience," we also conclude that the Agreements are substantively unconscionable. There are at least five major provisions in the Agreements that create a high degree of substantive unconscionability.
i. Restrictions on alienability
The Agreements substantially restrict Anderson's rights to sell his interest in Hempki. The Amended Management Agreement entitles Thrive Manager to refuse a transfer to any buyer who does not agree to be bound by the agreement's terms. Alternatively, if Anderson seeks to transfer control of Hempki after the first 10 years of the Amended Management Agreement's term, Thrive Manager can, at its sole discretion, elect to demand a termination fee in the amount of $100,000 multiplied by the number of months left in the contract. Hempki will also be required to pay any outstanding debt to Thrive Manager in full before transferring control to a buyer.
Even if Anderson finds a buyer willing to comply with these terms, Thrive Manager retains for itself a right of first refusal to purchase the license and the business' other assets for a predetermined price "[if] at any point it becomes legally permissible" for a management company to own either the license or the business.
The Amended Operating Agreement independently restricts Anderson's alienability rights, prohibiting him from resigning or transferring his interest in Hempki unless he secures the consent of minority stakeholder Secured Holdings.
These provisions increase Thrive Manager and Secured Holdings' control over Hempki at the expense of Anderson's authority over his own equity share in the business. (Sonic, supra, 57 Cal.4th at p. 1145 [contract terms that are "'unreasonably favorable to the more powerful party'" are unconscionable].)
ii. Termination rights
The Amended Management Agreement allows Thrive Manager-but not Hempki or its manager, Anderson-to unilaterally terminate the agreement "in its sole and absolute discretion" upon receipt of a legal opinion that the agreement might violate applicable laws. Hempki is limited to the Amended Management Agreement's general termination provisions, which prohibit all parties from terminating the contract within 10 years "other than for a material breach." After that period, any party may unilaterally terminate the contract by providing written notice to all parties.
However, if Hempki elects to unilaterally terminate under the latter provision, it would have to pay the exorbitant termination fee; if Thrive Manager exercised the same termination right, it would not have to pay anything. (See Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1407 [unilateral terms with "overly harsh effect[s]" indicate substantive unconscionability].)
iii. Operational control
The Amended Management Agreement all but eliminated Anderson's ability to participate in the business' day-to-day operations. Thrive Manager retained control over broad areas such as staffing, determining the company's operating hours, budgeting, marketing, leasing and constructing the company's storefront, and the company's operative name and trademarks. Anderson-or any other representative of Hempki-was prohibited from "direct[ing] or control[ling] . . . the operational activities of" Thrive Manager. Hempki's authority over its own core activities was severely limited; among other things, its representative was not allowed to seek loans or other types of funding from third parties.
Independently, the Amended Operating Agreement constrained Anderson's authority as manager of Hempki to (1) obtaining and maintaining a license and (2) hiring Thrive Manager as a management company. All other responsibilities, including asset management, financial decision making, and dissolving or liquidating the company, were deemed outside of his control.
To an extent, this lopsided division of operational control is expected. A primary purpose of the Agreements is to delegate management responsibilities to Thrive Manager. Appellants expand on this idea, arguing that because applicants and licensees may lawfully delegate management authority to outside companies, any contractual provisions that concentrate operational power in Thrive Management are not unconscionable.
Appellants' contention conflates the distinct concepts of illegality and substantive unconscionability. It also ignores that the Amended Management Agreement goes beyond reserving operational control for itself; multiple provisions claw back power from the limited responsibilities otherwise left to Anderson.
For example, as Hempki's manager, Anderson ostensibly retains final approval over annual budgets proposed by Thrive Manager. But that approval is undermined by other provisions allowing Thrive Manager, "in its sole discretion," to either exceed the approved operating budget "by up to . . . 25% for any budget category[,]" or to spend up to $25,000 on a single unbudgeted expense. And, independently of the annual budget approval process, Thrive Manager gave itself the power to determine "a reasonable amount" to design and construct the business' retail storefront, only requiring Anderson's approval for additional charges exceeding whatever amount Thrive Manager had previously decided on.
Provisions like these demonstrate appellants' commitment to wresting as much control from Anderson as possible, even in areas apparently reserved to him.
iv. Monetary entitlements
Under the Amended Management Agreement, Thrive Manager is entitled to a monthly management fee equal to 14.5 percent of the business' gross revenue. If Hempki misses any payments, the amount of unpaid fees "become[s] a loan payable at 15% annual interest" to Thrive Manager.
