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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Reply Brief
- **Published:** January 1, 2008

## Text

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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)

ii

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

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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

3

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.

4

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

5

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

6

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

7

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.

8

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”).

9

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

10

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]”).

11

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).

12

CONCLUSION

for the foregoing reasons, and those stated in the
petition, the petition for a writ of certiorari should be
granted.

Respectfully submitted,
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0574%3A4. Public record. Not legal advice.