Reply Brief — Circuit City Stores, Inc. v. Gentry, 128 S. Ct. 1743 (2008) (No. 07-998)

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No. 07-998 ae

IN THE

Supreme Court of the United States

CIRCUIT CITY STORES, INC.,

Petitioner,

Vv.

ROBERT GENTRY,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court of California

REPLY BRIEF IN SUPPORT OF

PETITION FOR CERTIORARI

REX DARRELL BERRY CARTER G. PHILLIPS*

BERRY & BLOCK, LLP PAUL J. ZIDLICKY

2150 River Plaza Drive ILEANA MARIA CIOBANU

Sacramento, CA 95833 HL ROGERS

(916) 564-2000 SIDLEY AUSTIN LLP

1501 K Street, N.W.

STEVEN B. KATZ Washington, D.C. 20005

THELEN REID BROWN (202) 736-8000

RAYSMAN & STEINER LLP

333 South Hope Street

29th Floor

Los Angeles, CA 90071-3048

(213) 576-8072

Counsel for Petitioner

March 11, 2008 * Counsel of Record

LEE IS BEDE Ra, SRE ENE MLE TS BREET ES co

VWALSON-EPES PRINTING Co., INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIBES ............ccccssscsssccsveceeass il

REPLY BRIEF IN SUPPORT OF PETITION

OES COR ie o PPA INE i sikcarescctecsoneoeeue na 1

A. This Court Has Jurisdiction Over The

Questions Presented ..................ccesseeeeeeeees 3

B. This Case Implicates A Deep Conflict On

Whether Enforcement Of An Arbitration

Agreement May Be Refused Based On

State Law That Does Not Apply To “Any

SFE aacssinnsieinsDhesanusinsnsnastcciemeaan ae 6

C.The Unconscionability Ruling Conflicts

With Decisions Of This Court And The

"FRGG 4 AROUE siivciinissciapnnaaeeeee 8

CO MICLATIIIOIIN occininsssaisseantersascesnnincienebanneane 12

(i)

TABLE OF AUTHORITIES

CASES Page

A & M Produce Co. v. FMC Corp., 135 Cal.

I EOE COND ivsinnnssavdccussnaussuncvarcentnions 10

Allied-Bruce Terminix Cos. v. Dobson, 513

EE CID winicicbisinccicsssiedunsivadsdnendiomaeuntens 5

Bradley v. Harris Research, Inc., 275 F.3d

EI GE, SEE ED cninenncessuncossensasssiisaseaabonann 7

Brutoco Eng’g & Constr., Inc. v. Superior

Court, 107 Cal. App. 4th 1326 (2008)........ 11

Buckeye Check Cashing, Inc. v. Cardegna,

546 U.S. 440 (2006)....... laminpnnanicnes sumleianan 5

Citizens Bank v. Alafabco, Inc., 539 U.S. 52

EE inctikiennsicehidedadevannatsenennsnnadicannmiaiadectpiibsis 5

Cregg v. Ministor Ventures, 148 Cal. App.

EE SMD ixnranssnnsscsosansscoscesvanadsesuaiuadsiie 8

Doctor’s Assocs., Inc. v. Casarotto, 517 U.S.

ET isinertnsensesxancesnanknnntsexeniianammeaieaate 5, 10

Ellis v. McKinnon Broad. Co., 18 Cal. App.

BER E1GS CLD) ....0..ccccrccncesecescessassssssasecenes 10

Gay v. CreditInform, 511 F.3d 369 (3d Cir.

ITT ies snanistcencnguiintsiaseiahavisteasaadpoaserereenconmeniicn 9

Gilmer v. Interstate/Johnson Lane Corp.,

BT aS. BO (CIGD) 0. cscccccccscsccsonsccsccosecnssesons 11

Iikhchooyi v. Best, 37 Cal. App. 4th 395

I sistihesnsesuhaacindnnstntsndacsshasnisbandesesnineaaeiin 10

Jenkins v. Georgia, 418 U.S. 153 (1974) ...... 4

Pardee Constr. Co. v. Superior Ct., 100 Cal.