Hempki must also pay Thrive Manager a fee equivalent to a percentage of the costs of designing and constructing the cannabis store. Because the power to determine the initial design and construction budgets is solely within Thrive Manager's control, it can also unilaterally determine the amount of these related fees. If it charges an amount that Hempki cannot pay upfront and "in a lump sum[,]" Thrive Management will loan it the money, again at a 15 percent annual interest rate.
Additionally, any "short-term loan[s]" made to cover Hempki's capital or operating expenses would "not reduce . . . [g]ross [r]evenue with respect to the calculation of" Thrive Manager's management fee. This provision insulates Thrive Manager's monthly fees from the impact of multiple high-interest loans, shifting the burden of these loans to Anderson's profit margin.
The Amended Management Agreement does not define the term "short-term loan."
Taken together, these provisions all but guarantee that Thrive Manager will receive the lion's share of any money generated under the Agreements. Even before the cannabis business opens to the public, Thrive Manager can encumber Hempki with high-interest loans that benefit itself at the expense of the business' profits.
And Anderson is only entitled to a proportionate share of those profits, if any exist after Hempki pays its commitments to Thrive Manager. Otherwise, the only money guaranteed to Hempki-and thus, to Anderson-is a minimum annual fee from Thrive Manager, to be offset by any profits the company generates for its members. In its first year, that fee would amount to less than $3,000 a month.
The agreement transferring 49 percent of Anderson's ownership in Hempki requires Secure Holdings to "transfer and immediately pay to [Anderson] any amounts received . . . as a result of its ownership" interest in the company. Since Secure Holdings retains no financial interest in Hempki, it is unclear what it gains from this arrangement and what its role is in the business-unless it gained ownership just to further limit Anderson's control over Hempki.
In the first year, the minimum annual fee would be $35,000. The fee would increase by three percent each year.
Appellants claim that these unequal entitlements are not substantively unconscionable, because Anderson is neither personally liable for Hempki's debts nor is he required to invest his own money into the business. Therefore, Anderson "faces virtually zero financial risk" and "only stands to make a profit." And, at any rate, the fact that Anderson may not earn a profit if the business underperforms "does not render the [A]greements illegal."
Appellants' arguments miss the point. Anderson need not risk personal financial ruin before the Agreements can be considered substantively unconscionable. It is enough that the Agreements allow Thrive Manager to enrich itself via lucrative loan arrangements that simultaneously diminish the likelihood of Anderson receiving any profits from the business.
This is not "'a simple old-fashioned bad bargain'" that "'merely gives one side a greater benefit[.]'" (Sanchez, supra, 61 Cal.4th at p. 911.) These financial provisions create an "'unreasonably favorable'" and "'unduly oppressive'" mechanism that unconscionably concentrates power and monetary reward in the hands of Thrive Manager. (Ibid.)
v. Punitive damages waiver
Finally, as the trial court noted, the arbitration clauses in both Agreements require the parties to recognize that they would give up "the rights they may otherwise have . . . to an award of punitive or exemplary damages" on any claims. (Capitalization omitted.) And the arbitration clause in the Amended Operating Agreement specifically prohibited the arbitrator from awarding punitive or exemplary damages.
"The waiver of punitive damages as a remedy for all nonstatutory claims . . . is substantively unconscionable regardless of its mutuality." (Lange v. Monster Energy Co. (2020) 46 Cal.App.5th 436, 449.) Appellants argue that the arbitration clauses are not unconscionable because they allow Anderson to seek injunctive relief from the arbitrator, but that does not excuse their blanket prohibition on punitive damages.
4. Overall unconscionability
The combined effect of the procedural unconscionability and substantive unconscionability discussed above renders the Agreements, in their totality, "unreasonably one-sided." (Sonic, supra, 57 Cal.4th at p. 1146.) Furthermore, the Agreements are so permeated with unconscionability that they cannot be saved by severing or altering the objectionable provisions. (Nelson v. Dual Diagnosis Treatment Center, Inc. (2022) 77 Cal.App.5th 643, 666 ["'"An agreement to arbitrate is considered 'permeated' by unconscionability where it contains more than one unconscionable provision ...."'")
Having satisfied "the overall test of unconscionability" (Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 250), we conclude that appellants' motion to compel arbitration was properly denied.
B. Illegality
Alternatively, appellants dispute the trial court's determination that the Agreements are illegal. Having already decided that the Agreements are unenforceable as unconscionable, we need not reach the parties' arguments on illegality. (See San Bernardino County Fire Protection Dist. v. Page (2024) 99 Cal.App.5th 791, 813 [having affirmed the order on one ground, any alternative bases for reversal are moot].)
DISPOSITION
The order is affirmed. Anderson is entitled to costs on appeal.
We concur: LUI, P. J. HOFFSTADT, J.