Amicus Curiae Brief — MHN Gov't Servs., Inc. v. Zaborowski, 136 S. Ct. 27 (2015) (No. 14-1458)

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Supreme Court. US.

FILED

JUL 10 20%

OFFICE OF THE CLERK

No. 14-1458

In THE

Supreme Court of the Anited States

MHN GOVERNMENT SERVICES, INC., AND

MANAGED HEALTH NETWORK, INC..,

Petitioners.

Vv.

THOMAS ZABOROWSKI, ET AL.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF AMICUS CURIAE OF

ATLANTIC LEGAL FOUNDATION anpb

THE INTERNATIONAL ASSOCIATION OF

DEFENSE COUNSEL

IN SUPPORT OF PETITIONERS

MARY-CHRISTINE SUNGAILA MARTIN S. KAUFMAN

HAYNES AND BOONE, LLP Counsel of Record

600 ANTON BLVD., SUITE 700 ATLANTIC LEGAL FOUNDATION

CosTA MESA, CA 92626 2039 PALMER AVENUE, #104

(949) 202-3000 LARCHMONT, NY 10538

Attorneys for (914) 834-3322

INTERNATIONAL mskaufman@atlanticlegal.org

ASSOCIATION OF DEFENSE Attorneys for

COUNSEL ATLANTIC LEGAL FOUNDATION

July 10, 2015

QUESTION PRESENTED

Whether California’s severability rule, as

applied to agreements to arbitrate, is preempted

by the Federal Arbitration Act when California

law applies a different rule of contract severability

to contracts in general and when the arbitration

agreement contains an express severability clause.

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 29.6 of the Rules of this

Court, amici curiae Atlantic Legal Foundation and

International Association of Defense Counsel state

the following:

Atlantic Legal Foundation is a not for profit

corporation incorporated under the laws of the

Commonwealth of Pennsylvania. It has no share-

holders, parents, subsidiaries or affiliates.

The International Association of Defense

Counsel is a non-profit professional association. It

has no parent company and no shareholders.

TABLE OF CONTENTS

QUESTION PRESENTED. .... ..... es

CORPORATE DISCLOSURE STATEMENT. | ii

TABLE OF AUTHORITIES.... .. ie ae

INTEREST OF AMICI CURIAE. , ioe

PRELIMINARY STATEMENT. oat ty .4

SUMMARY OF ARGUMENT ... . .. ss

ARGUMENT...... fa ae wes ee

The Decisions Below Are Inconsistent

With The Federal Arbitration Act and

This Court’s Teaching on the Enforceability

of Arbitration Agreements.. ..... eo wee

CONCLUSION.... .. .... ‘s . 24

TABLE OF AUTHORITIES

Page(s)

Cases

14 Penn Plaza LLC v. Pyett,

Sa Ws Oe, PG. wos cee tl UC

Adair v. Stockton Unified School Dist.,

77 Cal.Rptr.3d 62 (Cal. App. 2008). ...... 15

Allan v. Snow Summit, Inc.,

59 Cal.Rptr.2d 813 (Cal. Ct. App. 1996). ..16

Allied-Bruce Terminix Cos. v. Dobson,

American Express Co. v. Italian Colors

Restaurant, 133 S. Ct. 2304 (2013).... .. 2-3

Armendariz v. Found. Health Psychcare

Servs., Inc., 6 P.3d 669 (Cal. 2000)... . passim

AT&T Mobility LLC v. Concepcion,

131 S. Ct. 1740 (2011)... ... ... .. passim

Baeza v. Superior Court, 135 Cal.Rptr.3d 557

(Cal. Ct. App. 2011). .... ... eo

Birbower, Montalbano, Condon & Reis U.

Super. Ct., 949 P.2d 1 (Cal. 1998)...... 15-16

Broughton v. Cigna, 988 P.2d 67 (Cal. 1999).. 19

Buckeye Check Cashing, Inc. v. Cardegna,

546 U.S. 440 (2006). ......... jos ee

Carmona v. Lincoln Millennium Car

Wash, Inc., 171 Cal.Rptr.3d 42

(Cal. Ct. App. 2014)... ... ....... 21

Chavarria v. Ralph’s Grocery Co.,

733 F.3d 916 (9th Cir. 2013)... ra

Circuit City Stores, Inc. v. Adams,

532 U.S. 105 (2001). . eae oi

Cruz v. PacifiCare Health Systems, a

66 P.34 1167 (Cal. 2003)... ...... .19

Dean Witter Reynolds Inc. v. Byrd,

470 U.S. 213 (1985). . 7 soe ce ee

DIRECTYV, Inc. v. ctaiiain No. 14- 462. ee pt

Doctor’s Assocs., Inc. v. Casarotto,

Say a ee Ss bc oe eka Sa

Ellis v. U.S. Sec. Assocs., 169 Cal.Rptr.

