Amicus Curiae Brief — DHL Express (USA), Inc. v. Ontiveros, (2008) (No. 737)

Supreme Court. U.S

FILED

ow”

we Pa DEC 3 1 2008

SQ OFF

In the

Supreme Court of the Anited States

,*

vw

DHL EXPRESS (USA), INC.,

Petitioner,

Vv.

GINA ONTIVEROS,

Respondent.

On Petition for Writ of Certiorari

to the California Court of Appeal,

First Appellate District

ai.

4

BRIEF AMICUS CURIAE OF

PACIFIC LEGAL FOUNDATION

IN SUPPORT OF PETITION FOR WRIT OF

CERTIORARI OR FOR SUMMARY REVERSAL

sa

eel

DEBORAH J. LA FETRA

TIMOTHY SANDEFUR

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

QUESTION PRESENTED

The Federal Arbitration Act preempts state

restrictions on the enforcement of arbitration

agreements, and bars state courts from employing any

unique “unconscionability” analysis to arbitration

agreements that differs from the unconscionability

analysis applied to other contracts. See, e.g., Perry v.

Thomas, 482 U.S. 483, 492 n.9 (1987). The California

Court of Appeal appled an unconscionability analysis

in this case that is uniquely predicated on the fact that

the contract at issue is an arbitration agreement. Does

the decision below conflict with the Federa] Arbitration

Act?

ll

TABLE OF CONTENTS

QUESTION PRESENTED ................

fee OF AUTHORITIES ...............

IDENTITY AND INTEREST

OF AMICUS CURIAE ...............

SUMMARY OF REASONS FOR

GRANTING THE PETITION .........

THIS CASE WARRANTS

SUMMARY REVERSAL .............

ey yeh v5 6 6 obo se ee oe ewes

I.

THE DECISION BELOW CREATES

A NEW AND UNPRECEDENTED

UNCONSCIONABILITY DOCTRINE

WHICH ALLOWS STATE COURTS

TO INVALIDATE FEDERALLY

PROTECTED ARBITRATION

AGREEMENTS AT WILL ................ 3

A. The Decision Below Conflicts

Directly with This Court's

Unambiguous Prohibition

Against State Courts Devising

New Unconscionability Doctrines

with Which to Void Federally

Protected Arbitration Agreements ..

The Decision Below }|s Part of

California’s Routine Abuse of

Unconscionability Doctrine to Deprive

Individuals of Their Constitutional

Right to Make and Enforce Contracts ...

10

ill

TABLE OF CONTENTS—Continued

Page

Il. STATE COURTS SHOULD NOT

BE FREE TO DEVISE SPECIAL

STATE-LAW THEORIES TO VOID

CONTRACTS OF WHICH THEY

DISAPPROVE AND THEREBY

EVADE THIS COURT'S REVIEW ........ 15

Ill. THIS CASE IS APPROPRIATE FOR

SUMMARY REVERSAL BECAUSE

THE DECISION BELOW IS

FLATLY CONTRARY TO THIS

COURT'S SETTLED PRECEDENT ....... 19

(AUR MIIED. oe heed eee ee ee 22

iV

TABLE OF AUTHORITIES

Page

Cases

Allied Structural Steel Co. v. Spannaus,

438 U.S. 234 (1978)... eee eee 15

Arkansas v. Sullivan, 532 U.S. 769 (2001) ...... 19

Armendariz vu. Found. Health Psychcare

Servs., Inc., 24 Cal. 4th 83 (2000) ........ 11-13

BMW of North America, Inc. v. Gore,

le Ghee OO CEO os eke seks ee ee ee 18

Bouie v. City of Columbia,

378 U.S. 347 (1964)... 0. ee cece ee 2,16

Bouton v. USAA Cas. Ins. Co.,

167 Cal. Amp. 4th 432 (2006)... . 6.22 e eve. 10

Brown v. Wells Fargo Bank, NA,

No. B196258, 2008 WL 4986125

(Cal. Ut. Ape. Mov. 25, 20S) 2... ww cre 20-21

Buckeve Check Cashing, Inc. v.

Cardegna, 546 U.S. 440 (2006)... .. 4-5, 9, 20-21

Cingular Wireless, LLC v. Mendoza,

BOT U.S. 26 Ce ove eo een ee 1-2

Cubic Corp. v. Marty,

185 Cal. App. 3d 438 (1986) ............... 6-7

Davis v. Wechsler, 263 U.S. 22 (1923) .......... 16

Dean Witter Revnolds, Inc. v. Byrd,

OPO Ue. Bee Crees 6 OE ea ee ee

Dean Witter Reynolds, Inc. v. Superior Court,

211 Cal. App. 8d 758 (1989) .....00..00.0.. 6-8

Vv

TABLE OF AUTHORITIES—Continued

Page

Doctor’s Associates, Inc. v. Casarotto,

Bi? 0.5. GB) (i996) ............. 5, 9, 12, 19-20

Douglas v. Alabama, 380 U.S. 415 (1965) ....... 16

Ex Parte McNaughton,

728 So. 2d 592 (Ala. 1998) ...........0-005. 13

Gentry v. Superior Court, 42 Cal. 4th 443 (2007),

cert. denied sub nom. Circuit City Stores, Inc.

