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

UPrOmILED

DEC 2- 2015

L OFFICE OF THE CLERK J

No. 14-1458

In The

Supreme Court of the United States

+

MHN GOVERNMENT SERVICES, INC. ET AL.,

Petitioners,

V.

THOMAS ZABOROWSKI ET AL.,

Respondents.

+

On Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

e

BRIEF OF AMICUS CURIAE

DRI—THE VOICE OF THE DEFENSE BAR

IN SUPPORT OF PETITIONERS MHN GOVERNMENT

SERVICES, INC. ET AL.

ao

HORVITZ & LEVY LLP DRI—THE VOICE OF THE

DAVID M. AXELRAD DEFENSE BAR

(Counsel of Record) LAURA E. PROCTOR

JOHN A. TAYLOR, JR. 55 WEST MONROE STREET,

FELIX SHAFIR SUITE 2000

JOHN F. QUERIO CHICAGO, ILLINOIS 60603

15760 VENTURA BOULEVARD, (615) 428-8638

18TH FLOOR leproctor26@icloud.com

ENCINO, CALIFORNIA 91436-3000

(818) 995-0800

daxelrad@horvitzlevy.com

Counsel for Amicus Curiae

DRI—The Voice of the Defense Bar

i

TABLE OF CONTENTS

Page

I Ce i iaiineetsiiciitniasinninsiaiiinaition ili

INTEREST OF AMICUS CURIAE .000.00.........cccccccc00000e 1

SUMMARY OF ARGUMENT. ................ccccccsesceeeeeeeees 2

f EAST RITNS NOR RN DADO Se NO Te 6

I. THE FAA PREEMPTS CALIFORNIA'S

ARBITRATION-SPECIFIC UNCON-

i gC I 6

A. The question presented in this

case encompasses whether

California’s unconscionability test,

as applied to _ arbitration

agreements, is preempted by the

Sie biintenncbiinnddnncnnndapdidpieinunieengensereniuncienn) 6

B. The FAA precludes a court from

refusing to enforce an arbitration

agreement on the ground that its

terms are undesirable as a matter

of state public policy. ..................cceceeeeees 8

C. California’s long resistance to FAA

preemption based on arbitration-

specific standards has continued

unabated after Concepcion. ................. ll

II.

IIT.

CONCLUSION

D. California’s unconscionability

standards are preempted because

they permit courts to invalidate

arbitration agreements based on

state policy concerns about

ASS EERE SS = PR ae ean 19

E. The FAA also preempts the

specific unconscionability standard

that was applied here because it

relies on the uniqueness of an

arbitration agreement and has a

disproportionate impact on such

Ee eee 21

RATHER THAN APPLYING _ILL-

DEFINED STANDARDS OF FAIRNESS

BASED ON STATE PUBLIC POLICY,

COURTS SHOULD DEEM

ARBITRATION AGREEMENTS

UNCONSCIONABLE ONLY WHEN

REQUIRED BY DUE PROCESG.................... 28

THE SEVERABILITY RULE

CALIFORNIA COURTS APPLY TO

ARBITRATION AGREEMENTS IS

PREEMPTED UNDER THE FAA. .............

COCR EEE EEE EEE EH CHRO RR eee

my

TABLE OF AUTHORITIES

Page(s)

Cases

14 Penn Plaza LLC v. Pyett,

| as en areas 29

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

RS Sn passim

Armendariz v. Found. Health Psychcare

Serus., Inc.,

24 Cal. 4th 83, 6 P.3d 669 (2000) ................ passim

AT&T Mobility LLC v. Concepcion,

ee IE Oil cnicienideicctinnnivtsiocmmnnnasinninancis passim

Biller v. Toyota Motor Corp.,

668 F.3d 655 (9th Cir. 2012)... eeeeeeeeeeees 30

Bowles Fin. Grp. v. Stifel, Nicolaus &

Co.,

22 F.3d 1010 (10th Cir. 1994)..............ccccscsssssesees 30

Chavarria v. Ralphs Grocery Co.,

733 F.3d 916 (9th Cir. 20138).................... 18, 19, 22

City of Boerne v. Flores,

gS emer 31

Coleman v. Prudential Bache Sec.,

802 F.2d 1350 (11th Cir. 1986).................ccceee eens 29

iv

Cruz v. Cingular Wireless, LLC,

648 F.3d 1205 (11th Cir. 2011).........................0.. 10

Discover Bank v. Superior Court,

36 Cal. 4th 148, 113 P.3d 1100

TEC eee 9, 10, 13, 14, 16

Elite Logistics Corp. v. Wan Hai Lines,

Ltd.,

B252543, 2015 WL 3522606 (Cal. Ct.

En TIITE icccinaniniticncbonniediitasnsenssnmminbenes 18

Ex parte McNaughton,

i 25

Fitz v. NCR Corp.,

118 Cal. App. 4th 702, 13 Cal. Rptr.

IIIT ics steiseesieteeisliisieiiinepeianaeniaiibaiininabiniempeanineianiaie 33

Gilmer v. Interstate/Johnson Lane

Corp.,

I atl 23

Gray v. Conseco, Inc.,

No. SA CV 00-322 DOC (EEX), 2000

WL 1480273 (C.D. Cal. Sept. 29,

RRC See 22, 25

Gross v. FBL Fin. Servs., Inc.,

ETE eee Ne 7

In re Marriage of Facter,

212 Cal. App. 4th 967, 152 Cal. Rptr.

saa cieiatieh taeda lietidimaialeaeaitiaiald 33, 34

Jaffe v. Zamora,

57 F. Supp. 3d 1244 (C.D. Cal. 2014)

Little v. Auto Stiegler, Inc.,

29 Cal. 4th 1064, 63 P.3d 979 (2003)

Marathon Entm't, Inc. v. Blasi,

42 Cal. 4th 974, 174 P.3d 741 (2008)

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

) | a. e. 2 | aeeeeeeenere

McElroy v. Tenet Health Care Corp.,

G047300, 2013 WL 4482928 (Cal. Ct.

Fe een

McMahan & Co. v. Dunn Newfund I,

Lid.,

656 N.Y.S.2d 620, 230 A.D.2d 1

SIN: UII: “EINE icaciscadieaninieampenntonioniceonbies

Medtronic AVE, Inc. v. Advanced

Cardiovascular Sys., Inc.,

247 F.3d 44 (3d Cir. 2001) .................

Mercado v. Doctors Med. Ctr. of

Modesto, Inc.,

F064478, 2013 WL 3892990 (Cal. Ct.

I Es CE icccctnteteicetinsiansacinn

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

+ | &s | eee

Perry v. Thomas,

Se ns I I iisdietiictcsiiisioninainiiisan

vl

Pinela v. Neiman Marcus Grp., Inc.,

238 Cal. App. 4th 227, 190 Cal. Rptr.

GREATER ESRI TASES STE EO 17, 33

Preston v. Ferrer,

TES ee ea re 11

Procunier v. Navarette,

434 U.S. 555 (1978) .......cccccecccsescsssecseseseseesececssevenees 7

Prudential Sec., Inc. v. Dalton,

929 F. Supp. 1411 (N.D. Okla. 1996) ........0000.00.. 31

Reed Elsevier, Inc. ex rel. LexisNexis

Div. v. Crockett,

FOG FB GG CEE Ct. BOD) .nccccccccccsccccccccsceccoccses 25

Samaniego v. Empire Today LLC,

205 Cal. App. 4th 1138, 140 Cal.

Se a I Gi inetd tdicinesbicctenichcgnsaniinmincnindaie 18

Sanchez v. Valencia Holding Co.,

61 Cal. 4th 899, 353 P.3d 741

ATR RSE SE ERISCORIE OAS ne re 16, 17, 19, 24

Shearson/Am. Express, Inc. v.

