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

FILED

© 442 3 2008

| OFEIGE OF THE CLERK

No. 07-998 | SUPREME COURT, U.S.

intraclass: aa

In the

Supreme Court of the Anited States

CIRCUIT CITY STORES, INC.,

Petitioner,

Vv.

ROBERT GENTRY,

Respondent.

7%

vv

On Petition for Writ of Certiorari

to the California Supreme Court

= Ss

a

BRIEF AMICUS CURIAE OF PACIFIC LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

7%

4

DEBORAH J. LA FETRA

Counsel of Record

Pacific Legal Foundation

3900 Lennane Drive,

Suite 200

Sacramento, California 95834

Telephone: (916) 419-7111

Facsimile: (916) 419-7747

Counsel for Amicus Curiae Pacific Legal Foundation

i

QUESTIONS PRESENTED

1. Whether the Federal Arbitration Act permits a

court to refuse to enforce an agreement calling for

individual arbitration based on state labor law policies

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

§ 2.

2. Whether the Federal Arbitration Act permits a state

court to refuse to enforce an agreement to arbitrate

based upon an unconscionability analysis “that takes

its meaning precisely from the fact that a contract to

arbitrate is at issue.” Perry v. Thomas, 482 U.S. 483,

492 n.9 (1987).

il

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ................... i

TABLES OF AUTHORITIES 2... ccccccsscsces ill

INTEREST OF AMICUS CURIAE.............. 1

INTRODUCTION AND SUMMARY OF

(|, : rrr err aera RA 1

REASONS FOR GRANTING THE WRIT ........ 3

I. CALIFORNIA’S UNCONSCIONABILITY

DOCTRINE UNIQUELY DISFAVORS

ARBITRATION CONTRACTS ............. 3

Il. CALIFORNIA COURTS REQUIRE

MUTUALITY IN ARBITRATION

CONTRACTS, BUT NOT OTHER TYPES

GP MEV RUR EG 6 0040 4RS o oe pee 8

MEMGAIGITEERIIN oo cases snes s Ohad eee wena 14

il

TABLE OF AUTHORITIES

Page

Cases

A & M Produce v. FMC Corp.,

135 Cal. Ann. 34 473 (1962) . 0. ec ees. 7

Allied-Bruce Terminix Cos., Inc. v. Dobson,

TRB R | err eer 6

Armendariz v. Foundation Health Psychcare

Services, Inc., 24 Cal. 4th 83 (2000) ........ 9-10

Buckeye Check Cashing, Inc. v. Cardegna,

ne ra SO I Se ree ey ke eee Week 1

Carboni v. Arrospide, 2 Cal. App. 4th 76

(a Re ae | ae a ean ee 13

Carnival Cruise Lines, Inc. v. Shute,

Se es 5 ho ek ae ke eee kad awa 4

Cingular Wireless, LLC v. Mendoza, 126 S. Ct.

PURI oe kick kek so ciawe banca: 1

Circuit City Stores, Inc. v. Adams,

cS ROR Re et) a a rn er 14

Discover Bank v. Superior Court,

om Get. OO LAB CRD) i... cc cc eee stews 10

Doctor's Assocs., Inc. v. Casarotto,

ET Ses Me CE a8 eed ickn a ds «8a oS 6,11

Ellis v. McKinnon Broadcasting Co.,

18 Cal. App. 4th 1796 (Cal. Ct. App. 1993) ....13

Gentry v. Superior Court,

OF Uk: SR BG Ce En oo es He Kaus 1, 10, 12

lv

TABLE OF AUTHORITIES—Continued

Gilmer v. Interstate/Johnson Lane Corp.,

ne Pe Eg a oa wd i ee wee

Goodwin v. Ford Motor Credit Co.,

970 F. Supp. 1007 (M.D. Ala. 1997) ......

Hall Street Associates L.L.C. v. Mattel, Inc.,

pending docket no. 06-989 .............

