Zaborowski v. MHN Government Services, Inc. ( 2014 )

FILED
NOT FOR PUBLICATION DEC 17 2014
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
THOMAS ZABOROWSKI; VANESSA No. 13-15671
BALDINI; KIM DALE; NANCY
PADDOCK; MARIA HOWARD; TIM D.C. No. 3:12-cv-05109-SI
PLATT, on behalf of themselves and all
others similarly situated,
MEMORANDUM*
Plaintiffs - Appellees,
v.
MHN GOVERNMENT SERVICES, INC.;
MANAGED HEALTH NETWORK, INC.,
Defendants - Appellants.
Appeal from the United States District Court
for the Northern District of California
Susan Illston, Senior District Judge, Presiding
Argued and Submitted November 18, 2014
San Francisco, California
Before: GOULD and WATFORD, Circuit Judges, and MARTINEZ, District
Judge.**
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Ricardo S. Martinez, District Judge for the U.S.
District Court for the Western District of Washington, sitting by designation.
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MHN Government Services, Inc. (MHN) appeals from the district court’s
order denying its motion to compel arbitration. We affirm.
1. The district court correctly held that the arbitration provision is
procedurally unconscionable. See Chavarria v. Ralph’s Grocery Co., 733 F.3d
916, 922–23 (9th Cir. 2013). The district court found that MHN was in a superior
bargaining position, the arbitration provision was a condition of employment, and
plaintiffs were not given a meaningful opportunity to negotiate. These findings are
not clearly erroneous, and they support the conclusion that the contract is
oppressive. See Ellis v. McKinnon Broad. Co., 23 Cal. Rptr. 2d 80, 83 (Ct. App.
1993) (defining oppression as the absence of real negotiation and meaningful
choice resulting from inequality of bargaining power). Contrary to MHN’s
contention, the contract’s modification provision did not invite negotiation, and
California law does not require plaintiffs to have attempted to negotiate in order to
show oppression. See, e.g., Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101,
1106–07 (9th Cir. 2003); A&M Produce Co. v. FMC Corp., 186 Cal. Rptr. 114,
125 (Ct. App. 1982).
2. The district court also correctly held that multiple aspects of the
arbitration provision are substantively unconscionable.
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First, the arbitrator-selection clause is substantively unconscionable. See
Chavarria, 733 F.3d at 923–26. The clause gives MHN the power to control
arbitrator candidates so long as those arbitrators are licensed to practice law and
are purportedly “neutral.” Granting MHN near-unfettered discretion to select its
three preferred arbitrators is “unjustifiably one-sided,” Chavarria, 733 F.3d at 923,
and unreasonably reallocates risks to the weaker bargaining party. Samaniego v.
Empire Today LLC, 140 Cal. Rptr. 3d 492, 497 (Ct. App. 2012).
Second, the contract’s sixth-month limitations period is substantively
unconscionable. California law permits contractually shortened limitations periods
so long as they “provide a party sufficient time to effectively pursue a judicial
remedy.” Ellis v. U.S. Sec. Assocs., 169 Cal. Rptr. 3d 752, 757 (Ct. App. 2014)
(internal quotation marks omitted). The district court correctly noted that
violations of labor laws are not discovered overnight: It takes time to recognize the
violation, investigate it, and file a claim. Given the nature of plaintiffs’ claims, the
sixth-month limitations period works as a “practical abrogation of the right of
action.” Ellis, 169 Cal. Rptr. 3d at 757 (internal quotation marks omitted).
Third, the costs-and-fee-shifting clause is substantively unconscionable.
The clause awards fees and costs to the “prevailing party, or substantially
prevailing party[],” which means that even if plaintiffs prevail on some of their
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claims but not all, they may still be required to pay MHN’s attorney’s fees and
costs. This provision is contrary to the applicable statutory cost-shifting regimes
provided by California and federal law, which entitle only the prevailing plaintiff
to an award of costs and fees. See 29 U.S.C. § 216(b); Cal. Lab. Code § 1194(a).
“There is no justification to ignore a [statutory] cost-shifting provision, except to
impose upon the employee a potentially prohibitive obstacle to having her claim
heard.” Chavarria, 733 F.3d at 925. The costs-and-fee-shifting clause results in
an “unreasonable” and “unexpected” allocation of risks. Samaniego, 140 Cal.
Rptr. 3d at 497. Its effect is to chill employees from seeking vindication of their
statutory rights by pursuing claims in arbitration.
Finally, we agree with the district court that, to at least a limited degree, the
filing fees and punitive damages waiver are substantively unconscionable. The
$2600 filing fee imposed by the commercial arbitration rules hampers one
party—the employee—much more than the other. Likewise, the punitive damages
waiver “improperly proscribes available statutory remedies” afforded to plaintiffs
bringing employment claims. See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165,
1179 (9th Cir. 2003).