v. Gentry, 128 S. Ct. 1743 (2008) .......... 1,14

Gilmer v. Interstate/Johnson Lane Corp..,

B00 17S. 2001981) ......... . cc ccc eee 6

Goodwin v. Ford Motor Credit Co.,

970 F. Supp. 1007 (M.D. Ala. 1997) ........... 7

Graham v. Scissor-Tail, Inc.,

ee es Ge CRED enn oc ve ee eee eww eee kn 8

Gray v. Conseco, Inc.,

No. SA CV 00-322DOC (EEX),

2000 WL 1480273 (C.D. Cal. Sept. 29, 2000) .. 13

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

ee R&R | a ee 1

Harris v. Green Tree Fin. Corp.,

16S F.3e 173 (a Cir. 1908) ................ 13

Hillsman v. Sutter Cmty. Hosps. of Sacramento,

153 Cal. App. 34 743 (1984) ................ 12

Hughes v. Washington, 389 U.S. 290 (1967) ..... 17

IFC Credit Corp. v. United Bus. & Indus. Fed.

Credit Union, 512 F.3d 989 (7th Cir. 2008) ... 6-7

vl

TABLE OF AUTHORITIES—Continued

Page

In re FirstMerit Bank, N.A.,

be @.W.o0 149 (Tex. 2001) ..............05. i$

In re Pate,

198 B.R. 841 (Bankr. S.D. Ga. 1996) ......... 13

James v. Kentucky, 466 U.S. 341 (1984) ........ 16

La Sala v. Bally Total Fitness Corp.,

No. A118461, 2008 WL 3274426

(al. Ct. Ape. Aug. 17, 2008) ............... 21

Madden v. Kaiser Found. Hosps.,

eR Beh ol) a 6

McBryde Sugar Co., Ltd. v. Robinson,

ae ee Be teem. TTS)... . ce ke ec 18

McDonald v. Halvorson,

780 P.2d 714 (Or. 1989) ................--. 17

NAACP v. Alabama ex rel. Patlerson,

Pe Oe, CIO. a es eee we eee cee ey LO

Ontiveros v. DHL Express (USA), Inc..

164 Cal. App. 4th 494 (2008) ...... 5-6, 8, 20-21

Osborne v. Ohio, 495 U.S. 103 (1990) ........... 16

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

Philip Morris USA Inc. v. Williams,

No. 07-1216 (U.S. filed Mar. 24, 2008) ........ 18

Preston v. Ferrer.

128 BS. Ct. $76 (2008)............... 1, 5, 20-21

Prima Paint Corp. v. Flood & Conklin Mfg. Co..,

DO WF. SOLA E) 5 kc ee ce ee ee .. 8-9

Vil

TABLE OF AUTHORITIES—Continued

Page

Principal Mut. Life Ins. Co. v.

Vars, Pave, McCord & Freedman,

65 Cal. App. 4th 1469 (1998) ............... 2

Raasch v. NCR Corp.,

254 F. Supp. 2d 847 (S.D. Ohio 2003) ........ 13

Robinson v. Ariyoshi, 441 F. Supp. 559

(D. Haw. 1977), affd 753 F.2d 1468

(9th Cir. 1985), reud 477 U.S. 902 (1986) ..... 18

Ryan v. Dan’s Food Stores, Inc.,

Oia © oe GOO UL BO). Ck ec ee oe ene ee 8

Schweiker v. Hansen, 450 U.S. 785 (1981) ..... So, ok

Southland Corp. v. Keating, 465 U.S. 1 (1984) ....9

Spinello v. Amblin Entmt,

7e ai. App. 4th To00 (1988) 2. oi. es 6-7

State Farm Mut. Auto. Ins. Co. v.

Campbell, 538 U.S. 408 (2003) ...........65. 18

Stevens v. City of Cannon Beach,

854 P.2d 449 (Or. 1993),

cert. denied, 114 S. Ct. 1832 (1994) .......... 17

United States Trust Co. of N_Y. v.

New Jersey, 431 U.S. 101977) 2... 2. cae. 15

Ward v. Bd. of County Comms of Love

County, Okia., 253 U.S. 17 (1920) ........ 15-16

Williams v. Philip Morris Inc..,

176 F.30 1255 Ge. FOS) 2. ce cc es nes 19

v1ll

TABLE OF AUTHGRITIES—Continued

Page

United States Constitution

U.S. Comm. MONE. Fo ice eee 18

Ui. Comet, 006.358 80 ia ee eee 15

Federal Statutes

Federal Arbitration Act,

SOUSA. S$ 1, 08 OO. «nw. ekki es 2-5, 13, 19, 21

Restatement (Second) of Contracts

S S63 cmt. CLIIGED ovens be ee eee 12-13

Rules of Court

U.S. Sep. (8.2. ST no oo ee ea Se eee 1

Serre le Re AN Pig <li ee ee ee 1

Miscellaneous

Broome, Stephen A., An Unconscionable

Application of the Unconscionability

Doctrine: How the California Courts Are

Circumventing the Kedera! Arbitration Act,

3 Hastings Bus. L. J. 39 (2006) .......... 10-11

Eisenberg, Theodore & Miller, Geoffrey P.,

The Flight from Arbitration: An Empirical

Study of Ex Ante Arbitration Clauses in

the Contracts of Publicly Held Companies,

56 DePaul L. Rev. 335 (2007) ............. 7,14

Martinez, John, Taking Time Seriously:

The Federal Constitutional Right to Be Free

from “Startling” State Court Overrulings,

11 Harv. J. L. & Pub. Pol’y 297 (1988) ........ 18

1X

TABLE OF AUTHORITIES—Continued

Page

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

California’s “Unique” Approach to Arbitration:

Why This Road Less Traveled Will Make All

the Difference on the Issue of Preemption

Under the Fedzral Arbitration Act,

2005 J. Disp. Resol. 61 (2005) ...........2... 10

1

IDENTITY AND

INTEREST OF AMICUS CURIAE

Pacific Legal Foundation (PLF) respectfully

submits this brief amicus curiae in support of the

Petitioner.’

