Petition for Writ of Certiorari — Circuit City Stores, Inc. v. Adams

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Supreme Court, US.

(VY FILED

U1146U APR 3 2002

No. O1-__

Os Caabiee tet oF ais

IN THE

Supreme Court of the Anited States

CIRCUIT CITY STORES, INC.,

Petitioner,

SAINT CLAIR ADAMS,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

WALTER DELLINGER REX DARRELL BERRY

PAMELA HARRIS (Counsel of Record)

SRI SRINIVASAN DAVIS GRIMM PAYNE

O’MELVENY & MYERS LLP MARRA & BERRY

555 13” Street N.W. 1111 Third Ave., #1865

Washington, D.C. 20004 Seattle, WA 98101

(202) 383-5300 (206) 447-0182

W. STEPHEN CANNON

TERI C. MILES

Circuit City Stores, Inc.

9954 Mayland Dr.

Richmond, VA 23233

(804) 967-2915

Attorneys for Petitioner

EARNS sc ARREARS PI EN ROAM RRA MEORO ARE A NEG HO IN EIN

apert

QUESTIONS PRESENTED

1. Whether, in light of this Court’s decisions in Gilmer

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

Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the

Ninth Circuit erred in relying on generalized and abstract

concerns about unequal bargaining power in the employment

context to hold an arbitration agreement unenforceable under

the Federal Arbitration Act.

2. Whether the Ninth Circuit erred in holding, contrary

to the decisions of this Court in Perry v. Thomas, 482 US.

483 (1987) and Doctor’s Associates, Inc. v. Casarotto, 517

U.S. 681 (1996), and decisions of other lower courts, that a

state law unconscionability rule may be applied in an arbitra-

tion-specific manner in order to invalidate an arbitration

agreement under the Federal Arbitration Act.

STATEMENT OF PARTIES AND AFFILIATES

The caption of the case in this Court contains the names

of all parties to the proceedings in the United States Court of

Appeals for the Ninth Circuit. Circuit City Stores, Inc.

(“Circuit City”), which has a wholly-owned subsidiary,

CarMax Auto Superstores, Inc. (“CarMax”), is a publicly

traded company with two series of common stock. Circuit

City group common stock tracks the performance of Circuit

City, while CarMax group common stock tracks the per-

formance of CarMax. Circuit City has retained an equity

interest in CarMax common stock. No other publicly held

corporation or publicly held entity has a direct financial in-

terest in the outcome of this litigation.

ill

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED..................c.ccccccsersscsccsscsssseconseees i

STATEMENT OF PARTIES AND AFFILIATES .............. il

TABLE OF AUTHORITIES ...................cccccccsrcsessssccsessesees v

CPTI BIO on nccsccccnceccesoceesccesccoscssosssoncssccnsccssccsscsesoees l

Mas Be asssccensccccesessssecececsncsesesassnsansceeenoasnncessabsesnaucnne l

STAT Be Bre VY BOD ccccccsnccccscscesscceseccccsconccscsesconnccoesseecens 2

STATEMENT OF THE CASE.................cc.cccccccsserscscsscsssssoes 3

A. Statutory Background.....................cccccsrcssssessssees 3

B. Factual Background ........................cccccssssssesscssees 4

C. Prior Proceedings and Decision Below................ 5

REASONS FOR GRANTING THE WRIT...............02::000 9

I. THE NINTH CIRCUIT’S HEAVY

RELIANCE ON UNEQUAL BARGAINING

POWER CONFLICTS WITH G/LMER AND

UNDERMINES CIRCUIT CITY I ........0::c0:eeceeeeeeees 10

TABLE OF CONTENTS

(continued)

Page 7

I]. THE NINTH CIRCUIT’S HOLDING THAT |

THE FAA DOES NOT PREEMPT :

ARBITRATION-SPECIFIC STATE LAW :

RULES OF UNCONSCIONABILITY IS :

INCORRECT AND CONFLICTS WITH

DECISIONS OF THIS COURT AND

Ss Se ida teiateciiectiiencnabeinsniisicinentesacininesetes 13

A. Under The Standard Announced In This

Court’s Cases, The State-Law

Unconscionability Rules Applied By The

Ninth Circuit Are Preempted By The FAA....... 14

B. The Ninth Circuit’s Preemption Holding

Conflicts With Decisions Of Other Courts ....... 18

SA ea winiskcesncibtiidieiinpiaiidanuaidinlsnconcasuncdmiipiasiaanetni 20

TABLE OF AUTHORITIES

CASES

Allied-Bruce Terminix Cos. v. Dobson,

Ee Os ME achakisenislntasesediadipicbanes

Armendariz v. Foundation Health Psychcare

Services, Inc., 6 P.3d 669 (Cal. 2000)........