McMahon,

nace niehindiaaienanpeiiciinihatecte 29

Sonic-Calabasas A, Inc. v. Moreno,

og |, SET RE Een Sennen 14

Sonic-Calabasas A, Inc. v. Moreno,

51 Cal. 4th 659, 247 P.3d 130 (2011) ............ 13, 14

vil

Sonic-Calabasas A, Inc. v. Moreno,

57 Cal. 4th 1109, 311 P.3d 184

SE ichabisiiennadntalauibieianiindeigiinninnwintniiniasin 14, 15, 16, 19

Southland Corp. v. Keating,

lalla 8, 11

Tempo Shain Corp. v. Bertek, Inc.,

I Sc insscincinccincinctpuiieiesiieel 30

THI of N.M. at Hobbs Ctr., LLC v.

Patton,

741 F.3d 1162 (10th Cir. 2014)... 21

Torrence v. Nationwide Budget Fin..,

753 S.E.2d 802 (N.C. Ct. App. 2014)................... 25

Trivedi v. Curexo Tech. Corp.,

189 Cal. App. 4th 387, 116 Cal. Rptr.

iia i iasilaaellaeincadccagens dinwiadaiediladianidied 33

Truly Nolen of Am. v. Superior Court,

208 Cal. App. 4th 487, 145 Cal. Rptr.

icant ncaelndanaicasbididlidin 10

United States v. Mendenhall,

al 7

Wherry v. Award, Inc.,

192 Cal. App. 4th 1242, 123 Cal.

SN I TT eccictesditteainsiniedindealibdisideinthdisicaciiiniensiinta 18

Willis v. Prime Healthcare Servs., Inc.,

231 Cal. App. 4th 615, 180 Cal. Rptr.

I escaneindioieiosind 29

vill

Woods v. JFK Mem? Hosp., Inc.,

G050286, 2014 WL 5475231 (Cal. Ct.

es I I ME icciaciniedilibtacnediicieninieniin

Constitutions

ff ome LE UN 8D eee

Statutes

9 U.S.C

a a

iT icdaachiticiedesiieniiaaioneienenioninniidaesanienioinio

I a ac ca

TT cicsincasceteicacidsissineninichinanedeninmenaion

Fae eva eon renee mean

Miscellaneous

Aaron-Andrew P Bruhl, The

Unconscionability Game: Strategic

Judging and the Evolution of

Federal Arbitration Law, 83 N.Y.U.

Bae BEDE. DGTP GRO ED ececencccrnsecionsecveseeseseces

Michael G. McGuinness & Adam J.

Karr, California’s “Unique”

Approach to Arbitration: Why This

Road Less Traveled Will Make All

the Difference on the Issue of

Preemption Under the Federal

Arbitration Act, 2005 J. Disp. Resol.

De cncntsisntsenietesmmesnesemetionanseniunsennvenn 20, 22, 23, 26, 31

ix

Paul Thomas, Note, Conscionable

Judging: A Case Study of California

Courts’ Grapple with Challenges to

Mandatory Arbitration Agreements,

62 Hastings L.J. 1065 (2011)................cc-..cceeeeeees 26

Stephen A. Brome, An Unconscionable

Application of the Unconscionability

Doctrine: How the California Courts

Are Circumventing the Federal

Arbitration Act, 3 Hastings Bus. L.J.

IEEE SS OE aN OT 8, 26

Stephen J. Ware, Arbitration and

Unconscionability After Doctor’s

Associates, Inc. v. Casarotto, 31

Wake Forest L. Rev. 1001 (1996) ..............0000000... 27

Susan Randall, Judicial Attitudes

Toward Arbitration and the

Resurgence of Unconscionability, 52

a Sf SEs c eee meee 27

1

INTEREST OF AMICUS CURIAE!

Amicus curiae DRI—The Voice of the Defense

Bar (DRI) is an international organization that

includes more than 21,000 members involved in the

defense of civil litigation. DRI has long been a voice in

the ongoing effort to make the civil justice system more

fair and efficient. To that end, DRI regularly

participates as amicus curiae in cases that raise issues

of vital concern to its members, their clients, and the

judicial system.

This case is of significant interest to DRI

because its members routinely represent clients

seeking to compel arbitration of claims brought under

wage and hour, consumer protection, or other state

laws that are subject to binding arbitration clauses.

Accordingly, DRI’s members are familiar with the

common occurrence of state and federal courts refusing

to enforce arbitration clauses (including in class action

litigation) because of state public policy,

unconscionability principles, or other tenets of state

law.

This case is another in a long line of state and

federal court decisions refusing to enforce the

1 This brief was authored by amicus curiae and its

counsel, and was not authored in whole or in part by counsel for a

party. No one other than amicus curiae, its members, or its

counsel has made any monetary contribution to the preparation or

submission of this brief. All parties provided written consent to

the filing of amicus curiae briefs, and this written consent is on

file with this Court.

2

preemptive mandate of the Federal Arbitration Act

(FAA) that arbitration clauses be enforced according to

their terms. Of particular concern to DRI and its

members is the Ninth Circuit’s reliance on California’s

state-law doctrine of unconscionability, under which

courts skeptical of arbitration evade the FAA’s

preemptive effect based on policy judgments about

whether arbitration agreements are insufficiently fair.

In doing so, these courts refuse to acknowledge the

basic principle, embodied in the Supremacy Clause of

the U.S. Constitution, that federal law preempts state

laws where they stand as an obstacle to the purposes

and objectives of the FAA.

The FAA was enacted to create “a body of

uniform federal law governing contracts within its

scope.” Medtronic AVE, Inc. v. Advanced

Cardiovascular Sys., Inc., 247 F.3d 44, 54 (3d Cir.

2001). DRI and its members seek uniform application

of the FAA across the nation in order to ensure that

arbitration can achieve its basic purpose of resolving

disputes efficiently, predictably, and at minimal cost.

The Ninth Circuit’s decision in this case, and the

specific California unconscionability rules that it

applies, thwart that goal. This Court should reverse.

+

SUMMARY OF ARGUMENT

The FAA was enacted “in response to

widespread judicial hostility to arbitration,” and

requires courts to “rigorously enforce’ arbitration

agreements according to their terms,” including the

terms setting “the rules under which that arbitration

3

will be conducted.” Am. Express Co. v. Italian Colors

Rest., 133 S. Ct. 2304, 2308-09 (2013) (citations

omitted).

As this Court has recognized, “[s]tate courts

rather than federal courts are most frequently called

upon to apply the [FAA], including the Act’s national

policy favoring arbitration. It is a matter of great

importance, therefore, that state supreme courts

adhere to a correct interpretation of the legislation.”

Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 501

(2012) (per curiam). Unfortunately, state courts have

long exhibited the very “judicial hostility towards

arbitration that prompted the FAA” decades ago, and

have employed “a great variety’ of ‘devices and

formulas” to avoid enforcing arbitration agreements.

AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341

(2011) (citation omitted).

In recent years, state court resistance to

arbitration agreements has been based on § 2 of the

FAA, which provides that arbitration agreements must

be enforced “save upon such grounds as exist at law or

in equity for the revocation of any contract.” 9 U.S.C.

§ 2 (2012). Reasoning that unconscionability is a state

contract law doctrine that can render “any contract”

unenforceable, state courts have increasingly held

arbitration agreements unenforceable by applying

arbitration-specific unconscionability rules that are

avowed to be only general principles of state

unconscionability law even as they actually cloak a

hostility to arbitration. The difficulty of determining

whether an unconscionability analysis is being applied

evenhandedly to an arbitration agreement has allowed

these state courts to nullify arbitration agreements

4

under the guise of § 2’s saving clause based on state

policy grounds that are hostile to arbitration.