PLF was founded more than 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 federal 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 Preston v. Ferrer, 128 S.

Ct. 978 (2008); Hall Street Associates, L.L.C. v. Mattel,

Inc., 128 S. Ct. 1396 (2008): Gentry v. Superior Court,

42 Cal. 4th 443 (2007), cert. denied sub nom. Circuit

City Stores, Inc. v. Gentry, 128 S. Ct. 1743 (2008): and

Cingular Wireless, LLC v. Mendoza, 547 U.S. 1188

' Pursuant to this Court’s Rule 37.2(a), all parties have consented

to the filing of this brief. Counsel of record for all parties received

notice at least 10 days prior to the due date of the Amicus Cunae’s

intention to file this brief. Letters evidencing such consent have

been filed with the Clerk of the Court.

Pursuant to Rule 37.6. Amicus Curiae affirms that no counsel

for any 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 counse] made a monetary

contribution to its preparation or submission.

2

(2006). PLF believes its public policy experience will

assist this Court in its consideration of the petition.

SUMMARY OF REASONS FOR

GRANTING THE PETITION

The petition for writ of certiorari should be

granted for review on the merits for at least the

following three reasons. In the alternative, the Court

ought to grant the petition and summarily reverse the

decision of the California Court of Appeal.

1. The decision below directly contradicts this

Court’s pronouncement that states may not devise

unique “unconscionability” analyses for purposes of

voiding agreements to arbitrate—agreements that are

guaranteed by federal statute. Perry v. Thomas,

482 U.S. 483, 492 n.9 (1987).

2. California courts routinely abuse the

unconscionability theory to void arbitration contracts,

in direct conflict with the Federal Arbitration Act,

9 U.S.C. § 1, et seg. (FAA), and with this Court’s

binding precedent. When state courts devise new and

unprecedented unconscionability theories in the service

of judicial policy preferences, they violate not only the

federal statute but the federal Constitution’s

guarantees of the right to make and enforce contracts.

3. If allowed to stand, the decision below will

invite further innovations by obstructionist state

courts that use federalism as a shield for their

violations of federally protected individual rights. This

Court has repeatedly invalidated such attempts—see,

e.g., Bouie v. City of Columbia, 378 U.S. 347 (1964):

JAACP v. Alabama ex rel. Patterson, 357 U.S. 449

(1958)—and it should continue to bar state courts from

3

invoking novel, purportedly state-law theories to avoid

review by this Court.

THIS CASE WARRANTS

SUMMARY REVERSAL

If this Court chooses not to review the full case on

the merits, it should summarily reverse, given that

“the law is settled and stable, the facts are not in

dispute, and the decision below is clearly in error.”

Schweiker v. Hansen, 450 U.S. 785, 791 (1981)

(Marshall, J., dissenting). The California Court of

Appeal constructed a new and unprecedented theory of

unconscionability uniquely applicable to arbitration

agreements, thereby directly conflicting with this

Court’s statement in Perry, 482 U.S. at 492 n.9, and in

clear contravention to the preclusive effect of the FAA.

ARGUMENT

I

THE DECISION BELOW CREATES

A NEW AND UNPRECEDENTED

UNCONSCIONABILITY DOCTRINE

WHICH ALLOWS STATE COURTS TO

INVALIDATE FEDERALLY PROTECTED

ARBITRATION AGREEMENTS AT WILL

The FAA guarantees the enforceability of

arbitration agreements between private parties. The

policy behind that statute is to ensure that the law

gives effect to the choices of those people who sign

arbitration agreements. Dean Witter Reynolds, Inc. v.

Byrd, 470 U.S. 213, 220 (1985) (“first and foremost”

purpose of the FAA is “to enforce agreements into

which parties had entered.”).

The hallmark of the right to make

contracts—whether arbitration contracts or any other

kind of contract—is freedom of choice. For that reason,

courts have repeatedly warned against the temptation

to use such legal theories as “unconscionability” or

“public policy” to alter or to void contracts to which

people have agreed. Nevertheless, California courts

have time and again yielded to this temptation in the

context of arbitration contracts, and imposed their

judicial policy preferences on people against their will

by annulling the contracts they have signed. In doing

so, these courts violated both the Act and the

Constitution. This Court should act to stop such

abuses.

A. The Decision Below Conflicts

Directly with This Court’s

Unambiguous Prohibition

Against State Courts Devising

New Unconscionability Doctrines

with Which to Void Federally

Protected Arbitration Agreements

This Court has often declared that the FAA

preempts state laws that deny enforcement to

arbitration contracts. As a matter of federal law, the

arbitrator must determine the validity of an

arbitration agreement in the first instance, even if the

other clauses in the agreement are arguably invalid.

Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.

