Amicus Curiae Brief — OTO, L.L.C., Petitioner v. Ken Kho, et al.

No. 19-875

IN THE

Supreme Court of the United States

___________

OTO, LLC,

Petitioner,

v.

KEN KHO;

JULIE A. SU, CALIFORNIA LABOR COMMISSIONER,

Respondents.

___________

On Petition for a Writ of Certiorari to

the California Supreme Court

___________

BRIEF OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

___________

February 14, 2020

CORBIN K. BARTHOLD

Counsel of Record

CORY L. ANDREWS

WASHINGTON LEGAL

FOUNDATION

2009 Mass. Ave., NW

Washington, DC 20036

(202) 588-0302

cbarthold@wlf.org

QUESTION PRESENTED

Whether the Federal Arbitration Act preempts a

state from invalidating an arbitration agreement as

substantively unconscionable on the ground that it

provides procedural protections akin to civil

litigation, rather than to the streamlined administrative proceeding that would be available under

state law in the absence of the agreement.

iii

TABLE OF CONTENTS

TABLE OF AUTHORITIES .................................. iv

INTEREST OF AMICUS CURIAE ........................ 1

STATEMENT OF THE CASE ................................ 2

SUMMARY OF ARGUMENT................................. 5

REASONS FOR GRANTING THE PETITION ..... 8

I.

THE DECISION BELOW IS A THINLY

VEILED EFFORT TO BAR WAGE-DISPUTE

ARBITRATION ALTOGETHER ........................... 8

II.

THE CALIFORNIA SUPREME COURT NEEDS

GUIDANCE ON APPLYING CONCEPCION

AND ITALIAN COLORS .................................. 10

III.

A.

The California Supreme Court

Misinterprets The FAA ................... 11

B.

Concepcion and Italian Colors

Confirm And Highlight The

California

Supreme

Court’s

Errors ............................................... 13

C.

After Concepcion And Italian

Colors, The California Supreme

Court Continues To Misinterpret

The FAA ........................................... 15

THE CALIFORNIA COURTS NEED A

REMINDER THAT ARBITRATION AGREEMENTS MUST NOT BE SUBJECTED TO A

SPECIAL STANDARD OF UNCONSCIONABILITY......................................................... 17

CONCLUSION ...................................................... 22

iv

TABLE OF AUTHORITIES

Page(s)

Cases:

Am. Express Co. v. Italian Colors Rest.,

570 U.S. 228 (2013) ..................................... passim

Am. Software, Inc. v. Ali,

46 Cal. App. 4th 1386 (1996) ............................. 21

Armendariz v. Foundation Health

Psychcare Services, Inc.,

24 Cal. 4th 83 (2000) .......................... 3, 12, 13, 21

AT&T Mobility LLC v. Concepcion,

563 U.S. 333 (2011) ..................................... passim

Broughton v. Cigna Healthplans of Cal.,

21 Cal. 4th 1066 (1999) ................................ 12, 13

Buckeye Check Cashing, Inc. v.

Cardegna,

546 U.S. 440 (2006) ........................................ 6, 13

Carmona v. Lincoln Millennium Car

Wash, Inc.,

226 Cal. App. 4th 74 (2014) ............................... 19

Carnival Cruise Line, Inc. v. Shute,

409 U.S. 585 (1991) ............................................ 20

Chretian v. Donald L. Bren Co.,

151 Cal. App. 3d 385 (1984) ......................... 20, 21

DIRECTV, Inc. v. Imburgia,

136 S. Ct. 463 (2015) ........................................ 1, 6

Epic Systems Corp. v. Lewis,

136 S. Ct. 1612 (2018) .......................................... 1

Eyre v. Potter,

56 U.S. 42 (1853) ................................................ 18

v

Page(s)

Hume v. United States,

132 U.S. 406 (1889) ............................................ 18

Iskanian v. CLS Transp. Los Angeles, LLC,

59 Cal. 4th 348 (2014) ........................................ 16

Kindred Nursing Ctrs. Ltd. P’ship

v. Clark,

137 S. Ct. 1421 (2017) .......................................... 8

Little v. Auto Stiegler, Inc.,

29 Cal. 4th 1064 (2003) ...................................... 12

McGill v. Citibank, N.A.,

2 Cal. 5th 945 (2017) .......................................... 17

Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc.,

473 U.S. 614 (1985) ............................................ 12

Oblix, Inc. v. Winiecki,

374 F.3d 488 (7th Cir. 2004) .............................. 20

Penilla v. Westmont Corp.,

3 Cal. App. 5th 205 (2016) ................................. 19

Perry v. Thomas,

482 U.S. 483 (1987) ...................................... 11, 14

Pinela v. Neiman Marcus Group, Inc.,

238 Cal. App. 4th 227 (2015) ............................. 19

Preston v. Ferrer,

552 U.S. 346 (2008) ............................................ 11

Ramos v. Superior Court,

28 Cal. App. 5th 1042 (2018) ............................. 19

Serafin v. Balco Properties Ltd., LLC,

235 Cal. App. 4th 165 (2015) ............................. 19

vi

Page(s)