3d 752 (Cal. Ct. App. 2014)... .... . 7-8

GAR Energy & Associates, Inc. v.

Ivanhoe Energy Inc., No. 1:11-CV-00907 (AW)),

2011 WL 6780927 (E.D. Cal. Dec. 27, 2011),

report and recommendation adopted,

2012 WL 174952 (E.D. Cal. Jan. 20, 2012).. 18

Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20 (1991). .... ..... Tee)

Green Tree Fin. Corp.-Ala. v. Randolph,

531 U.S. 79 (2000)... .... .19

Hedges v. Frink, 163 P. 884 (Cal. 1917). 15

Herskowitz v. Apple Inc.,

940 F. Supp. 2d 1131 (N.D. Cal. 2013)..... 18

Higgins v. Superior Court,

45 Cal.Rptr.3d 293 (Cal. Ct. App. 2006). ..17

In re Marriage of Facter, 152 Cal.Rptr.3d 79

Gis. Ge. A BE cc cece ——c

vil

Ingle v. Circuit City Stores, Inc.,

328 F.3d 1165 (9th Cir. 2003)..... ..... 0,9

Lhotka v. Geographic Expeditions, Inc.,

104 Cal.Rptr.3d 844

(Cal. Ct. App. 2010). ... eee,

Little v. Auto Stiegler, Inc.,

Fe | fo re 15

Lona v. Citibank, N.A..,

134 Cal.Rptr.3d 622 (Cal. Ct. App. 2011).. 18

Marathon Entertainment, Inc. v. Blasi,

174 P.36 741 Wal. BOOS). .. ....2.-: ie

Marin Storage & Trucking, Inc. v.

Benco Contracting & Engineering, Inc.,

107 Cal.Rptr.2d 645 (Cal. Ct. App. 2001)... 16

Marmet Health Care Ctr., Inc. v. Brown,

132 S. Ct. 1201, 1203-04 (2012)........... 14

Mitsubishi Motors Corp. v. Soler

Chrysler—Plymouth, Inc.,

ee ee ae ee 13, 23

Moses H. Cone Mem'l Hosp. v. Mercury Constr.

Corp., 460 U.S. 1 (1068)... ... ... ..-13

Nitro-Lift Techs., L.L.C. v. Howard,

133 S. Ct. 500 (2012) (per curiam). ....... 14

Oblix, Inc., v. Winiecki, 374 F.3d 488

(7th Cir. 2004). ..... ba ara ual ea na 20

Oguejiofor v. Nissan, 2011 WL 3879482

ea ie paelines ere

Olsen v. Breeze, Inc..,

55 Cal.Rptr.2d 818 (Cal. Ct. App.1996). 16

vii

Parada v. Super. Ct., 98 Cal.Rptr.3d 743

Se, Gs SS ES. 6s « obo sc'es ey

Perry v. Thomas, 482 U.S. 483 (1987). . —

Pinnacle Museum Tower Assn. v.

Pinnacle Market Development (US), LLC,

Rent-A-Center, West, Inc. v. Jackson,

te e's 12

Samaniego v. Empire Today LLC,

140 Cal.Rptr.3d 492

ES rer re roe passim

Shearson/Am. Express Inc. v. McMahon,

ey aes POE, once ss ts wees Bee

Southland Corp. v. Keating,

465 U.S. 1(1984).. .. . . 14

Stolt-Nielsen S.A. v. AnimalFeeds Int'l — ”

gO EE)

Symcox v. Zuk,

34 Cal.Rptr. 462 (Cal. Dist. Ct. App. 1963). 15

Volt Info. Scis., Inc. v. Board of Trs. of

Leland Stanford Jr. Univ.,

489 U.S. 468 (1989)... ..... aoe

Statutes

California Code of Civil Procedure § 1021.. .. 8

California Civil Code § 1599.. . . og di: a

California Civil Code § 1717 (b)(1).. S

Federal Arbitration Act,

9 U.S.C. §§ 1, et seq.. ht Are passim

Federal Arbitration Act, 9 U. S. 8) ae 3,13

Other Sources

1 Witkin, Summary of Cal. Law Contracts,

INTEREST OF AMICI CURIAE'’

The Atlantic Legal Foundation is a non-profit

public interest law firm founded in 1976 whose

mandate is to advocate and protect the principles

of less intrusive and more accountable

government, a market-based economic system, and

individual rights. It seeks to advance this goal

through litigation and other public advocacy and

through education. Atlantic Legal Foundation’s

board of directors and legal advisory committee

consist of legal scholars, corporate legal officers,

private practitioners, business executives, and

prominent scientists. Atlantic Legal’s directors and

advisors are familiar with the role arbitration

clauses play in the contracts entered into between

companies and between companies and consumers.

Some of Atlantic Legal’s directors and advisers

have decades of experience with arbitration — as

‘ Pursuant to Rule 37.2(a), timely notice of intent to file

this brief was given to all parties and all parties have

consented to the filing of this brief. The consents have been

lodged with the Clerk.