Recognizing this potential for manipulation of

the unconscionability doctrine to evade FAA

preemption, this Court held in Concepcion that “[t]he

‘principal purpose’ of the FAA is to ‘ensurfe] that

private arbitration agreements are enforced according

to their terms” and that states cannot—whether in the

guise of unconscionability, public policy, or some other

state-law defense—“require a procedure that is

inconsistent with the FAA, even if it is desirable for

unrelated reasons.” Concepcion, 563 U.S. at 343, 350

(citation omitted). The Court held that the FAA

preempts such defenses where they “have a

disproportionate impact on arbitration agreements”

even though these defenses “presumably apply” to all

contracts, because “a doctrine normally thought to be

generally applicable, such as... unconscionability,”

can be “applied in a fashion that disfavors arbitration.”

Id. at 340-41. The Court concluded that the FAA

preempts unconscionability defenses that would allow

a state court to invalidate an arbitration agreement

because it prescribes procedures that are undesirable

for state policy reasons. See id. at 340-43, 349-51.

Despite Concepcion’s sharp rebuke that

“California’s courts” in particular “have been more

likely” to apply their own state unconscionability laws

to preclude the enforcement of arbitration agreements,

id. at 341, courts applying California law have

persisted in using arbitration-specific unconscionability

rules as a rationale to resist the mandate of the FAA.

The decisions of the district court and the Ninth

5

Circuit in this case are examples of this continuing

post-Concepcion trend.

Both courts interpreted the arbitration clause in

the standard counseling services contract of MHN

Government Services, Inc. (MHN) by looking to

California law—and Ninth Circuit cases interpreting

California law—directly overruled by or in direct

conflict with Concepcion. See, e.g., Pet. App. 3a-5a,

19a. The lower courts’ application of California law

violates the Supremacy Clause of the USS.

Constitution, and California may not “opt out” of the

Supremacy Clause. “When this Court has fulfilled its

duty to interpret federal law, a state court may not

contradict or fail to implement the rule so established.

See U.S. Const., Art. VI, cl. 2.” Marmet Health Care

Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202 (2012) (per

curiam).

This brief will trace the history of California’s

efforts, both before and after Concepcion, to apply

state-law unconscionability rules to avoid enforcing

arbitration agreements according to their terms, as

mandated by the FAA. Incorrect and disproportionate

use of the unconscionability doctrine has permitted

California courts to invalidate arbitration agreements

they deem too unfair or one-sided, an analysis

preempted by the FAA because it rests on policy

judgments about the efficacy of arbitration for the

vindication of a litigant’s rights. Furthermore,

California’s unconscionability standards are preempted

by the FAA because they take their meaning from the

fact that an arbitration agreement is at issue, and as

applied have a disproportionate impact on such

agreements, particularly when California’s state-law

6

severability rule is simultaneously applied in a manner

unique to arbitration agreements. Finally, this brief

will explain that, rather than applying ill-defined

standards of fairness under the guise of an

unconscionability analysis, courts should be limited to

invalidating arbitration agreements based on

unconscionability only when required to do so by

constitutional due process requirements.

+

ARGUMENT

A THE FAA PREEMPTS CALIFORNIA’S

ARBITRATION-SPECIFIC UNCONSCION-

ABILITY RULES.

A. The question presented in this case

encompasses whether California’s

unconscionability test, as applied to

arbitration agreements, is preempted by

the FAA.

The petition for a writ of certiorari here presents

the question “whether California’s arbitration-only

severability rule is preempted by the FAA.” Pet.i. As

respondents concede, “[t}he significance of any impact

that California’s severance doctrine may have on the

FAA’s objectives depends, in the first instance, on the

scope of the state’s unconscionability doctrine.” Pet.

Opp. 32-33. This is unsurprising because, under

California law, questions about whether specific terms

can be severed from an arbitration agreement come

into play only after a court first deems those terms to

be unconscionable pursuant to state law, and this

7

severability analysis turns on the degree to which an

“unconscionable taint” permeates the agreement. See

Armendariz v. Found. Health Psychcare Servs., Inc., 24

Cal. 4th 83, 121-25, 6 P.3d 669, 695-97 (2000).

Consequently, the extent to which the California rules

governing whether an arbitration agreement is

unconscionable contravene the FAA necessarily

influences how a court will assess the “unconscionable

taint” in the agreement and apply the arbitration-only

severability rule.

Because California’s unconscionability rules are

inextricably intertwined with the state’s severability

rule, this Court—in resolving whether California’s

arbitration-only severability rule is preempted by the

FAA—can and should decide the antecedent question

whether the FAA preempts’ California’s

unconscionability rules as applied to arbitration

agreements.?

2 This Court’s “power to decide [issues] is not limited by

the precise terms of the question presented.” Procunier v.

Navarette, 434 U.S. 555, 559 n.6 (1978). Rather, that power

extends to any question “essential” to the disposition of the issues

in a case. United States v. Mendenhall, 446 U.S. 544, 551 n.5

(1980); see also Gross v. FBL Fin. Servs., Inc., 557 U.S. 167, 173

n.1 (2009) (“[T]he statement of any question presented is deemed

to comprise every subsidiary question fairly included therein.”

(citation omitted)).

8

B. The FAA precludes a court from refusing

to enforce an arbitration agreement on the

ground that its terms are undesirable as a

matter of state public policy.

Before Congress enacted the FAA in 1925, courts

viewed arbitration with disfavor in no small measure

because of “judges’ paternalistic attitude that only they

could ensure that individual plaintiffs would be

afforded a fair opportunity to challenge corporate

defendants.” Stephen A. Broome, An Unconscionable

Application of the Unconscionability Doctrine: How the

California Courts Are Circumventing the Federal

Arbitration Act, 3 Hastings Bus. L.J. 39, 42 (2006).

Congress enacted the FAA to overcome this judicial

hostility to arbitration agreements by requiring courts

to place them “on an equal footing with other

contracts” and “enforce them according to their terms.”

Concepcion, 563 U.S. at 338. The FAA preempts any

contrary state law and is binding on state courts as

well as federal. Southland Corp. v. Keating, 465 U.S.

1, 10-17 (1984).

Congress tempered the FAA’s mandate to

respect parties’ freedom of contract by including in the

FAA a saving clause that preserves from preemption

generally applicable state-law contract defenses. 9

U.S.C. § 2; see Concepcion, 563 U.S. at 342. But even a

contract defense that a state court characterizes as

“generally applicable” is preempted by the FAA if the

defense “stands as an obstacle to the accomplishment

and execution of the full purposes” of the FAA.

Concepcion, 563 U.S. at 340-42, 351 (citation omitted).

9

Concepcion held that the FAA preempted the

California Supreme Court’s decision in Discover Bank

v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100

(2005), which had applied California’s

unconscionability standards to prohibit class action

waivers in arbitration contracts. Concepcion, 563 U.S.

at 339, 351. Concepcion emphasized that, while the

FAA’s saving clause “permits agreements to arbitrate

to be invalidated by ‘generally applicable contract

defenses, such as fraud, duress, or unconscionability,”

the FAA preempts such defenses where they “have a

disproportionate impact on arbitration agreements”

even though these defenses “presumably apply” to all

contracts. Jd. at 338, 341 (citation omitted).

Concepcion concluded that the FAA preempts

unconscionability or public policy defenses that would

allow a state court to invalidate an arbitration

agreement on the ground it prescribes procedures that

are undesirable for state policy reasons. See id. at 340-

43, 349-51.3

3 Justice Thomas offered an additional basis for finding

state-law unconscionability and public policy defenses preempted

by the FAA when applied to invalidate an arbitration agreement.

The saving clause in § 2 of the FAA, read in harmony with the

plain language of the FAA’s other provisions,

require[s} enforcement of an agreement to

arbitrate unless a party successfully asserts a

defense concerning the formation of the

agreement to arbitrate, such as fraud, duress, or

mutual mistake. Contract defenses unrelated to

the making of the agreement—such as public

policy—could not be the basis for declining to

enforce an arbitration clause.