Shearson/Am. Exp. Inc. v. McMahon,

482 U.S. 220 (1987) ........................................ 1, 12

Sonic-Calabasas A, Inc. v. Moreno,

51 Cal. 4th 659 (2011) .......................................... 9

Sonic-Calabasas A, Inc. v. Moreno,

57 Cal. 4th 1109 (2013) ............................... passim

Southland Corp. v. Keating,

465 U.S. 1 (1984) ................................................ 11

Constitution and Statutes:

Const. art. VI, cl. 2 ................................................... 5

9 U.S.C. § 2 ............................................................... 5

Cal. Civ. Code § 1670.5(a) ...................................... 19

Miscellaneous:

Stephen A. Broome, An Unconscionable

Application of the Unconscionability

Doctrine: How the California Courts are

Circumventing the Federal Arbitration Act,

3 Hastings Bus. L.J. 39 (2006) ..................... 14, 21

Aaron-Andrew P. Bruhl, The Unconscionability Game: Strategic Judging and the

Evolution of Federal Arbitration Law,

83 N.Y.U. L. Rev. 1420 (2008) ...................... 17, 18

Russell Korobkin, Bounded Rationality,

Standard Form Contracts, and Unconscionability, 70 U. Chi. L. Rev. 1203 (2003) ........ 20

vii

Page(s)

John F. Querio, Courts in California

Enable End-Run of Federal Arbitration

Act by Expanding Obscure State Labor

Law, WLF Legal Backgrounder, www.bit.

ly/2vNjfDn (June 16, 2017) ................................... 1

Susan Randall, Judicial Attitudes Toward

Arbitration and the Resurgence of

Unconscionability, 52 Buffalo L.

Rev. 185 (2004) .................................................... 14

Restatement (Second) of Contracts § 208 ............. 19

Paul Thomas, Note, Conscionable Judging:

A Case Study of California Courts’

Grapple with Challenges to Mandatory

Arbitration Agreements, 62 Hastings

L.J. 1065 (2011) ................................................... 18

1

INTEREST OF AMICUS CURIAE*

Washington Legal Foundation is a nonprofit,

public-interest law firm and policy center with

supporters nationwide. WLF promotes free

enterprise, individual rights, limited government,

and the rule of law. It has appeared as amicus curiae

before this Court in important Federal Arbitration

Act cases. See, e.g., Epic Systems Corp. v. Lewis, 136

S. Ct. 1612 (2018); DIRECTV, Inc. v. Imburgia, 136

S. Ct. 463 (2015). It has also published many articles

on arbitration—including articles on the California

courts’ struggles to follow this Court’s FAA rulings—

by outside experts. See, e.g., John F. Querio, Courts

in California Enable End-Run of Federal Arbitration

Act by Expanding Obscure State Labor Law, WLF

Legal Backgrounder, www.bit.ly/2vNjfDn (June 16,

2017).

The FAA “establishes a federal policy favoring

arbitration.” Shearson/Am. Exp. Inc. v. McMahon,

482 U.S. 220, 226 (1987). To operate properly,

however, the FAA must apply consistently across the

nation. The California Supreme Court has

repeatedly created inconsistency. It has done so in

this case, using its own precedents to flout AT&T

Mobility LLC v. Concepcion, 563 U.S. 333 (2011),

No party’s counsel authored any part of this brief. No

person or entity, other than Washington Legal Foundation and

its counsel, helped pay for the brief’s preparation or

submission. At least ten days before the brief was due, WLF

notified each party’s counsel of record of WLF’s intent to file

the brief. Petitioner’s counsel and Respondent Su’s counsel

consented in writing to the brief’s being filed. Respondent Kho

has filed a blanket consent to the filing of amicus briefs.

*

2

American Express Co. v. Italian Colors Restaurant,

570 U.S. 228 (2013), and other rulings by this Court.

The California high court plainly needs to be told—

again—how to apply the FAA. WLF urges this Court

to grant review.

STATEMENT OF THE CASE

While working as a service technician for One

Toyota of Oakland, Ken Kho signed an arbitration

agreement. (Pet. App. 3a.) After OTO terminated his

employment (id. at 93a), Kho filed a claim for unpaid

wages with the California Labor Commissioner (id.

at 5a). The Commissioner scheduled a hearing. (Id.)

OTO, meanwhile, went to Superior Court to enforce

the arbitration agreement. (Id.)