Harris v. Green Tree Fin. Corp.,

183 F.3d 173 (9d Cir. 1999) ............

Hess Collection Winery v. Agricultural

Labor Relations Board, 140 Cal. App. 4th

1584 (Cal. Ct. App.), rev. denied

I gy gaa sala ok aa x ae

Hillsman v. Sutter Cmty. Hosp.,

153 Cal. App. 3d 743 (Cal. Ct. App. 1984 .

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

ee I I ie re ee ks a os

In re Pate, 198 B.R. 841 (S.D. Ga. 1996) ....

Johnisee v. Kimberlite Corp.,

No. A107341, 2005 WL 1249198

(Cal. Ct. App. May 24, 2005) ...........

Kinney v. United Healthcare Servs.,

70 Cal. App. 4th 1322 (Cal. Ct. App. 1999)

Little v. Auto Stiegler, Inc.,

ZO Cal. 2 1066 R008) oie ccc ccaees

McNaughton v. United Health Care Servs. Inc.,

728 So. 2d 592 (Ala. 1999) .............

Vv

TABLE OF AUTHORITIES—Continued

Page

Munoz v. Green Tree Fin. Corp.,

ee ee ee Ge. BOL) www cea 11

Perry v. Thomas, 482 U.S. 483 (1987) ......... 5-6

Phoenix Leasing Inc. v. Johnson,

No. A089871, 2001 WL 1324778

(Cal. Ct. App., Oct. 29,2001) ............ 12-13

Preston v. Ferrer, No. 06-1463,

2008 WL 440670 (U.S., Feb. 20, 2008) ......... 1

Principal Mut. Life Ins. Co. v. Vars,

Pave, McCord & Freedman, 65 Cal.

App. 4th 1469 (Cal. Ct. App. 1998) .......... 12

Pritzker v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 7 F.3d 1110 (3d Cir. 1993) ........ 4

Robertson v. The Money Tree of Alabama,

954 F. Supp. 1519 (M.D. Ala. 1997) ........... 9

Shearson/Am. Express, Inc. v.

McMahon, 482 U.S. 220 (1987) .............. 7

Southland Corp. v. Keating, 465 U.S. 1 (1984) .... 2

Stirlen v. Supercuts, Inc., 51 Cal.

App. 4th 1519 (Cal. Ct. App. 1997) ........... 8

Szetela v. Discover Bank, 97 Cal.

App. 4th 1094 (Cal. Ct. App. 2002),

cert. dented, 537 U.S. 1226 (2002) ........... 10

Statutes and Regulations

Federal Arbitration Act, 9 U.S.C. §§ 1-16 .. 1, 3, 5-6

Cal. Civ. Code § 1670.5, Legis. Comm. Cmt. ...... 5

vi

TABLE OF AUTHORITIES—Continued

Page

Cal. Lab. Code § 229 (West 1971) ............... 6

| EP re rrr 3

Uniform Commercial Code § 2-302 .............. 5

Miscellaneous

Broome, Stephen A., An Unconscionable

Application of the Unconscionability

Doctrine: How the California Courts

Are Circumventing the Federal

Arbitration Act, 3 Hastings

Oe 7, 10,13

Drahozal, Christopher R., “Unfair”

Arbitration Clauses, 2001 U.

ne ck we cees eases 4

Epstein, Richard A., Unconscionability:

A Critical Reappraisal, 18 J. L. & Econ.