(continued...)

10

In sum, Concepcion “found Discover Bank

objectionable” because Discover Bank “allowed courts

to ignore and refuse to enforce the clear terms of the

parties’ agreement, and instead employ a judicial

policy judgment” that a procedure to which the parties

did not contractually agree “would better promote the

vindication of the parties’ rights in certain cases.”

Truly Nolen of Am. v. Superior Court, 208 Cal. App.

4th 487, 506, 145 Cal. Rptr. 3d 432, 445 (2012); see

Italian Colors, 133 S. Ct. at 2308-09 (holding that the

FAA requires courts to “rigorously enforce’ arbitration

agreements according to their terms,” including the

terms setting “the rules under which that arbitration

will be conducted” (citation omitted)); see also Italian

Colors, 133 S.Ct. at 2313 (Thomas, J., concurring)

(“Italian Colors voluntarily entered into a contract

containing a bilateral arbitration provision. It cannot

(...continued)

Concepcion, 563 U.S. at 351-56 (Thomas, J., concurring) (citation

omitted). The “[rjefusal to enforce a contract for public-policy

reasons does not concern whether the contract was properly

made” under California law. Jd. at 356 (Thomas, J., concurring);

see also Cruz v. Cingular Wireless, LLC, 648 F.3d 1205, 1212,

1215 (11th Cir. 2011) (applying Justice Thomas's analysis in

Concepcion to affirm an order compelling arbitration in part

because plaintiffs argued the arbitration agreement violated

“public policy” and thus did “not allege any defects in the

formation of the contract”). Justice Thomas therefore concluded

that the FAA’s saving clause did not preserve from preemption

Discover Bank’s “unconscionab{ility]” rule because the rule was

grounded in state public policy considerations rather than

predicated on a concern for the making of a contract. Concepcion,

563 U.S. at 355-56 (Thomas, J., concurring).

11

now escape its obligations merely because the claim it

wishes to bring might be economically infeasible.”).

C. California’s long resistance to FAA

preemption based on arbitration-specific

standards has continued unabated after

Concepcion.

The Ninth Circuit’s effort in this case to

circumvent the FAA under the guise of applying a

“neutral” California unconscionability rule is not a

unique occurrence, but merely one example of a long-

standing hostility among the state and lower federal

courts towards the FAA. Notwithstanding this Court’s

rulings to the contrary, California courts aggressively

refuse to enforce arbitration agreements. See

Concepcion, 563 U.S. at 341. Time and again, this

Court has been called on to eliminate barriers to

arbitration put in place by California’s legislature and

courts. See, e.g., id. at 337-51; Preston v. Ferrer, 552

U.S. 346, 349-63 (2008); Perry v. Thomas, 482 U.S. 483,

488-93 (1987); Southland Corp., 465 U.S. at 10-17

A brief history of the arbitration-specific

unconscionability doctrine employed by the California

Supreme Court—both before and after Concepcion—

will provide useful context for assessing California’s

resistance to this Court’s FAA precedents:

a Armendariz. In Armendariz, the

California Supreme Court held that as a matter of

state public policy courts can refuse to enforce

mandatory employment agreements to arbitrate

unwaivable state statutory claims for employment

discrimination if they deem the arbitration clause at

12

issue to be unconscionable. 24 Cal. 4th at 90-91, 99-

103, 6 P.3d at 674, 679-82. Rather than apply general

principles of unconscionability law to make that

determination, the court instead invented arbitration-

specific rules mandating a “modicum of bilaterality” in

arbitration—i.e., that an arbitration clause required as

a condition of employment must apply to both claims

more likely to be brought by an employer and claims

more likely to be brought by an employee. Id. at 117-

19, 6 P.3d at 692-93. In reaching the conclusion that

an arbitration clause cannot be too one-sided, the

California Supreme Court rejected the notion that its

version of unconscionability law impermissibly “takes

its meaning precisely from the fact that a contract to

arbitrate is at issue,” Perry, 482 U.S. at 492 n.9, and

thus was preempted by the FAA. Instead, it held that

“ordinary principles of unconscionability may manifest

themselves in forms peculiar to the arbitration

context.” Armendariz, 24 Cal. 4th at 119, 6 P.3d at

693.

Applying this standard, the California Supreme

Court concluded the arbitration agreement in

Armendariz was “unconscionably unilateral” where it

violated state public policy. Jd. at 91, 121, 6 P.3d at

674, 694.

2. Little. Several years after Armendariz, in

Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 63 P.3d

979 (2003), the California Supreme Court reiterated

Armendariz’s state public policy limitation on the

enforceability of arbitration agreements governed by

the FAA, and further developed California’s

arbitration-specific unconscionability rules. See id. at

1071-81, 63 P.3d at 983-90. Little held that one type of

13

substantively unconscionable arbitration clause

originates with “the party imposing arbitration [who]

mandates a post-arbitration proceeding, either judicial

or arbitral, wholly or largely to its benefit at the

expense of the party on which the arbitration is

imposed.” Id. at 1072, 63 P.3d at 984. The court then

invalidated a contractual term authorizing either party

to appeal to a second arbitrator from an arbitral award

exceeding $50,000, concluding it would unduly favor

defendants over plaintiffs. Jd. at 1071 74, 63 P.3d at

983-85.

3. Discover Bank. Two years later, in

Discover Bank, the California Supreme Court

addressed whether courts may invalidate class action

arbitration waivers pursuant to an unconscionability

defense. 36 Cal. 4th at 152-53, 160-63, 113 P.3d at

1103, 1108-10. The California Supreme Court held

that because class actions and arbitrations are “often

inextricably linked to the vindication” of substantive

state rights, class arbitration waivers are contrary to

California public policy and therefore unconscionable

when class actions are the only effective way to halt

and redress wrongful conduct. Jd. at 160-63, 113 P.3d

at 1108-10. Discover Bank held that the FAA did not

preempt its unconscionability holding because, while

specifically tailored to arbitration agreements, the

unconscionability determination could be traced to a

general state public policy against exculpatory

contracts. See id. at 163-67, 113 P.3d at 1110-13.

4. Sonic I. In Sonic-Calabasas A, Inc. v.

Moreno (Sonic J), 51 Cal. 4th 659, 247 P.3d 130 (2011),

a decision issued just two months before Concepcion,

the California Supreme Court concluded that an

14

agreement to resolve disputes through arbitration

impermissibly waived the “advantages” of certain

procedures that California laws made available to

employees who pursue state statutory wage claims in

an administrative proceeding before the state Labor

Cc nissioner’s office. See id. at 668-69, 671-72, 679,

681 n.4, 247 P.3d at 133-35, 140-41, 142 n.4. The

California Supreme Court concluded that substituting

arbitration as an alternative to the Labor

Commissioner procedures violated California public

policy and rendered the agreement unconscionable as

written. Jd. at 678-84, 686-87, 247 P.3d at 140-44, 145-

46. Applying the reasoning of Discover Bank, the court

also held that this result was not preempted by the

FAA. Id. at 687-95, 247 P.3d at 146-52.

5. Sonic II. This Court vacated Sonic J and

remanded for reconsideration in light of Concepcion.

See Sonic-Calabasas A, Inc. v. Moreno, 132 S. Ct. 496

(2011). On remand, the California Supreme Court

addressed whether any barrier to the vindication of a

plaintiffs right to recover unpaid wages under

California law “would make the arbitration agreement

unconscionable or otherwise unenforceable . . . and, if

so, whether such a rule would be preempted by the

FAA.” Sonic-Calabasas A, Inc. v. Moreno (Sonic II), 57

Cal. 4th 1109, 1142, 311 P.3d 184, 200 (2013).

