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

Sucre™? CCurt, Cs.

FILED

DEC 2- 20%

No. 14-1458

QESInE OF THE CLERK

In THE

Supreme Court of the Gnited States

MHN GOVERNMENT SERVICES, INC., AND

MANAGED HEALTH NETWORK, INC.,

Petitioners,

Vv.

THOMAS ZABOROWSKI, ET AL.,

Respondents.

7

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

+

BRIEF OF AMICI CURIAE

ATLANTIC LEGAL FOUNDATION AND

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

(949) 202-3000 Larchmont, NY 10538

Attorneys for Amicus (914) 834-3322

International Association mskaufman@atlanticlegal.org

of Defense Counsel Attorneys for Amicus

Atlantic Legal Foundation

December 2, 2015

i

QUESTION PRESENTED

Whether Federal law preempts California’s

severability rule applicable only to agreements to

arbitrate, even when the agreement contains an

express severability clause, and when California

law applies a different rule of contract severability

to other types of contracts.

‘3

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.

ill

TABLE OF CONTENTS

QUESTION PRESENTED.............. ieee

CORPORATE DISCLOSURE STATEMENT. .. ii

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

INTEREST OF AMICICURIAE. ........ cee

PRELIMINARY STATEMENT.............. 4

SUMMARY OF ARGUMENT. ............. 10

ee Fae chro 12

The Decisions Below Are Inconsistent

With The Federal Arbitration Act and

This Court’s Teaching on the Enforceability

of Arbitration Agreements.. ot das 12

ce ee eee ee eee aad. “eae

lV

TABLE OF AUTHORITIES

Page(s)

Cases

14 Penn Plaza LLC v. Pyett,

ee ee, ee, ce wentedenn 24

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).... 17

Allied-Bruce Terminix Cos. v. Dobson,

513 U.S. 265 (1995)... ..... a Tee 14

American Express Co. v. Italian Colors

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

Armendariz v. Found. Health Psychcare

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

AT&T Mobility LLC v. Concepcion,

fie Be Sy fl Ul} eee . passim

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

eR re ae 20

Birbower, Montalbano, Condon & Frank v.

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

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

Buckeye Check Cashing, Inc. v. Cardegna,

ee ee 65° \b'o5 ween ee 13, 14

Carmona v. Lincoln Millennium Car

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

ao eS ae ee ee oe 22

Vv

Chavarria v. Ralph’s Grocery Co.,

733 F.3d 916 (9th Cir. 2013). ...... 7,9

Circuit City Stores, Inc. v. Adams,

532 U.S.105(2001).. . ... ee aeue

Cruz v. PacifiCare Health Systems, in.

66 P.3d 1157 (Cal. 2003). . ..... 19

Dean Witter Reynolds Inc. v. Byrd,

470 U.S. 213(1985). .. . 21

DIRECTYV, Inc. v. Imburgia, No. 14- 462. . 3, 10

Doctor’s Assocs., Inc. v. Casarotto,

517 U.S. 681 (1996)... ..... ers

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

oe Tee Guan. Ce. Ape. BOLO. 6... cee ee 7

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).. 20

Gilmer v. Interstate/Johnson Lane Corp.,

PEE, 565s escceewssvex's 15, 24

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

531 U.S. 79 (2000). .... oe 19, 21

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

Herskowitz v. Apple Inc.,

940 F. Supp. 2d 1131 (N.D. Cal. 2013)..... 20

Higgins v. Superior Court,

45 Cal.Rptr.3d 293 (Cal. Ct. App. 2006)... . 18

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

(Cal. Ct. App. 2013). . . a aa 15

vi

Ingle v. Circuit City Stores, Inc.,

328 F.3d 1165 (9th Cir. 2003)............. 8

Lhotka v. Geographic Expeditions, Inc.,

104 Cal.Rptr.3d 844 (Cal. Ct. App. 2010)... 23

Little v. Auto Stiegler, Inc.,

$2 (..2,: 4% Ser 16

Lona v. Citibank, N.A.,

134 Cal.Rptr.3d 622 (Cal. Ct. App. 2011)... 20

Marathon Entertainment, Inc. v. Blasi,

ees 2.50 > 5 ££ eee. 15

Marin Storage & Trucking, Inc. v.