Circuit City Stores, Inc. v. Adams,

RR | RR CORR

Circuit City Stores, Inc. v. Adams,

FP a Se i iicincschtisansesnntvnncestoanenis

Circuit City Stores, Inc. v. Ahmed, _ F.3d _,

2002 WL 441528 (9th Cir. Mar. 22, 2002)

Circuit City Stores, Inc. vy. Gannon,

262 F.3d 677 (8th Cir. 2001)...........0......e..

Doctor's Associates, Inc. v. Casarotto,

FF es Ne Orn nuisscsacnedisanicbosscunanaey

Doctor's Associates, Inc. v. Hamilton,

150 F.3d 157 (2nd Cir. 1998)...........0000000...

Gilmer v. Interstate/Johnson Lane Corp.,

Fe i BP ininciitrinhnienhinalliiterseiteds

Green Tree Financial Corp. v. Randolph,

PES Cs. Fe iiittncidemtntinieasiansnaaeiie

Harris v. Green Tree Financial Corp..,

Pe oe SFP Or a riesctseisn sen loicosaenmtadladinie

Hillsman v. Sutter Community Hospital of

Sacramento, 200 Cal. Rptr. 605 (Ct. App.

IID sasoicstnsneniccuinteosharil Ridendibcunstaaomaciaueattiees

Page(s)

sabdanninipalds passim

saitelanndaiaei passim

iiverenmnin bores 4,11

TABLE OF AUTHORITIES

(continued)

Page(s)

KKW Enterprises v. Gloria Jean's Gourmet

Coffees Franchising Corp., 184 F.3d 42 (1st

COUR. GEE nnnsnnesivssnnisncnisciivendaueaninneadeinaamasinimmensecasassitaniaiea 19

Koveleskie v. SBC Capital Markets, Inc.,

167 F.3d 361 (7th Cir. 1999) 0000... ccceceeeneteeeeneee 12

McNaughton v. United Health Care Services,

Fae CO FOO CR, CID etcnsennnineiineniseinniiiin 18

Moses H. Cone Memorial Hospital v. Mercury -

Construction Corp., 460 U.S. 1 (1983) ........ccccccccccceeseeees 3

OPE International LP v. Chet Morrison

Contractors, 258 F.3d 443 (2001) ..............ccccccccceececeeees 19

Perry v. Thomas, 482 U.S. 483 (1987) ........c.ccccccccceeees passim

Prudential Insurance Corp. v. Vars,

77 Cal. Rptr. 2d 479 (Ct. App. 1998).............ccccceceeseeeee 16

Rosenberg v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 170 F.3d 1 (Rat Cir. TSDD)......ccccccsscsesccsseseses 12

Southland Corp. v. Keating, 465 U.S. 1 (1984) 2.0.0... 3

STATUTE

BF eels Se BORN Ua iissnncsnccapodipeeatatansasoucnanne passim

OTHER AUTHORITY

A. SR, GRD CI cosevncenniscntininccciendentnenacssnaennsnennineataieinianainel 18

0 eed O68 © + weet

No. 01-

IN THE

Supreme Court of the Gnited States

Circuit City STORES, INC..,

Petitioner,

SAINT CLAIR ADAMS,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioner Circuit City Stores, Inc. (“Circuit City”) re-

spectfully prays that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the Ninth

Circuit in this case.

OPINION BELOW

The opinion of the Ninth Circuit (App. la-1Qa) 1s re-

ported at 279 F.3d 889 (9th Cir. 2002).

JURISDICTION

The judgment of the United States Court of Appeals for

the Ninth Circuit was entered on February 4, 2002. The ju-

risdiction of this Court is invoked under 28 U.S.C. § 1254(1)

(2000).

STATUTE INVOLVED

The Federal Arbitration Act, 9 U.S.C. §§ 1-16 (2000),

provides in pertinent part:

transaction or a contract evidencing a transaction

involving commerce to settle by arbitration a

controversy thereafter arising out of such contract or

transaction, or the refusal to perform the whole or any

part thereof, or an agreement in writing to submit to

arbitration an existing controversy arising out of such |

a contract, transaction, or refusal, shall be valid,

irrevocable, and enforceable, save upon such grounds

as exist at law or in equity for the revocation of any

contract.

$2 A whnitten provision in any manitime |

$3 If any suit or proceeding be brought in i

any of the courts of the United States upon any issue ;

referable to arbitration under an agreement in. wnting

for such arbitration, the court in which such suit is :

pending, upon being satisfied that the issue involved

in such suit or proceeding is referable to arbitration

under such an agreement, shall on application of one

of the parties stay the trial of the action until such

arbitration has been had in accordance with the terms i

of the agreement, providing the applicant for the stay :

is not in default in proceeding with such arbitration.

$4 A party aggneved by the alleged failure,

neglect, or refusal of another to arbitrate under a

written agreement for arbitration may petition any j

United States district court which, save for such

agreement, would have jurisdiction under Title 28, in ;

a civil action or in admiralty of the subject matter of a

Suit arising out of the controversy between the parties,

for an order directing that such arbitration proceed in

the manner provided for in such agreement. .. . The

court shall hear the parties, and upon being satisfied

that the making of the agreement for arbitration or the

failure to comply therewith is not in issue, the court

shall make an order directing the parties to proceed to

arbitration in accordance with the terms of the

agreement. ...

Id. §§ 2-4.

STATEMENT OF THE CASE

A. Statutory Background.

The Federal Arbitration Act (“FAA” or “Act”), 9 U.S.C.

§§ 1-16, was enacted in 1925 in order to overcome long-

standing judicial reluctance to enforce arbitration agree-

ments. See Allied-Bruce Terminix Cos. v. Dobson, $13 U.S.