Re tc a own oe 0 4 6-0 0 8's 5,9

Gundzik, Aaron C. & Gundzik,

Rebecca Gilbert, Will California

Become the Forum of Choice for

Attacking Class Action Waivers?,

25-FALL Franchise L.J. 56 (2005) ........... 13

H.R. 2969 (109th Cong.) (2005) bill history

available at http://thomas.loc.gov/cgi-bin/

bdquery/ z?d109:HR02969:@@@L&

summ2=m& (last visited Feb. 11, 2008) ....... 4

vil

TABLE OF AUTHORITIES—Continued

Page

Kaplinsky, Alan S. and Levin, Mark J.,

The Gold Rush of 2002: California

Courts Lure Plaintiffs’ Lawyers (but

Undermine Federal Arbitration Act)

by Refusing to Enforce “No-Class Action”

Clauses in Consumer Arbitration

Agreements, 58 Bus. Law. 1289 (2003) ...... 5-6

McGuinness, Michael G., & Karr, Adam J.,

California’s “Unique” Approach to

Arbitration: Why This Road Less

Traveled Will Make Ali the Difference

on the Issue of Preemption Under the

Federal Arbitration Act, 2005 J. Disp.

ee as a See a ee ket 10-11

Perillo, Joseph M., Corbin on Contracts:

Avoidance & Reformation § 29.1

nee Sa ras wala 6 60 46d 64 4-5

S. 2435 (107th Cong.) (2002) available at

http:// thomas.loc.gov/cgi-bin/bdquery/z?d107:

SN02435:@@@L&summ2=m& (last

co 4

Schneidereit, Michael, Note, A Cold Night:

Unconscionability as a Defense to Mandatory

Arbitration Clauses in Employment

Agreements, 55 Hastings L.J. 987 (2004) ...... 10

Ware, Stephen J., Alternative Dispute

Resolution § 2.25(b) (West 2001) ............. 6

1

INTEREST OF AMICUS CURIAE

PLF was founded 35 years ago and is widely

recognized as the largest and most experienced

nonprofit legal foundation of its kind. PLF litigates

matters affecting the public interest at all levels of

state and federai courts and represents the views of

thousands of supporters nationwide. Among other

things, PLF’s Free Enterprise Project defends the

freedom of contract, including the right of parties to

agree by contract to the process for the resolution of

disputes between them. To that end, PLF has

participated as amicus curiae in many important cases

involving the Federal Arbitration Act and freedom of

contract in general, including Hall Street Associates

L.L.C. v. Mattel, Inc., pending docket no. 06-989;

Preston v. Ferrer, No. 06-1463, 2008 WL 440670 (U.S.,

Feb. 20, 2008); Cingular Wireless, LLC v. Mendoza,

126 S. Ct. 2353 (2006); and the proceedings in this case

in the California Supreme Court. Gentry v. Superior

Court, 42 Cal. 4th 443 (2007).’

INTRODUCTION AND

SUMMARY OF ARGUMENT

In Buckeye Check Cashing, Inc. v. Cardegna,

546 U.S. 440, 443 (2006), this Court reaffirmed that

Congress enacted the Federal Arbitration Act (FAA),

9 U.S.C. §§ 1-16, to overcome judicial resistance to

‘ Written consent was granted by counsel for all parties and

lodged with the Clerk of this Court. All parties were notified of

PLF’s plan to file this brief more than 10 days before the due date.

No counsel for a party authored this brief in whole or in part, and

no counsel or party made a monetary contribution intended to

fund the preparation or submission of this brief. No person other

than amicus curiae, its members, or its counsel made a monetary

contribution to its preparation or submission.

2

arbitration and that the savings clause of Section 2

embodies the national policy favoring arbitration and

places arbitration agreements on equal footing with all

other contracts. Applying this federal substantive law

to the states, this Court held that arbitration contracts

are to be construed as any other contract, not subjected

to more stringent review or disfavor because the

subject matter is arbitration. The Court thus con-

firmed the holding of Southland Corp. v. Keating,

465 U.S. 1, 16 (1984).

These matters have been settled law for more than

20 years. California courts, however, still scrutinize

arbitration with suspicion and dislike, and invalidate

arbitration contracts with distressing regularity. Most

commonly, California courts invoke unconscionability

principles to invalidate the contracts. However, the

unconscionability doctrine is not applied neutrally

among all types of contracts, resulting in the dispro-

portionate invalidation of arbitration provisions as

opposed to other contracts. This feature of California

jurisprudence interferes with the normal and proper

functioning of the California marketplace, injuring

businesses and consumers alike. Because employment

contracts—including arbitration clauses—are

ubiquitous throughout California, and because

California courts are invalidating arbitration clauses

at a rate far exceeding that of any other state, this case

presents an important question that can be resolved

only by this Court. The petition for writ of certiorari

should be granted.