440, 449 (2006) (“[R]egardless of whether the challenge

is brought in federal or state court, a challenge to the

validity of the contract as a whole, and not specifically

to the arbitration clause, must go to the arbitrator.”).

Even if state law would otherwise require the validity

of an agreement to be determined in the first instance

)

by a state administrative agency, the FAA requires

that validity be determined in the first instance by the

arbitrator. Id.; accord, Preston v. Ferrer, 128 S. Ct.

978, 987 (2008).

Of course, states retain their common law

authority to invalidate contracts that are defective in

formation, and this rule applies to arbitration

agreements no less than to other kinds of contracts.

Perry, 482 U.S. at 492 n.9. But this caveat would

swallow up the rule if state courts could simply declare

arbitration agreements to be invalid on public policy

grounds, or subject to heightened scrutiny. States

could then avoid the mandate of the FAA entirely, and

because they could plausibly cite “independent state

grounds’ for doing so, such evasion of the law would be

insulated from this Court’s review.

It was to block this obvious and unfair tactic that

this Court declared that state law grounds for

invalidation must not “take[] [their] meaning precisely

from the fact that a contract to arbitrate is at

issue.... Acourt may not... rely on the uniqueness

of an agreement to arbitrate as a basis for a state-law

holding that enforcement would be unconscionable.”

Id. Or, as the Court rephrased the point in Doctor's

Associates, Inc. v. Casarottio, 517 U.S. 681, 687 (1996),

“Courts may not... invalidate arbitration agreements

under state laws applicable only to arbitration

provisions.” Yet this is exactly the tactic adopted by

the court below.

The California Court of Appeal began its analysis

here by concluding that the arbitration agreement was

a contract of adhesion, because it was a standardized

contract offered by “the stronger party,” and offered on

a “take it or leave it” basis. Ontiveros v. DHL Express

6

(USA), Inc., 164 Cal. App. 4th 494, 504 (2008) (citation

omitted). These elements have never before sufficed to

classify a contract as adhesive and unenforceable

either in California or federal law. See, e.g., Cubic

Corp. v. Marty, 185 Cal. App. 3d 438, 449-50 (1986);

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

33 (1991) (Mere inequality in bargaining power .. . 1s

not a sufficient reason to hold that asbitention

agreements are never enforceable in the employment

context.”). As the Seventh Circuit noted in IFC Credit

Corp. v. United Bus. & Indus. Fed. Credit Union,

512 F.3d 989, 992-93 (7th Cir. 2008), form contracts

are “common and enforceable” and serve an

economically efficient purpose: “As long as the price is

negotiable and the customer may shop elsewhere,

consumer protection comes from competition rather

than judicial intervention.”

Thus, to be unenforceably adhesive, a contract

must also include some element of duress or lack of

frec choice. See Marty, 185 Cal. App. 3d at 449 (“[T]he

weaker party may have no realistic opportunity to look

elsewhere for a more favorable contract.” (emphasis

added)); accord, Madden v. Kaiser Found. Hosps..,

17 Cal. 8d 699, 710-11 (1976); Spinello v. Amblin

Entmt, 29 Cal. App. 4th 1390, 1396-97 (1994); Dean

Witter Reynolds, Inc. v. Superior Court, 211 Cal. App.

3d 758, 766-67 (1989).

There is no evidence in this case that

Ms. Ontiveros was for any reason barred from looking

for employment elsewhere if she disliked the terms on

which DHL offered her employment. In Spinello, the

court of appeal found that a form arbitration

agreement was not adhesive because the plaintiff “had

the opportunity to go elsewhere .. . [bv] submitt[ing]

tj

his script to... other producers.” 29 Cal. App. 4th

at 1397. And in Dean Witier, the court recognized that

the “availability of alternative products in the

market .... demonstrates that any claim based on

unconscionability lacks merit.” 211 Cal. App. 3d

at 767. Alternatives are available to employees who do

not want to sign arbitration agreements; fewer than

half of the employment contracts in California require

such agreements. Theodore Eisenberg & Geoffrey P.

Miller, The Flight from Arbitration: An Empirical

Study of Ex Ante Arbitration Clauses in the Contracts

of Publicly Held Companies, 56 DePaul J.. Rev. 335,

361 (2007).

There was simply no precedent in California law

for declaring that Ms. Ontiveros’ arbitration contract

was unenforceably adhesive just because it was on a

standard form and was presented on a take-it-or-leave-

it basis. Many, if not most, modern business contracts

are printed on standard forms and offered on a “take-

it-or-leave-it” basis. See IFC Credit Corp., 512 F.3d

at 992-93; Goodwin v. Ford Motor Credit Co., 970 F.

Supp. 1007, 1015 (M.D. Ala. 1997) (“{S]tandardization

of forms for contracts is a rational and economically

efficient response to the rapidity of market

transactions and the high costs of negotiations .. .

which contributes to rational pricing.”). Customers are

not invited to bargain over the prices offered at a fast-

food restaurant, for example, or whether they are

required to use safety devices when riding on the

attractions at an amusement park, yet California

courts have never held that this renders such contracts

unenforceably adhesive. It is only where a party lacks

free choice—such as the choice to shop elsewhere or get

a job elsewhere—that a contract may qualify as

adhesive. Marty, 185 Cal. App. 3d at 449. The fact

8

that Ms. Ontiveros couid have chosen employment at

any of a vast number of other employers shows that

she had the type of free choice that renders

her unconscionability claim meritless. Dean Witter,

211 Cal. App. 3d at 768 (“[T]he existence of a

‘meaningful choice’ to do business elsewhere must tend

to defeat any claim of oppression.”). See also Ryan v.