The Commissioner conducted the hearing—over

OTO’s objection and in its absence—and awarded

Kho more than $150,000 in wages, liquidated

damages, interest, and penalties. (Id.) The Superior

Court vacated the award, concluding that the

Commissioner should not have proceeded without

OTO (id. 141a-143a); but it denied OTO’s motion to

compel arbitration (id. at 127a-140a). The Court of

Appeal reversed the order on arbitration and, in

consequence, saw no need to consider the order

vacating the Commissioner’s award. (Id. at 92a119a.)

California’s administrative wage-dispute procedure has several employee-friendly features. The

pleading process is streamlined; no discovery occurs;

simplified rules of evidence apply; the officer who

presides at the hearing—known as a “Berman”

hearing—may tutor the employee in basic aspects of

3

the law; and a translator attends the hearing, free of

charge, when needed. (Id. at 8a.) Appeals go to the

Superior Court. Although the court reviews the

Commissioner’s ruling de novo, a one-way feeshifting rule requires an employer-appellant to pay

attorney’s fees to the employee if the court awards

her so much as a single cent. (Id. at 9a.)

The arbitration agreement Kho signed set forth

procedures that look less like the Berman process,

and more like conventional civil litigation. The

arbitration would be conducted by a retired

California trial judge, who would apply the normal

pleading rules, allow discovery, and enforce the

state’s evidence code and much of its code of civil

procedure. (Id. at 4a.) In accord with Armendariz v.

Foundation Health Psychcare Services, Inc., 24 Cal.

4th 83 (2000), OTO would cover most of the

arbitration’s cost. (Id. at 28a.) Attorney’s fees could

be awarded under state-law rules friendly to Kho

(though not quite as friendly to him as under the

Berman rules). (Id. at 29a-30a.)

Homing in on the differences between the

administrative wage-dispute rules and the OTO

arbitration-agreement rules, the California Supreme

Court, in a 6-1 ruling, reversed. The court found that

the arbitration agreement was both procedurally and

substantively unconscionable. The court gave a nod

to the traditional “shocks the conscience” standard of

unconscionability. (Id. at 20a.) Concluding, however,

that the “agreement’s execution involved an

extraordinarily high degree of procedural unconscionablility”—a notion that Justice Chin, in dissent,

vigorously disputed (id. at 48a-55a)—the court,

breaking new ground, ruled that it could toss the

4

agreement based on “a relatively low degree of

substantive unconscionability” (id. at 14a).

The court centered its analysis of substantive

unconscionability around a discussion of “what Kho

gave up and what he received in return.” (Id. at 31a.)

The Berman process was treated, in other words, as

the standard against which the arbitration

agreement was to be judged. The civil litigation-like

procedures in the agreement were not, in the court’s

view, as advantageous to Kho as the Berman

process. The agreement’s ordinary litigation rules

created a “barrier,” therefore, to the “vindication” of

Kho’s state-law rights. (Id. at 33a.) The upshot was

that Kho had entered “an unfair bargain” that could

be set aside. (Id. at 31a.)

Even the majority, Justice Chin noted in dissent,

acknowledged that the arbitration agreement’s

procedure was “carefully crafted to ensure fairness

on both sides.” (Id. at 79a.) Justice Chin objected to

striking down the agreement simply because, in the

majority’s view, that procedure was “not as

advantageous for Kho as the Berman procedure.”

(Id.) Although it tried “to disguise [it]s obvious

preference for the Berman procedure under the cloak

of unconscionability,” Justice Chin wrote, the

majority could not hide that its ruling impermissibly

“frustrate[d] the FAA’s purpose to ensure that

private arbitration agreements are enforced

according to their terms.” (Id. at 85a (quoting

Concepcion, 563 U.S. at 347 n.6).)

5

SUMMARY OF ARGUMENT

The Supremacy Clause is simple. It says that

federal law trumps contrary state law. Const. art.

VI, cl. 2. The FAA is simple too. It says that an

arbitration clause in a contract involving commerce

is valid and enforceable. 9 U.S.C. § 2. True, the FAA

contains a saving clause, but it as well is pretty

unpretentious. It says that an arbitration clause

may be invalidated based on any ground “for

revocation of any contract”—based, that is, on a

generally applicable contract defense. Id. Like every

other area of law, arbitration law is sure to generate

the occasional thorny question. On the whole,

however, arbitration clauses should cause little fuss

in state court. Enforce them, Congress has

instructed, unless you spot one that is a sham, a

fraud, a travesty, or the like.

For years now the California Supreme Court has

insisted on making things complex. It has upheld

state laws that disfavor arbitration; invented

reasons to let state law obstruct the FAA; created

rules that apply only to arbitration clauses; and,

when applying ostensibly neutral rules, held

arbitration agreements to a higher standard. None of

this is allowed under the FAA, and this Court has

repeatedly said so. Yet the California high court just

can’t (or won’t) keep it simple.

