# Amicus Curiae 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:** Amicus Curiae Brief
- **Published:** January 1, 2008

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0574%3A7. Public record. Not legal advice.