Dan’s Food Stores, Inc., 972 P.2d 395, 404 (Utah 1998)

(employment contract was not adhesive where

employee “was free to seek employment with another

pharmacy that did not maintain [the challenged

employment policy}”).

Adhesiveness has never been held sufficient to

render a contract unenforceable in California law;

there must be some element of substantive

unconscionability as well. See Graham v. Scissor-Tail,

Inc., 28 Cal. 3d 807, 819-20 (1981). Here, the court of

appeal explicitly analyzed the alleged substantive

unconscionability of this contract differently than other

types of contracts because this case involves an

arbitration agreement: “We have a genuine concern

about the potential for the inequitable use of such

arbitration provisions in areas, such as employment.”

Ontiveros, 164 Cal. App. 4th at 505.

It cited various “advantages” which business

defendants allegedly enjoy in arbitration, id., and

quoted at length from two law review articles opposed

to arbitration on policy grounds. Id. at 506 n.6, 506-07.

It then recited from the dissenting opinion in this

Court’s Prima Paint decision to support the conclusion

that arbitration contracts should be subjected to a

special kind of unconscionability analysis. See td.

at 506-07 (quoting Prima Paint Corp. v. Flood &

9

Conklin Mfg. Co., 388 U.S. 395, 403-06 (1967) (Black,

J., dissenting)).

Yet Perry and Doctor’s Associates—which the court

below did not mention—could not be clearer: 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.” Perry, 482 U.S.

at 492 n.9.

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

16 n.11 (1984), this Court responded to Justice Black’s

Prima Paint dissent by reiterating that a state may not

apply a unique unconscionabihity analysis (or any other

substantive limit) to arbitration contracts that are not

applied to all other contracts. Otherwise, the Court

held, “states could wholly eviscerate Congressional

intent to place arbitration agreements ‘upon the same

footing as other contracts.... We have rejected this

analysis because it is in conflict with the Arbitration

Act and would permit states to override the

declared policy requiring enforcement of arbitration

agreements.” See also Buckeye Check Cashing,

546 U.S. at 446 (reiterating Southland’s response to

Justice Black’s Prima Paint dissent).

The bottom line is that states may not “place|]

arbitration agreements in a class apart from ‘any

contract’ ” for purposes of testing their validity.

Doctor’s Associates, 517 U.S. at 688. Yet here, the

Cahfornia Court of Appeal crafted a _ novel

unconscionability analysis, specially applicable to

arbitration agreements, so that it could void those

agreements and evade review by this Court. This

should not be allowed to stand.

10

B. The Decision Below Is

Part of California’s Routine

Abuse of Unconscionability

Doctrine to Deprive Individuals

of Their Constitutional Right

to Make and Enforce Contracts

California courts have declared their open

hostility to the process of arbitration. See generally

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). Although the state’s

courts continue to recite pro forma statements to the

effect that public policy favors the use of arbitration,

see, e.g., Bouton v. USAA Cas. Ins. Co., 167 Cal. App.

4th 412, 419-20 (2008), the reality is that they

routinely seek opportunities to nullify validly formed

contracts which include arbitration provisions. They

often use the unconscionability doctrine to do so,

principally because “{uJnconscionability is one of the

most amorphous terms in the law of contracts.”

Michael G. 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, 2008 J.

Disp. Resol. 61, 74 n.111 (2005) (citation omitted).

Broome, supra, has detailed the ways in which

“California courts continue to view arbitration

agreements as a ‘lesser caste’ of contract provision to

be ignored whenever the court suspects one party may

be disadvantaged.” Id. at 67. He performed a

thorough empirical analysis showing that California

courts disproportionately favor unconscionability

arguments in cases involving arbitration agreements

1]

as opposed to other types of contracts, ia. at 44-48, and

he ovserved that California courts apply a different

type of unconscionability analysis to arbitration

agreements than to other types of agreements. Id.

at 60 (“In the non-arbitration setting, courts ... in

California, seek to discover ... the circumstances

surrounding the signing of the contract .... For

arbitration agreements, by contrast, adhesion alone is

enough to satisfy the California courts that the

agreement is procedurally unconscionable.”). Of the

114 cases in which California courts of appeal

considered the alleged unconscionability of arbitration

contracts in the years between 1982 and 2006, 53

resulted in a finding of unconscionability and 13 more

found some other reason to void the arbitration

provision. /d. at 44-45. But in 46 unconscionability

cases that did not involve arbitration contracts, 41

decisions rejected the unconscionability argument, and

only 5 annulled the contracts.

California courts are biased in this way because

they are highly suspicious of arbitration, and assume

that it is biased in favor of businesses and against

employees. ‘They strongly favor litigation in state

courts instead, and routinely impose that preference on

contracting parties by invalidating their agreements

under special tests that apply only to arbitration

agreements. In Armendariz v. Found. Health

Psycheare Servs., Inc., 24 Cal. 4th 88 (2000), for

example, the California Supreme Court adopted the so-

called “mutuality test,” under which a contract may be

deemed unconscionable when it is unfairly one-sided

and does not include a meaningful bilateral exchange.

