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

No. 19-875

IN THE

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_______________

OTO, L.L.C.,

Petitioner,

v.

KEN KHO;

JULIE A. SU, CALIFORNIA LABOR COMMISSIONER,

Respondents.

_______________

On Petition For A Writ Of Certiorari

To The Supreme Court Of California

_______________

BRIEF OF THE CATO INSTITUTE

AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

_______________

ILYA SHAPIRO

CATO INSTITUTE

1000 Massachusetts Ave., N.W.

Washington, D.C. 20001

(202) 842-0200

ishapiro@cato.org

BRADLEY J. HAMBURGER

Counsel of Record

SAMUEL ECKMAN

GIBSON, DUNN & CRUTCHER LLP

333 South Grand Avenue

Los Angeles, CA 90071-3197

(213) 229-7000

bhamburger@gibsondunn.com

Counsel for Amicus Curiae

QUESTION PRESENTED

Does the Federal Arbitration Act prohibit states

from invalidating contracts on the ground that they

require resolution of disputes in arbitration rather

than in an administrative proceeding?

ii

TABLE OF CONTENTS

Page

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

INTRODUCTION AND SUMMARY OF

ARGUMENT ............................................................... 1

ARGUMENT ............................................................... 4

I.

II.

CALIFORNIA COURTS HAVE A LONG

HISTORY OF REFUSING TO ENFORCE

ARBITRATION AGREEMENTS,

PROMPTING MULTIPLE REVERSALS

FROM THIS COURT. ....................................... 4

A.

Judicial Hostility To

Arbitration In California Is

Well Documented. ............................... 4

B.

This Court Has Repeatedly

Rejected California’s Hostility

To Arbitration...................................... 9

NOTWITHSTANDING THIS COURT’S

DECISIONS, CALIFORNIA COURTS

CONTINUE TO INVENT NEW WAYS TO

FRUSTRATE THE ENFORCEMENT OF

ARBITRATION AGREEMENTS. ....................... 11

III. THIS COURT SHOULD GRANT

CERTIORARI TO REJECT THE

CALIFORNIA SUPREME COURT’S

LATEST ATTEMPT TO UNDERMINE THE

FREEDOM OF PARTIES TO ENTER INTO

ARBITRATION AGREEMENTS. ....................... 14

CONCLUSION .......................................................... 18

iii

TABLE OF AUTHORITIES

Page(s)

Cases

Allied-Bruce Terminix Cos. v. Dobson,

513 U.S. 265 (1995) ............................................. 1

AT&T Mobility LLC v. Concepcion,

563 U.S. 333 (2011) ............................... 10, 11, 13

Carter v. Countrywide Credit Indus., Inc.,

362 F.3d 294 (5th Cir. 2004) ............................... 5

DirecTV, Inc. v. Imburgia,

136 S. Ct. 463 (2015) ................................... 11, 14

Discover Bank v. Superior Court,

113 P.3d 1100 (Cal. 2005) ....................... 9, 10, 11

Dominick’s Finer Foods v. Nat’l Constr. Servs., Inc.,

2010 WL 891321 (C.D. Cal. Mar. 9, 2010) ......... 5

Henry Schein, Inc. v. Archer & White Sales, Inc.,

139 S. Ct. 524 (2019) ........................................... 2

Iskanian v. CLS Transp. L.A., LLC,

327 P.3d 129 (Cal. 2014) ................................... 13

Kindred Nursing Ctrs. Ltd. P’ship v. Clark,

137 S. Ct. 1421 (2017) ......................................... 6

McGill v. Citibank, N.A.,

393 P.3d 85 (Cal. 2017) ..................................... 13

iv

Nagrampa v. MailCoups, Inc.,

469 F.3d 1257 (9th Cir. 2006) ............................. 5

Perry v. Thomas,

482 U.S. 483 (1987) ....................................... 9, 10

Preston v. Ferrer,

552 U.S. 346 (2008) ............................................. 9

Oce Bus. Servs., Inc. v. Christensen,

803 N.Y.S.2d 19 (2005) ....................................... 5

Ramos v. Superior Court,

28 Cal. App. 5th 1042 (2018) ............................ 12

Rent-A-Ctr., W., Inc. v. Jackson,

561 U.S. 63 (2010) ............................................. 16

Southland Corp. v. Keating,

465 U.S. 1 (1984) ................................................. 9

Statutes

9 U.S.C. § 2 ........................................................... 1, 6

Cal. Lab. Code § 98 ................................................. 14

Cal. Lab. Code § 98.2(a) ......................................... 14

Other Authorities

Charles L. Knapp, Blowing the Whistle on

Mandatory Arbitration:

Unconscionability as a Signaling Device,

46 San Diego L. Rev. 609 (2009)..................... 8, 9

v

E. Gary Spitko, Federal Arbitration Act

Preemption of State Public-Policy-Based

Employment Arbitration Doctrine: An

Autopsy and Argument for Federal

Oversight,

20 Harv. Negot. L. Rev. 1 (2015) ............ 4, 11, 12

Paul Thomas, Conscionable Judging: A

Case Study of California Courts’ Grapple

with Challenges to Mandatory

Arbitration Agreements,

62 Hastings L.J. 1065 (2011) .............................. 7

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) ................ 7, 8

Susan Randall, Judicial Attitudes Toward

Arbitration and the Resurgence of

Unconscionability,

52 Buff. L. Rev. 185 (2004) ............................. 7, 8

Thomas J. Stipanowich, The Third

Arbitration Trilogy: Stolt-Nielsen, RentA-Center, Concepcion and the Future of

American Arbitration,

22 Am. Rev. Int’l Arb. 323 (2011) ....................... 6

INTEREST OF AMICUS CURIAE1

The Cato Institute was established in 1977 as a

nonpartisan public policy research foundation dedicated to advancing the principles of individual liberty,

free markets, and limited government. Cato’s Center

for Constitutional Studies was established in 1998 to

help restore the principles of limited constitutional

government that are the foundation of liberty. Toward

those ends, Cato publishes books and studies, conducts conferences and forums, files amicus briefs, and

produces the Cato Supreme Court Review.

This case concerns Cato because it implicates the

fundamental principle that contracts between private

parties should be enforced according to their terms

without government interference.

INTRODUCTION AND

SUMMARY OF ARGUMENT

Congress enacted the Federal Arbitration Act

(“FAA”) in 1925 “to overcome judicial hostility to arbitration agreements.” Allied-Bruce Terminix Cos. v.

Dobson, 513 U.S. 265, 272 (1995). By providing that

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, the FAA established that “arbitration is a

1

Pursuant to Rule 37.6, counsel for amicus curiae states that

no counsel for a party authored this brief in whole or in part and

no one other than the amicus and its counsel made a monetary

contribution to fund the preparation or submission of this brief.

Pursuant to Rule 37.2, counsel for amicus curiae states that

counsel for Petitioner and Respondents received timely notice of

intent to file this brief, and each has consented in writing to the

filing of this brief.

2

matter of contract, and courts must enforce arbitration agreements according to their terms,” Henry

Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct.

524, 529 (2019).

Nearly a century later, courts across the country

continue to treat arbitration agreements as a form of

second-class contract that they will enforce only when

doing so serves their interests and brush aside otherwise. Nowhere is this judicial hostility to arbitration

more apparent or more flagrant than in California.

For decades, California courts have stood in defiance

of the FAA. And when this Court has intervened to

remind them that they are bound by this federal statute—as it has done no fewer than five times, including

three times in the past 12 years—California courts

have responded by inventing new justifications for invalidating contracts calling for arbitration.

This tendency has only become more pronounced

in recent years. After this Court struck down a California Supreme Court rule holding that class action

waivers in consumer contracts are per se unconscionable, the California Supreme Court responded by recasting various forms of relief under California’s consumer-protection laws as “public” in nature and thus

beyond the purview of the FAA. At the same time,

California courts have stretched the facially neutral

unconscionability doctrine beyond all recognition

when an arbitration agreement is at issue. In fact,

just last year the California Court of Appeal refused

to enforce an arbitration agreement between a law

firm and one of its partners who had a Ph.D. in biophysics, on the ground that the agreement was somehow unconscionable despite the sophistication of both

parties. One would be forgiven for doubting whether

3

the same result would have obtained had the contract

in question been anything other than a contract to arbitrate.

The decision below is the latest example of the refusal of California courts to enforce contracts that require the arbitration of disputes, and it illustrates how

far astray those courts have gone in their quest to rid

California of arbitration. The agreement here took

care to ensure that all disputes would be arbitrated in

a process that closely tracked ordinary civil litigation,

including “full discovery,” “adherence to ‘all rules of

pleading . . . [and] all rules of evidence,’” and decision

“before a retired superior court judge.” Pet. App. 4a.