App. 4th 1081 (2002)...........0... eee 10

Perry v. Thomas, 482 U.S. 483 (1987)........ 3, 5, 7,

9, 10

Preston v. Ferrer, 128 S. Ct. 978 (2008)........ 1,6

Raley v. Ohio, 360 U.S. 423 (1959) ............... 4

Southland Corp. v. Keating, 465 U.S. 1

Caccdnccusetnrssentistsagenaeenstanhiiaevesvedapeedieel 5, 6, 7

Tunkl v. Regents, 383 P.2d 441 (Cal. 1963).. 8

TABLE OF AUTHORITIES -— continued

Page

Vilner v. Crocker Nat’ Bank, 89 Cal. App.

Be CE CE tiiksstsiesrntcicnndarneonicanien 8

STATUTES

ae Oe Oe iacccstasenascdnaneistcesaliisaedti ait 6, 7,8

CSL, RA Re B BIDE onc cnscssccsvacecsonsssssssensaens 8

OTHER AUTHORITIES

Gressman et al., Supreme Court Practice

I es I Ritdchcisnisininstvsansastenidescanuesstenioianss 4

1 Witkin, Summary of California Law

SUI Us. SEINE Goi sstan. stucccedicabunniananscencuoncumeaniaenn 8

REPLY BRIEF IN SUPPORT OF

PETITION FOR CERTIORARI

In its Petition, Circuit City Stores, Inc. (“Circuit

City”) showed that the refusal of the California

Supreme Court, based on state labor law policies, to

enforce the parties’ agreement to _ arbitrate

individually conflicts with decisions of five federal

circuit courts and the decisions of this Court

interpreting Section 2 of the Federal Arbitration Act

(“FAA”). Pet. 3, 15-24. Circuit City further showed

that the unconscionability ruling by the court below

conflicted with this Court’s decisions and a decision of

the Third Circuit because the California Supreme

Court impermissibly applied arbitration-specific

standards to conclude that the arbitration agreement

was procedurally unconscionable. Id. at 4, 24-30.

Since filing its petition, Circuit City’s position has

been reaffirmed by this Court in Preston v. Ferrer,

128 S. Ct. 978 (2008). In Preston, this Court held

that, under the FAA, an agreement to arbitrate could

neither be deferred nor avoided based on California’s

Talent Agency Act because that law impermissibly

“imposes prerequisites to enforcement of an

arbitration agreement that are not applicable to

contracts generally.” Id. at 985 (following Doctor’s

Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).

The Preston Court held that the California law was

preempted by Section 2 of the FAA because it

“frustrated” and “hinder[ed] speedy resolution of the

controversy’ in accordance with the _ parties’

agreement to arbitrate. Id. at 986. That is what the

California Supreme Court has done here: By refusing

to enforce the parties’ agreement to arbitrate

individually and instead remanding for further

proceedings that do not apply to “any contract,” and

further, by establishing an “arbitration-specific” test

for procedural unconscionability, the decision below

violates the FAA and thus warrants further review

and reversal by this Court.

Respondent's brief in opposition (“Opp.”) does not

address the holding in Preston. Nor can respondent

deny that the decision below is vitally important

given the multiple amici explaining the profound

impact that the California Supreme Court’s decision

would have if left unreviewed by this Court. See

Brief of Amicus Curiae of the Chamber of Commerce

of the United States of America at 3 (explaining that

decision below throws into “jeopardy” the “validity of

millions of contracts reflecting the intent of parties

to arbitrate”); Brief of Amicus Curiae of Pacific Legal

Foundation at 3 (“California’s hostility toward

arbitration contracts affects many millions of

employees and businesses”); Brief of Amici Curiae of

Ace American Ins. Co. et al. at 3, 5-6 (explaining

“widespread implications” of questions presented).