Id. at 116. But while it purports to be a general rule

applicable to all kinds of contracts, the “mutuality test”

is actually a special test applied specially to arbitration

12

agreements—and therefore invalid under Doctor's

Associates and Perry, which bar the use of unique legal

tests to test the validity of arbitration contracts.

Indeed, the Armendariz decision itself relied

specifically on the alleged unfairness inherent in

arbitration contracts, and not on general principles of

contract law:

[I]n the context of an arbitration agreement

imposed by the employer on the employee,

such a one-sided term is unconscionable ....

|'l'}he doctrine of unconscionability limits the

extent to which a stronger party may,

through a contract of adhesion, impose the

arbitration forum on the weaker party

without accepting that forum for itself.

Id. at 118 (emphasis added). Most notably, California

courts do not apply the “mutuality” approach outside

the arbitration context. See, e.g., Principal Mut. Life

Ins. Co. v. Vars, Pave, McCord & Freedman, 65 Cal.

App. 4th 1469, 1489 (1998) (unilateral agreement

upheld because “where sufficient consideration is

present, mutuality is not essential.”); Hillsman v.

Sutter Cmty. Hosps. of Sacramento, 153 Cal. App. 3d

743, 752 (1984) (same). ‘The “mutuality” test is

therefore not a general test of contract law but a

special, substantive rule which limits the availability

of arbitration and the conditions under which the

parties may choose arbitration.”

* Moreover, the Armendariz court misapplied the “mutuality” test.

“(T]he law does not require that the parties have similar remedies

in case of breach, and the fact that specific performance or an

injunction 1s not available to one party is not a sufficient reason

for refusing it to the other party.” Restatement (Second) of

(continued...)

13

Other courts have also criticized the ‘mutuality”

test of Armendariz because of its clear conflict with

this Court’s prohibition of unique unconscionability

analyses in arbitration cases. In kx Parte

McNaughton, 728 So. 2d 592 (Ala. 1998), the Alabama

Supreme Court noted that Armendariz “assigns a

suspect status to arbitration agreements,” and thus

“flies in the face of Doctor’s Associates.” Id. at 598. In

Gray v. Conseco, Inc., No. SA CV 00-322DOC (EEX),

2000 WL 1480273 (C.D. Cal. Sept. 29, 2000), the court

observed that the Armendariz “rule singles out and

imposes a special burden on arbitration agreements,”

contrary to the requirements of the FAA. Id. at *4.

In short, while the Armendariz “mutuality” rule

purports to be a general rule of contract law that

invalidates some kinds of arbitration agreements, it is

a unique substantive limit, applicable only to

arbitration contracts, which requires that parties to an

arbitration agreement—but not partics to other types

of contracts—undertake specific duties, and renders

agreements unenforceable if they lack such obligations.

That rule is a device which singles out arbitration

contracts and treats them differently than other types of

contracts.

” (...continued)

Contracts § 363 cmt. c (1981). Mutuality does not require that

each side agree to undertake an identical obligation. If parties

agree that, in exchange for consideration, one side will in the

future submit to arbitration while the other will not, that contract

is still mutually binding and survives the mutuality requirement.

See Raasch v. NCR Corp., 254 F. Supp. 2d 847, 857 (S.D. Ohio

2003); In re FirstMerit Bank, N.A.,52S.W.3d 749, 757 (Tex. 2001):

Harris v. Green Tree Fin. Corp., 183 F.3d 173, 180 (3d Cir. 1999);

In re Pate, 198 B.R. 841, 844 (Bankr. S.D. Ga. 1996).

14

Much more extreme was Gentry v. Superior Court,

42 Cal. 4th 443 (2007), cert. denied sub nom. Circuit

City Stores, Inc. v. Gentry, 128 S. Ct. 1748 (2008).

There, the California Supreme Court declared an

arbitration agreement unconscionable because it

waived an employee's right to bring a class action

lawsuit. It did so despite the fact that the employees

were given an information packet on the effect of the

arbitration agreement, were required to watch a video

providing information on the arbitration process, were

told to consult an attorney before signing if they were

unclear on its legal effect, and were not only given the

choice not to sign, but were given a grace period in

which to change their minds after signing. See id.

at 474 (Baxter, J., dissenting). In addition, the court

ignored the fact that California workers who

disapprove of arbitration requirements have many

other options for seeking employment. Eisenberg &

Miller, supra, at 361.

The Gentry court admitted that the employer did

not compel workers to sign, but concluded that the

agreement was “not entirely free from procedural

unconscionability” because employees “felt at least

some pressure” to sign it. Jd. at 472. As the dissenting

justice observed, the court’s justifications for resisting

the use of arbitration in lieu of class action litigation

may have made good policy arguments, but the

Legislature had chosen to enact a procedure allowing

for arbitration, and declaring that public policy favored

arbitration. The Gentry court simply “elevatfed] a

mere judicial affinity for class actions as a beneficial

device for implementing the wage laws above the

policy expressed by both Congress and our own

Legislature.” Jd. at 477 (Baxter, J., dissenting).

~

15

Decisions like these do not merely increase the

already hig’ cost of doing business in California; more

fundamentally, they vi late the vital constitutional

right to make and enforce contracts. Article l,

section 10, of the Constitution forbids states from

impairing the obligation of contracts, and while that

prohibition has long been understood as allowing

states broad leeway to set the terms on which contracts

may be based, it does not allow and never has allowed

limitless authority to states to override the contractual

choices citizens make. Allied Structural Steel Co. v.