The decision below is another new cog in the

California justices’ Rube Goldberg approach to

arbitration. The arbitration agreement here is not a

sham, a fraud, a travesty, or the like. No one could

claim otherwise with a straight face. Yet the

California Supreme Court still declared the

6

agreement unconscionable. Why? Because it offers

the signatories too much procedure. Because it offers

dispute resolution that too closely resembles

ordinary civil litigation. As every law student learns,

the unconscionability defense excuses a party from

complying with a contract clause that “shocks the

conscience.” The court below concluded, in effect,

that it “shocks the conscience” to resolve a wage

dispute using the rules that govern ordinary legal

disputes. That is mind-bending.

The California high court reached its desired

destination by setting its state’s administrative

mechanism for resolving wage disputes, the Berman

procedure, as the standard by which the fairness of a

wage-dispute arbitration clause is to be judged. The

court declared the arbitration agreement here

invalid, not because it flunked some objective test of

unconscionability, but because by the court’s lights it

did not compare favorably to the court’s state-lawcentric Berman-process benchmark. As OTO

explains in its petition, the California Supreme

Court’s ruling fails to place “arbitration clauses”—in

particular, wage-dispute arbitration clauses—“on

equal footing with all other contracts.” Imburgia, 136

S. Ct. at 468 (quoting Buckeye Check Cashing, Inc. v.

Cardegna, 546 U.S. 440, 443 (2006)). The decision

below is markedly out of step with the FAA and this

Court’s precedents. The Court should dispatch it.

We write in part to emphasize the breadth of the

California Supreme Court’s holding. Although the

court claimed to limit its ruling to cases where an

employer uses “unusually coercive” means to obtain

an employee’s consent to arbitration, no one who

reads the opinion carefully, and who knows the

7

context in which it arises, can reasonably expect that

qualification to have any bite. Well aware that the

FAA blocks it from banning wage-dispute arbitration

outright, the California Supreme Court has plainly

tried to thread the needle, imposing a de facto ban

without saying so in as many words.

The decision below is one of many by the

California Supreme Court that misapply the FAA.

Some of these decisions this Court has reversed;

others have so far slipped by. Unfortunately, the

California high court often makes a heroic effort to

explain that this Court’s latest and plainest word on

arbitration—a word not infrequently written while

reversing a decision out of California—has little or

no effect on California’s separate and not-so-simple

body of arbitration law. Concepcion, 563 U.S. 333, for

instance, says that a court must treat an arbitration

clause like other contracts. And Italian Colors, 570

U.S. 228, strongly suggests—and its dissenting

opinion asserts explicitly—that a court may not treat

an arbitration clause unlike other contracts as part

of an effort to “vindicate” a state law or policy. Yet in

Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109

(2013) (Sonic II), the California Supreme Court

distorted Concepcion and narrowed Italian Colors

beyond recognition. The court then concluded, quite

implausibly, both in Sonic II and elsewhere, that

various of its own special arbitration rules survive

both decisions. That mischief, in turn, left it free in

this case to follow its usual routine, using rigged

standards and discredited doctrines to disfavor

arbitration. Not only should this Court grant review

and reverse; it should tell the California high court

to stop putting curlicues on this Court’s straightforward FAA decisions.

8

We will also discuss the occasional subtlety of

the California courts’ bias against arbitration

clauses. Although those courts often use a

purportedly general rule—the unconscionability

doctrine—to void an arbitration clause, a review of

the case law as a whole reveals that they are

“covertly . . . disfavoring contracts that (oh so

coincidentally) have the defining features of

arbitration agreements.” Kindred Nursing Ctrs. Ltd.

P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017). This

Court should remind California’s courts once again

of the FAA’s demand that neutral rules be applied

neutrally.

REASONS FOR GRANTING THE PETITION

I.

THE DECISION BELOW IS A THINLY VEILED

EFFORT TO BAR WAGE-DISPUTE ARBITRATION

ALTOGETHER.

Before getting to the California Supreme Court’s

record of antipathy to the FAA, it is worth briefly

clarifying what its most recent anti-arbitration

ruling holds.

In the decision below, the California Supreme

Court insisted that it was not banning arbitration

agreements that deviate from the Berman process.

Just “this particular agreement” was invalid, the

court said, because it combined a deviation from the

Berman process with an “unusually coercive” effort,

by OTO, to get Kho to sign the agreement. (Pet. App.

31a.) Justice Chin disputed the notion that anything

“unusual” occurred here. (Id. at 48a-55a.) But in any

event, the court’s finding of “extraordinary” procedu-

9

ral unconscionability (id. at 14a), and consequent

lowering of the substantive-unconscionability threshold (id.), was a red herring.