Pursuant to Rule 37.6, amici affirm that no counsel

for any party authored this brief in whole or in part, and no

counsel or party made a monetary contribution intended to

fund the preparation or submission of this brief. No person

other than amici curiae or their counsel made a monetary

contribution to the preparation or submission of this brief.

legal counsel, as arbitrators, and as members or

supporters of organizations that administer

arbitration regimes. They are familiar with the

benefits of arbitration, especially the role of

arbitration (and other “alternative dispute

resolution” mechanisms) in facilitating business

and commerce and in alleviating the burdens on

courts and parties.

The International Association of Defense

Counsel (“IADC”), established in 1920, is an

association of approximately 2,500 corporate and

insurance attorneys from the United States and

around the globe whose practice is concentrated on

the defense of civil lawsuits. The IADC is

dedicated to the just and efficient administration

of civil justice and continual improvement of the

civil justice system. The IADC supports a justice

system in which plaintiffs are fairly compensated

for genuine injuries, culpable defendants are held

liable for appropriate damages, and non-culpable

defendants are exonerated and can defend

themselves without unreasonable cost. In

particular, the IADC has a strong interest in the

fair and efficient administration of class actions as

well as arbitrations, both of which are increasingly

global in reach.

The abiding interest of amici in the benefits of

arbitration is exemplified by their participation as

amicus and as counsel for amici in American

Express Co. v. Italian Colors Restaurant, 133 S. Ct.

2304 (2013) and most recently in DIRECTV, Inc. v.

Imburgia, No. 14-462, currently before the Court.

Amici believe that the decisions of the Court of

Appeals for the Ninth Circuit and the district court

in this case are inconsistent with the Federal

Arbitration Act, 9 U.S.C. §§ 1, et seg. (“FAA”) and

AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740

(2011) in which this Court held that the FAA

means exactly what it says: Agreements to

arbitrate “shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at

law or in equity for the revocation of any

contract.”(/d. at 1745, quoting 9 U.S.C. § 2). The

FAA preempts state laws that expressly disfavor

arbitration agreements. The FAA also preempts

“generally applicable contract defenses,” which

purport to apply to all contracts, but which in

practice apply “only to arbitration” or that “derive

their meaning from the fact that an agreement to

arbitrate is at issue,” (id. at 1746) or which “have

a disproportionate impact on arbitration

agreements.” (Id. at 1747).

PRELIMINARY STATEMENT

In the instant case the parties agreed to

arbitrate their disputes, and they agreed that if

any specific terms of the agreement were deemed

invalid or unenforceable, a court should sever

those terms and enforce the remainder of the

agreement.

In construing and enforcing contracts generally,

California courts honor severability provisions, as

opposed to invalidating the entire agreement,

unless the core purpose of the agreement is illegal

or unless doing so would be impossible without

rewriting the agreement. In contrast, in construing

agreements to arbitrate, California courts hold

that the existence of more than one invalid

provision can be interpreted by a court to indicate

that the “stronger party” sought to use arbitration

not simply as an alternative to litigation, but as a

tool to take advantage of the “weaker party.” The

court can therefore refuse severance and, instead,

simply invalidate the entire agreement to

arbitrate. This, we submit, shows a clear bias

against arbitration.

Petitioners are military contractors who

contract with the Department of Defense to

provide military service members and their

families with confidential life-skills counseling.

Consultants who work for petitioners, including

respondents Zaborowski and Baldini, are

independent, highly-trained, and well-educated

professionals who hold graduate degrees and

professional licenses that require advanced

training. Pet. 4-5.

Respondents signed a contract, the Provider

Services Task Order Agreement (hereafter the

“Agreement”), which contains a section captioned

“Mandatory Arbitration” in bold and underlined

typeface written in the same type font and type

size as the rest of the contract. The arbitration

provision requires that the parties confer in good

faith to resolve any problems or disputes that may

arise under the Agreement as a condition

precedent to any arbitration demand by either

party, and that any controversy or claim arising

out of or relating to the Agreement, or breach

thereof, shall be settled by final and binding

American Arbitration Association arbitration in

San Francisco, California before a single, neutral

arbitrator who is licensed to practice law to be

chosen by the consultant (called the “Provider”)

from a list of three neutral arbitrators provided by

MHN. The Mandatory Arbitration clause further

states that the parties waive their right to a jury

or court trial. The Arbitration clause also

stipulates that the decision of the arbitrator shall

be final and binding, and that the arbitrator shall

have no authority to make material errors of law,

to award punitive damages, to add to, modify or

refuse to enforce any agreements between the

parties, or to make any award that could not have

been made by a court of law. The Arbitration

clause also provides that the prevailing party, or

substantially prevailing party’s costs of

arbitration, are to be borne by the other party,

including reasonable attorney’s fees. Pet. 5-7; Pet.

