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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0561%3A10

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2015

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0561%3A10. Public record. Not legal advice.