Although the court “stress[ed]” that a “waiver of

Berman procedures does not, by itself, render an

arbitration agreement unconscionable” (id. at 21a),

the rest of the decision gives every impression that,

to the contrary, arbitration clauses that depart from

the Berman procedure are now prohibited. In the

California Supreme Court’s view, an employee

should not have to “surrender the benefits . . . of the

Berman process” without receiving adequate

“efficiencies or cost savings” in arbitration. (Id. at

25a.) Given their entrenched hostility to arbitration—more on that to follow—it is fair to assume

that the California justices will not deviate from this

conclusion just because an employer is careful to

give an employee lots of time to read a well-written

arbitration clause laid out in big print. As Justice

Chin put it, “the majority’s assurance that an

identical arbitration provision ‘might pass muster

under less coercive circumstances’ rings hollow.” (Id.

at 47a.)

Indeed, although Sonic I (Sonic-Calabasas A,

Inc. v. Moreno, 51 Cal. 4th 659 (2011), vacated 565

U.S. 973 (2011)) held that the Berman process

cannot be waived, the California Supreme Court

acknowledged, in Sonic II, that that approach is

foreclosed by Concepcion, 563 U.S. 333. So the

California high court’s “stress[ing]” that it was not

creating a blanket bar on wage-dispute arbitration

looks like so much fig-leafing over the fact that,

actually, it aimed to do precisely that.

10

The state high court’s attempt to “vindicate”

state law, at the FAA’s expense, further reveals the

court’s true goal. The Berman process is, of course, a

state-law innovation. In holding that process up as

the standard by which the arbitration agreement in

question was to stand or fall, the court declared that

arbitration may not act as a “barrier[] to the

vindication” of Kho’s rights under state law. (Id. at

26a.) The court then discussed at length the benefits

of the Berman process. (E.g., id. at 26a-28a.) Those

benefits were, in fact, the focus of the court’s

analysis (hardly surprising, given the alternative of

trying to explain how ordinary litigation raises

unconscionable barriers to the “vindication” of statelaw rights). The decision is best understood,

therefore, as holding that arbitration may not serve

as a “barrier” to the “vindication” of an employee’s

state-law right to the Berman process itself.

II.

THE CALIFORNIA SUPREME COURT NEEDS

GUIDANCE ON APPLYING CONCEPCION AND

ITALIAN COLORS.

For decades this Court has been reversing

California court rulings that discriminate against

arbitration. In spite of these frequent reversals, the

California Supreme Court has persisted in giving the

FAA short shrift. Concepcion, which bluntly

demands compliance with the FAA, and Italian

Colors, which forecloses the “vindication” method of

bypassing the FAA, should have resolved almost

every doubt about the FAA’s scope and brought the

California high court into line. But so far they

haven’t. If anything, California’s outlier status has

become even clearer.

11

A.

The California Supreme Court Misinterprets The FAA.

Even before Concepcion and Italian Colors, it

should have been obvious to the California Supreme

Court that under federal law, an arbitration

agreement must be treated like any other contract.

As far back as Perry v. Thomas, 482 U.S. 483, 492

n.9 (1987), this Court declared:

A court may not . . . construe [an arbitration]

agreement in a manner different from that

in which it otherwise construes nonarbitration agreements under state law. Nor may a

court rely on the uniqueness of an agreement

to arbitrate as a basis for a state-law holding

that enforcement would be unconscionable.

At issue in Perry, it is worth noting, was a California

law that removed wage disputes from arbitration. In

declaring that law preempted by the FAA, Perry

rejected the state legislature’s naked attempt to do

precisely what the state high court did, by only

slightly more subtle means, here.

Perry is, in fact, one in a series of preConcepcion/Italian Colors cases reversing a

California court’s misreading of the FAA. See

Southland Corp. v. Keating, 465 U.S. 1, 16 (1984)

(the FAA preempts a California law exempting

franchise disputes from arbitration; contrary holding

of the California Supreme Court reversed); Perry,

482 U.S. at 489-92 (the FAA preempts a California

law exempting wage disputes from arbitration;

contrary holding of the California Court of Appeal

reversed); Preston v. Ferrer, 552 U.S. 346, 356 (2008)

12

(the FAA preempts a California law transferring

certain disputes from arbitration to the state labor

commissioner; contrary holding of the California

Court of Appeal reversed).

Several of the California Supreme Court’s preConcepcion/Italian Colors decisions—even apart

from the ones this Court reversed—plainly disfavor

arbitration agreements. Armendariz, 24 Cal. 4th 83,

for example, creates criteria that arbitration

agreements, but not other contracts, must satisfy to

remain valid. “The Armendariz requirements,” the

California high court has openly acknowledged,

“specifically concern arbitration agreements.” Little

v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1079 (2003).

And much as the decision below allows the state

legislature to excuse from arbitration a group of

litigants who enjoy special procedural privileges,

Broughton v. Cigna Healthplans of California, 21

Cal. 4th 1066, 1083 (1999), empowers it to remove

from arbitration all private civil remedies that can

be understood to serve a public interest.