265, 270-71 (1995). The “preeminent concern” behind the

FAA was to “enforce private [arbitration] agreements into

which parties had entered.” Perry v. Thomas, 482 U.S. 483,

490 (1987) (internal quotation omitted). Accordingly, § 2,

the major substantive provision of the Act, requires that

courts enforce arbitration agreements just as they would any

other contract. Allied-Bruce, 513 U.S. at 273. Sections 3

and 4 of the FAA allow federal district courts to compel arbi-

tration by staying federal and state court proceedings that are

initiated by a party to an arbitration agreement.

The effect of these provisions is to establish a “liberal

federal policy favoring arbitration agreements, notwithstand-

ing any state substantive or procedural policies to the con-

trary.” Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 24 (1983). It follows, the Court held in

Southland Corp. v. Keating, 465 U.S. 1 (1984), that the FAA

preempts any state law that would “undercut the enforceabil-

ity of arbitration agreements.” /d. at 11-12, 16. In short, the

FAA creates a “body of federal substantive law of arbitrabil-

ity,” Moses H. Cone, 460 U.S. at 24, that leaves states with-

out the authority to apply their own rules against enforce-

Nee RR

ment of arbitration agreements. See Allied-Bruce, 513 U.S.

at 271-72 (describing and reaffirming Southland).

Finally, and importantly for this case, the Court has made

clear that FAA’s “liberal federal policy favoring arbitration”

applies fully in the employment context. In cases like Perry

and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20

(1991), this Court has held that mandatory, pre-dispute

agreements by employees to arbitrate employment-related

causes of action, including statutory claims, are to be “ngor-

ously enforced” under the FAA. Perry, 482 U.S. at 490.

Nothing about arbitration, the Court explained in Gilmer,

makes it an inherently inferior method of protecting employ-

ees’ legal rights. On the contrary, arbitration offers all par-

ties — employees as well as employers — significant advan-

tages over litigation, including “simplicity, informality, and

expedition.” 500 U.S. at 31. Generalized attacks on arbitra-

tion of employment disputes, the Court concluded,

rest on suspicion of arbitration as a method of

weakening the protections afforded in the substan-

tive law to would-be complainants, and as such,

they are far out of step with our current strong en-

dorsement of the federal statutes favoring this

method of resolving disputes.

Id. at 30 (internal quotations omitted).

B. Factual Background.

In March 1995, Circuit City implemented an Associate

Issue Resolution Program (“AIRP”) providing for binding

arbitration of employment-related legal disputes. Persons

employed by Circuit City at that time were given the choice

of either participating in the AIRP or “opting-out.” Follow-

ing implementation of the AIRP, new applicants, like re-

spondent, were required as part of the application process to

sign the “Circuit City Dispute Resolution Agreement”

(“DRA”), which requires all applicants and current and for-

ee eee ae

mer employees to submit any employment-related legal dis-

pute to binding arbitration. App. 2a.

The DRA incorporates a set of “Dispute Resolution

Rules and Procedures,” which establish the basic rules gov-

eming the conduct of arbitrations under the DRA. The rules

emphasize that the outcome of the arbitration is final and

binding on both the employee and Circuit City. The rules

also contemplate that, subject to re-allocation by the arbitra-

tor, each party will bear one-half of the fees and costs of ar-

bitration. Employees, however, may limit their liability for

any fees and costs to three percent (3%) of their most recent

annual income. Employees also can be relieved of paying

any share of the fees and costs if they prevail.’

C. Prior Proceedings and Decision Below.

In November 1997, respondent, notwithstanding his

agreement to submit any employment-related legal disputes

to arbitration, filed a lawsuit against Circuit City in a Cali-

fornia Superior Court alleging various forms of employment

discrimination and related claims under state law. Circuit

City, invoking §§ 3 and 4 of the FAA, 9 U.S.C. §§ 3-4, filed

a petition in the United States District Court for the Northern

District of California to stay the state court proceedings and

to compel arbitration of respondent’s claims. The district

court granted Circuit City’s petition and entered an order

staying the state court proceedings and compelling arbitra-

tion.

1. a. The Ninth Circuit reversed. In Circuit City Stores,

Inc. v. Adams, 194 F.3d 1070 (1999) (per curiam), the court

found that § 1 of the FAA — which excludes from the Act’s

coverage “contracts of employment of seamen, railroad em-

' The text of the entire DRA and Dispute Resolution Rules and Pro-

cedures are reprinted in the original and supplemental joint appendix to

Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (No. 99-1379).

ployees, or any other class of workers engaged in foreign and

interstate commerce,” 9 U.S.C. § 1 — rendered the FAA in-

applicable to a// contracts of employment. Because the DRA

was part of respondent’s employment contract, the court

held, the FAA failed to provide a basis for enforcing the

DRA’s arbitration requirement.

b. This Court reversed the Ninth Circuit. In Circuit City

Stores, Inc. v. Adams, 532 U.S. 105 (2001) (“Circuit City I’),

this Court held that the exclusion in § 1 of the FAA does not

— as the Ninth Circuit had erroneously concluded — exempt

all contracts of employment from the Act’s coverage. In-

stead, the exclusion exempts only the employment contracts

of transportation workers. See id. at 119. In all other cir-

cumstances, an employee’s agreement to submit his or her

- claims to binding arbitration is fully subject to enforcement

under the FAA. Jd.