And yet the California Supreme Court counterintuitively held that this contract was unconscionable on

the ground that it required employees to forgo asserting their claims in an administrative proceeding

providing fewer procedural protections than would be

available in arbitration.

The implications of that decision reach far beyond

the facts of this case and cut to the very heart of the

freedom of contract. The California Supreme Court

has created an irrational and arbitrary bar on the

ability of employers and employees to agree to resolve

disputes through arbitration. Although the decision

below is just the most recent in a long line of cases in

which California courts have flouted the FAA and this

Court, it surely will not be the last.

This Court should grant certiorari and again reject the California Supreme Court’s latest attempt to

evade the FAA.

4

ARGUMENT

I.

CALIFORNIA COURTS HAVE A LONG HISTORY OF

REFUSING

TO

ENFORCE

ARBITRATION

AGREEMENTS,

PROMPTING

MULTIPLE

REVERSALS FROM THIS COURT.

That California courts are hostile to arbitration is

no secret. Courts and commentators alike have documented the creativity and zeal with which courts in

California have attempted to sidestep Congress’s directive that arbitration agreements enjoy the same

protection as any other contract. Despite this Court’s

vigorous enforcement of the FAA, California courts

still have not gotten the message that they cannot apply a different set of rules to contracts calling for the

arbitration of disputes.

A. Judicial Hostility To Arbitration In

California Is Well Documented.

“California’s legislature and courts have been

among the most aggressive in seeking to limit arbitration.” E. Gary Spitko, Federal Arbitration Act Preemption of State Public-Policy-Based Employment Arbitration Doctrine: An Autopsy and Argument for Federal Oversight, 20 Harv. Negot. L. Rev. 1, 4 (2015). And

while there is no dispute that “[s]tates aside from California also have long” attempted to evade the FAA’s

mandate, “no other state has done so to the extent that

California has.” Id. at 5–6.

This hostility to arbitration—even as compared to

other states that have similarly hesitated to fully em-

5

brace the practice—has drawn the attention of numerous courts within and without California.2 It has also

drawn the attention of litigants who, in the words of

one federal judge in California, “have come to recognize ‘California courts’ open hostility to arbitration,’”

Dominick’s Finer Foods v. Nat’l Constr. Servs., Inc.,

2010 WL 891321, at *5 (C.D. Cal. Mar. 9, 2010), with

uncertain implications for those litigants’ faith in the

neutrality of the courts.

Of course, California courts have not generally

targeted arbitration explicitly. While courts before the

enactment of the FAA would not hide their antipathy

for arbitration, in the wake of that statute’s enactment—and particularly since this Court began to actively police compliance with the FAA in recent decades—courts have resorted to subtler means of

achieving the same result. In particular, California

courts have dressed up their hostility to arbitration in

the guise of generally applicable contract defenses—

primarily (but not exclusively) the doctrine of unconscionability.

2

See, e.g., Oce Bus. Servs., Inc. v. Christensen, 803 N.Y.S.2d

19, at *3 n.4 (2005) (unpublished) (“California is quite hostile to

the enforcement of pre-dispute agreements to arbitrate employment agreements, as compared to New York, which is far more

supportive of arbitration.”); Carter v. Countrywide Credit Indus.,

Inc., 362 F.3d 294, 301 n.5 (5th Cir. 2004) (“California law and

Texas law differ significantly, with the former being more hostile

to the enforcement of arbitration agreements than the latter.”);

Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1313 (9th Cir.

2006) (en banc) (Kozinski, J., dissenting) (observing that “California courts have shown a lamentable tendency to hold the arbitration clauses in [form] contracts unenforceable,” reflecting “a

disturbing trend of judicial hostility” to such contracts).

6

But while the FAA provides that a court may decline to enforce an arbitration agreement “upon such

grounds as exist at law or in equity for the revocation

of any contract,” 9 U.S.C. § 2, this Court has made

clear that the FAA not only “preempts any state rule

discriminating on its face against arbitration,” but

also “any rule that covertly accomplishes the same objective,” Kindred Nursing Ctrs. Ltd. P’ship v. Clark,

137 S. Ct. 1421, 1426 (2017). That is precisely what

California courts have done, applying the ostensibly

neutral unconscionability defense in a much more

sweeping manner when a contract calls for arbitration.

