Foundation Files Another Brief in Case Involving Courts Refusal to Enforce Arbitration Agreement

The Atlantic Legal Foundation and the International Association of Defense Counsel filed an amicus brief in the U.S. Supreme Court in support of a petition for certiorari in an appeal from a Ninth Circuit affirmance of a district court decision throwing out an arbitration agreement because of several provisions that are against public policy and refusing to sever the offending clauses in MHN Government Services v. Zaborowski.

MHN operates a healthcare consulting business and employs highly educated (masters degree or higher) professional healthcare workers and counselors. When they are employed by MHN, these professionals read and signed an employment contract containing an arbitration clause requiring arbitration, rather than litigation, of all disputes arising out of the employment relationship. It also contained a variety of clauses ancillary to the underlying basic promise to arbitrate. The employment contract also contained an express severability term providing that if any provision of the agreement is rendered invalid or unenforceable the remaining provisions of the agreement would remain in full force and effect.

A putative class of MHNs healthcare workers sued the company in federal court claiming denial of certain overtime benefits. On MHNs motion to compel arbitration pursuant to the agreement, the district court found several provisions of the arbitration agreement, but not the basic underlying agreement to arbitrate rather than litigate, to be unconscionable. Under California state law, if a court finds multiple provisions in an arbitration agreement to be unconscionable, it ipso facto can deny severance and refuse to enforce the agreement in its entirety. Applying this principle, the district court declined to sever the offensive provisions, and instead invalidated the entire agreement and did not hold the employees to their basic underlying agreement to arbitrate. A divided three-judge panel of the Ninth Circuit affirmed, one judge dissenting.

In the general contractual context, a court applying California law can withhold severance only if it finds, after a fact intensive provision by provision analysis, that the unconscionable provisions truly permeate and infect the entirety of the contract. The different severance rule applied by the district court, the rule that a court can withhold severance simply upon finding that multiple unconscionable provisions exist, whether or not the offensive provisions truly do permeate and infect the entirety of the contract, treats arbitration agreements less favorably than other contracts. This rule, applied only to arbitration agreements, facilitates invalidation of entire arbitration agreements more readily than invalidation of contracts generally.

Judge Gould, in dissent, argued that the district courts severance rule is preempted by the Federal Arbitration Act under the Supreme Courts landmark decision in AT&T Mobility, LLC v. Concepcion (2011) in which the Court held that the FAA preempts state law rules that treat arbitration agreements less favorably than other contracts. The parties, Judge Gould said, should at the very least have been held to their basic bargain to arbitrate. He even attached a mark up of the agreement to his dissent, showing how the terms found to be unconscionable were collateral to the basic underlying promise to arbitrate.

MHN argued in its petition for certiorari that the Ninth Circuits decision conflicts with Concepcion, as well as with decisions of other circuits which have recognized the FAAs preference for honoring severability clauses such as the one in MHNs arbitration agreement. The issue of severance is pervasive: It arises in literally every case in which provisions of an arbitration agreement are found unconscionable.

The Foundation, in its amicus brief argued that California courts routinely display the very hostility to arbitration that the FAA was designed to end and that this case, and cases such as DIRECTV v. Imburgia, No. 14-462, presently before the Court, demonstrate that California law, whether construed by state courts or by federal courts sitting in California, is frequently in conflict with the language and purpose of the FAA and the Supreme Courts FAA jurisprudence. Further, the Ninth Circuits decision upholding Californias unconscionability/non-severability rule is contrary to binding precedent construing the FAA and, therefore, review by the Supreme Courts is necessary to effectuate the primacy of federal arbitration law.

The FAA explicitly provides that state courts may refuse to enforce arbitration agreements only upon such grounds as exist at law or in equity for the revocation of any contract. In Concepcion, the Supreme Court held that state law rules purporting to apply to all contracts are preempted by the FAA if they have a disproportionate impact on arbitration agreements. Concepcion, 131 S. Ct. at 1747. In addition, numerous Supreme Court decisions hold that preemption also applies when a generally applicable contract defense, applies, in practice, only to arbitration or derive[s] [its] meaning from the fact that an agreement to arbitrate is at issue.

The California law at issue here, which encourages courts to void arbitration agreements that contain clauses that are deemed unconscionable, rather than to sever the offending provisions and preserve the essence of the agreement to arbitrate, is preempted by federal law. While California courts generally enforce valid parts of a contract, and it is settled law that where a contract has both void and valid provisions, a court may sever the void provision and enforce the remainder of the contract, Californias severance rules that apply only to arbitration agreements evince the strong aversion to parties rights to contract for arbitration and the continued judicial hostility towards arbitration that the FAA was intended to foreclose. One of the cases on which the Ninth Circuit panel relied extensively creates special requirements and establishes special hurdles for arbitration agreements because it applies a bright-line rule disfavoring severability and favoring nullification in the context of arbitration agreements when there is none in the context of ordinary contracts. Thus, under Concepcion, the FAA preempts this decision for its bias against agreements to arbitrate.

We pointed out several recent California cases that acknowledge that the case on which the Ninth Circuit relied heavily has been abrogated in relevant part by Concepcion, but that the Ninth Circuit panel in this case did not seem to recognize that California case it cited is no longer good law.

To read our brief, click here.