3

REASONS FOR GRANTING THE WRIT

I

CALIFORNIA’S UNCONSCIONABILITY

DOCTRINE UNIQUELY DISFAVORS

ARBITRATION CONTRACTS

California’s reluctance to enforce arbitration

contracts conflicts with the Federal Arbitration Act’s

policy of favoring arbitration. It also conflicts with the

approach of other states and the federal circuit courts,

which comply with the federal policy codified in the

FAA. Because California’s hostility toward arbitration

contracts affects many millions of employees and busi-

nesses in the country’s most populous state, this Court

should grant the writ of certiorari to review and

reverse the decision below.

With one procedurally bizarre and narrow excep-

tion, there is no statute in California, or any other

state, that requires parties to a transaction to arbitrate

disputes.” Nonetheless, arbitration frequently is

described as “mandatory,” by which those who oppose

arbitration contracts generally mean either that

(1) individuals must agree to arbitration if they wish to

buy the product or continue being employed; or (2) by

agreeing to arbitrate, the contract “mandates”

individuals to resolve disputes by arbitration even if

they later would prefer to go to court. Christopher R.

* See Hess Collection Winery v. Agricultural Labor Relations

Board, 140 Cal. App. 4th 1584, 1600-01 (Cal. Ct. App. 2006), rev.

denied (Sept.13, 2006) (upholding validity of Cal. Labor Code

§ 1164, mandating “interest” arbitration (as opposed to “grievance”

arbitration) between agricultural employer and workers, which

compels the parties to submit to mediation imposing a collective

bargaining agreement when the parties fail to agree on the terms

of an initial bargaining agrecment).

4

Drahozal, “Unfair” Arbitration Clauses, 2001 U. Il. L.

Rev. 695, 706 (2001). This Court, however, has refused

to invalidate arbitration agreements solely on the

grounds that an individual must take-it-or-leave-it.

See Gilmer v. Interstate/Jchnson Lane Corp., 500 U.S.

20, 33 (1991) (“Mere inequality in bargaining power,

however, is not a sufficient reason to hold that

arbitration agreements are never enforceable in the

employment context.”);? see also Pritzker v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1118

(3d Cir. 1993) (arbitration agreements are enforceable

even if they involve unequal bargaining power). (Cf.

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585,

596-97 (1991) (upholding a forum-selection clause in

cruise-line ticket).

One way that individuals seek to evade an

arbitration provision in a contract is to invoke the

unconscionability doctrine. Unconscionability is a

notoriously flexible concept. See Joseph M. Perillo,

Corbin on Contracts: Avoidance & Reformation § 29.1

(rev. ed. 2002) (“Unconscionability is one of the most

* In 2002, Senator Edward Kennedy introduced a bill expressly to

restrict the FAA to nonemployment agreements. S. 2435 (107th

Cong.) (2002) (“A bill to amend title 9 of the United States Code to

exclude all employment contracts from the arbitration provisions

of chapter 1 of such title; and for other purposes.”) available

at http://thomas.loc.gov/cgi-bin/bdquery/z?d107:SN02435:@@@L

&summ2=m& (last visited Feb. 11, 2008). This bill has since been

reintroduced and referred to committee five times, but never made

it out of committee. See e.g., H.R. 2969 (109th Cong.) (2005)

(“Preservation of Civil Rights Protections Act of 2004 - Amends

the Federal Arbitration Act to modify the definition of commerce

so as to exclude employment contracts from arbitration

provisions’), bill history available at http://thomas.loc.gov/

cgi-bin/bdquery/z7d 109: HR02969:@@@L&summ2=m& (last visited

Feb. 11, 2008).