Benco Contracting & Engineering, Inc.,

107 Cal.Rptr.2d 645 (Cal. Ct. App. 2001).. 17

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

132 S. Ct. 1201, 1203-04 (2012)... .. 18-14

Martinez v. Master Prot. Corp.,

118 Cal.App.4th 107,

12 Cal.Rptr.3d 663 (2004). ve <_< «ae

Mitsubishi Motors Corp. v. Soler

Chrysler—Plymouth, Inc.,

473 U.S. 614 (1985). i cee - te eee

Moses H. Cone Mem' Hosp. v. Mercury

Constr. Corp., 460 U.S. 1 (1983). ... ....18

Nagrampa v. Mailcoups, Inc.,

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

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

133 S. Ct. 500 (2012) (per curiam). .... 14-15

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

yk? SS . See ee ee 21

vii

Oguejiofor v. Nissan, 2011 WL 3879482

(N.D.Cal. 2011).. - 20

Olsen v. Breeze, Inc.,

55 Cal.Rptr.2d 818 (Cal. Ct. App.1996). ... 17

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

eS ree . 23

Perry v. Thomas, 482 U.S. 483 (1987). .. 14

Pinnacle Museum Tower Assn. v.

Pinnacle Market Development (US), LLC,

282 P.3d 1217 (Cal. 2012). 23

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

CP, gs te te eee 12

Samaniego v. Empire Today LLC,

140 Cal.Rptr.3d 492,

(Cal. Ct. App. 2012). =... .. « passim

Sanchez v. Valencia Holding Co. LLC.

Cal. Sup. Ct. (2015), Cal. LEXIS 5292)... .. 20

Shearson/Am. Express Inc. v. McMahon,

482 U.S. 220 (1987). ........ Sa:

Southland Corp. v. Keating,

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

Stolt-Nielsen S.A. v _AnimalFeeds Int'l — a

559 U.S. 662 (2010). ..... 12

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)....... ; « oe

Statutes

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

California Civil Code § 1599................ 15

California Civil Code § 1717 (b)(1)............ 8

Cal. Civil Code §1751.. .... ...... sees ce

Cal. Civil Code § 1781........... fase) eee

Federal Arbitration Act,

9 U.S.C. §§ 1, et seg.. .. passim

Federal Arbitration Act, 9 U. S. C. s 2 oedemats 3,13

Other Sources

1 Witkin, Summary of Cal. Law Contracts,

§ 422 (10th ed. 2005)... ........... Ss

l

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 Lega] 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 legal

counsel, as arbitrators, and as members or

' Pursuant to Rule 37.2(a), 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 counse! 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.

2

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 several cases

concerning Federal] arbitration law, including, inter

3

alia, American Express Co. v. Italian Colors

Restaurant, 133 S. Ct. 2304 (2013) and, recently,

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 seq. (“FAA”) and

AT&T Mobility LLC v. Concepcion, 131 8S. 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.” (Jd. at 1747).

4

PRELIMINARY STATEMENT

In this case the parties agreed to arbitrate their

disputes, and they agreed that if any particular

terms of the agreement were deemed by a court to

be invalid or unenforceable, the court should sever

those terms and enforce the remainder of the

agreement.

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

5

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.

6

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

“(t]he finding of ‘multiple unlawful provisions’

allows a trial court to conclude that ‘the arbitration

agreement is permeated by an unlawful purpose”

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

Found. Health Psychcare Servs., 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

7

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-fee-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

8

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

9

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

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

* 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.

10

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 other cases, such as

AT&T Mobility LLC v. Concepcion, 1318S. Ct. 1740

(2011) 'and 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

11

frequently in conflict with the language and

purpose of the FAA and this Court’s FAA

jurisprudence.

In construing and enforcing contracts generally,

California courts honor severability provisions, and

do not invalidate the entire agreement unless

doing so would be impossible without rewriting the

agreement or unless the core purpose of the

agreement is illegal. In construing agreements to

arbitrate, however, 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 as a tool

to take advantage of the “weaker party,” not as

legitimate alternative to litigation. California

courts thus can refuse to sever the “offending”

contract clauses and, instead, invalidate the entire

arbitration agreement. This, we submit, shows a

clear bias against arbitration.

The Ninth Circuit’s decision upholding

California’s unconscionability/non-severability

rule is contrary to binding precedent of this Court

construing the FAA as favoring arbitration and

precluding state law that is inimical to arbitration.

12

ARGUMENT

THE DECISIONS BELOW ARE

INCONSISTENT WITH THE FEDERAL

ARBITRATION ACT AND THIS CO™RT’S

TEACHING ON THE ENFORCEABILITY OF

ARBITRATION AGREEMENTS

Amici urge this Court to reverse the Court of

Appeal’s decision and reaffirm this Court’s

holdingsin AT&T Mobility LLC v. Concepcion, 131

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

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 FAA section 2 in particular, was

intended to ‘revers[e] centuries of judicial hostility

to arbitration agreements,’ by ‘placing arbitration

13

agreements upon the same footing as other

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

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

Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11

(1974).

