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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0866%3A2

## Record

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

## Text

Supreme Court. U.S
FILED

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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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0866%3A2. Public record. Not legal advice.