The California Supreme Court noted that, when

an employee elects to pursue his state statutory nght

to recover unpaid wages before the Labor

Commissioner rather than in court, state law affords

the employee certain hearing and posthearing

procedures that are designed to “reduc[e] the costs and

risks of pursuing a wage claim in several ways.” Id. at

15

1129, 311 P.3d at 191. The court held it appropriate to

consider whether agreed-upon arbitration procedures

fail to include these statutory procedures, and whether

the absence of these procedures fails to “provide an

employee with an accessible and affordable arbitral

forum for resolving wage disputes.” Id. at 1146, 311

P.3d at 203.

In the court’s view, this unconscionability

standard survived FAA preemption even after

Concepcion and Italian Colors. Relying on

Armendariz, which preceded both decisions, the

majority maintained that the FAA allows state courts

to refuse to enforce agreements to arbitrate state

statutory claims where arbitration would not afford

procedural benefits that plaintiffs would have received

outside arbitration. Jd. at 1150-52, 311 P.3d at 206-08

(citing Armendariz, 24 Cal. 4th at 98-99, 6 P.3d at 679-

80).

Justice Chin’s dissenting opinion explained that

the majority’s decision—which concluded that courts

have the power to create state-law rules “uniquely in

the context of arbitration,” id. at 1143, 311 P.3d at 201

(majority opinion)—impermissibly applied a state-law

contract defense to an arbitration agreement based on

the uniqueness of that agreement, id. at 1190-91, 311

P.3d at 235 (Chin, J., concurring in part & dissenting

in part). However, “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, for this would enable the court to effect

what ..the state legislature cannot.” Concepcion,

563 U.S. at 340 (citation omitted). Such an arbitration-

specific rule is preempted by the FAA because it has “a

16

disproportionate impact on arbitration agreements.”

Id. at 341. By grounding its analysis on an

unconscionability standard that is peculiar to

arbitration, Sonic II's development of a “unique rule”

for arbitration agreements flouted Concepcion. Sonic

IT, 57 Cal. 4th at 1190-91, 311 P.3d at 235 (Chin, J.,

concurring in part & dissenting in part).

6. Sanchez. Most recently, in Sanchez v.

Valencia Holding Co., 61 Cal. 4th 899, 353 P.3d 741

(2015), the California Supreme Court reversed a lower

court decision holding an arbitration agreement in an

automobile sales contract unenforceable on

unconscionability grounds. But the California

Supreme Court reaffirmed that arbitration provisions

may be found unconscionable if they “contravene the

public interest or public policy,” id. at 911, 353 P.3d at

748 (citation omitted), and approved “using [the]

unconscionability doctrine on a case-by-case basis to

protect. consumers against fees that unreasonably

limit access to arbitration,” id. at 920, 353 P.3d at 755.

The California Supreme Court rejected the

premise that the FAA preempts such unconscionability

rules after Concepcion. See id. at 906-07, 912-13, 920-

21, 353 P.3d at 745-46, 749-50, 755-56. The court

emphasized that the FAA does not preempt

unconscionability defenses, id. at 906, 353 P.3d at 745-

46, even though Concepcion had concluded the FAA

preempted Discover Bank’s unconscionability rules,

Concepcion, 563 U.S. at 337-51. Adhering to Sonic il’s

interpretation of Concepcion, the court held that the

FAA does not preclude states from applyg their

unconscionability rules to ensure that the “arbitral

scheme set forth in a contract is ix practice ‘an

17

accessible, affordable process for resolving. .

disputes.” Sanchez, 61 Cal. 4th at 921, 353 P.3d at

756 (citation omitted).

In his dissenting opinion, Justice Chin noted

that after Italian Colors, it is clear “the FAA preempts

the majority’s rule insofar as it makes a ‘substantial

deterrent effect’ sufficient to establish substantive

unconscionability.” Jd. at 942, 353 P.3d at 770 (Chin,

J., concurring in part & dissenting in part). The

dissent further explained that under this Court’s

“binding precedent, if a cost provision does not impose

fees that ‘make access to the forum

impracticable’ .. then the FAA precludes a court from

invalidating it as unconscionable because of a

subjective determination that it will, in a particular

case, ‘have a substantial deterrent effect’ on a party’s

exercise of the right to request a second arbitration.”

Id. at 942, 353 P.3d at 770-71 (Chin, J., concurring in

part & dissenting in part) (citations omitted).

“ke

Consistent with its own arbitration

unconscionability jurisprudence, the California

Supreme Court has given California’s intermediate

appellate courts virtually free rein in using the

unconscionability doctrine to resist Concepcion. In

multiple cases in which California’s intermediate

appellate courts have invalidated arbitration

agreements on the ground they are substantively

unconscionable, the California Supreme Court has

denied review, allowing such decisions to stand. See,

e.g., Pinela v. Neiman Marcus Grp., Inc., 238 Cal. App.

4th 227, 250, 190 Cal. Rptr. 3d 159, 178-79 (2015),

18

review denied, Sept. 16, 2015; Elite Logistics Corp. v.

Wan Hai Lines, Lid., B252543, 2015 WL 3522606, at

*1 (Cal. Ct. App. June 4, 2015), review denied, S »pt. 9,

2015; Woods v. JFK Mem1 Hosp., Inc., G050286, 2014

WL 5475231, at *1 (Cal. Ct. App. Oct. 30, 2014), review

denied, Jan. 21, 2015; Samaniego v. Empire Today

LLC, 205 Cal. App. 4th 1138, 1141-42, 140 Cal. Rptr.

3d 492, 495 (2012), review denied, July 11, 2012;

Wherry v. Award, Inc., 192 Cal. App. 4th 1242, 1245,

123 Cal. Rptr. 3d 1, 3 (2011), review denied, Apr. 27,

2011.

The Ninth Circuit has sided with California

courts in determining that California’s application of

the unconscionability doctrine to invalidate arbitration

agreements is not preempted by the FAA. In

Chavarria v. Ralphs Grocery Co., 733 F.3d 916 (9th

Cir. 2013), which the panel below found controlling

when it rejected the petitioner's FAA preemption

arguments in the present case, see Pet. App. 5a-6a, the

Ninth Circuit applied the unconscionability rules

articulated by the California Supreme Court in

Armendariz to hold unconscionable an arbitration

provision that effectively gave the power to select the

arbitrator to the party not requesting arbitration. The

Ninth Circuit acknowledged that “the FAA preempts

state laws having a ‘disproportionate impact’ on

arbitration” and that “any state law that invalidated

this provision would have a disproportionate impact on

arbitration because the term is arbitration specific.”

Id. at 927. But the court reasoned that state law must

be able to “require some level of fairness in an

arbitration agreement” and that the “FAA does not

preempt [California law’s] invalidation of [the]

19

arbitration policy” so long as it “reflects a generally

applicable [state] policy against abuses of bargaining

power.” Id.

D. California’s unconscionability standards

are preempted because they permit courts

to invalidate arbitration agreements based

on state policy concerns about fairness.

Although California courts have employed a

variety of verbal formulations to describe the standard

for determining whether a contract is substantively

unconscionable, “all mean the same thing”: “[t]he

ultimate issue in every case is whether the terms of the

contract are sufficiently unfair, in view of all relevant

circumstances, that a court should withhold

enforcement.” Sanchez, 61 Cal. 4th at 911-12, 353 P.3d

at 749.

But normative judgments about the fairness of

arbitration procedures are not a basis for invalidating

arbitration agreements governed by the FAA. Acourt’s

determination that an arbitration agreement is

“sufficiently unfair” under state law—and therefore

unconscionable—embodies little more than a state

policy judgment about the efficacy of arbitration as a

forum for vindicating a plaintiffs rights. See, e.g., id.

at 911 12, 353 P.3d at 748-49 (holding that contract’s

terms are unconscionable if they “contravene the public

interest or public policy”); Sonic I, 57 Cal. 4th at 1145-

46, 1154-55, 311 P.3d at 202-03, 209 (unconscionability

rules are concerned with whether terms “contravene

the public interest or public policy” and courts may

therefore consider whether the parties’ agreed-upon

arbitration procedures are unconscionable if they fai!