The FAA reflects “a ‘liberal federal policy

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

1745 (quoting Moses H. Cone Mem'l 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 only “upon such grounds as exist at

law or in equity for the revocation of any contract,”

9 U.S.C. § 2. But even state laws purporting to

apply to all contracts are preempted by the FAA if

they “have a disproportionate impact on

arbitration agreements.” Concepcion, 1315S. Ct. at

1747. Thus, preemption applies when a “generally

applicable contract defense” in practice applies

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

from the fact that an agreement to arbitrate is at

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

14

Care Ctr., Inc. v. Brown, 565 U.S. __, 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. uv.

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,

492-93 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

* In Perry, the Court said that the FAA’s preemptive

effect might extend even to grounds traditionally thought to

exist “at law or in equity for the revocation of any

contract.” Id., at 492, n. 9 (emphasis deleted), and that a

court may not “rely on the uniqueness of an agreement to

arbitrate as a basis for a state-law holding that enforcement

would be unconscionable. . ." Jd., at 493, n. 9.

15

(2012) (per curiam), quoting Concepcion, 1315S. Ct.

at 1745, 1747, 1757; see also Gilmer ov.

Interstate/Johnson Lane Corp., 500 U.S. 20, 24

(1991).

California courts generally enforce valid

portions of a contract that has some unenforceable

provisions: “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, ifthe

illegality is collateral to the main purpose of the

contract, and the illegal provision can be excised

16

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 “[i]f 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.

Under California law, almost any arbitration

agreement between an employer and a non-union

employee would be deemed unconscionable and

unenforceable because of the “unequal” bargaining

* Judge Gould, in his dissent below, 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.

17

power of the parties.° See Martinez v. Master Prot.

Corp., 118 Cal.App.4th 107, 114, 12 Cal.Rptr.3d

663 (2004) (“An arbitration agreement that is an

essential part of a ‘take it or leave it’ employment

condition, without more, is_ procedurally

unconscionable),” cited in Nagrampa v. Mailcoups,

Inc.,469 F.3d 1257 (9th Cir. 2006) (arbitration

clause in franchise agreement unenforceable

because of unequal bargaining power of franchiser

and franchisee). However, 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 other types of form

contracts. See, e.g., Marin Storage & Trucking, Inc.

vu. 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

injury and to hold ski resort harmless).

But California courts treat arbitration

agreements differently, and impose on form

arbitration clauses more or different requirements

° Sometimes called “contracts of adhesion.”

18

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

other types of contracts, under Concepcion it is

preempted.

California courts treat arbitration agreements

quite differently and exhibit the very suspicion of

and hostility towards arbitration this Court has

® Unlike many such contracts, the arbitration and

severability provisions of the contracts between MHN and

respondents were in the same type size as all other parts of

the document and the title of the section was set out in bold

type. 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).

19

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.)

20

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. For

example, recently the California Supreme Court in

Sanchez v. Valencia Holding Co. LLC, (2015) Cal.

LEXIS 5292) applied Concepcion to strike down

provisions of the California Consumer Legal

Remedies Act (CLRA) (Cal. Civil Code Sections

1751 and 1781) which provide for class action

litigation and which declare the right to a class

action to be unwaivable as preempted by the FAA.

The court specifically noted Concepcion’s holding,

“that a state rule invalidating class waivers

interferes with arbitration’s fundamental

attributes of speed and efficiency, and thus

disfavors arbitration as a practical matter.” See

also, 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 in this case does not even cite

Concepcion.

21

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.

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

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

22

was to “ensurfe] that private agreements to

arbitrate are enforced according to their terms”).

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.8d 42, 55 (Cal. Ct. App. 2014).

Armendariz sets categorical requirements specific

to arbitration clauses.’ California’s “two strikes

" 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.” (Id.

at 762.) Fourth, “when an employer imposes mandatory

arbitration as a condition of employment, the arbitration

agreement or arbitration process cannot generally require

the employee to bear any type of expense that the employee

(continued...)

23

and you’re out” rule as to arbitration agreements

(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.

In Armendariz, the California state court

decision on which the Ninth Circuit grounded its

decision here, the court 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

"(...continued)

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).

24

“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.

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

25

promises, as California does, and the Ninth Circuit

did in this case, violates the FAA.

CONCLUSION

For the foregoing reasons, this Court should

reverse the judgment of the Ninth Circuit.

Respectfully submitted,

Martin S. Kaufman

Counsel of Record

Atlantic Legal Foundation

2039 Palmer Avenue

Larchmont, NY 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, CA 92626

(949) 202-3000

mc.sungaila@haynesboone.com

Attorneys for Amicus Curiae

International Association

of Defense Counsel

December 2, 2015