In refusing to find all employment contracts outside the

reach of the FAA, the Court expressly “reject[ed] the suppo-

sition that the advantages of . . . arbitration somehow disap-

pear when transferred to the employment context.” Jd. at

123. In fact, the Court observed, the benefits of arbitration

“may be of particular importance in employment litigation.”

Id. Exempting all contracts of employment from the FAA,

the Court explained, “would call into doubt the efficacy of

alternative dispute resolution procedures adopted by many of

the Nation’s employers, in the process undermining the

FAA’s proarbitration purposes and breeding litigation from a

statute that seeks to avoid it.” Jd. (internal quotation marks

omitted). Because the FAA generally applies to employment

contracts, and because respondent does not fall within the

narrow exception for transportation workers, the Court re-

versed the Ninth Circuit and remanded for further proceed-

ings consistent with its opinion. Jd. at 124.

2. On remand, the Ninth Circuit again denied enforce-

ment under the FAA of respondent’s agreement to submit his

employment-related claims to arbitration. This time, the

court pinned its decision on § 2 of the FAA, which makes

arbitration agreements “valid, irrevocable, and enforceable”

but also allows for non-enforcement on “such grounds as ex-

ist at law or in equity for the revocation of any contract.” 9

U.S.C. § 2 (emphasis added). Applying this § 2 “savings

clause,” the Ninth Circuit determined that the DRA is unen-

forceable on one “such ground” — that it is “unconscionable”

as a matter of California state law.

The court began by explaining that, “{uJnder California

law, a contract is unenforceable if it is both procedurally and

substantively unconscionable.” App. 4a. According to the

Ninth Circuit, procedural unconscionability turns principally

on “the equilibrium of bargaining power between the par-

ties,” while substantive unconscionability turns on an as-

sessment of “whether the terms of the contract are unduly

harsh or oppressive.” Jd. In applying these standards, the

court turned for guidance to the California Supreme Court’s

decision in Armendariz v. Foundation Health Psychcare

Services, Inc., 6 P.3d 669 (Cal. 2000), which held an em-

ployment arbitration agreement unconscionable under Cali-

fornia law.

The Ninth Circuit first concluded, relying on Armen-

dariz, that the DRA is procedurally unconscionable. App.

5a. The sole basis articulated for that holding is that the

DRA is a “contract of adhesion . . . drafted by the party with

superior bargaining power,” in that Circuit City “possesses

considerably more bargaining power than nearly all of its

employees or applicants,” “few [of whom] are in a position

to refuse a job because of an arbitration agreement.” Jd. (cit-

ing Armendariz, 6 P.3d at 690).

The court went on to hold, again relying on Armendariz,

that the DRA is substantively unconscionable as well. First,

the Ninth Circuit concluded, the DRA fails to Satisfy the

“modicum of bilaterality” purportedly required by California

law for the enforcement of arbitration agreements in the em-

ployment context. Jd. at 6a. Although the DRA is “bilat-

eral” in the sense that both parties — Circuit City and its em-

ployees — are bound by the outcome of arbitration, the Ninth

Circuit found that the DRA is “one-sided” in a different

sense, i.e., that it requires employees to arbitrate their claims

against Circuit City but does not require Circuit City to arbi-

trate any claims it might have against an employee. Id.

Second, the Ninth Circuit focused on the DRA’s cost-sharing

provision, and held that any requirement that an employee

share in an arbitrator’s fees is substantively unconscionable.

Id. at 7a.

After finding the DRA unconscionable as a matter of

California law, the court stated that its decision also was “en-

tirely consistent with federal law concerning the enforceabil-

ity of arbitration agreements.” Jd. at 8a. Addressing the

question of federal preemption only briefly, the Ninth Circuit

concluded that its invalidation of the DRA was consistent

with the FAA under the §2 savings clause: “Nor does our

decision run afoul of the FAA by imposing a heightened

burden on arbitration agreements,” the court reasoned,

“(bJecause unconscionability is a defense to contracts gener-

ally and does not single out arbitration agreements for spe-

cial treatment.” Jd. at 9a.

Finally, the court addressed whether the provisions of the

DRA it deemed unenforceable could be severed. The court

concluded that they could not. “[T]he objectionable provi-

> That “asymmetry,” the Ninth Circuit added, was “compounded”

by the agreement's failure to allow recovery in arbitration of the full

range of remedies available to a claimant in court. App. 6a-7a. The

Ninth Circuit included this factor in its analysis, if only in a supporting

role, despite the fact that Circuit City advised the court that it no longer

sought to enforce the limitations on remedies in this case or in any other

arbitration. See id. at 7a n.3.

sions pervade the entire contract,” the court determined, in

that “the unilateral aspect of the DRA runs throughout the

agreement and defines the scope of matters that are covered.”

Id. at 10a. In the Ninth Circuit’s view, there was no way to

eliminate the objectionably “unilateral” nature of the DRA

by excising particular provisions, and as such, “the entire

arbitration agreement [was] unenforceable.” Jd.