App. 56a-57a.

The Agreement also contains an express

severability clause, captioned “Severability”,

which, like the arbitration clause, is in the same

typeface and type size as the rest of the Agreement

and provides that if “any provision of this

Agreement is rendered invalid or unenforceable

.. . the remaining provisions of this Agreement

shall remain in full force and effect.” Pet. 7, Pet.

App. 5a.

Respondents filed a putative class-action

lawsuit in district court against Petitioners,

alleging violations of the Fair Labor Standards

Act. Pet. 7 Petitioners moved to compel

arbitration, which Respondents opposed. The

district court, applying California law, concluded

that multiple terms in the arbitration agreement

were unconscionable. Pet. 8, Pet. App. 17a-28a.

The district court refused to sever the purportedly

unconscionable provisions of the arbitration clause.

The district court noted that, under California law,

a court may decline a request to sever a contract

when the contract “is permeated by

unconscionability.”. Pet. App. 29a (internal

quotation marks omitted). The court invalidated

the entire arbitration agreement, holding that

“(tlhe finding of ‘multiple unlawful provisions’

allows atrial court to conclude that ‘the arbitration

agreement is permeated by an unlawful purpose”

and to deny severance. /d. (quoting Armendariz v.

Found. Health Psychcare Servus., Inc., 6 P.3d 669,

697 (Cal. 2000)).

A divided panel of the Ninth Circuit affirmed.

The majority of the panel agreed with the district

court that multiple provisions of the arbitration

agreement were unconscionable. Pet. 8, Pet. App.

at 2a-4a.

First, the panel held, the arbitrator-selection

clause is substantively unconscionable because it

gives MHN the “power to control arbitrator

candidates” citing Chavarria v. Ralph’s Grocery

Co., 733 F.3d 916, 923-26 (9th Cir. 2013) Pet. App.

3a. But, as the panel itself acknowledged, the

Agreement requires that those arbitrators be

“neutral.” Second, the panel held that the

Agreement’s six month limitations period is

substantively unconscionable because, given the

nature of plaintiffs’ claims, the limitations period

works as a “practical abrogation of the right of

action,” citing Ellis v. U.S. Sec. Assocs., 169

Cal.Rptr.3d 752, 757 (Cal. Ct. App. 2014). Pet.

App. 3a.

Third, the costs-and-‘ee-shifting clause, which

awards fees and costs to the “prevailing party, or

substantially prevailing party[],” is, in the panel’s

view, “substantively unconscionable” because it

results in an “unreasonable” and “unexpected”

allocation of risks, citing Samaniego v. Empire

Today LLC, 140 Cal.Rptr.3d 492, 497 (Cal. Ct.

App. 2012) because even if plaintiffs prevail on

some of their claims but not all, they may still be

required to pay MHN’s attorney’s fees and costs;

this provision, the panel wrote, is contrary to the

applicable statutory cost-shifting regimes provided

by California and federal law, which entitle only

the prevailing plaintiff to an award of costs and

fees. The effect of this fee-award clause, the Panel

said, deters employees from seeking vindication of

their rights by pursuing arbitration. Pet. App. 4a.

However, California Code of Civil Procedure § 1021

provides that “[e]xcept as attorney’s fees are

specifically provided for by statute, the measure

and mode of compensation of attorneys and

counselors at law is left to the agreement, express

or implied, of the parties.” Moreover, California

Civil Code § 1717 (b)(1) provides that “the party

prevailing on the contract shall be the party who

recovered a greater relief in the action on the

contract,” a concept quite similar to the

Agreement’s “substantially prevailing party”

language. Finally, the panel held, the “filing fees

and punitive damages waiver” provisions are

“substantively unconscionable” because the

American Arbitration Association’s filing fee

hampers the employee more than it does MHN,

and the punitive damages waiver “improperly

proscribes available statutory remedies” afforded

to plaintiffs bringing employment claims. Pet. App.

4a, citing Ingle v. Circuit City Stores, Inc., 328 F.3d

1165, 1179 (9th Cir. 2003). The filing fee and

punitive damages waiver provisions are facially

neutral. The specifics of the filing fee provision are,

of course, unique to arbitration, and to that extent

the panel’s decision does not rest on a defense

“generally applicable” to all contracts.”

The Circuit Court panel also upheld the district

court’s denial of severance. The panel majority

relied on Samaniego, 140 Cal.Rptr.3d at 501 which

held: “An arbitration agreement can be considered

permeated by unconscionability if it ‘contains more

than one unlawful provision Such multiple

defects indicate a systematic effort to impose

* In some respects, arbitration is more accessible to

individual plaintiffs than court litigation; for example,

arbitration procedures usually limit discovery, which is

frequently prolonged and expensive. Indeed, the Agreement

at issue circumscribes discovery. See Agreement, § 20, Pet.