The pre-Concepcion/Italian Colors decisions

draw heavily on an “effective vindication” theory—

and a similar “inherent conflict” theory—found in

this Court’s FAA jurisprudence. The Court has said

that the FAA applies “so long as the prospective

litigant effectively may vindicate its statutory cause

of action in the arbitral forum.” Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,

637 (1985). The FAA might not apply, in other

words, when “an inherent conflict” exists “between

arbitration and [a] statute’s underlying purpose.”

Shearson, 482 U.S. at 226-27.

13

But this exception applies only when the FAA

runs into “a contrary congressional command.” Id. at

226 (emphasis added). After all, only a federal law

can displace another federal law. The Supremacy

Clause demands that a state law not be “vindicated”

at a federal law’s expense, and that an “inherent

conflict” between a state law and a federal law not be

resolved in the state law’s favor. Yet long before it

did so in the decision below, the California Supreme

Court repeatedly used the “vindication” rationale to

raise state law above the FAA. See Broughton, 21

Cal. 4th at 1083 (“[the state] legislature may restrict

a private arbitration agreement when it inherently

conflicts with a public statutory purpose”);

Armendariz, 24 Cal. 4th at 101 (a party must “be

able to fully vindicate his or her [state] statutory

cause of action in the arbitral forum”).

B.

Concepcion and Italian Colors Confirm

And Highlight The California Supreme

Court’s Errors.

Any lingering confusion about the need to treat

an arbitration agreement like any other contract, or

about the vindication theory’s inapplicability to state

law, should have been laid to rest by Concepcion and

Italian Colors.

A court, Concepcion declares, “must place

arbitration agreements on an equal footing with

other contracts.” 563 U.S. at 339 (quoting Buckeye,

546 U.S. at 443). A state law that “prohibits outright

the arbitration of a particular type of claim” is,

therefore, “displaced by the FAA.” Id. at 341. So is a

rule that has “a disproportionate impact on

arbitration agreements.” Id. at 342. And so is a rule

14

that “rel[ies] on the uniqueness of an agreement to

arbitrate.” Id. at 341 (quoting Perry, 482 U.S. at 493

n.9).

Concepcion is, by the way, yet another of this

Court’s decisions striking down yet another of

California’s many efforts to limit arbitration. The

Court lamented the “great variety of devices and

formulas” that some courts, in their “hostility

towards arbitration,” have invented to “declar[e]

arbitration against public policy.” Id. at 342. And

California’s courts in particular, the Court noted,

seem “more likely to hold contracts to arbitrate

unconscionable than other contracts.” Id. (citing

Stephen A. Broome, An Unconscionable Application

of the Unconscionability Doctrine: How the

California Courts are Circumventing the Federal

Arbitration Act, 3 Hastings Bus. L.J. 39, 54, 66

(2006), and Susan Randall, Judicial Attitudes

Toward Arbitration and the Resurgence of

Unconscionability, 52 Buffalo L. Rev. 185, 186-87

(2004)).

Italian Colors discusses the “judge-made”

“vindication exception” to the FAA. 570 U.S. at 235.

The exception “originated as dictum,” the Court

observed, and, every time it has come up, the Court

“has declined to apply it to invalidate the arbitration

agreement at issue.” Id. More than that: in Italian

Colors all nine justices treated the exception as one

that governs federal law. Id. at 235 n.2; see also id.

at 240-41, 252 (Kagan, J., dissenting).

15

C.

After Concepcion And Italian Colors,

The California Supreme Court Continues To Misinterpret The FAA.

Concepcion and Italian Colors make three things

clear. A state may not (1) subject an arbitration

agreement to special rules, (2) use ostensibly neutral

rules to disfavor an arbitration agreement, or

(3) invalidate an arbitration agreement in order to

“vindicate” a state-law-created public policy. In the

decision below, the California Supreme Court elided

each of these principles. It openly acknowledged

using a “different approach” for wage-dispute

arbitration clauses (Pet. App. 26a); it applied to the

arbitration agreement before it a funhouse-mirror

sense of unconscionability; and its overriding aim

was plainly to vindicate the state-law Berman

process.

But the decision at hand is no one-off. It is the

latest in a string of post-Concepcion/Italian Colors

decisions in which the California high court has

“thumbed its nose at the Federal Arbitration Act and

this Court.” (Pet. at 2.)

Begin with Sonic II, 57 Cal. 4th 1109, which

claims that Concepcion instructs a court merely to

protect the “fundamental attributes of arbitration,”

id. at 1143-45, 1151. This reading is flatly

contradicted by Concepcion itself. A rule of

unconscionability could easily have “a disproportionate impact on arbitration agreements” (forbidden

under the real Concepcion) without interfering with

arbitration’s “fundamental attributes” (the only

constraint in Sonic II’s version of the case). 563 U.S.

at 342; 57 Cal. 4th at 1143. Look no further than the

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result in Sonic II, which requires that an employee

receive a wage-dispute arbitration hearing at least

as “accessible” and “affordable” as a Berman hearing

before a deputy labor commissioner. 57 Cal. 4th at

1150. Enforcing this requirement clearly disfavors

and disproportionately affects arbitration agreements. In singling out, and treating as suspect, any

arbitration clause that does not confer the benefits of

a Berman hearing (e.g., a free translator for the

employee), Sonic II defies Concepcion. Id. at 1146.