REASONS FOR GRANTING THE WRIT

This is the second time the Ninth Circuit has declined to

enforce the same arbitration agreement between Circuit City

and respondent. In Circuit City I, this Court reversed the

Ninth Circuit’s first effort, rejecting the position that em-

ployment arbitration agreements as a class are unenforceable

under the FAA. Now, the Ninth Circuit has once again

deemed the agreement unenforceable, largely on the basis of

what appears to be a continued presumption that pre-

employment arbitration agreements are unfair to employees.

This new rationale is no more persuasive than the prior ra-

tionale rejected by this Court. The Court’s review is once

more required to ensure that the pro-arbitration mandate of

the FAA is given full effect by the court below.

The Ninth Circuit’s conclusion that the DRA is uncon-

scionable and unenforceable under California law rests on

three grounds: (1) that Circuit City “possesses considerably

more bargaining power than nearly all of its employees,”

App. 5a; (2) that the DRA is “substantively unconscionable”

in requiring employees but not employers to arbitrate em-

ployment-related claims and in requiring employees poten-

tially to pay a share of the costs of arbitration, id. at 6a; and

(3) that the DRA fails to allow recovery of the full range of

remedies available in a judicial forum, id. at 8a. The Ninth

Circuit’s reliance on the first two of those considerations is

inconsistent with the FAA’s “liberal federal policy in favor

of arbitration,” and it is decidedly out of step with decisions

of this Court and other courts. See Parts I & II, infra.

As for the limitations on available remedies, Circuit City

advised the Ninth Circuit that the DRA has long since been

revised, and Circuit City no longer seeks to enforce any such

limits in this or any other arbitration. App. 7a n.3. Circuit

City does not here challenge the Ninth Circuit’s analysis of

these now-dormant provisions. Even assuming that the

remedies limitations are unconscionable under California

law, however, the decision below could not stand on that ba-

sis alone. Once the factors on which the Ninth Circuit incor-

rectly relied — i.e., unequal bargaining power, lack of mutual-

ity, and cost-sharing — are stricken, the limit on remedies

would be severed under the Ninth Circuit’s own analysis be-

cause it does not “run{] throughout the agreement.” /d. at

10a. As a result, the basic requirement to submit employ-

ment-related legal disputes to arbitration would be enforced.

Cf. Circuit City Stores, Inc. v. Gannon, 262 F.3d 677 (8th

Cir. 2001) (severing limitation on recovery of punitive dam-

ages in Circuit City DRA and enforcing obligation to arbi-

trate claims).

I. THE NINTH CIRCUIT’S HEAVY RELIANCE ON

UNEQUAL BARGAINING POWER CONFLICTS

WITH GILMER AND UNDERMINES CIRCUIT

CITY I.

In finding the DRA unenforceable on state law grounds

of unconscionability, the Ninth Circuit placed dispositive

weight on a presumed disparity in bargaining power between

Circuit City and its employees. In particular, the court’s sole

basis for concluding that the DRA is procedurally uncon-

scionable was that the agreement was “drafted by the party

with superior bargaining power and relegates to” employees

and applicants “the option of either adhering to its terms .. .

or rejecting the contract entirely.” App. 5a. The court’s

analysis of substantive unconscionability under California

law likewise turns in significant part on the parties’ relative

bargaining power. See id. at Sa-6a; Armendariz, 6 P.3d at

Fe ea le ee ee he Rd aD een aie ae te ee

692 (finding that “it is unfairly one-sided for an employer

with superior bargaining power to impose arbitration on the

employee . . . but not to accept such limitations when it seeks

to prosecute a claim against the employee’); id. at 687

(“when an employer imposes mandatory arbitration as a

condition of employment” the arbitration agreement may not

include a fee-sharing provision).

The Ninth Circuit’s heavy reliance on generalized con-

cems about unequal bargaining power cannot be reconciled

with this Court’s decisions. In Gilmer v. Interstate/Johnson

Lane Corp., 500 U.S. 20 (1991), the Court squarely rejected

the argument that agreements to arbitrate employment claims

are unenforceable under the FAA because “there often will

be unequal bargaining power between employers and em-

ployees.” Jd. at 33. “Mere inequality in bargaining power,”

the Court made clear, “is not a sufficient reason to hold that

arbitration agreements are never enforceable in the employ-

ment context.” /d. Instead, a “claim of unequal bargaining

power is best left for resolution in specific cases,” based on a

fact-specific inquiry into whether the employee was “coerced

or defrauded into agreeing to the arbitration clause.” /d.

The substantial weight attached by the Ninth Circuit to

abstract concerns about unequal bargaining power — without

any case-specific analysis of economic coercion or fraud — is

contrary to the clear instruction of Gilmer. It is also irrecon-

cilable with this Court’s prior decision in this very case. In

Circuit City I, respondent asserted that “the perceived dispar-

ity in bargaining power between worker and employer” sup-

ported its position that all employment contracts fall outside

the reach of the FAA. Brief for Respondent, Circuit City

Stores, Inc. v. Adams (No. 99-1379), at 38-39, 44-45 (2001).

Both dissenting opinions in Circuit City J adopted the same

view, concluding that Congress intended to exempt all con-

tracts of employment from the FAA’s coverage because of

“the potential disparity in bargaining power between indi-

vidual employees and large employers,” Circuit City I, 532

U.S. at 132 (Stevens, J., dissenting); see id. at 138-39 & n.3

(Souter, J., dissenting). But this Court rejected that position,

finding that the FAA covers all employment contracts except

those of transportation workers.

