Severing The FAA: California Courts Maintain Separate Rules For Arbitration Agreements

In the instant case the parties agreed to arbitrate their disputes, and they agreed that if any specific terms of the agreement were deemed invalid or unenforceable, a court should sever those terms and enforce the remainder of the agreement. In construing and enforcing contracts generally, California courts honor severability provisions, as opposed to invalidating the entire agreement, unless the core purpose of the agreement is illegal or unless doing so would be impossible without rewriting the agreement. However, when construing agreements to arbitrate, California courts hold that the existence of more than one invalid provision can be interpreted by a court to indicate that the “stronger party” sought to use arbitration not simply as an alternative to litigation, but as a tool to take advantage of the “weaker party.”

The Agreement between Petitioners, military contractors, and Respondents signed a contract which contained a “Mandatory Arbitration” clause and a “Severability” clause. The district court declared that multiple terms of the agreement were unconscionable, and refused to sever these provisions from the broader arbitration agreement, citing a rule that allows California courts to refuse to sever when the contract is “permeated with unconscionability.” Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 697 (Cal. 2000). A divided Ninth Circuit panel affirmed. The majority held that giving Petitioners power to select arbitrator candidates, although they must be neutral, and that the Agreement’s six month limitations period were both unconscionable. The majority also held that cost and fee shifting clause in favor of the prevailing party was also unconscionable. 

Issue Areas:

Free Enterprise, Limited Government

Case:

MHN Government Services, Inc., v. Zaborowski, No. 14-1458 (Supreme Court) (petition stage)

Read the Amicus Brief:

Question(s) Presented:

Whether California’s severability rule, as applied to agreements to arbitrate, is preempted by the Federal Arbitration Act when California law applies a different rule of contract severability to contracts in general and when the arbitration agreement contains an express severability clause.

Additional Background:

Amici believe that the decisions of the Court of Appeals for the Ninth Circuit and the district court in this case are inconsistent with the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. (“FAA”) and AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) in which this Court held that the FAA means exactly what it says: Agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”(Id. at 1745, quoting 9 U.S.C. § 2). The FAA preempts state laws that expressly disfavor arbitration agreements. The FAA also preempts “generally applicable contract defenses,” which purport to apply to all contracts, but which in practice apply “only to arbitration” or that “derive their meaning from the fact that an agreement to arbitrate is at issue,” (id. at 1746) or which “have a disproportionate impact on arbitration agreements.” (Id. at 1747).

The Circuit panel majority relied upon Samaniego v. Empire Today LLC, 140 Cal.Rptr.3d 492, 501 (Cal. Ct. App. 2012), which held: “An arbitration agreement can be considered permeated by unconscionability if it ‘contains more than one unlawful provision . . . Such multiple defects indicate a systematic effort to impose arbitration . . . not simply as an alternative to litigation, but as an inferior forum that works to the [stronger party’s] advantage.’” Circuit Judge Gould dissented. Judge Gould wrote that Armendariz was decided more than a decade before the Supreme Court’s decision in Concepcion and that “[t]he reasoning in Armendariz that multiple unconscionable provisions will render an arbitration agreement’s purpose unlawful has a disproportionate impact on arbitration agreements’ and should have been preempted.”

ALF’s Amicus Brief:

In an amicus brief ALF argues that California courts routinely display the very hostility to arbitration that the FAA was designed to end, as shown by the very language used in California cases such as Samniego where the California Court called arbitration “an inferior forum.” ALF asks the Court to review this case to effectuate the primacy of Federal Arbitration Law, which has been recognized by this Court as a Congressional policy of placing arbitration on equal footing with other forms of contract. Concepcion, 131 S. Ct. at 1745; Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010); Volt Information Scis., Inc. v. Board of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 479 (1989).

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. The state court decisions on which the courts below rely evince a strong aversion to parties’ rights to contract for arbitration and the continued “judicial hostility towards arbitration” that the FAA was intended to foreclose. California courts generally enforce valid parts of a contract and sever the unconscionable portions unless the central purpose is tainted with illegality. Therefore Federal Law requires California courts to treat arbitration agreements similarly, that is as severable as any other form of contract. ALF asks the Supreme Court to grant certiorari to affirm that the federal policy of favoring arbitration agreements as enforceable as other contracts controls even in California.

Status:

On April 12, 2016, the petition was dismissed per rule 46.