Instead, respondent adopts a scattershot approach,

arguing that review should be denied because (i)

Circuit City “failfed] to raise these issues below,”

Opp. 2, (ii) there is no “final judgment under 28

U.S.C. § 1257(a),” id. at 4, and (iii) there is no conflict

on either question because Circuit City has

“mischaracteriz[ed] the reasoning of the decision

below,” td. at 2.1 As shown below, none of these

arguments withstands scrutiny.

1 Respondent attempts to divert attention from the stark

conflicts implicated in this case by arguing that the 1995 version

of Circuit City’s arbitration rules “drastically limited

substantive rights guaranteed by California law.” Opp. 6; id. at

6-8. That argument — which Circuit City rejects — simply has no

bearing on the merits of this petition. Indeed, the court below

expressly declined to address Circuit City’s showing that later

A. This Court Has Jurisdiction Over The

Questions Presented.

1. Respondent's lead argument — u.e., that the

“Questions Presented” are not properly before this

Court, Opp. 1-2, 11, 13, 17, 23 — is insubstantial.

Respondent contends that “[ajt no stage of the

proceedings below did Circuit City argue that an

agreement to arbitrate cannot be invalidated by

state-law policies other than those that apply to ‘any

contract.” Id. at 11 (quoting 9 U.S.C. § 2). That is

false. In the California Supreme Court, Circuit City

argued, point blank:

Section 2 of the FAA requires state and federal

courts to enforce the terms of arbitration

contracts, unless they ... are subject to “such

grounds as exist at law or equity for the

revocation of any contract.” 9 U.S.C. § 2. No

“additional limitations under state law” may be

applied to invalidate an enforceable arbitration

agreement.

Circuit City's Answer Brief (“Answer Brief’) at 46

(quoting Southland Corp. v. Keating, 465 U.S. 1, 10-

11 (1984)).

Respondent is likewise wrong in asserting that

Circuit City did not advance its unconscionability

argument below. Opp. 13, 23. To the contrary,

Circuit City relied heavily on Perry v. Thomas, 482

U.S. 483, 490-91 & n.9 (1987), see Answer Brief at 47-

48, and argued, as it does now, that any “arbitration-

specific rule would be preempted by the FAA” and

that a “contrary rule of ‘unconscionability’ necessarily

amendments superseded these challenged provisions. Pet. App.

4lan.1l.

would be arbitration-specific, and preempted by the

FAA.” Id. at 50-51.

Further, as a legal matter, “[t]here can be no

question as to the proper presentation of a federal

claim when the highest state court passes on it.”

Raley v. Ohio, 360 U.S. 423, 436-37 (1959); accord

Jenkins v. Georgia, 418 U.S. 153, 157 (1974);

Gressman et al., Supreme Court Practice 197 (9th ed.

2007) (“Once it is clear that the highest state court

has actually passed on the federal question, any

inquiry into how or when the question was raised in

the state courts is considered irrelevant... .”). In its

petition, Circuit City highlighted that the California

Supreme Court had expressly rejected its position

that the FAA foreclosed state-law rules that would

deny enforcement of its agreement to arbitrate. Pet.

11 (citing Pet. App. 26a-29a). That decision makes

clear that the court below considered and passed on

Circuit Citys arguments regarding FAA preemption.

Pet. App. 26a-27a (“Nor do we accept Circuit City’s

argument that a rule invalidating class arbitration

waivers discriminates against arbitration clauses in

violation of the [FAA].”); id. at 27a (“We also continue

to reject Circuit City’s suggestion .. . that compelling

class arbitration in the appropriate case violates the

FAA.”).

2. Equally meritless is respondent’s claim that

this Court “lacks jurisdiction under § 1257(a).” Opp.