The opinion below effectively undermines this Court’s

decision in Circuit City I. By placing dispositive weight on

generalized concerns about the disparity in bargaining power

between employers and employees — entirely apart from any

showing of coercion or misconduct in these particular cir-

cumstances — the opinion below creates a heavy presumption

that a/] employment arbitration agreements are unconscion-

able. Nearly all employment arbitration agreements are en-

tered into on a non-negotiable basis (as, for instance, were

the employment arbitration agreements approved by this

Court in Gilmer and Perry). If requiring an arbitration

agreement as a condition of employment is enough to make

that agreement unconscionable, the effect is to create some-

thing very much like a general employment exemption to the

FAA - precisely the exemption rejected by this Court in this

very case.

In view of Gilmer and Circuit City I, it is not surprising

that the opinion below is out of step with decisions from

other federal appellate courts. See Koveleskie v. SBC Capital

Mkts., Inc., 167 F.3d 361, 367 (7th Cir. 1999) (explaining

that Gilmer “specifically reject[s] the argument that the Form

U-4 creates an unconscionable contract of adhesion because

of the unequal bargaining power between the plaintiff and

his employer,” and that an arbitration agreement “is not un-

enforceable on the grounds that it is an unconscionable con-

tract of adhesion” absent a “showing of fraud, misconduct, or

wrongdoing”); Rosenberg v. Merrill Lynch, Pierce, Fenner

& Smith, Inc., 170 F.3d 1, 17 (1st Cir. 1999) (recognizing

Gilmer’s holding that “disparity of bargaining power” does

not suffice to render an arbitration agreement unenforceable,

and that there must be a “showing of fraud or oppressive

conduct”). The Ninth Circuit’s conclusion that unequal bar-

gaining power is tantamount to “procedural unconscionabil-

ity” is contrary to this Court’s decisions and those of other

federal appellate courts, and warrants this Court’s review.

Il. THE NINTH CIRCUIT’S HOLDING THAT THE

FAA DOES NOT PREEMPT ARBITRATION-

SPECIFIC STATE LAW RULES OF UNCON-

SCIONABILITY IS INCORRECT AND CON-

FLICTS WITH DECISIONS OF THIS COURT AND

OTHER COURTS.

In the decision below, the Ninth Circuit relied on two

rules of California law to hold that the Circuit City DRA is

unconscionable and hence unenforceable. First, the court

applied the rule, established in Armendariz v. Foundation

Health Psychcare Services, Inc., 6 P.3d 669, 692-93 (Cal.

2000), that an arbitration agreement is substantively uncon-

scionable where it is imposed as a condition of employment

and fails to provide a “modicum of bilaterality” — that is,

where it obligates the employee but not the employer to arbi-

trate employment-related disputes. See App. 5a-6a. Second,

and again invoking Armendariz, the court applied the rule

that any provision for employee “fee-sharing” renders an ar-

bitration agreement unconscionable. See id. at 7a; see also

Armendariz, 6 P.3d at 685-89.

Whether the Ninth Circuit correctly construed California

law, of course, presents no federal issue for this Court to de-

cide. What is a federal question — and one of great impor-

tance — is whether state law, so construed, is preempted by

the FAA. Contrary to the holding of the Ninth Circuit, see

App. 9a, the FAA does indeed preempt state-law uncon-

scionability rules that prohibit enforcement of any employ-

ment arbitration agreement that is “unilateral” or includes a

fee-sharing provision.

A. Under The Standard Announced In This Court’s

Cases, The State-Law Unconscionability Rules

Applied By The Ninth Circuit Are Preempted By

The FAA.

1. Section 2 of the FAA generally mandates the en-

forcement of arbitration agreements regardless of state law to

the contrary. See, e.g., Allied-Bruce, 513 U.S. at 271-72.

Accordingly, the Ninth Circuit could invalidate the DRA un-

der state unconscionability law only by relying on § 2’s

“savings clause,” which provides that arbitration agreements

may be deemed unenforceable “upon such grounds as exist

at law or in equity for the revocation of any contract.” See

App. 9a. But as this Court’s precedents make clear, a state-

law rule that is keyed specifically to the arbitration context

falls outside the savings clause of § 2 and therefore is pre-

empted by the FAA.

In Perry v. Thomas, the Court considered precisely the

question raised here: how to resolve the “choice-of-law is-

sue”’ that arises when state unconscionability law is asserted

as a bar to enforcement of an arbitration agreement under the

FAA. 482 U.S. at 492-93 n.9. Naturally enough, the Court

turned to the “text of § 2” as the “touchstone for choosing

between state-law principles and the principles of federal

common law envisioned by the passage” of the FAA. /d. As

the Court read the relevant language, a state unconscionabil-

ity rule may be given force under the savings clause — but

only if that rule “arose to govern issues concerning the valid-

ity, revocability, and enforceability of contracts generally.”

Id. By contrast, a state-law unconscionability rule that

“takes its meaning precisely from the fact that a contract to

arbitrate is at issue” does not qualify as a general principle

under the savings clause and instead is preempted by the

federal rule of enforceability found in § 2 of the FAA. /d.