20

to include procedural protections available to an

employee outside of arbitration as those protections

would help “vindicate” the employee’s state statutory

rights (citation omitted)). As commentators have

noted, the California Supreme Court has expressed

“deeply rooted doubts regarding the fairness of

arbitration,” especially “in an employment setting.”

Michael G. McGuinness & Adam J. Karr, California’s

“Unique” Approach to Arbitration: Why This Road Less

Traveled Will Make All the Difference on the Issue of

Preemption Under the Federal Arbitration Act, 2005 J.

Disp. Resol. 61, 84.

After Concepcion, such a policy judgment clashes

with the FAA’s mandate that courts enforce arbitration

agreements according to their terms. As this Court

recently confirmed, the FAA requires courts to

“rigorously enforce’ arbitration agreements according

to their terms,” including the terms setting “the rules

under which that arbitration will be conducted.”

Italian Colors, 133 S. Ct. at 2309 (citations omitted).

In other words, the FAA itself imposes a binding policy

judgment, which cannot be superseded by state public

policy in the guise of an unconscionability rule. See

Concepcion, 563 U.S. at 350 (“States cannot require a

procedure that is inconsistent with the FAA, even if it

is desirable for unrelated reasons.”); see also id. at 354-

56 (Thomas, J., concurring) (concluding that the FAA

preempted a California unconscionability rule

grounded in state public policy because a state’s “public

policy” concerns “could not be the basis for declining to

enforce an arbitration clause” under the FAA).

Consistent with the FAA, therefore, courts

cannot invalidate arbitration agreements based on a

21

finding that the agreement is insufficiently fair as a

matter of state policy, as embodied in the state’s

unconscionability standards. See THI of N.M. at Hobbs

Ctr., LLC v. Patton, 741 F.3d 1162, 1169-70 (10th Cir.

2014) (where arbitration agreement is allegedly

unconscionable because it is unfair, “the heart of the

asserted unfairness is the disparity” between

arbitration and litigation outside the arbitral forum

and the supposed lack of fairness therefore reflects a

state “policy hostile to arbitration” that is

“impermissible” under the FAA (citation omitted)).

Accordingly, California’s formulations of the

unconscionability standard—based as they are on an

assessment of fairness as a matter of state policy—

conflict with Concepcion, Italian Colors, and the

decisions of lower courts that have faithfully followed

the Supreme Court’s interpretation of the FAA.

E. The FAA also preempts the specific

unconscionability standard that was

applied here because it relies on the

uniqueness of an arbitration agreement

and has a disproportionate impact on such

agreements.

The formulation of the unconscionability

standard that the district court and the Ninth Circuit

applied in this case is an especially egregious rule at

odds with Concepcion and Italian Colors. The district

court, citing the California Supreme Court’s decision in

Armendariz, concluded that “[a|n arbitration provision

is substantively unconscionable if it is ‘overly harsh’ or

generates “one-sided results.”"” Pet. App. 19a. The

Ninth Circuit likewise looked to whether any

arbitration provision was “unjustifiably one-sided.”

22

Pet. App. 3a. Although the panel quoted the Ninth

Circuit’s earlier decision in Chavarria for this

unconscionability rule, id., Chavarria simply applied

the unconscionability rules from Armendariz and its

progeny, Chavarria, 733 F.3d at 921-23.

But as the California Supreme Court itself

acknowledged before Concepcion was decided, an

unconscionability standard that focuses on whether an

employment agreement to arbitrate statutory claims is

too “one-sided” is “peculiar to the arbitration context.”

Armendariz, 24 Cal. 4th at 117-20, 6 P.3d at 692-94;

see Gray v. Conseco, Inc., No. SA CV 00-322 DOC

(EEX), 2000 WL 1480273, at *4 (C.D. Cal. Sept. 29,

2000) (“Under California law, other non-mutual

contract provisions are valid and not unconscionable.

The language used by the California Supreme Court in

the Armendariz opinion itself demonstrates that the

rule singles out and imposes a special burden on

arbitration agreements. ..” (citation omitted)). This

is so because it turns on an examination of whether an

employer has “impose[d] a system of arbitration on an

employee that seeks to maximize the advantages and

minimize the disadvantages of arbitration for itself at

the employee’s expense.” Armendariz, 24 Cal. 4th at

118-20, 6 P.3d at 692-94.

As commentators have observed, “California

courts—and the Ninth Circuit—have taken the FAA’s

‘savings clause’ where no court ha[d] gone before”

Armendariz. McGuinness & Karr, supra, at 62. “With

only a few exceptions, arbitration agreements that

have been evaluated under California’s post-

Armendariz law have been held invalid under the

‘generally applicable contract defense of

23

unconscionability.” Jd. Based on Armendariz and its

progeny, “(t]he FAA’s savings clause, which was

enacted with the aim of placing arbitration agreements

‘on equal footing with other contracts,’ is now used as

the platform to strike them down in legion.” Jd.

The California Supreme Court’s view that its

arbitration-specific “modicum of bilaterality” test is not

preempted by the FAA is wholly untenable. See

Concepcion, 563 U.S. at 341-42 (state courts may not

use unconscionability doctrine to impose particular

arbitral procedures based on perception they will

prevent one party from having an undue advantage in

arbitration over the other); see also Gilmer v.

Interstate/ Johnson Lane Corp., 500 U.S. 20, 30 (1991)

(holding that “challenges to the adequacy of arbitration

procedures” in arbitration agreements governed by the

FAA were “insufficient to preclude arbitration of

statutory claims”).

Indeed, Concepcion held “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.” Concepcion, 563 U.S. at 341

(citation omitted). As an illustration of such a

prohibited unconscionability standard, this Court

disapproved state-law doctrines finding unconscionable

agreed-upon arbitration procedures that “would be of

greater benefit” to the defendant than to the plaintiff.

Id. at 341-42. Concepcion pointed out that while such

a mutuality rule is nominally a generally applicable

contract defense in that it applies to ““any’ contract,”

the rule would “[ijn practice have a

disproportionate impact on arbitration

agreements .” Id. at 342. Thus, a court cannot

24

disapprove on unconscionability grounds a provision

that merely specifies the procedures to be followed,

even if that provision benefits one party more than

another, because the FAA protects the right of parties

to arbitrate according to specific rules or to limit the

issues to be arbitrated. See id. at 343-45 (recognizing

that the FAA protects parties’ right to limit the issues

to be arbitrated, to arbitrate according to specific rules,

and to limit with whom they will arbitrate).

Hence, after Concepcion, the FAA preempts an

unconscionability test that relies on the uniqueness of

an arbitration agreement by deeming such an

agreement unconscionable, and therefore

unenforceable, because the arbitration procedures set

by the agreement are too one-sided. As Justice Chin’s

dissenting opinion in Sanchez explained, “the FAA

requires that (California’s} standard for

unconscionability be ‘the same for arbitration and

nonarbitration agreements,” but the California

Supreme Court “first articulated the ‘unfairly one-

sided’ formulation [of the unconscionability test]

specifically in the context of an unconscionability

challenge to an arbitration provision, and the

formulation has since been used almost exclusively in

that context.” Sanchez, 61 Cal. 4th at 937, 353 P.3d at

767 (Chin, J., concurring in part & dissenting in part)

(citation omitted). Under Concepcion, the FAA sweeps

away unconscionability rules that “have a

disproportionate impact on arbitration agreements,”

even if they are rules that would supposedly apply to

all contracts. Concepcion, 563 U.S. at 342.

It is this rigid bilaterality standard’s peculiar

focus on the uniqueness of an arbitration agreement

25

that led the Alabama Supreme Court to refuse to adopt

such a rule on the ground it was barred by the FAA.