As one commentator has observed, although traditionally “judicial decisions grounded on unconscionability doctrine were few and far between,” “[w]ith the

expanded use of binding arbitration provisions in consumer contracts, . . . unconscionability doctrine came

into vogue as a means of curtailing perceived abuses.”

Thomas J. Stipanowich, The Third Arbitration Trilogy:

Stolt-Nielsen, Rent-A-Center, Concepcion and the Future of American Arbitration, 22 Am. Rev. Int’l Arb.

323, 352 (2011). And while the increased reliance on

unconscionability as a means of circumventing the

FAA has been widespread, “the courts of some states,

notably California, have been considerably more energetic in developing unconscionability doctrine than

others.” Id. at 353.

Empirical evidence confirms that California has

developed an increasingly hostile—and increasingly

circumspect—arbitration jurisprudence. As one study

of California Court of Appeal decisions between 1982

and 2006 found, “unconscionability challenges suc-

7

ceeded in about fifty-eight percent of cases in the arbitration context,” whereas “[i]n the non-arbitration

context . . . unconscionability challenges succeeded

only eleven percent of the time.” 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, 48 (2006). And these results are not a one-off.

On the contrary, a review of 119 cases decided by the

California Court of Appeal between 2005 and 2008

concluded that the court “found in favor of unconscionability at a noticeably higher rate in arbitration cases,

as compared to other cases”—50.6 percent compared

to just 16.7 percent. Paul Thomas, Conscionable

Judging: A Case Study of California Courts’ Grapple

with Challenges to Mandatory Arbitration Agreements, 62 Hastings L.J. 1065, 1083 (2011).

This disparity is not attributable to any intrinsic

difference in arbitration agreements as compared to

other types of contracts. In fact, in the early 1980s

“[t]he rate of unconscionability findings by type of contract, arbitration or nonarbitration, showed little variation,” with courts holding “12.5% of the arbitration

agreements, as compared to 15.2% of other types of

contracts, unconscionable.” Susan Randall, Judicial

Attitudes Toward Arbitration and the Resurgence of

Unconscionability, 52 Buff. L. Rev. 185, 196 (2004).

Just 20 years later, however, “[c]ourts found 50.3% of

the arbitration agreements unconscionable, as op-

8

posed to 25.6% of other types of contracts,” with “federal and state courts in California decid[ing] a significant number of these cases.” Id. at 194–95.3

This overwhelming evidence admits of only one

conclusion: “California courts continue to view arbitration agreements as a ‘lesser caste’ of contract provision to be ignored whenever the court suspects one

party may be disadvantaged by having to arbitrate its

claims.” Broome, 3 Hastings Bus. L.J. at 67 (footnote

omitted). And while they continue to mask their decisions in the language of unconscionability, “[t]hrough

both empirical and substantive analysis . . . the cloak

of the ‘generally applicable’ contract defense of unconscionability is removed, and these unique standards

and requirements are revealed for what they really

are: manifestations of the California courts’ ingrained

bias against arbitration as an alternative to the judicial forum.” Id. at 68.

To be sure, California is not alone in this practice.

But “California state courts are clearly playing a leading role” in a widespread resistance to Congressional

policy and this Court’s precedents, with a full onethird of state-court cases invalidating an arbitration

3

See also Charles L. Knapp, Blowing the Whistle on Mandatory Arbitration: Unconscionability as a Signaling Device, 46 San

Diego L. Rev. 609, 622–23 (2009) (“Over the entire period from

1990 through 2008, the annual number of nonarbitration cases

in which an unconscionability claim was upheld remained remarkably constant at only a handful—never more than half a

dozen per year. By contrast, not only did the annual number of

unconscionability claims in arbitration cases show a consistent

increase beginning in 1997, their relative rate of success also increased over the first years of the new century.” (footnote omitted)).

9

agreement on unconscionability grounds coming from

California. Knapp, 46 San Diego L. Rev. at 623–24.

For this reason, California decisions striking down arbitration agreements on unconscionability grounds—

as in this case—merit special attention from this

Court.

B. This Court Has Repeatedly Rejected

California’s Hostility To Arbitration.