5

amorphous terms in the law of contracts.”). The

flexibility no doubt stems from the original purpose of

the unconscionability doctrine: to protect consumers.

Richard A. Epstein, Unconecionability: A Critical

Reappraisal, 18 J. L. & Econ. 293, 302 (1975) (“Ideally,

the unconscionability doctrine protects against fraud,

duress and incompetence, without demanding specific

proof of any of them.”). However, the doctrine was not

written to enable courts to do justice by rewriting

contracts. In fact, in the official comments to Uniform

Commercial Code § 2-302, the drafters explained that

the unconscionability principle “is one of prevention of

oppression and unfair surprise and not of disturbance

of allocation of risks because of superior bargaining

power.” See id., official comment 1 (emphasis added);

accord Cal. Civ. Code § 1670.5, Legis. Comm. Cmt.

(same).

While the FAA permits state courts to apply

“ordinary principles of unconscionability,” the FAA

forbids state courts from implementing substantive

state policies that undermine arbitration clauses.

Moreover, “a state cannot evade FAA preemption

simply by labeling procedures which are inconsistent

with its substantive policies as unconscionable.” Alan

S. Kaplinsky and Mark J. Levin, The Gold Rush of

2002: California Courts Lure Plaintiffs’ Lawyers (but

Undermine Federal Arbitration Act) by Refusing to

Enforce “No-Class Action” Clauses in Consumer

Arbitration Agreements, 58 Bus. Law. 1289, 1295

(2003). Similarly, this Court’s arbitration jurispru-

dence does not permit a state to use unconscionability

as a ground for voiding arbitration agreements in

certain classes of disputes just because the state court

believes those disputes are better handled by some

other means of dispute resolution. For example, this

are

6

Court held that the FAA preempts California Labor

Code § 229 insofar as the state statute allowed liti-

gation in court to collect wages “without regard to the

existence of any private agrcement to arbitrate.” Perry

v. Thomas, 482 U.S. 483, 484, 491 (1987) (quoting Cal.

Lab. Code § 229 (West 1971)). This strongly suggests

that California could not simply deem such an

arbitration clause to be unconscionable and

unenforceable to the extent it prevented an employee

from suing in court to collect unpaid wages. See Gold

Rush, 58 Bus. Law. at 1295. As one commentator

noted:

[T]he United States Supreme Court surely

would review state courts’ unconscionability

rulings to the extent necessary to prevent the

unconscionability doctrine from effectively

nullifying the FAA with respect to a huge

class of contracts. Indeed, the Court has

twice stated that state courts 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.”

Stephen J. Ware, Alternative Dispute Resolution

§ 2.25(b), at 58 (West 2001) (citing Doctor’s Assocs., Inc.

vu. Casarotto, 517 U.S. 681, 687-88 n.3 (1996)); Perry,

482 U.S. at 492 n.9. That is, a court may not “decide

that a contract is fair enough to enforce all its basic

terms (price, service, credit), but not fair enough to

enforce its arbitration clause.” Allied-Bruce Terminix

Cos., Inc. v. Dobson, 513 U.S. 265, 281 (1995).

Nonetheless, California courts have found the

unconscionability doctrine to be a valuable tool to

7

invalidate arbitration contracts. In so doing, California

has developed a reputation as “hostile” to arbitration.

A recent empirical analysis conducted by Stephen

Broome revealed that unconscionability challenges in

California succeed against arbitration provisions with

far greater frequency than any other type of contract

provision. 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 (2006).

Broome identified 114 cases in which the California

Courts of Appeal considered the unconscionability of

arbitration contracts; in 53 of those cases, the

arbitration provision was held unconscionable and

unenforceable and another 13 found some aspect of the

arbitration provision to be unconscionable and severed

it. Id. at 44-45.‘ Forty-eight cases upheld the arbitra-

tion contract. By way of contrast, of the 46 unconscion-

ability claims made outside the context of arbitration,

41 of the contracts were upheld by the courts, while

only 5 were struck down as unconscionable. Id. at 47.