Sonic II also relies heavily on the vindication

theory. In fact, the decision frames the issue before

the court as “whether any barrier to vindicating” the

employee’s “right to recover unpaid wages” would

“make the arbitration agreement unconscionable.”

Id. at 1142.

The California Supreme Court again misapplied

Concepcion and Italian Colors in Iskanian v. CLS

Transportation Los Angeles, LLC, 59 Cal. 4th 348

(2014). At issue was California’s Private Attorney

General Act, which empowers an employee to sue

her employer for state labor code violations against

her and other employees. A PAGA lawsuit is “a type

of qui tam action”; 75 percent of a recovery goes to

the government. Id. at 380, 382. Iskanian thus

concludes that “a PAGA claim lies outside the FAA’s

coverage” because “it is a dispute between an

employer and the state.” Id. at 386. But this begs the

question. An employee signs a contract waiving

PAGA rights. Regardless of whom a California court

says a PAGA action is ultimately “between,” that

employee has agreed, by contract, not to be the one

driving such a lawsuit. State law can reverse that

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employee’s agreement only by using state public

policy to override the FAA.

The state high court continued to misapply the

vindication theory in McGill v. Citibank, N.A., 2 Cal.

5th 945 (2017). McGill describes Italian Colors as

teaching that “the FAA does not require enforcement

of a provision in an arbitration agreement that . . .

eliminates the right to pursue a statutory [right or]

remedy.” Id. at 963. Having thus denuded the

vindication exception of its federal-law grounding,

McGill concludes that the FAA must yield to a state

public policy barring an arbitration-clause waiver of

the right to seek injunctive relief under various state

consumer-protection laws. Id. at 952, 963.

The California Supreme Court has taken an “any

stick to beat a dog” approach to striking down

arbitration clauses. As the FAA, Concepcion, and

Italian Colors show, that approach is untenable.

III. THE CALIFORNIA COURTS NEED A REMINDER

THAT ARBITRATION AGREEMENTS MUST NOT

BE SUBJECTED TO A SPECIAL STANDARD OF

UNCONSCIONABILITY.

Although many of the contradictions between the

California Supreme Court’s arbitration jurisprudence and the Concepcion and Italian Colors

decisions are clear, it is important not to overlook

the California courts’ more general distortion of the

unconscionability doctrine as applied to arbitration

agreements.

“It is well known that unconscionability is

generally a loser of an argument.” Aaron-Andrew P.

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Bruhl, The Unconscionability Game: Strategic

Judging and the Evolution of Federal Arbitration

Law, 83 N.Y.U. L. Rev. 1420, 1442 (2008). This is

unsurprising, given the rigor of the classic

unconscionability test. Under the traditional rule, an

unconscionable contract is one that “no man in his

senses, not under duress, would make,” and that “no

fair and honest man would accept.” Hume v. United

States, 132 U.S. 406, 406 (1889). A contract is

unconscionable, in other words, if it “shock[s] the

conscience.” Eyre v. Potter, 56 U.S. 42, 60 (1853).

The “shocks the conscience” phrase is still alive

in California. (Pet. App. 20a.) But the words “so onesided as to shock the conscience” are now used in

tandem with—and are even declared to mean the

same thing as—the self-evidently weaker words

“unreasonably one-sided.” Sonic II, 57 Cal. 4th at

1159-60. This muddying of the standard may or may

not be a deliberate part of a push by California’s

courts to apply a looser unconscionability test to

arbitration agreements. But a looser test they have

unmistakably applied—a test that has in turn

encouraged ever more attacks on arbitration clauses.

Consider a pre-Concepcion study. It found that in a

three-year period, three California appellate districts

addressed unconscionability in 119 cases. Paul

Thomas, Note, Conscionable Judging: A Case Study

of California Courts’ Grapple with Challenges to

Mandatory Arbitration Agreements, 62 Hastings L.J.

1065, 1083 (2011). The courts found unconscionability in 50.6% of the arbitration cases, but in only

16.7% of the non-arbitration cases. Id. And,

remarkably, three out of four cases in the sample

involved an arbitration agreement. Id.