This Court is no stranger to California’s insistence

that arbitration agreements are a form of second-class

contract. On the contrary, it has spent nearly 40 years

reviewing—and reversing—California decisions refusing to enforce arbitration agreements on increasingly inventive grounds.4 This Court’s interventions

reached a crescendo in the past decade.

First on the docket was the anti-arbitration rule

that the California Supreme Court created in Discover

Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).

4

See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 10 (1984)

(concluding that “[t]he California Supreme Court[’s] interpret[ation of a State] statute to require judicial consideration of

claims brought under the State statute . . . directly conflicts with

§ 2 of the Federal Arbitration Act”); Perry v. Thomas, 482 U.S.

483, 491 (1987) (holding that “[t]he oblique reference to the Federal Arbitration Act in footnote 15 of [the precedent relied on by

the California Court of Appeal] cannot fairly be read as a definitive holding” that the FAA does not require arbitration of claims

under California Labor Code § 229); Preston v. Ferrer, 552 U.S.

346, 359 (2008) (concluding that “[w]hen parties agree to arbitrate all questions arising under a contract, the FAA supersedes

state laws lodging primary jurisdiction in another forum,

whether judicial or administrative,” and thus “disapprov[ing] the

distinction between judicial and administrative proceedings

drawn by Ferrer and adopted by the appeal court”).

10

Discover Bank held that “class action waivers in consumer contracts of adhesion are unenforceable.” Id. at

1103. In the California Supreme Court’s view, such a

rule did not conflict with the FAA because “the principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally,” id. at 1112—even if it “may be the

case that arbitration becomes a less desirable forum

. . . if the arbitration must be conducted in a classwide

manner,” id. at 1117.

This Court did not just strike down the rule articulated by the California Supreme Court in Discover

Bank; it repudiated its reasoning root and branch.

Noting that “the judicial hostility towards arbitration

that prompted the FAA had manifested in ‘a great variety’ of ‘devices and formulas’ declaring arbitration

against public policy,” the Court confirmed that “the

FAA’s pre-emptive effect might extend even to

grounds traditionally thought to exist ‘at law or in equity for the revocation of any contract’” when those

grounds have “been applied in a fashion that disfavors

arbitration.” AT&T Mobility LLC v. Concepcion, 563

U.S. 333, 341–42 (2011). In support of this proposition,

the Court cited its prior decision in Perry, which announced the very same principle more than 20 years

earlier in the course of reversing a different California

decision refusing enforcement of an arbitration agreement. Id. at 341. Small wonder, then, that the Court

considered it “worth noting that California’s courts

have been more likely to hold contracts to arbitrate

unconscionable than other contracts.” Id. at 342.

11

While other courts may have been chastened by

such a reversal, California courts were emboldened.

Less than three years after Concepcion, the California

Court of Appeal invalidated a different arbitration

agreement under the very same Discover Bank rule

that this Court had recently held was invalid under

the FAA. Again reversing, this Court saw fit to begin

its opinion by reviewing the fundamental proposition

that “lower courts must follow this Court’s holding in

Concepcion” notwithstanding “[t]he fact that Concepcion was a closely divided case, resulting in a decision

from which four Justices dissented.” DirecTV, Inc. v.

Imburgia, 136 S. Ct. 463, 468 (2015).

In all, this Court has reviewed and reversed antiarbitration decisions of California courts on five separate occasions, each time concluding that they had

used ostensibly neutral state-law principles in a manner that failed to provide equal treatment to contracts

calling for arbitration. Yet California courts have

made it abundantly clear that they will continue crafting new anti-arbitration rules.

II. NOTWITHSTANDING THIS COURT’S DECISIONS,

CALIFORNIA COURTS CONTINUE TO INVENT NEW

WAYS TO FRUSTRATE THE ENFORCEMENT OF

ARBITRATION AGREEMENTS.

Although “a majority of the U.S. Supreme Court’s

landmark FAA preemption cases have arisen in the

context of challenges to California statutory or case

law . . . , especially in the context of employment arbitration agreements, the California courts have remained undeterred by the mere Supremacy Clause.”

Spitko, 20 Harv. Negot. L. Rev. at 4–5. They have instead developed a jurisprudence “characterized by its

12

creativity if not willful blindness to U.S. Supreme

Court precedents,” with each new doctrinal innovation

“of dubious validity from a preemption standpoint.”

Id. at 5.