By targeting arbitration provisions for exceptionally

harsh review under the unconscionability doctrine,

California courts violate Section 2 of the FAA, which

demands that arbitration contracts be considered on

“equal footing” with any other contract. Shearson/Am.

Express, Inc. v. McMahon, 482 U.S. 220, 225-26 (1987).

See also Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20 at 36.

* Broome’s survey included cases decided from 1982 to 2006. The

starting date was set by California’s adoption of the currently

existing unconscionability doctrine in A & M Produce v. FMC

Corp., 135 Cal. App. 3d 473, 486 (1982). Broome, 3 Hastings Bus.

L.J. at 44 n.33.

8

II

CALIFORNIA COURTS REQUIRE

MUTUALITY IN ARBITRATION

CONTRACTS, BUT NOT OTHER TYPES

OF CONTRACTS

What accounts for the difference in the courts’

willingness to invalidate arbitration contracts as

unconscionable as opposed to contracts in other

contexts? Mostly, the culprit is a special test that

California courts apply to unconscionability claims

brought only against arbitration contracts. This

test—the “mutuality test”—first appeared in Stirlen v.

Supercuts, Inc., 51 Cal. App. 4th 1519 (Cal. Ct. App.

1997), in which the court held that a contract that

requires one party to arbitrate but not the other is so

“one-sided” as to be unconscionable. Jd. at 1532. The

Stirlin court repeatedly labeled the contract between

the parties as a “contract of adhesion,” with the

assumption that the label would be dispositive of the

legal issues. Jd. at 1533; see also Kinney v. United

Healthcare Servs., 70 Cal. App. 4th 1322, 1332 (Cal. Ct.

App. 1999) (invalidating “unilateral obligation to

arbitrate”). Yet this disdain of adhesion contracts

itself betrays a certain bias.

“The contract of adhesion is a part of the

fabric of our society. It should neither be

praised nor denounced. .. .” That is because

there are important advantages to its use

despite its potential for abuse. There

advantages include the fact that standardi-

zation of forms for contracts is a rational and

economically efficient response to the rapidity

of market transactions and the high costs of

negotiations, and that the drafter can

9

rationally calculate the costs and risks of

performance, which contributes to rational

pricing.

Goodwin v. Ford Motor Credit Co., 970 F. Supp. 1007,

1015 (M.D. Ala. 1997) citing Robertson v. The Money

Tree of Alabama, 954 F. Supp. 1519, 1526 n.6 and n.10

(M.D. Ala. 1997)).°

None of those advantages were even acknowledged

by the California Supreme Court, however, and that

court adopted the mutuality test in Armendariz uv.

Foundation Health Psychcare Services, Inc., 24 Cal.

4th 83, 117 (2000), announcing that arbitration

agreements must contain a “modicum of bilaterality.”

Since Armendariz, more than two-thirds of the courts

° Richard Epstein explains why the “mutuality argument” cannot

be a legitimate basis for declaring a contract unconscionable:

A could not complain if B decided not to make him any

offer at all; why then is he entitled to complain if B

decides to make him better off by now giving him a

choice when before he had none? If A does not like B’s

offer, he can reject it; but to allow him to first accept the

agreement and only thereafter to force B to work at a

price which B finds unacceptable is to allow him to

resort (with the aid of the state) to the very form of

duress that on any theory is prohibited. There is no

question of “dictation” of terms where B refuses to

accept the terms desired by A. There is every question

of dictation where A can repudiate his agreement with

B and hold B to one to which B did not consent; and that

element of dictation remains even if A is but a poor

individual and B is a large and powerful corporation. To

allow that to take place is to indeed countenance an

“Inequality of bargaining power” between A and B, with

A having the legal advantage as he is given formal legal

rights explicitly denied B.

Epstein, supra, at 297.