App. 56a.

arbitration . not simply as an alternative to

litigation, but as an inferior forum that works to

the [stronger party’s] advantage.” Pet. 8-9; Pet.

App. 5a.

The panel majority rejected MHN’s preemption

arguments as “foreclosed by” Ninth Circuit

precedent, and held that the severability analysis

was not “impermissibly unfavorable to

arbitration.” Pet. App. 5a-6a (citing Chavarria, 733

F.3d at 926-27

Circuit Judge Gould dissented. Judge Gould

wrote that Armendariz was decided more than a

decade before the Supreme Court’s decision in

Concepcion and that “[t]he reasoning in

Armendariz that multiple unconscionable

provisions will render an arbitration agreement’s

purpose unlawful has a disproportionate impact on

arbitration agreements’ and should have been

preempted.” Pet. App. 8a (quoting Concepcion, 131

S. Ct. at 1747). Judge Gould further observed that

“Concepcion and its progeny should create a

presumption in favor of severance when an

arbitration agreement contains a relatively small

number of unconscionable provisions that can be

meaningfully severed and after severing the

unconscionable provisions, the arbitration

agreement can still be enforced.” Jd.

Remarkably, the Ninth Circuit panel majority

seemed to ignore entirely this Court’s holding in

Concepcion, which it cited not once.

The Ninth Circuit denied further review Pet.

10, Pet. App. 31a.

SUMMARY OF ARGUMENT

California courts routinely display the very

hostility to arbitration that the FAA was designed

to end. Indeed, this case, and cases such as

DIRECTV v. Imburgia, No. 14-462, presently

before the Court, demonstrate that California law,

whether construed by state courts or by federal

courts sitting in California, is frequently in conflict

with the language and purpose of the FAA and this

Court’s FAA jurisprudence.

The Ninth Circuit’s decision upholding

California’s unconscionability/non-severability

rule is contrary to binding precedent of this Court

construing the FAA.* This Court’s review is

necessary to effectuate the primacy of federal

arbitration law

* The decision below also creates conflicts among the

circuits, as the Petition amply shows. See Pet. at 18-21.

ARGUMENT

THE DECISIONS BELOW ARE

INCONSISTENT WITH THE FEDERAL

ARBITRATION ACT AND THIS COURT’S

TEACHING ON THE ENFORCEABILITY OF

ARBITRATION AGREEMENTS

Amici urge this Court to grant the petition and,

ultimately, on the merits, reverse the Court of

Appeal’s decision and reaffirm this Court’s

holdings in AT&T Mobility LLC v. Concepcion, 131

S. Ct. 1740 (2011), Stolt-Nielsen S.A. ov.

AnimalFeeds Int'l Corp., 559 U.S. 662 (2010) and

numerous other cases which recognize the

overriding Congressional policy favoring

arbitration.

This Court has repeatedly held that the

“fundamental principle [is] that arbitration is a

matter of contract,” Concepcion, 131 S. Ct. at 1745

(quoting Rent-A-Center, West, Inc. v. Jackson, 561

U.S. 63, 67 (2010)); see also Stolt-Nielsen, 559 U.S.

at 681; Volt Information Scis., Inc. v. Board of Trs.

of Leland Stanford Jr. Univ., 489 U.S. 468, 479

(1989), and that courts must enforce arbitration

agreements according to their terms, Volt, 489 U.S.

at 478; Stolt-Nielsen, 559 U.S. at 682; Concepcion,

131 S. Ct. at 1748.

The FAA, and section 2 in particular, “was

intended to ‘revers[e] centuries of judicial hostility

to arbitration agreements,’ by ‘placing arbitration

agreements upon the same footing as other

contracts.” Shearson/American Express, Inc. v.

McMahon, 482 U.S. 220, 225-226 (1987) (citations

omitted). The FAA reflects “a ‘liberal federal policy

favoring arbitration.” Concepcion, 131 S. Ct. at

1745 (quoting Moses H. Cone Mem’ Hosp. v.

Mercury Constr. Corp., 460 U.S. 1, 24 (1983);

Buckeye Check Cashing Inc. v. Cardegna, 546 U.S.

440, 443 (2006).“[A]s a matter of federal law, any

doubts concerning the scope of arbitrable issues

should be resolved in favor of arbitration,” Moses

H. Cone, 460 U.S. at 24-25 & n.32; Mitsubishi

Motors Corp. v. Soler Chrysler—Plymouth, Inc., 473

U.S. 614, 626 (1985). California courts often ignore

these precepts.

State courts may refuse to enforce arbitration

agreements “upon such grounds as exist at law or

in equity for the revocation of any contract,” 9

U.S.C. § 2. However, state law rules purporting to

apply to all contracts are preempted by the FAA if

they “have a disproportionate impact on

arbitration agreements.” Concepcion, 131 S. Ct. at

1747. Preemption also applies when a “generally

applicable contract defense,” applies, in practice,

“only to arbitration” or “derive[s] [its] meaning

from the fact that an agreement to arbitrate is at

issue.” Id. at 1746; see also, e.g., Marmet Health

Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1203-04

(2012); Rent-A-Center, 561 U.S. at 67-68; Preston v.