Spannaus, 438 U.S. 234, 244 n.15 (1978) (“‘[P]rivate

contracts are not subject to unlimited modification

under the police power.” (quoting United States Trust

Co. of N.Y. v. New Jersey, 431 U.S. 1, 22 (1977))).

In a case like this, where Congress has

affirmatively chosen by statute to guarantee the

validity of the contracts at issue, it is especially

unlikely that the state can articulate the type of

justification necessary to overcome the constitutional

protection of contractual choices.

I]

STATE COURTS SHOULD

NOT BE FREE TO DEVISE

SPECIAL STATE-LAW THEORIES

TO VOID CONTRACTS OF WHICH

THEY DISAPPROVE AND THEREBY

EVADE THIS COURT'S REVIEW

This Court has long recognized the danger that “if

nonfederal grounds, plainly untenable, may be... put

forward successfully, our power to review easily

[might] be avoided.” Ward v. Bd. of County Comm Ts of

Love County, Okla., 253 U.S. 17, 22 (1920). Therefore,

16

the Court may inguire into whether the mandates of

federal law have been violated “in substance and effect,

as by putting forward nonfederal grounds of decision

that were without any fair or substantial support.” Jd.

at 22 (citing cases).

On that basis, the Court has frequently stepped in

to stop states from deploying newly minted “state law

grounds” to evade Supreme Court review when

depriving individuals of their rights. The most notable

example is Bouie, 378 U.S. 347, in which the South

Carolina Supreme Court reinterpreted its criminal

trespass statute ‘o classify a civil rights sit-in as a

crime, when it would not previously have satisfied the

statutory elements. Although a state’s highest court is

normally the last word on the interpretation of state

law, this Court granted certiorari and reversed, finding

that the decision violated the Due Process Clause. Jd.

at 350.

‘

Likewise, in Alabama ex rel. Patterson, 357 U.S.

449, this Court reviewed a state conviction for

contempt of court, despite the state’s argument

that the conviction was a state law matter outside

this Court’s jurisdiction. “Novelty in procedural

requirements cannot be permitted to thwart review in

this Court applied for by those who, in justified

reliance upon prior decisions, seek vindication in state

courts of their federal constitutional rights.” — Z7d.

at 457-58.

This Court has followed the same rule in many

other cases. See, e.g., Osborne v. Ohio, 495 U.S. 103,

124-25 (1990): James v. Kentucky, 466 U.S. 341, 348-49

(1984); Douglas v. Alabama, 380 U.S. 415, 421-22

4

(1965); Davis v. Wechsler, 263 U.S. 22, 24-25 (19283).

This Court has the power to ensure that state

17

judiciaries do not abuse their authority to evade the

requirements of federal statutes or the Constitution.

Nevertheless, state courts often employ this

“rewriting state law” gambit to deprive property

owners of their constitutional rights. In Hughes v.

Washington, 389 U.S. 290 (1967), Justice Stewart

observed that states should not be free to “defeat the

constitutional prohibition against taking property

without due process of Jaw by the simple device of

asserting retroactively that the property it has taken

never existed at all.” Jd. at 296-97. Yet in Stevens v.

City of Cannon Beach, 854 P.2d 449 (Or. 1993), where

owners of beach property sought just compensation for

the state’s action in denying them a permit to build a

seawall, thereby rendering their property valueless, see

id. at 450-51, the Oregon Supreme Court denied them

compensation on the grounds that “the common law

doctrine of custom” barred landowners from excluding

the public from dry sand areas. Id. at 454. This

application of the doctrine of custom had been

climinated as a matter of Jaw four years carlier in

McDonald v. Halvorson, 780 P.2d 714 (Or. 1989), but

the Stevens court simply ignored the Halvorson

decision. This Court denied certiorari, over a dissent

by Justices Scalia and O'Connor, who observed that

the state court had simply manipulated state law to

avoid review by this Court: “As a general matter, the

Constitution leaves the law of real property to the

States. But just as a State may not deny rights

protected under the Federal Constitution through

pretextual procedural rulings, neither may it do so by

invoking nonexistent rules of state substantive law.”

Stevens v. City of Cannon Beach, 1148. Ct. 1332, 1334

(1994) (citation omitted) (Scalia and O'Connor, JJ.,

dissenting from denial of cert.).

18

The Hawaii Supreme Court employed a similar

trick in McBryde Sugar Co., Lid. v. Robinson, 504 P.2d

1330 (Haw. 1973), when, “[t]lo the surprise of all

concerned,” the state court declared that the property

at issue—water located on the _ plaintiffs’

land—belonged to the state and could not be sold,

meaning that the owners had no property interest in

the first place and were therefore not entitled to just

compensation. John Martinez, Taking Time Seriously:

The Federal Constitutional Right to Be Free from

“Startling” State Court Overrulings, 11 Harv. J. L. &

Pub. Pol'y 297, 342 (1988). By retroactively redefining

the property rights in ways that eliminated the right

at stake in the case, the state court effected a taking of

property in a manner that avoided the requirements of

the Fifth Amendment. A federal district court later

concluded that the state court’s extreme alteration of

background principles of state law was an attempt to

“take away the private property of the plaintiffs

without paying them for it.” Robinson v. Ariyoshi,

441 F. Supp. 559, 586 (D. Haw. 1977), affd. 753 F.2d

1468 (9th Cir. 1985), rev'd, 477 U.S. 902 (1986)

(summary disposition).