10

that invalidated arbitration provisions did so because

the provisions lacked mutuality. Broome, 3 Hastings

Bus. L.J. at 50-51; see also Michael Schneidereit, Note,

A Cold Night: Unconscionability as a Defense to

Mandatory Arbitration Clauses in Employment

Agreemeris, 55 Hastings L.J. 987, 1002 (2004) (“[I]n

Armendariz, the court honed California

unconscionabilty law into a weapon that could be used

against mandatory arbitration agreements.”). Indeed,

in Discover Bank v. Superior Court, 36 Cal. 4th 148

(2005), the California Supreme Court employed a form

of the mutuality test to strike down class-arbitration

waivers. In the court’s view:

[C]lass action or arbitration waivers are

indisputably one-sided. ‘Although styled as a

mutual prohibition on representative or class

actions, it is difficult to envision the

circumstances under which the provision

might negatively impact Discover [Bank],

because credit card companies typically do

not sue their customers in class action

lawsuits.’

Id. at 161 (quoting Szetela v. Discover Bank, 97 Cal.

App. 4th 1094, 1101 (Cal. Ct. App. 2002), cert. denied,

537 U.S. 1226 (2002)). The court below relied on what

it perceived as the one-sided nature of the contract in

striking down Circuit City’s class-arbitration waiver.

Gentry v. Superior Court, 42 Cal. 4th at 470-72.

Although some language in Armendariz suggests that

lack of mutuality can be justified by “business

realities,” Armendariz, 24 Cal. 4th at 117, no lower

court has yet identified a business reality sufficient to

justify lack of mutuality in an arbitration agreement.

Broome, 3 Hastings Bus. L.J. at 54, citing Michael G.

il

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, 81 (2005). The mutuality test thus makes it

significantly easier to challenge arbitration agreements

as unconscionable.

Yet this Court held that “[t]he ‘goals and policies’

of the FAA... are antithetical to threshold limitations

placed specifically and solely on arbitration provi-

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

688. Given this straightforward holding, jurisdictions

other than California have been unwilling to adopt a

requirement of mutuality for arbitration agreements.

See, e.g., McNaughton v. United Health Care Servs.

Inc., 728 So. 2d 592, 599 (Ala. 1999) (a mutuality

approach relies on the “uniqueness of the concept of

arbitration,” “assigns a suspect status to arbitration

agreements,” and therefore “flies in the face of Doctor’s

Associates.”). See also Harris v. Green Tree Fin. Corp.,

183 F.3d 173, 180 (3d Cir. 1999) (“substantive federal

law stands for the proposition that parties to an

arbitration agreement need not equally bind each other

with respect to an arbitration agreement if they have

provided each other with consideration beyond the

promise to arbitrate”); In re Pate, 198 B.R. 841, 844

(S.D. Ga. 1996) (same result under Georgia law);

Munoz v. Green Tree Fin. Corp., 542 S.E.2d 360, 365

(S.C. 2001) (“the doctrine of mutuality of remedy does

not apply here. An agreement providing for arbitration

does not determine the remedy for a breach of contract

but only the forum in which the remedy for the breach

is determined.”) (italics in original).

12

Meanwhile, outside the arbitration context,

California courts do not demand mutuality either. See

Principal Mut. Life Ins. Co. v. Vars, Pave, McCord &

Freedman, 65 Cal. App. 4th 1469, 1488-89 (Cal. Ct.

App. 1998) (unilateral mortgage agreement upheld

because “[w]here sufficient consideration is present,

mutuality is not essential.”); Hillsman v. Sutter Cmty.

Hosp., 153 Cal. App. 3d 743, 752 (Cal. Ct. App. 1984)

(upholding unilateral employment contract where

consideration requirement is properly met; a

“mutuality of obligation” is unnecessary).

Thus, California’s “mutuality” approach to deter-

mining substantive unconscionability in arbitration

provisions differs from the standard used to analyze

ordinary contractual provisions for unconscionability.