Ferrer, 552 U.S. 346, 356 (2008); Buckeye Check

Cashing, Inc. v. Cardegna, 546 U.S. 440, 443-44

(2006); Doctor’s Assocs., Inc. v. Casarotto, 517 U.S.

681, 687-88 & n.3 (1996); Allied-Bruce Terminix

Cos. v. Dobson, 513 U.S. 265, 270-71 (1995); Perry

v. Thomas, 482 U.S. 483, 492 n.9 (1987);

Southland Corp. v. Keating, 465 U.S. 1, 16 & n.11

(1984).

The California law at issue here — which

encourages courts to void arbitration agreements

that contain clauses that are deemed

unconscionable, rather than to sever the offending

provisions and preserve the essence of the

agreement to arbitrate — is preempted by federal

law. The state court decisions on which the courts

below rely evince a strong aversion to parties’

rights to contract for arbitration and the continued

“judicial hostility towards arbitration” that the

FAA was intended to foreclose. Nitro-Lift Techs.,

L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per

curiam), quoting Concepcion, 131 S. Ct. at 1745,

1747, 1757; see also Gilmer v. Interstate/Johnson

Lane Corp., 500 U.S. 20, 24 (1991).

California courts generally enforce valid parts

of a contract: “It is settled that where a contract

has both void and valid provisions, a court may

sever the void provision and enforce the remainder

of the contract.” Adair v. Stockton Unified School

Dist., 77 Cal.Rptr.3d 62 (Cal. Ct. App. 2008)

(employment contract), citing California Civil Code

§ 1599. This has been the rule for a century, and

remains so today. See Hedges v. Frink,163 P. 884,

885 (Cal. 1917); Symcox v. Zuk,34 Cal.Rptr. 462,

466 (Cal. Dist. Ct. App. 1963); In re Marriage of

Facter, 152 Cal.Rptr.3d 79, 95 (Cal. Ct. App. 2013);

see also 1 Witkin, Summary of Cal. Law Contracts,

§ 422, at 463-464 (10th ed. 2005) and cases cited

therein.

A court will commonly determine severance is

appropriate unless “the central purpose of the

contract is tainted with illegality.” Marathon

Entertainment, Inc. v. Blasi, 174 P.3d 741, 754

(Cal. 2008). If the central purpose of the contract

is tainted with illegality, then the contract as a

whole cannot be enforced. On the other hand, if the

illegality is collateral to the main purpose of the

contract, and the illegal provision can be excised

from the contract by means of severance or

restriction, then such severance and restriction are

appropriate. See Little v. Auto Stiegler, Inc., 63

P.3d 979, 985-86 (Cal. 2003). Only “[iJf the court is

unable to distinguish between the lawful and

unlawful parts of the agreement” may the court

invalidate the entire contract. Birbower,

Montalbano, Condon & Frank v. Super. Ct., 949

P.2d 1, 12 (Cal. 1998). In Birbrower, the

California Supreme Court was dealing with

attorney’s fees — both fixed fee and contingency fee

arrangements — and held that nothing in the

nature of the agreement was an obstacle to

severance. It directed the trial court to determine,

on remand, whether a partially valid agreement

existed, and, if so, what value should be attributed

to legally provided services. Birbrower, 949 P.2d at

12-13. The central purpose of the Agreement in

this case, and of the arbitration provision of it,

cannot be said to be tainted with illegality.

Moreover, the relative bargaining power of the

parties, which is the rationale for disfavoring

arbitration provisions in employment or consumer

contracts, is not always decisive. California

routinely enforces limited warranties and other

terms found in form contracts, sometimes called

“contracts of adhesion.” See, e.g., Marin Storage &

Trucking, Inc. v. Benco Contracting & Engineering,

Inc., 107 Cal.Rptr.2d 645 (Cal. Ct. App. 2001)

(indemnification); Olsen v. Breeze, Inc., 55

Cal.Rptr.2d 818 (Cal. Ct. App. 1996) (release);

Allan v. Snow Summit, Inc., 59 Cal.Rptr.2d 813

(Cal. Ct. App. 1996)(promise to accept risk of

* Judge Gould showed that one can readily distinguish

between the lawful and allegedly unlawful parts of the

Agreement, excise the unlawful parts, and still preserve the

essence of the agreement to arbitrate. Pet. App. 8a-10a.

injury and to hold ski resort harmless). But

California courts treat arbitration agreements

differently, and impose on form arbitration clauses

more or different requirements from those imposed

on other contract clauses.”

