2015 was a dry spell in arbitration decisions from the U.S. Supreme Court, but 2016 promises to be much more interesting. In addition to the California case being heard next week, SCOTUS just granted certiorari in another California-based arbitration decision. This one, MHN Government Services, Inc. v. Zaborowski, will review an unpublished 2-1 decision of the Ninth Circuit, affirming a district court’s refusal to compel arbitration. The beautifully succinct question presented is “whether California’s arbitration-only severability rule is preempted by the FAA.”
In Zaborowski, counselors who provide services to members of the military alleged that MHN improperly classified them as independent contractors instead of employees, thereby violating federal and state labor laws. (The district court opinion is at 936 F. Supp. 2d 1145.) The relevant agreement had an arbitration clause which the counselors argued was unconscionable under California law. The court summarized the provisions that the plaintiffs objected to as including “MHN shall choose three arbitrators, and the [counselor] shall choose one amongst them; each party may depose one individual and any opposing expert witness; arbitration must be initiated within six months of the claim’s occurrence; the arbitrator may not modify or refuse to enforce any agreements; the parties may not be awarded punitive damages; and the prevailing party or substantially prevailing party’s costs are borne by the other party.” 963 F. Supp. 2d at 1150. The district court found procedural unconscionability and determined that many of the provisions raised by plaintiffs were substantively unconscionable.
Critically, the district court refused to sever those provisions it found substantively unconscionable. It concluded, citing primarily to a California Supreme Court decision from 2000, that the arbitration agreement was “so permeated with unconscionability that it is not severable.” A majority of the appellate panel affirmed that conclusion, noting that while they may have made a different decision in the first instance, the district court did not abuse its discretion. Judge Gould dissented only with respect to the severability question, opining “Concepcion and its progeny should create a presumption in favor of severance when an arbitration agreement contains a relatively small number of unconscionable provisions that can be meaningfully severed and after severing the unconscionable provisions, the arbitration agreement can still be enforced.” 601 Fed. Appx. 461.
The petition for certiorari was bold and attention-grabbing. It states: “California courts routinely display the flagrant hostility to arbitration that the FAA was designed to end. The Ninth Circuit routinely allows this to occur. And the severability issue presented here arises literally every time a court finds one or more provisions of an arbitration agreement to be invalid under California law.” In response, the plaintiffs argue that “California’s severance doctrine derives from statutes that apply to all contracts and from cases dealing with contracts of various sorts—not just arbitration agreements.” (They also note that a dozen judges have refused to enforce MHN’s arbitration agreement and lean on the discretion of district courts.)
Will this case be Concepcion part II, focused on when state contract rules of interpretation should be deemed obstacles to arbitration? Or will it be narrowly focused on appropriate rules of severability?
Also, could there be more arbitration cases this term?