14. The governing rule is that “judgments of state

courts that finally decide a federal issue are

immediately appealable when [i] ‘the party seeking

review here might prevail [in the state court] on the

merits of nonfederal grounds, .. . [ii] where reversal

of the state court on the federal issue would be

preclusive of any further litigation on the relevant

cause of action’. . . and [iu] ‘refusal immediately to

review the state-court decision might seriously erode

federal policy.” Southland Corp. v. Keating, 465 U.S.

1, 6 (1984) (second alteration in original) (quoting

Cox Broad. Corp. v. Cohn, 420 U.S. 469, 483 (1975)).

Applying that framework to the FAA, this Court in

Southland held that “to delay review of a state

judicial decision denying enforcement of the contract

to arbitrate until the state-court litigation has run its

course would defeat the core purpose of a contract to

arbitrate.” Id. at 7-8; accord Perry, 482 U.S. at 489

n.7. Since then, this Court repeatedly has exercised

jurisdiction and reversed state court judgments that

denied enforcement or made enforcement of

agreements to arbitrate contingent on proceedings

that would violate the FAA. See, e.g., Buckeye Check

Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006);

Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 58 (2003)

(per curiam); Doctor’s Assocs., Inc. v. Casarotto, 517

U.S. 681, 689 (1996); Allied-Bruce Terminix Cos. v.

Dobson, 513 U.S. 265, 282 (1995).

Respondent asserts that neither Southland nor

Perry “controls because in both, the lower courts had

rendered final decisions on the federal questions at

issue.” Opp. 15. As discussed above, the California

Supreme Court unquestionably rendered a _ final

judgment rejecting Circuit City’s showing that the

FAA preempted state-law rules “compelling class

arbitration in the appropriate case.” Pet. App. 27a.

This Court thus has jurisdiction under § 1257(a) over

the judgment of the court below. See Southland, 465

U.S. at 6-7; Perry, 482 U.S. at 489 n.7.

Respondent suggests that jurisdiction is divested

because the decision below leaves open for remand

whether Circuit City might be able to enforce its

agreement to arbitrate by satisfying the state-law

standards that Circuit City contends violate federal

law. See Opp. 15. That possibility, however, is

irrelevant because even if “the party seeking review

here might prevail [in the state court] on the merits

of nonfederal grounds,” jurisdiction in this Court is

proper. Southland, 465 U.S. at 6 (alteration in

original). This Court has rejected respondent’s

argument for cases involving the FAA because

delaying review “until the state-court litigation has

run its course would defeat the core purpose of a

contract to arbitrate.” Jd. at 7-8. Indeed, just last

month, in Preston, this Court exercised jurisdiction

and reversed a state court judgment that did not

strike down an agreement to arbitrate, but instead

made enforcement of arbitration contingent on

preliminary proceedings that were not “applicable to

contracts generally.” 128 S. Ct. at 985 (following

Doctor’s Assocs., 517 U.S. at 687).

This Court plainly has jurisdiction over the petition

in this case.

B. This Case Implicates A Deep Conflict

On Whether Enforcement Of An

Arbitration Agreement May Be Refused

Based On State Law That Does Not

Apply To “Any Contract.”

Respondent attempts to dismiss the conflict

implicated by the decision below as involving merely

“a handful of federal circuit decisions.” Opp. 2. But

respondent cannot escape that the California

Supreme Court’s decision makes enforcement of the

parties agreement to arbitrate contingent on

application of California labor law, not on principles

applicable to “any contract.” 9 U.S.C. § 2. As such,

the decision below conflicts directly with rulings by

five separate federal courts of appeals which hold

that enforcement of agreements under the FAA

cannot be denied based on a state law that “does not

apply to ‘any contract.” Bradley v. Harris Research,

Inc., 275 F.3d 884, 890 (9th Cir. 2001) (quoting 9

U.S.C. § 2); see also Pet. 3 (citing conflicting cases).

Respondent does not dispute that these circuits

hold that enforcement of the terms of arbitration

agreements cannot be avoided based upon siate laws

that do not apply to “any contract.” 9 U.S.C. § 2.