Under the mutuality test, the court relies on its own

speculation that the arbitral proceeding itself might

impede a party’s ability to obtain the requested relief.

In the decision below, the court went even further,

speculating that unidentified other potential class

members might find it difficult to assert their rights.

Gentry, 42 Cal. 4th at 461 (“Some workers, particularly

immigrants with limited English language skills, may

be unfamiliar with the overtime laws. Even

English-speaking or better educated employees may

not be aware of the nuances of overtime laws with

their sometimes complex classifications of exempt and

nonexempt employees.”) (citation omitted).

For nonarbitration contractual provisions,

however, California courts invalidate contracts as

unconscionable only upon evidence of measurable,

inevitable hardship if the disputed term is enforced.

See Phoenix Leasing Inc. v. Johnson, No. A089871,

2001 WL 1324778, at *6 (Cal. Ct. App., Oct. 29, 2001)

13

(invalidating provision that would have given lender

$208,000 of unaccrued interest); [/khchooyi v. Best,

37 Cal. App. 4th 395, 411 (Cal. Ct. App. 1995)

(invaliding landlord’s attempt to appropriate a portion

of the sale price of a lease); Carboni v. Arrospide, 2 Cal.

App. 4th 76, 83 (Cal. Ct. App. 1991) (Gnvalidating

interest rate of 200% per annum on a secured $99,000

loan); Ellis v. McKinnon Broadcasting Co., 18 Cal. App.

4th 1796, 1806 (Cal. Ct. App. 1993) (invalidating

contract that gave employer all of employee’s sales

commissions (which were the employee’s sole

compensation) that were received after the employee

left the company when the sales were generated by the

employee prior to his voluntary departure); Johnisee v.

Kimberlite Corp., No. A107341, 2005 WL 1249198 at *8

(Cal. Ct. App., May 24, 2005) (same).°®

Because such class action waivers are upheld in

most other courts, consumers who wish to sue national

corporations (and their counsel) can circumvent those

waivers by the simple mechanism of initiating a class

action lawsuit in California. They need only to find a

plaintiff in California to take the lead and file suit in

state court, and then, once the lawsuit is under way,

broaden the class action to include plaintiffs from

around the country. See Aaron C. Gundzik & Rebecca

Gilbert Gundzik, Will California Become the Forum of

Choice for Attacking Class Action Waivers?, 25-FALL

Franchise L.J. 56, 59 (2005). Thus, although

California consumers and businesses are most

obviously affected by the California courts’ refusal to

° These five cases are the only ones identified by Stephen Broome

where California appellate courts invalidated contracts as

unconscionable outside the arbitration context. See Broome,

3 Hastings Bus. L.J. at 56-58.

14

enforce class action waivers in arbitration, the true

impact is national in scope and warrants this Court’s

review.

7%

a

CONCLUSION

The California courts consistently hold arbitration

agreements to a different standard when it comes to

u.conscionability, and the decision below represents

the latest, and most extreme, example. Five years ago,

then-Justice Janice Rogers Brown explained that “this

court appears to be ‘chip[ping] away at’ United States

Supreme Court precedents broadly construing the

scope of the FAA ‘by indirection,’ despite the high

court’s admonition against doing so” and “urge[ d]” this

Court “to clarify once and for all whether our approach

to arbitration law comports with its precedents.”

Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1095

(2003) (Brown, J., concurring and dissenting) (quoting

Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 122

(2001). This Court remains the only recourse to

15

reestablish the validity of arbitration agreements in

the nation’s most populous state.

The petition for writ of certiorari should be

granted.

DATED: March, 2008.

Respectfully submitted,

DEBORAH J. LA FETRA

Counsel of Record

Pacific Legal Foundation

3900 Lennane Drive,

Suite 200

Sacramento, California 95834

Telephone: (916) 419-7111

Facsimile: (916) 419-7747

Counsel for Amicus Curiae Pacific Legal Foundation