One of the cases on which the Ninth Circuit

panel relied extensively, Armendariz, creates

special requirements and establishes special

hurdles for arbitration agreements. It applies a

bright-line rule disfavoring severability and

favoring nullification in the context of arbitration

agreements when there is none in the context of

ordinary contracts, and thus the FAA would

preempt this decision for its bias against

agreements to arbitrate. Because Armendariz

treats arbitration clauses more unfavorably than

* Unlike many such contracts, the arbitration and

severability provisions of the contracts between MHN and

respondents were in the same very readable type size as al]

other parts of the document and the title of the section was

set out in bold font. There was no attempt to hide or

minimize those provisions. Moreover, respondents and

other consultants are highly-educated professionals, well

able to understand the agreement they signed. In

Samaniego, the plaintiffs were low-level manual laborers,

not proficient in English, see 140 Cal.Rptr.3d at 498; see

also Higgins v. Superior Court, 45 Cal. Rptr.3d 293 (Cal.

Ct. App. 2006) (the parties to an agreement to appear in

reality television program were young and

unsophisticated).

other types of contracts, under Concepcion it is

preempted.

It is noteworthy that while some California

cases seem to acknowledge that Armendariz has

been “abrogated in relevant part on other grounds”

by Concepcion, the Ninth Circuit panel did not.

See, e.g., Herskowitz v. Apple Inc., 940 F Supp. 2d

1131, 1144 (N.D. Cal. 2013), Oguejiofor v. Nissan,

2011 WL 3879482 at *8 (N.D.Cal. 2011), Baeza v.

Superior Court, 135 Cal.Rptr.3d 557 (Cal. Ct. App.

2011), Lona v. Citibank, N.A., 134 Cal. Rptr.3d

622, 637 (2011), GAR Energy & Associates, Inc. v.

Ivanhoe Energy Inc., No. 1:11-CV-00907 AWI, 2011

WL 6780927, at *8 (E.D. Cal. Dec. 27, 2011), report

and recommendation adopted, 2012 WL 174952

(E.D. Cal. Jan. 20, 2012). Indeed, as noted above,

the panel’s decision does not even cite Concepcion.

California courts treat arbitration agreements

quite differently and exhibit the very suspicion of

and hostility towards arbitration this Court has

denounced. Samaniego, for example, holds that

when an “arbitration agreement contains more

than one unlawful provision,” that fact by itself

“indicate[s] a systematic effort to impose

arbitration on an employee not simply as an

alternative to litigation, but as an inferior forum

that works to the employer's advantage.”

Samaniego, 140 Cal.Rptr.3d at 501 (Cal. Ct. App.

2012), cited by the Ninth Circuit panel, Pet. App.

5a. See also Broughton v. Cigna, 988 P.2d 67, 78

(Cal. 1999) (“The judicial forum has significant

institutional advantages over arbitration in

administering a public injunctive remedy, which as

a consequence will likely lead to the diminution or

frustration of the public benefit if the remedy is

entrusted to arbitrators.”); Cruz v. PacifiCare

Health Systems, Inc., 66 P.3d 1157, 1163 (Cal.

2003) (“Arbitration cannot necessarily afford all

the advantages of adjudication in the area of

private attorney general actions, that in a narrow

class of such actions arbitration is inappropriate,

and that this inappropriateness does not turn on

the happenstance of whether the rights and

remedies being adjudicated are of state or federal

derivation,” and that this Court’s decisions in

Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S.

79 (2000) and Circuit City Stores, Inc. v. Adams,

532 U.S. 105 (2001) do not weaken the California

court’s holding in Broughton.)

This Court has repeatedly rejected such

“generalized attacks on arbitration that rest on

suspicion of arbitration as a method of weakening

the protections afforded in the substantive law.”

See, e.g., Green Tree Fin. Corp.-Ala., 531 U.S. at

89-90 (quotation omitted); Circuit City Stores, Inc.

(mandatory arbitration agreements in the

employment context fall under the FAA).

As Judge Easterbrook noted in Oblix, Inc., v.

Winiecki, 374 F.3d 488 (7th Cir. 2004) , arbitration

clauses usually are supported by consideration —

in this case the consultant’s compensation.

Contracts typically, contain “bundles of rights and

obligations” of both parties. An arbitration clause

is no more suspect, or any less enforceable, than

the other provisions. Arbitration was as much a

part of the meeting of the minds between MHN

and the consultants as were the consultant’s pay

and benefits, confidentiality undertakings, and

other terms.

Severance of provisions found to be illegal or

unenforceable would give effect to the intent of the

contracting parties, which was the “preeminent

concern” of Congress in passing the FAA — “to

enforce private agreements into which parties had

entered.” Dean Witter Reynolds Inc. v. Byrd, 470

U.S. 213, 221 (1985); see also Volt Info. Scis., Inc.

vu. Bd. of Trs. of Leland Stanford Jr. Univ., 489

U.S. at 479 (1989) (“the FAA’s primary purpose”

was to “ensurfe] that private agreements to

arbitrate are enforced according to their terms”).

