Opinion ID: 1087290
Heading Depth: 3
Heading Rank: 2

Heading: Preemption by the FAA

Text: Federal law preempts state laws that stand as an obstacle to the accomplishment of Congress’s objectives. Concepcion, 131 S. Ct. at 1753. Accordingly, the FAA preempts state laws that in theory apply to contracts generally but in practice impact arbitration agreements disproportionately. Id. at 1747. California’s unconscionability doctrine applies to all contracts generally and therefore constitutes “such grounds at law or in equity for the revocation of [a] contract.” 9 U.S.C. § 2. But specific application of rules within that doctrine may be problematic. See Concepcion, 131 S. Ct. at 1753 (holding that California’s rule making class waivers unconscionable was preempted by the FAA). In this case, California’s procedural unconscionability rules do not disproportionately affect arbitration agreements, for they focus on the parties and the circumstances of the agreement and apply equally to the formation of all contracts. The application of California’s general substantive unconscionability rules to Ralphs’ arbitration policy, however, warrants more discussion. The Supreme Court’s recent decision in American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), does not preclude us from considering the cost that Ralphs’ arbitration agreement imposes on employees in order for them to bring a claim. In that case, plaintiffs argued that CHAVARRIA V. RALPHS 21 the class waiver term of the arbitration agreement at issue effectively foreclosed vindication of the plaintiffs’ federal rights: specifically, their rights under the Sherman Antitrust Act. Id. at 2310. Plaintiffs could not pursue their antitrust claims, they argued, because the experts required to prove an antitrust claim would cost hundreds of thousands of dollars, while the individual recovery would not exceed $40,000. Id. The class waiver provision did not foreclose effective vindication of that right, the Court reasoned, because “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute an elimination of the right to pursue that remedy.” Id. at 2311. The Court explicitly noted that the result might be different if an arbitration provision required a plaintiff to pay “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at 2310–11. Ralphs’ arbitration policy presents exactly that situation. In this case, administrative and filing costs, even disregarding the cost to prove the merits, effectively foreclose pursuit of the claim. Ralphs has constructed an arbitration system that imposes non-recoverable costs on employees just to get in the door. The Supreme Court’s holding that the FAA preempts state laws having a “disproportionate impact” on arbitration cannot be read to immunize all arbitration agreements from invalidation no matter how unconscionable they may be, so long as they invoke the shield of arbitration. Our court has recently explained the nuance: “Concepcion outlaws discrimination in state policy that is unfavorable to arbitration.” Mortensen v. Bresnan Commc’ns, LLC, 722 F.3d 1151, 1160 (9th Cir. 2013) (emphasis added). We think this is a sensible reading of Concepcion. 22 CHAVARRIA V. RALPHS This case illustrates the distinction. In addition to the problematic cost provision, Ralphs’ arbitration policy contains a provision that unilaterally assigns one party (almost always Ralphs, in our view, as explained above) the power to select the arbitrator whenever an employee brings a claim. Of course, any state law that invalidated this provision would have a disproportionate impact on arbitration because the term is arbitration specific. But viewed another way, invalidation of this term is agnostic towards arbitration. It does not disfavor arbitration; it provides that the arbitration process must be fair. If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees. Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power. California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power. The FAA does not preempt its invalidation of Ralphs’ arbitration policy.