Here, however, the California Supreme Court made

enforcement of the parties’ arbitration agreement

contingent on an assessment whether individual

arbitration protected by the FAA was consistent with

California labor law principles, which the court below

called “unwaivable.” Pet. App. 10a (interpreting

California Labor Code § 1194); see also id. at 1a (“we

consider whether class arbitration waivers” violate

“statutory rights to overtime pay pursuant to Labor

Code section 500 et seq. and 1194”); id. at 25a

(applying strong public policy behind § 1194). As

such, the decision below authorizes California courts

to disregard the terms of agreements to arbitrate

based on whether a court believes that different

procedures would be “significantly more effective” in

vindicating class members’ right to overtime pay. Id.

at 23a.

That ruling directly conflicts with circuit decisions

from across the country, see Pet. 3, and is also flatly

inconsistent with this Court’s holdings. For example,

in Southland, this Court reversed the California

Supreme Court’s refusal to enforce an agreement to

arbitrate based on state law that prohibited any

agreement “to waive compliance with any provision”

of state franchise law. 465 U.S. at 10. This Court

held that arbitration must go forward because “the

California Franchise Investment Law is not a ground

that exists at law or in equity ‘for the revocation of

any contract.” Id. at 16 n.11; see also Perry, 482 U.S.

at 490-91 (FAA preempts California state policy that

precluded arbitration of labor disputes).

Respondent insists, however, that there is no

conflict. He claims that the decision below does not

refuse to enforce the arbitration agreement based on

State labor law but instead is an application of a

“generally applicable contract defense” “codified in

California Civil Code § 1668, which expressly

indicates its universal application.” Opp. 19

(emphasis added). “That is wrong because the

California Supreme Court’s decision expressly relied

upon and applied “the strong public policy behind

section 1194” of California Labor Code. See Cal.

Labor Code § 1194; Pet. App. 25a. In any event,

contrary to respondent’s argument, Section 1668 does

not have “universal application” and is thus not

grounds under California law “for the revocation of

any contract.” 9 U.S.C. § 2. Indeed, the California

Supreme Court has held that § 1668 applies only to

the subset of contracts that involve the “public

interest.” Tunkl v. Regents, 383 P.2d 441 (Cal.

1963).2

C. The Unconscionability Ruling Conflicts

With Decisions Of This Court And The

Third Circuit.

Review also should be granted because the

California Supreme Court’s unconscionability ruling

2 See also Vilner v. Crocker Natl Bank 89 Cal. App. 3d 732,

735 (1979) (‘Despite its broad language, section 1668 does not

apply to every contract”); accord Cregg v. Ministor Ventures, 148

Cal. App. 3d 1107, 1111 (1983) (“[Section 1668] will be applied

only to contracts that involve ‘the public interest.”); 1 Witkin,

Summary of California Law § 660, at 737-38 (10th ed. 2005)

(Section 1668 does not apply to contracts where “no public

interest is involved”).

adopts an arbitration-specific rule in violation of this

Court’s decisions in Perry and Doctor’s Associates,

and in conflict with the Third Circuit’s decision in

Gay v. CreditInform, 511 F.3d 369 (8d Cir. 2007).

Respondent denies any conflict, arguing that

“unconscionability is a generally applicable contract

defense that is not preempted by the FAA.” Opp. 21.

That argument ignores Perry, in which this Court

explained that “[a] state-law principle that takes its

meaning precisely from the fact that a contract to

arbitrate is at issue does not comport with .. . § 2,”

and thus, for example, a court could not “rely on the

uniqueness of an agreement to arbitrate as a basis for

a state-law holding that enforcement would be

unconscionable.” 482 U.S. at 493 n.9. Relying on

Perry, the Third Circuit in Gay likewise has ruled

that a state unconscionability law is not insulated

from review under the FAA when it relies on “the

uniqueness” of the arbitration provision as a basis for

refusing to enforce the terms of the parties

agreement. 511 F.3d at 395. Indeed, respondent

acknowledges that the Ninth Circuit has deepened

this conflict by “refus[ing] to follow Gay.” Opp. 25

(citing Lowden v. T-Mobile USA, 512 F.3d 1213 (9th

Cir. 2008)).