The state of the law in California has reached such

a dismal condition that even lawyers can escape agreements to arbitrate on the grounds of unconscionability. In Ramos v. Superior Court, 28 Cal. App. 5th 1042

(2018), the California Court of Appeal denied a motion

filed by the law firm Winston & Strawn to compel arbitration of a case filed by one of its partners. The

court acknowledged that the partner was “an experienced litigator and patent practitioner with a doctorate in biophysics,” id. at 1046, who “had an established

career in intellectual property law,” had “previously

worked as a partner at two other law firms,” and was

“admitted as a solicitor in the United Kingdom,” id. at

1047. Nevertheless, the court concluded that “the arbitration agreement [wa]s procedurally unconscionable” because the partner “had no opportunity to negotiate or amend any term of th[e] agreement” and “was

presented with the Partnership Agreement the day after she began work and was told to return it, signed,

within 30 days.” Id. at 1064. At the same time, the

court found the arbitration agreement substantively

unconscionable because it required the partner to pay

her own attorney fees and split the arbitration costs

with her employer, limited the arbitrator’s authority

to award certain relief, and contained a confidentiality

provision. See id. at 1064–65.

It is difficult to imagine a non-arbitration contract

between such sophisticated parties that would fail un-

13

der such circumstances. And if a partner at a prestigious law firm with a Ph.D. in biophysics cannot be held

to her agreement to arbitrate, then nobody can.

At the same time that they have been stretching

unconscionability in the arbitration context beyond all

recognition, California courts have added a new epicycle to their “generally applicable defense” framework

to circumvent Concepcion. In particular, these courts

have recast entire categories of state-law claims as implicating public rights, such that they fall outside the

scope of the FAA altogether.

For example, the California Supreme Court has

refused to compel individual arbitration of “representative” claims under the California Labor Code’s

Private Attorneys General Act (“PAGA”), reasoning

that such claims “directly enforce the state’s interest

in penalizing and deterring employers who violate

California’s labor laws” and thus are not governed by

“the United States Supreme Court’s FAA jurisprudence,” which “consists entirely of disputes involving

the parties’ own rights and obligations, not the rights

of a public enforcement agency.” Iskanian v. CLS

Transp. L.A., LLC, 327 P.3d 129, 150, 152 (Cal. 2014).

The California Supreme Court has employed similar reasoning in refusing to compel individual arbitration of claims for “public injunctive relief ” under

California’s Unfair Competition Law, Consumer Legal

Remedies Act, and False Advertising Law, concluding

that such relief is “a substantive statutory remedy that

the Legislature . . . has made available” to plaintiffs

rather than “‘a procedural device’” like a class action,

and thus has nothing to do with Concepcion. McGill

v. Citibank, N.A., 393 P.3d 85, 97 (Cal. 2017).

14

In short, California courts have become increasingly assertive in their hostility to arbitration in the

five years since DirecTV. This assertiveness reached

its culmination in the decision below.

III. THIS COURT SHOULD GRANT CERTIORARI TO

REJECT THE CALIFORNIA SUPREME COURT’S

LATEST ATTEMPT TO UNDERMINE THE FREEDOM

OF PARTIES TO ENTER INTO ARBITRATION

AGREEMENTS.

The California Supreme Court’s decision in this

case exemplifies and extends its post-Concepcion assault on arbitration by applying an increasingly elastic unconscionability doctrine in a manner that would

never apply to non-arbitration agreements. Worse

still, the decision creates a near de facto categorical

exemption from arbitration for an entire category of

California employment claims—namely, those that

would otherwise be eligible for a so-called “Berman”

administrative hearing.5

As has become its practice, the California Supreme Court insists that it has done no such thing,

and that its decision here is simply the result of a

faithful application of neutral unconscionability principles to the particular facts at hand. Although it

5

A Berman hearing is a streamlined administrative procedure

before the California Labor Commissioner in which certain employment claims, including claims for unpaid wages, may be litigated. See Cal. Lab. Code § 98 et seq.; see also Pet. App. 7a–10a.

Although an employee has the choice whether to file a complaint

with the Labor Commissioner or proceed directly to court, the

Labor Commissioner’s decision is subject to de novo review in the

California Superior Court. Cal. Lab. Code § 98.2(a).

15

found the agreement at issue to be procedurally unconscionable, the court emphasized that “an unconscionability analysis must be sensitive to context,” and

that “the same contract terms might pass muster under less coercive circumstances.” Pet. App. 30a–31a.