See Ex parte McNaughton, 728 So. 2d 592, 598-99 (Ala.

1998). As the Alabama Supreme Court explained, the

standard “directly depends on arbitration for its

application” and therefore impermissibly “assigns a

suspect status to arbitration agreements.” Jd. at 598;

see also Reed Elsevier, Inc. ex rel. LexisNexis Div. v.

Crockett, 734 F.3d 594, 600 (6th Cir. 2013) (arbitration

procedure could not be found unconscionable so as to

defeat FAA preemption, even though arbitration clause

was adhesive and one-sided, because “all of these

things—the one-sided nature of the arbitration clause,

and its adhesive nature—were also present” in Jtalian

Colors, which found an arbitration agreement

enforceable “all of those concerns notwithstanding”);

Gray, 2000 WL 1480273, at *4 (“out of deference to the

federal policy favoring arbitration,” refusing to apply

Armendariz’s unconscionability test because it “singles

out and imposes a special burden on arbitration

agreements’); Torrence v. Nationwide Budget Fin., 753

S.E.2d 802, 811-12 (N.C. Ct. App. 2014) (after

Concepcion, “the one-sided quality of an arbitration

agreement is not sufficient to find it substantively

unconscionable” in cases governed by the FAA).

Empirical data confirms __ that an

unconscionability standard that takes its meaning

precisely from the fact that an agreement to arbitrate

is at issue will necessarily have a disproportionate

impact on arbitration agreements. Based on a study of

California unconscionability jurisprudence that this

Court cited in Concepcion, 563 U.S. at 342-43, one

commentator has explained that “California courts are

26

clearly biased against arbitration as an alternative

means of dispute settlement” and “[t]heir disdain

manifests” in the standard they apply to assess

whether arbitration agreements are enforceable.

Broome, supra, at 41. The Broome study demonstrated

that the unconscionability standard used by the Ninth

Circuit in this case imposes “arbitration-specific”

requirements and that, under California’s

jurisprudence predating Concepcion, “unconscionable’

means something quite different when the validity of

an arbitration agreement is at issue.” Jd. at 53-55, 67-

68.

A follow-up study of 119 California state court

decisions issued between 2005 and 2008 made findings

that “confirm[ed] those of Professor Broome.” Paul

Thomas, Note, Conscionable Judging: A Case Study of

California Courts’ Grapple with Challenges to

Mandatory Arbitration Agreements, 62 Hastings L.J.

1065, 1082-84 (2011). The data shows that under

California law “very few contracts are voided as

unconscionable—unless they can be classified as

‘agreements to arbitrate which appear to be biased

against the weaker party.” Jd. at 1070. This study

concluded that in California “unconscionability

challenges to arbitration agreements succeed at a

higher rate than unconscionability challenges to other

agreements,” id. at 1074, and that “[clourts applying

California law are most likely discriminating against

arbitration agreements in a manner that is preempted

by the interpretation of the FAA advanced by the

Supreme Court,” id. at 1084; see also McGuinness &

Karr, supra, at 62 (“California has created a new brand

27

of unconscionability. It is far more demanding—and it

is unique to arbitration.”).

This phenomenon is not limited to California. A

nationwide analysis of federal and state court decisions

between the years 1994 and 2007 found that as this

Court has closed off other means of resisting

arbitration, state law unconscionability doctrines have

become “new tools” that are “being used to limit

arbitration” and strike down arbitration agreements.

Aaron-Andrew P. Bruhl, The Unconscionability Game:

Strategic Judging and the Evolution of Federal

Arbitration Law, 83 N.Y.U. L. Rev. 1420, 1440-43 &

n.85 (2008). “Where unconscionability challenges once

appeared in less than 1% of all arbitration-related

cases, more recently they have appeared in 15-20% of

all cases involving arbitration.” Jd. at 1441; see also

Susan Randall, Judicial Attitudes Toward Arbitration

and the Resurgence of Unconscionability, 52 Buff. L.

Rev. 185, 194 (2004) (concluding that after this Court

had blocked other challenges to arbitration,

unconscionability challenges to arbitration agreements

came to represent two-thirds of all unconscionability

challenges (161 out of 235) and succeeded at twice the

rate of unconscionability arguments directed at other

types of contracts); Stephen J. Ware, Arbitration and

Unconscionability After Doctor’s Associates, Inc. v.

Casarotto, 31 Wake Forest L. Rev. 1001, 1034 (1996)

(“Judicial decisions apply unconscionability, and other

common law doctrines, more aggressively to arbitration

agreements than to other contracts.”).

Disproportionate application of the

unconscionability doctrine to arbitration agreements

can be explained only as a manifestation of hostility to

28

arbitration. “[I]t is well known that unconscionability

is generally a loser of an argument” and in the non-

arbitration context “has been mostly in intellectual

retreat for various reasons.” Bruhl, supra, at 1442.

The increasing use of unconscionability has therefore

“been aptly described by scholars as an attempt, using

one of the few tools remaining, to put the brakes on the

pro-arbitration trend and restore some sort of balance.”

Id. at 1442-43. Because “it will often be nearly

impossible to tell if a court is applying state

unconscionability doctrine evenhandedly in the way

the FAA requires,” unconscionability provides a means

for courts “to misapply, or perhaps even manipulate,

state contract doctrines so as to nullify arbitration

agreements while simultaneously frustrating the

ability of reviewing courts to reverse.” Jd. at 1422,

1449.

Il. RATHER THAN APPLYING ILL-DEFINED

STANDARDS OF FAIRNESS BASED ON

STATE PUBLIC POLICY, COURTS

SHOULD DEEM ARBITRATION

AGREEMENTS UNCONSCIONABLE ONLY

WHEN REQUIRED BY DUE PROCESS.

Some argue that arbitration provisions are

found unconscionable more often than ordinary

contract provisions because they actually are more

often unfair than other types of provisions, apart from

the requirement of arbitration itself. But even if that

were true—and there is no evidence that is the case+—

4 As this Court has explained, “streamlined procedures

of arbitration do not entail any consequential restriction on

(continued...)

29

it would not justify courts in applying freewheeling and

subjective unfairness standards based on state public

policy to advance preferred outcomes while evading

review on FAA preemption grounds.

Assessing whether an arbitration agreement is

insufficiently fair—and therefore unconscionable—

embodies a state policy judgment about the utility of

arbitration in vindicating rights. See supra, at 8-11.

Under Concepcion, such policy judgments cannot

override the FAA’s mandate requiring courts to enforce

(...continued)

substantive rights.” Shearson/Am. Express, Inc. v. McMahon, 482

U.S. 220, 232 (1987). “[T}here is nothing inherently unfair or

oppressive about arbitration clauses.” Coleman v. Prudential

Bache Sec., 802 F.2d 1350, 1352 (11th Cir. 1986). Thus, an

“employee's ‘generalized attacks’ on ‘the adequacy of arbitration

procedures” are “insufficient to preclude arbitration of statutory

claims.” 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 258 (2009)

(citation omitted).

5 The glaring and untenable inconsistencies that can

result from such subjective policy judgments are illustrated by

Woods, 2014 WL 5475231, in which a California intermediate

appellate court found an arbitration agreement to be

substantively unconscionable because it lacked sufficient

mutuality and was unfairly one-sided. Jd. at *6-*8. But the very

same (or materially similar) arbitration agreement has been held

enforceable by multiple other California appellate courts,

including by a different, earlier panel of the same appellate court

that decided Woods: Willis v. Prime Healthcare Servs., Inc., 231

Cal. App. 4th 615, 618-34, 180 Cal. Rptr. 3d 297, 298-310 (2014);

McElroy v. Tenet Health Care Corp., G047300, 2013 WL 4482928,

at *3-*6 (Cal. Ct. App. Aug. 21, 2013); Mercado v. Doctors Med.

Ctr. of Modesto, Inc., F064478, 2013 WL 3892990, at *2-*8 (Cal.