Here, the California Supreme Court did not apply

generally applicable contract law or conclude that the

parties’ agreement was procedurally unconscionable

because Circuit City “concealfed] the unfavorable

terms of an agreement.” Opp. 22. To the contrary,

the majority acknowledged that (i) the terms of the

arbitration agreement were set forth in full in Circwit

City’s “Dispute Resolution Rules and Procedures,”

Pet. App. 38a, (ii) respondent was given 30 days to

review and consider those terms, id. at 33a, (iil)

respondent was advised that he could “consult with

an attorney” about his legal rights, :d. at 39a, and

(iv) respondent expressly acknowledged that his

decision whether to participate in the arbitration

program was “voluntary,” id. at 32a. Respondent

ignores these undisputed facts in suggesting that the

decision below merely employed unconscionability

principles that “regularly apply . . . to all manner of

contracts.” Opp. 22.3

What mattered to the court below was that even

though Circuit City acknowledged “some of the

shortcomings of arbitration in a general sense, it did

not mention any of the additional significant

disadvantages that this particular § arbitration

agreement had compared to litigation.” Pet. App. 37a.

That, however, is an impermissible arbitration-

specific standard in violation of this Court’s ruling

that “[a] state-law principle that takes its meaning

precisely from the fact that a contract to arbitrate is

at issue does not comport with... § 2.” Perry, 482

U.S. at 493 n.9; accord Doctor’s Assocs., 517 U.S. at

685. As such, respondent cannot distinguish Perry,

3 Cf. Pardee Constr. Co. v. Supertor Court, 100 Cal. App. 4th

1081, 1089-90 (2002) (operative paragraph “was difficult to read

and misleading” and agreement “omitted mention of the

economically significant matter of referee’s fees”); Ilkhchooyi v.

Best, 37 Cal. App. 4th 395, 410 (1995) {party affirmatively

misled by assurances that term in new lease was “basically the

same” as an earlier lease when in fact a new provision had been

added in diminutive print in the middle of one of five lengthy

paragraphs); Ellis v. McKinnon Broad. Co., 18 Cal. App. 4th

1796, 1804 (1993) (party asked to sign form “without warning”

and affirmatively told that it was a “formality”); A & M Produce

Co. v. FMC Corp., 135 Cal. App. 3d 473, 489-91 (1982)

(provisions procedurally unconscionable when party presented

evidence that he was surprised by terms that were “only

casually shown to [him]”).

Doctor’s Associates, or the Third Circuit’s ruling in

Gay.

Lastly, respondent suggests that “employees likely

felt pressure not to opt out of arbitration” because

Circuit City’s materials made clear it preferred

arbitration. Opp. 22. Under California law, however,

the party opposing enforcement of a contract has the

affirmative burden of proving unconscionability. E.g.,

Brutoco Eng’g & Constr., Inc. v. Superior Court, 107

Cal. App. 4th 1326, 1331 (2003). Here, respondent

“signed an easily readable, one-page form that

accompanied receipt of the Associate Issue Resolution

Package,” which explained the procedures if he

wanted to opt out of arbitration with Circuit City and

confirmed that respondent was aware that the

program was “voluntary.” Pet. App. 32a-33a.

Speculation that respondent nevertheless might have

“felt pressure” cannot defeat arbitration under the

FAA because “[mJere inequality in bargaining

power... is not a sufficient reason to hold that

arbitration agreements are never enforceable in the

employment context.” Gilmer v. Interstate/Johnson

Lane Corp., 500 U.S. 20, 33 (1991).

CONCLUSION

for the foregoing reasons, and those stated in the

petition, the petition for a writ of certiorari should be

granted.

Respectfully submitted,