And although it found the arbitration process to be

substantively unconscionable, the court reasoned that

“we have simply evaluated the bargain at issue” and

“[w]e have not said that no arbitration could provide

an appropriate forum for resolution of Kho’s wage

claim, but only that this particular arbitral process . . .

is unconscionable.” Id. at 33a.

But if an arbitration agreement like this one cannot pass muster under California law, it is unclear

what contract can. The terms of the agreement that

the California Supreme Court found “‘overly harsh,’”

“‘unduly oppressive,’” and “‘so one-sided as to shock

the conscience’” under California’s substantive unconscionability analysis, Pet. App. 20a (some quotation

marks omitted), provide for the very same protections

that define everyday civil litigation, id. at 25a (criticizing “the arbitration provided for here” because it

“incorporates the intricacies of civil litigation”). According to the California Supreme Court, an arbitration agreement that provides the same protections as

civil litigation—and not some streamlined procedures

comparable to those in a Berman hearing—is per se

unfair.

Underlying the California Supreme Court’s decision is a subtler yet more pernicious skepticism of the

foundational premise of the freedom of contract: mutual exchange. “The FAA reflects the fundamental

principle that arbitration is a matter of contract,” and

16

thus “requires courts to enforce [arbitration agreements] according to their terms.” Rent-A-Ctr., W., Inc.

v. Jackson, 561 U.S. 63, 67 (2010). And arbitration

agreements, like any contract, necessarily entail each

party forgoing something of value in order to gain

something of greater value from the other party.

Here, just such an exchange took place. While

Mr. Kho agreed to resolve this dispute according to the

normal rules of civil litigation rather than through the

streamlined procedures afforded in a Berman hearing—as he was free to do in the absence of an arbitration agreement—OTO agreed to submit itself to these

very same rules with respect to all other claims

Mr. Kho might bring against it. There is every reason

to believe that employees like Mr. Kho would consider

the benefits of this trade-off well worth the cost. After

all, Berman hearings are available only for a subset of

employment claims, whereas the arbitration agreement covers a wide range of other claims where the

enhanced procedures available in civil litigation

might prove advantageous to employees as compared

to the more streamlined procedures typically afforded

in arbitration.

The California Supreme Court, however, substituted its own judgment concerning the equities of this

exchange for that of the parties. In its view, the arbitration agreement “was sufficiently one-sided as to

render [it] unenforceable” because “Kho surrendered

the full panoply of Berman procedures and assistance”

while “[w]hat he got in return was access to a formal

and highly structured arbitration process that closely

resembled civil litigation if he could figure out how to

avail himself of its benefits and avoid its pitfalls.” Pet.

App. 31a. But as explained above, that was not all he

17

got; only by narrowly focusing on the arbitration

agreement’s application to claims that could be asserted in a Berman hearing could the bargain ever appear “one-sided.”

In fact, it is the decision below that requires a onesided bargain—albeit one that would redound solely

to the benefit of employees like Mr. Kho. By holding

that an arbitration agreement may be enforced with

respect to claims subject to a Berman hearing only

where it “provide[s] in exchange an accessible and affordable forum for resolving wage disputes,” Pet. App.

26a (emphasis omitted), the California Supreme

Court established that administrative process as an

inflexible baseline from which an arbitration agreement may deviate in favor of only one party.

The effect of this rule is plain. When parties are

denied the opportunity to engage in a mutual exchange for their shared benefit, there is no place for

contract. By precluding parties from negotiating the

methods of arbitrating employment claims like those

here, the California Supreme Court has effectively

closed off the possibility that any arbitration agreement will address those claims. That this discrimination is accomplished indirectly by a manipulation of

contract law doctrines rather than through an outright ban makes no difference—either approach violates the FAA.

18

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted.

ILYA SHAPIRO

CATO INSTITUTE

1000 Massachusetts Ave., N.W.

Washington, D.C. 20001

(202) 842-0200

ishapiro@cato.org

BRADLEY J. HAMBURGER

Counsel of Record

SAMUEL ECKMAN

GIBSON, DUNN & CRUTCHER LLP

333 South Grand Avenue

Los Angeles, CA 90071-3197

(213) 229-7000

bhamburger@gibsondunn.com

Counsel for Amicus Curiae

February 14, 2020