California’s “two strikes and you’re out” rule

(see Samaniego, 140 Cal.Rptr.3d at 501 (“An

arbitration agreement can be_ considered

permeated by unconscionability if it contains more

than one unlawful provision... .” (emphasis

added)); see also Lhotka v. Geographic Expeditions,

Inc., 104 Cal.Rptr.3d 844, 853 (Cal. Ct. App. 2010);

Parada v. Super. Ct., 98 Cal.Rptr.3d 743, 769 (Cal.

Ct. App. 2009), is clearly inimical to the principle

that state law cannot disfavor arbitration. Under

the California standard, as applied by the lower

courts in this case, the mere existence of multiple

“unlawful provisions” allows a trial court to

conclude that “the arbitration agreement is

permeated by an unlawful purpose” and to deny

severance. See Armendariz, 6 P.3d at 697); see also

Carmona v. Lincoln Millennium Car Wash, Inc.,

171 Cal.Rptr.3d 42, 55 (Cal. Ct. App. 2014).

Armendariz sets categorical requirements specific

to arbitration clauses.°

* Armendariz sets forth four “minimum requirements

for the arbitration of nonwaivable statutory claims,”

including claims of discrimination in employment asserted

under the FEHA. Armendariz, 6 P.3d at 757-758, 766.

First, the arbitration agreement “may not limit statutorily

imposed remedies such as punitive damages and attorney

fees.” (Id. at 759.) Second, “adequate discovery is

indispensable for the vindication of FEHA claims,” and

employees “are at least entitled to discovery sufficient to

adequately arbitrate their statutory claim, including access

to essential documents and witnesses....” (Jd. at 760, 761.)

Third, “in order for. judicial review to be successfully

accomplished, an arbitrator in a FEHA case must issue a

written arbitration decision that will reveal, however,

briefly, the essential findings and conclusions on which the

award is based.” (Jd. at 762.) Fourth, “when an employer

imposes mandatory arbitration as a condition of

(continued...)

The Armendariz court, too, refused to apply the

FAA. Instead, it held that arbitration agreements

should be reviewed with “a particular scrutiny.” 6

P.3d at 757. It described arbitration as a potential

“instrument for injustice,” id. at 768, and an

“inferior forum,” id. at 775, rife with

“disadvantages that may exist for plaintiffs

arbitrating disputes,” id. at 770. Among these were

“the fact that courts and juries are viewed as more

likely to adhere to the law and less likely than

arbitrators to ‘split the difference’ between the two

sides, thereby lowering damages awards for

plaintiffs.” Id.

°(...continued)

employment, the arbitration agreement or arbitration

process cannot generally require the employee to bear any

type of expense that the employee would not be required to

bear if he or she were free to bring the action in court.” (Jd.

at 765, italics omitted.) The court in Armendariz further

held that employer agreements purporting to require

arbitration of nonwaivable statutory claims meeting these

four “minimum requirements” must additionally be

scrutinized under the principles of unconscionability “that

apply more generally to any type of arbitration imposed on

the employee by the employer as a condition of

employment, regardless of the type of claim being

arbitrated.” (Jd. at 766.) The California Supreme Court

reiterated these principles of unconscionability applicable

to arbitration agreements in Pinnacle Museum Tower Assn.

v. Pinnacle Market Development (US), LLC, 282 P.3d 1217

(Cal. 2012).

Armendariz openly displays the kind of hostility

to arbitration that this Court has repeatedly

criticized. In short, the rules derived from

Armendariz-— including the severance rule — do not

treat arbitration agreements equally with ordinary

contracts, as the FAA requires. See, e.g., 14 Penn

Plaza LLC v. Pyett, 556 U.S. 247, 266 (2009);

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

20, 30 (1991); Shearson/Am. Express Inc. v.

McMahon, 482 U.S. 220, 231-32 (1987); Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 626-27 (1985).

As Circuit Judge Gould showed in his dissent,

severance of the “offending” clauses would have

given effect to the intent of the contracting parties

and ensured that the essence of their agreement to

arbitrate would be enforced. Applying a different

rule to arbitration that treats arbitration

agreements less favorably than other contractual

promises, as California does, and the Ninth Circuit

did in this case, violates the FAA.

CONCLUSION

For the foregoing reasons, this Court should

grant the petition.

Respectfully submitted,

Martin S. Kaufman

Counsel of Record

Atlantic Legal Foundation

2039 Palmer Avenue, #104

Larchmont, New York 10538

(914) 834-3322

mskaufman@atlanticlegal.org

Attorneys for Amicus Curiae

Atlantic Legal Foundation

Mary-Christine Sungaila

Haynes and Boone, LLP

600 Anton Blvd., Suite 700

Costa Mesa, California 92626

(949) 202-3000

mc.sungaila@haynesboone.com

Attorneys for Amicus Curiae

International Association

of Defense Counsel

July 10, 2015

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.