The Court reaffirmed this understanding of § 2 and its

savings clause in Doctor's Associates, Inc. v. Casarotto, 517

Ol Nat cd ae toe

ee ed ss

U.S. 681 (1996), holding that a state-law notice provision for

arbitration agreements is preempted by the FAA. In reach-

ing this conclusion, the Court specifically rejected the argu-

ment that the notice requirement came within the scope of

the savings clause because it could be phrased in arbitration-

neutral terms, as “but one illustration of a cross-the-board

rule” against adhesion contracts. /d. at 687 n.3. The mere

invocation of a state unconscionability doctrine, in other

words, is not enough to trigger the savings clause of § 2.

“[A] court may not ‘rely on the uniqueness of an agreement

to arbitrate as a basis for a state-law holding that enforce-

ment would be unconscionable, for this would enable the

court to effect what . . . the state legislature cannot.” Jd.

(quoting Perry, 482 U.S. at 493 n.9).

2. The decision below cannot be squared with this

Court’s construction of § 2 in Perry and Doctor's Associates.

In deciding that the rules articulated in Armendariz on mutu-

ality and fee-sharing are saved from preemption under § 2,

the Ninth Circuit appears to have taken the view that any ap-

plication of a state law unconscionability doctrine necessar-

ily falls within the savings clause. The entirety of the court’s

reasoning is that “[b]ecause unconscionability is a defense to

contracts generally . . . it is also a valid reason not to enforce

an arbitration agreement under the FAA.” App. 9a. But

Perry and Doctor's Associates make perfectly clear that

some applications of state unconscionability law are s:ffi-

ciently arbitration-specific to trigger preemption by the FAA.

Indeed, the standard carefully laid out by the Court in Perry

and Doctor's Associates is designed to identify precisely

which applications of state unconscionability law are pre-

empted and which are not. The Ninth Circuit entirely ig-

nores this established law and fails to engage even perfuncto-

nly in the inquiry mandated by Perry and Doctor's Associ-

ates.

Once the proper standard is applied, it becomes plain that

the unconscionability doctrine relied on by the Ninth Circuit

to invalidate the DRA is preempted under § 2. The first

principle that the Ninth Circuit derives from Armendariz and

then applies to invalidate the DRA is this: a unilateral arbi-

tration agreement imposed on an employee as a condition of

employment is unconscionable and unenforceable under

California law. App. Sa-6a. That principle is arbitration-

specific on its face. A rule that preemployment arbitration

agreements must include mutuality of obligation does not

apply to contracts generally. By its own terms, such a rule is

limited to the arbitration context.’ The second Armendariz

principle — that an employee may not be required to pay a

portion of the arbitrator’s fees — fares no better. Again, a

rule that arbitration agreements may not require the sharing

of arbitrators’ fees by definition has no application outside

the arbitration context. In the words of Perry, the state-law -

principles applied by the Ninth Circuit below “take [their]

meaning precisely from the fact that a contract to arbitrate is

at issue,” 482 U.S. at 493 n.9, and are therefore preempted

by the FAA.*

> California law confirms this common-sense reading. In general,

outside of the arbitration context, California contract law does not require

mutuality of obligation as a pre-condition for the enforcement of a con-

tract. See, e.g., Prudential Ins. Corp. v. Vars, 77 Cal. Rptr. 2d 479, 490

(Ct. App. 1998) (mortgage agreement provision enforceable despite uni-

lateral nature; “Where sufficient consideration is present, mutuality is not

essential.”); Hillsman v. Sutter Cmty. Hosp. of Sacramento, 200 Cal.

Rptr. 605, 611 (Ct. App. 1984) (employment contract enforceable despite

unilateral nature; “If the requirement of consideration is met, there is no

additional requirement of . . . equivalence in the values exchanged, or

‘mutuality of obligation.””) (citations and internal quotations omitted).

* Once preemption is established, of course, it follows that the pro-

arbitration mandate of the FAA governs. Under the FAA, there is no

question but that the DRA is enforceable. Respondent does not even

suggest that the FAA makes an exception to its enforcement rule for arbi-

tration agreements that are “unilateral” in the sense described by the

The arbitration-specific nature of the Armendariz princi-

ples applied below is reinforced by an analysis of the Ar-

mendariz decision itself. Armendariz self-consciously pur-

ports to establish a set of minimum requirements for the en-

forcement of arbitration agreements under California law. 6

P.3d at 674 (listing “certain minimum requirements” for

arbitration). At every step of its analysis, Armendariz returns

to what the California court takes to be uniquely unfavorable

features of preemployment arbitration agreements. Jd. at 690

(“in the case of preemployment arbitration contracts, the

economic pressure exerted by employers on all but the most

sought-after employees may be particularly acute, for .. .

few employees are in a position to refuse a job because of an

arbitration requirement”) (emphasis added); id. at 692 (it

would be “unfairly one-sided for an employer with superior

bargaining power to impose arbitration on the employee as

plaintiff but not to accept such limitations” for itself) (em-

phasis added); id. at 686 (requiring employer to pay all arbi-

tration fees “because [arbitration] has been mandated by the

employer as a condition of employment’) (emphasis added).