Finally, in Philip Morris USA Inc. v. Williams,

No. 07-1216 (U.S. filed Mar. 24, 2008), currently under

consideration by this Court, the Oregon Supreme Court

adopted a new rationale to uphold a radically

disproportionate punitive damages award after this

Court’s remand. Despite this Court's clear instruction

that the Oregon Supreme Court apply the due process

standards enunciated in BMWof North America, Inc. v.

Gore, 517 U.S. 559 (1996), and State Farm Mut. Auto.

Ins. Co. v. Campbell, 538 U.S. 408 (2003), the state

court reaffirmed its prior decision instead, citing a

19

newly discovered state law procedural barricr—one

which parties had neither bricfed nor argued in the

near decade in which that case has been litigated.

Williams v. Philip Morris Inc., 176 P.38d 1255, 1260

(Or. 2008). There is little question that the state court

adopted this procedural device to reaffirm the punitive

damages verdict in spite of this Court’s direct

instruction.

If California courts can employ a_=e special

unconscionability analysis to arbitration contracts, and

then use the fact that unconscionability is a matter of

state common law as a shield against this Court’s

review, they will effectively escape the requirements of

the FAA and the Supremacy Clause. The California

judiciary’s attempt to thwart the use of arbitration will

succeed unless this Court enforces its pronouncements

in Perry and Doctor’s Associates that unconscionability

analysis may not single out arbitration contracts and

treat them differently than other kinds of contracts.

Il

THIS CASE IS

APPROPRIATE FOR SUMMARY

REVERSAL BECAUSE THE DECISION

BELOW IS FLATLY CONTRARY TO

THIS COURT’S SETTLED PRECEDENT

Although this Court is not normally occupied with

correcting mere errors of law, summary reversal is

appropriate in those unusual cases in which a clearly

erroneous decision threatens to cause significant

disruption of settled law in the future. See, e.g.,

Arkansas v. Sullivan, 532 U.S. 769, 771 (2001)

(“Because the Arkansas Supreme Court's decision on

rehearing is flatly contrary to this Court’s controlling

20

precedent, we grant the State’s petition for a writ of

certiorari and reverse.”).

The court of appeal’s decision in this case is more

than an erroneous application of controlling precedent;

it is part of a notorious and continuing effort by the

California judiciary to undermine the _ federally

mandated enforcement of arbitration agreements.

Because the California Supreme Court denied

review, the decision of the court of appeal will be the

final word in the state unless this Court acts. Trial

courts throughout California's First Appellate

District—which includes San Francisco and

Surrounding counties—will be bound by its

determination to treat arbitration contracts differently

from other types of contracts for purposes of testing

unconscionability, in direct conflict with this Court’s

statements in Perry, Doctor's Associates, and other

cases. The decision threatens the validity of all

arbitration clauses in standardized form contracts

because it holds (in conflict with Preston and Buckeye

Check Cashing) that a “provision requiring that the

arbitrator decide enforceability issues is substantively

unconscionable,” Ontiveros, 164 Cal. App. 4th at 510.

If this Court simply denies certiorari, it will invite

further abuses.

Indeed, in just the time since the decision below

was announced, California courts of appeal have

already begun relying upon it to justify treating

arbitration agreements differently than other types of

contracts for purposes of unconscionability analysis. In

Brown v. Wells Fargo Bank, NA, No. B196258, 2008

WL 4986125 (Cal. Ct. App. Nov. 25, 2008), the court of

appeal declared that California courts “have

specifically held that unconscionability constitutes a

21

defense against agreements to arbitrate.” Jd. at *8.

See also La Sala v. Bally Total Fitness Corp.,

No. A118461, 2008 WL 3274426, at *11 n.4 (Cal. Ct.

App. Aug. 11, 2008) (relying on Ontiveros to decide,

contrary to Buckeye Check Cashing and Preston, that

“unconscionability is for the trial] court to decide”).

Summary reversal is unquestionably an

extraordinary remcdy, but it is appropriate where “the

law is settled and stable, the facts are not in dispute,

and the decision below is clearly in error.” Schweiker,

450 U.S. at 791 (Marshall, J., dissenting). The decision

below treats arbitration contracts differently from

other types of contract, in direct conflict with the

settled law, due to the state court’s “concern about the

potential for the inequitable use of such arbitration

provisions.” Ontiveros, 164 Cal. App. 4th at 505.

Whether or not those concerns are warranted, the

FAA, as interpreted by repeated and unambiguous

holdings of this Court, forbids states from treating

arbitration provisions differently from other types of

contracts for purposes of unconscionability analysis.

Yet that is exactly what the decision below did.

If the decision below is allowed to stand, trial

courts will deny enforcement to arbitration agreements

despite the requirements of federal law, and California

will continue to thwart the repeated holdings of this

Court that require the enforcement of agreements to

arbitrate. The error below should not be allowed to

stand. This case is an appropriate candidate for

summary reversal.

bo

7X

Vv

CONCLUSION

The petition for certiorari should be granted, and

if the Court declines to hear the full case on the merits,

it ought to summarily reverse.

DATED: December, 2008.

Respectfully submitted,

DEBORAH J. LA FETRA

TIMOTHY SANDEFUR

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