Ct. App. July 26, 2013); accord Jaffe v. Zamora, 57 F. Supp. 3d

1244, 1245-48 (C.D. Cal. 2014).

30

arbitration agreements according to their terms. To

adhere to this directive, yet protect against truly

unconscionable arbitration terms, this Court should

require state courts applying an unconscionability

analysis to do so based on constitutional due process

standards, rather than on ill-defined and inherently

subjective assessments of whether an arbitration

agreement is insufficiently fair. The FAA already

contains restrictions on arbitration procedures that are

designed to protect such due process rights. See

9 U.S.C. §§ 10-11 (2012). Those statutory protections,

supplemented as appropriate by due _ process

jurisprudence, should be the basis for any substantive

unconscionability standard in the arbitration context.

Under the FAA, a fundamentally fair arbitration

is one that occurs with proper “notice” of the

arbitration and the “opportunity to be heard and to

present relevant and material evidence and argument”

before arbitrators who “are not infected with bias.”

Bowles Fin. Grp. v. Stifel, Nicolaus & Co., 22 F.3d

1010, 1012-13 (10th Cir. 1994); see Tempo Shain Corp.

uv. Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997) (section

10(a)(3) of the FAA codifies a “fundamental fairness”

standard pursuant to which “an arbitrator ‘must give

each of the parties to the dispute an adequate

opportunity to present its evidence and argument”

(citation omitted)). Such restrictions (along with

others) that are codified as part of the FAA for actions

pending in federal court, e.g., 9 U.S.C. § 10(a)(2)-(3),

are considered due process limitations. See Biller v.

Toyota Motor Corp., 668 F.3d 655, 663-64 (9th Cir.

2012) (grounds for vacatur of arbitration award under

FAA are “designed to preserve due process” (citation

31

omitted)); Prudential Sec., Inc. v. Dalton, 929 F. Supp.

1411, 1417 (N.D. Okla. 1996) (“fundamental fairness”

restrictions on “arbitration process” are “fundamental

due process” limitations).

These fairness limitations are “not to be equated

with the full panoply of judicial procedural safeguards

and legal ‘niceties’ of the courtroom” because “/djue

process in arbitration means satisfying ‘minimal

requirements of fairness.” McMahan & Co. v. Dunn

Newfund I, Ltd., 656 N.Y.S.2d 620, 621, 230 A.D.2d 1,

4 (App. Div. 1997) (citation omitted). But that is by

congressional design, and state court efforts based on

state public policies of fairness that attempt to impose

procedures more closely approximating courtroom

litigation upend the balance Congress sought to

achieve when taking into account the parties’ right to

control the terms under which their disputes will be

resolved. See Concepcion, 563 U.S. at 341-44, 350-52.

Whatever limitations arbitration agreements

may typically impose on arbitration procedures, these

agreements “are a far cry from the overtly oppressive

contracts traditionally policed by courts under the

doctrine of unconscionability.” McGuinness & Karr,

supra, at 90. If an agreement includes unfair

limitations, they can be readily redressed through the

due process protections for fairness already built into

the FAA by Congress. Should a case present a highly

unusual problem of unfairness that reaches

constitutional due process dimensions but that is not

already addressed in the FAA, then the FAA will, of

course, have to give way. See City of Boerne v. Flores,

521 U.S. 507, 529 (1997). Constitutional due process

protections trump the congressional dictates of the

32

FAA. And a body of due process jurisprudence exists

for courts to draw upon in ascertaining whether a

party has been deprived of adequate notice and an

opportunity to be heard. If such a deprivation has not

occurred, however, state courts may not refuse to

enforce arbitration agreements under a substantive

unconscionability standard predicated on subjective

state policy judgments about fairness, however

formulated.

Ill, THE SEVERABILITY RULE CALIFORNIA

COURTS APPLY TO ARBITRATION

AGREEMENTS IS PREEMPTED UNDER

THE FAA.

Even if this Court were to limit its focus in this

case to determining whether the severability principle

applied by the Ninth Circuit is preempted by the FAA,

it should still reverse the opinion below because

California’s arbitration-specific severability rule

disproportionately invalidates arbitration agreements.

In Armendariz, 24 Cal. 4th at 124, 6 P.3d at 696-

97, the California Supreme Court held that where “the

arbitration agreement contains more than one

unlawful provision,” that inherently “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.” The California Supreme Court further

held that, in that circumstance, a court may refuse to

sever the unconscionable provisions on the ground that

the entire arbitration agreement is “permeated by an

unlawful purpose.” IJd., 6 P.3d at 697

33

Ever since Armendariz, California courts have

applied this arbitration-specific severability rule in a

mechanical way to disfavor arbitration agreements.

See, e.g., Pinela, 238 Cal. App. 4th at 256, 190 Cal.

Rptr. 3d at 183-84 (stating severance is appropriate

“where only one clause in an arbitration agreement [is]

found to be substantively unconscionable,” but refusing

to sever where “multiple provisions” were found

unconscionable); Trivedi v. Curexo Tech. Corp., 189

Cal. App. 4th 387, 398, 116 Cal. Rptr. 3d 804, 812-13

(2010) (following Armendariz in refusing to sever

multiple unconscionable provisions in arbitration

agreement because that is “a circumstance considered

by [the California] Supreme Court to ‘permeate’ the

agreement with unconscionability”); Fitz v. NCR Corp.,

118 Cal. App. 4th 702, 726, 13 Cal. Rptr. 3d 88, 106

(2004) (refusing to sever multiple unconscionable

arbitration provisions, holding “[i]Jn Armendariz the

California Supreme Court held that more than one

unlawful provision in an arbitration agreement weighs

against severance’).

By contrast, California courts have not applied

any presumption against severance outside the context

of arbitration agreements. Indeed, with non-

arbitration contracts, “California cases take a very

liberal view of severability, enforcing valid parts of an

apparently indivisible contract where the interests of

justice or the policy of the law would be furthered.” /n

re Marriage of Facter, 212 Cal. App. 4th 967, 987, 152

Cal. Rptr. 3d 79, 95 (2013) (citation omitted); see also

Marathon Entm‘t, Inc. v. Blasi, 42 Cal. 4th 974, 996-98,

174 P.3d 741, 743-44 (2008) (applying more liberal

approach to sever unlawful provisions of non-

34

arbitration contract). The presumption in favor of

severance is particularly strong where a contract (like

the arbitration agreement here) contains a severability

clause, which “evidence{s] the parties’ intent that, to

the extent possible, the valid provisions of the

contracts be given effect, even if some provision is

found to be invalid or unlawful.” Facter, 212 Cal. App.

4th at 985, 152 Cal. Rptr. 3d at 94 (citation omitted).

In short, California law applies a de facto

presumption against severance to arbitration

agreements that contain multiple unconscionable

provisions but a de facto presumption in favor of

severance to non-arbitration contracts containing

multiple unconscionable provisions. The California

severability doctrine thus disproportionately burdens

arbitration agreements and is therefore preempted by

the FAA. See Concepcion, 563 U.S. at 341-42.

*

35

CONCLUSION

The judgment of the Court of Appeals for the

Ninth Circuit should be reversed.

Respectfully submitted,

HORVITZ & LEVY LLP

DAVID M. AXELRAD

Counsel of Record

JOHN A. TAYLOR, JR.

FELIX SHAFIR

JOHN F. QUERIO

15760 Ventura Boulevard,

18th Floor

Encino, California 91436-3000

(818) 995-0800

daxelrad@horvitzlevy.com

DRI-THE VOICE OF THE

DEFENSE BAR

LAURA E. PROCTOR

55 West Monroe Street,

Suite 2000

Chicago, Illinois 60603

(615) 428-8638

leproctor26@icloud.com

Counsel for Amicus Curiae

DRI-The Voice of the Defense Bar

December 2, 2015