Armendariz establishes arbitration-specific rules in response

to arbitration-specific concerns, and under Perry and Doc-

tor’s Associates, such rules are preempted by the FAA.”

court below. Nor does a fee-sharing provision by itself render an arbitra-

hea agreement unenforceable under the FAA. See Green Tree Fin.

Corp. v. Randolph, 531 U.S. 79 (2000) (rejecting per se rule against fee-

sharing under FAA); Circuit City Stores, Inc. v. Ahmed, __ F.3d __ ,

2002 WL 441528 (9th Cir. Mar. 22, 2002) (enforcing DRA with fee-

sharing provision under FAA).

> Circuit City is not, of course, asking this Court to review Armen-

dariz or the California law established by that case. The only issue be-

fore this Court is the application of that state law by the court below to

invalidate an arbitration agreement, and whether that application of state

law is consistent with the FAA.

B. The Ninth Circuit’s Preemption Holding Conflicts

With Decisions Of Other Courts.

1. The Ninth Circuit’s holding that § 2 allows for appli-

cation of Armendariz’s “mutuality” rule conflicts directly

with the decision of the Alabama Supreme Court in

McNaughton v. United Health Care Servs., 728 So. 2d 592

(Ala. 1998).° At issue in McNaughton is precisely the same

choice-of-law question facing the Ninth Circuit below:

whether a state law unconscionability principle that requires

mutuality of obligation in preemployment arbitration agree-

ments is preempted by the FAA. Jd. at 597-98. According

to McNaughton, the answer is “yes.” Such a state-law rule

“directly depends on arbitration for its application” and “‘re-

lies on the uniqueness of the concept of arbitration under

[state] law to support the doctrine.” Jd. at 597-98. It follows

that application of that rule to invalidate an arbitration

agreement “flies in the face of Doctor’s Associates” and is

preempted under the FAA. Jd. at 598.

With respect to mutuality, the holding below also con-

flicts with the decision of the Third Circuit in Harris v.

Green Tree Financial Corp., 183 F.3d 173 (1999). Though

Harris arises outside the employment context, it 1s otherwise

on all fours with the instant case and with McNaughton. The

question addressed in Harris is whether state unconscion-

ability principles may be applied to preclude enforcement of

an arbitration agreement because it lacks mutuality. Jd. at

179-84; see id. at 183 (“According to the Harnses, the arbi-

tration clause is substantively unconscionable because it al-

lows Green Tree the option of litigating disputes, while it

provides no such choice to them.”) Like the Alabama Su-

preme Court, the Third Circuit concludes that those state-law

principles may not be applied consistent with Doctor’s Asso-

° See Sup. Ct. Rule 10(b) (conflict with state court of last resort as

grounds for granting certiorari).

ciates. Id. at 182-83. Instead, the Third Circuit holds as a

matter of federal law that the arbitration agreement is en-

forceable despite a lack of mutuality. Jd. at 180, 182.

2. As to both mutuality and fee-splitting, the Ninth Cir-

cuit’s application of Armendariz is inconsistent with the ap-

proach taken by several other federal circuits to preemption

under § 2. These circuits read Perry and Doctor's Associates

as establishing a rule that a state-law principle is “generally

applicable” within the meaning of the savings clause only if

the principle applies to any and every contract. A rule that

applies only to some subclass of contracts, on the other hand,

is not “generally applicable” under § 2’s savings clause and

hence is preempted by the FAA. Thus, both the First and

Second Circuits have held that state statutes governing forum

selection in franchise agreements, but not other contracts, are

preempted by the FAA as applied to arbitration agreements.

See KKW Enter. v. Gloria Jean’s Gourmet Coffees Franchis-

ing Corp., 184 F.3d 42, 51 (1st Cir. 1999) (because state

statute limited to franchise agreements “does not apply to

any contract” it is not “generally applicable” and is therefore

preempted by FAA) (emphasis in original); Doctor’s Assocs.

v. Hamilton, 150 F.3d 157, 163 (2d Cir. 1998) (same). On

the same reasoning, the Fifth Circuit has concluded that a

state statute governing forum selection in construction con-

tracts, but not other contracts, falls outside § 2’s savings

clause. OPE Int’l LP v. Chet Morrison Contractors, 258

F.3d 443, 447 (Sth Cir. 2001).

The difference in standards applied by the Ninth Circuit,

on the one hand, and the First, Second, and Fifth Circuits, on

the other, is more than semantic, and this case illustrates the

point. Whatever their other properties, there can be no real

question but that the Armendariz principles relied on by the

Ninth Circuit below are limited to the employment context.

See App. 6a (California law requires “modicum of bilateral-

ity” when arbitration agreement “forces employees to arbi-

trate claims against the employer’) (emphasis added); id. at

8a (“unlawful to require an employee, through a mandatory

arbitration agreement, to share the costs of arbitration”) (em-

phasis added). Under the approach to § 2 preemption

adopted by the First, Second and Fifth Circuits, those em-

ployment-specific standards alone would be enough to pre-

empt the Armendariz rules. The Ninth Circuit’s approach

thus stands in clear conflict to the approach adopted by the

First, Second and Fifth Circuits, and warrants this Court’s

review.

CONCLUSION

For the foregoing reasons, the petition for a wnt of cer-

tiorari should be granted.

Respectfully submitted,