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And California’s courts continue to strike down

arbitration clauses at a rapid clip. Many postConcepcion/Italian Colors decisions use discriminatory rules targeting arbitration, the vindication

theory, or both to declare an arbitration agreement

unconscionable. See, e.g., Ramos v. Superior Court,

28 Cal. App. 5th 1042, 1060-62, 1064-67 (2018);

Penilla v. Westmont Corp., 3 Cal. App. 5th 205, 221,

223 (2016); Pinela v. Neiman Marcus Group, Inc.,

238 Cal. App. 4th 227, 250-56 (2015); Serafin v.

Balco Properties Ltd., LLC, 235 Cal. App. 4th 165,

183 (2015); Carmona v. Lincoln Millennium Car

Wash, Inc., 226 Cal. App. 4th 74, 85-89 (2014).

The use of a distinct and more severe unconscionability test to disfavor arbitration clauses can

be subtle. An egregiously one-sided contract can,

after all, be unconscionable even under the

conventional unconscionability rule. But as the

abiding ubiquity of arbitration clauses in the

California courts’ unconscionability jurisprudence

shows—and as the words-have-no-meaning version

of the term “unconscionable” employed in this case

confirms—the conventional rule and the California

arbitration-clause rule are not the same.

One factor creating the divide between the

shocking unfairness needed under the conventional

unconscionability test, on the one hand, and the mild

unfairness needed under California’s special test for

arbitration clauses, on the other, is the matter of ex

ante benefits. Under California law, a court may void

a contract that was unconscionable “at the time it

was made.” Cal. Civ. Code § 1670.5(a); Restatement

(Second) of Contracts § 208 (same). A key aspect of a

form arbitration agreement, when it is made, is the

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benefits it stands to provide to the many contracting

parties who never have a dispute. The use of

arbitration lowers a company’s dispute-resolution

costs, and these cost-savings are generally passed on

in the form of higher salaries for employees and

lower prices for consumers. Cf. Carnival Cruise Line,

Inc. v. Shute, 409 U.S. 585, 593-94 (1991) (discussing

the ex ante benefits of a form contract’s forum

selection clause). An unconscionability analysis that

ignores these gains has a “glaring flaw.” Russell

Korobkin, Bounded Rationality, Standard Form

Contracts, and Unconscionability, 70 U. Chi. L. Rev.

1203, 1273-74 (2003).

Consider the point this way: a company pays for

its arbitration rights. OTO “paid [Kho] to do a

number of things; one of the things it paid [him] to

do was agree to non-judicial dispute resolution.”

Oblix, Inc. v. Winiecki, 374 F.3d 488, 491 (7th Cir.

2004) (Easterbrook, J.). Viewed ex ante, the arbitration agreement Kho signed is no more suspect, and

no less enforceable, than an agreement setting forth

his other conditions of employment. Id.

California’s courts are perfectly capable of

conducting this type of examination. Take Chretian

v. Donald L. Bren Co., 151 Cal. App. 3d 385 (1984). A

real-estate developer contracted to pay a salesperson

one commission for finding a house buyer, and

another for “servicing” the buyer’s purchase

“through successful close of escrow.” Id. at 388. After

resigning, the salesperson sued for the second

commission on each of his sales for which escrow was

pending. The salesperson argued that the “servicing”

portion of his job was “perfunctory,” and that his

contract was therefore unconscionable to the extent

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it permitted the developer to withhold the second

commissions on the uncompleted sales. Disagreeing,

the Court of Appeal insisted that the contract be

“examined prospectively.” Id. at 389. Looking at the

contract this way made it clear that the developer

had “negotiated the second commission as a financial

incentive for its salespersons to remain with [it]

during pendency of escrows.” Id. The court took

account of this ex ante incentive, notwithstanding

the plaintiff’s choice to ignore it by resigning. Id.; see

also Am. Software, Inc. v. Ali, 46 Cal. App. 4th 1386,

1392-94 (1996) (similar).

When it comes to arbitration agreements,

however, this type of inquiry into ex ante benefits

generally disappears from the California Reports.

Armendariz, 24 Cal. 4th 83, creates arbitration-only

criteria that exclude consideration of such benefits

by definition. 24 Cal. 4th at 102, 117-18, 124.

Sonic II discusses only the expected expenses that

exist when an arbitration agreement is signed. 57

Cal. 4th at 1164. And the decision below discusses

what procedural rights Kho “surrendered” (Pet. App.

26a, 31a), and what procedural rights he “received in

return” (id.), but not what he might have gained in

the form of better perks or higher wages from the

widespread use of arbitration.

It is clear, in short, that in California’s courts,

“‘unconscionable’ means something quite different

when the validity of an arbitration agreement is at

issue.” Broome, supra, 3 Hastings Bus. L.J. at 67.

The Court should put an end to that discrimination.

The FAA—and the Supremacy Clause—demands it.

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CONCLUSION

The petition should be granted.

Respectfully submitted,

February 14, 2020

CORBIN K. BARTHOLD

Counsel of Record

CORY L. ANDREWS

WASHINGTON LEGAL

FOUNDATION

2009 Mass. Ave., NW

Washington, DC 20036

(202) 588-0302

cbarthold@wlf.org