3. The district court did not abuse its discretion by declining to sever the
unconscionable portions of the arbitration provision. See Cal. Civ. Code
Page 5 of 6
§ 1670.5(a); Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d
996, 1005–06 (9th Cir. 2010) (holding that the district court did not abuse its
discretion in refusing to enforce an unconscionable arbitration clause in its
entirety). Although the Federal Arbitration Act expresses a strong preference for
the enforcement of arbitration agreements, the Act does not license a party with
superior bargaining power “to stack the deck unconscionably in [its] favor” when
drafting the terms of an arbitration agreement. Ingle, 328 F.3d at 1180. Under
generally applicable severance principles, California courts refuse to sever when
multiple provisions of the contract permeate the entire agreement with
unconscionability. See Samaniego, 140 Cal. Rptr. 3d at 1149. The district court
found that to be the case here, because striking the five unconscionable clauses
would require it to “assume the role of contract author rather than interpreter.”
Ingle, 328 F.3d at 1180. While we may have reached a different conclusion on that
score had we been conducting the analysis in the first instance, we cannot say that
the district court’s determination is “illogical, implausible, or without support in
inferences that may be drawn from the facts in the record.” United States v.
Hinkson, 585 F.3d 1247, 1263 (9th Cir. 2009) (en banc).
4. We reject MHN’s preemption arguments as foreclosed by recent case
law. See Chavarria, 733 F.3d at 926–27. Chavarria applied the same general
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principles of California unconscionability law we have applied here. Application
of those principles does not result in an analysis that is impermissibly unfavorable
to arbitration.
AFFIRMED.
FILED
Zaborowski v. MHN Government Services, Inc., No. 13-15671 DEC 17 2014
MOLLY C. DWYER, CLERK
GOULD, Circuit Judge, concurring in part, and dissenting in part: U.S. COURT OF APPEALS
I concur in paragraphs 1 and 2 of the memorandum disposition but dissent
from the majority’s conclusion in paragraphs 3 and 4 of the memorandum
disposition that the district court did not abuse its discretion in not severing the
unconscionable provisions of the arbitration agreement. I would reverse the
district court on this issue, requiring severance and leaving the arbitration
agreement in place.
A district court abuses its discretion when it erroneously interprets a law,
United States v. Beltran-Gutierrez, 19 F.3d 1287, 1289 (9th Cir. 1994), or when it
rests its decision on an inaccurate view of the law, Richard S. v. Dep’t of Dev.
Servs., 317 F.3d 1080, 1085–86 (9th Cir. 2003). In determining whether to sever
the unconscionable provisions of the arbitration agreement, the district court relied
on a California state court decision holding that “multiple unlawful provisions”
allow a trial court to conclude that “the arbitration agreement is permeated by an
unlawful purpose.” Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d
669, 697 (Cal. 2000).
But Armendariz was decided more than a decade before the Supreme
Court’s decision AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747 (2011).
1
The United States Supreme Court has vindicated a liberal federal policy favoring
arbitration. The 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 by the Federal
Arbitration Act (“FAA”). Concepcion, 131 S. Ct. at 1747.
In my view, 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. Id.; see also Moses H. Cone Mem’l Hosp. v. Mercury Const. Corp., 460
U.S. 1, 24 (1983) (holding that “questions of arbitrability must be addressed with a
healthy regard for the federal policy favoring arbitration”). Here, if all the
unconscionable provisions of the arbitration agreement, as determined by the
district court and affirmed by this panel, were severed (as shown by the strikeouts
in the paragraph below), the remainder of the arbitration agreement can still be
enforced, and the district court need not “assume the role of contract author,” Ingle,
328 F.3d at 1180:
Mandatory Arbitration. The parties agree to meet and confer in
good faith to resolve any problems or disputes that may arise under
this Agreement. Such negotiation shall be a condition precedent to the
2
filing of any arbitration demand by either party. The parties agree that
any controversy or claim arising out of or relating to this Agreement
(and any previous agreement between the parties if this Agreement
supersedes such prior agreement) or breach thereof, whether involving
a claim in tort, contract or otherwise, shall be settled by final and
binding arbitration in accordance with the provisions of the American
Arbitration Association. The parties waive their right to a jury or court
trial. The arbitration shall be conducted in San Francisco, California.
A single, neutral arbitrator who is licensed to practice law shall
conduct the arbitration. The complaining party serving a written
demand for arbitration upon the other party initiates these arbitration
proceedings. The written demand shall contain a detailed statement of
the matter and facts supporting the demand and include copies of all
related documents. [MHN shall provide Provider with a list of three
neutral arbitrators from which Provider shall select its choice of
arbitrator for the arbitration.] Each party shall have the right to take
the deposition of one individual and any expert witness designated by
another party. At least thirty (30) days before the arbitration, the
parties must exchange lists of witnesses, including any experts (one
each for MHN and Provider), and copies of all exhibits to be used at
the arbitration. [Arbitration must be initiated within 6 months after the
alleged controversy or claim occurred by submitting a written demand
to the other party. The failure to initiate arbitration within that period
constitutes an absolute bar to the institution of any proceedings.]
Judgment upon the award rendered by the arbitrator may be entered in
any court having competent jurisdiction. The decision of the arbitrator
shall be final and binding. The arbitrator shall have no authority to
make material errors of law [or to award punitive damages] or to add
to, modify or refuse to enforce any agreements between the parties.
The arbitrator shall make findings of fact and conclusions of law and
shall have no authority to make any award that could not have been
made by a court of law. [The prevailing party, or substantially
prevailing party’s costs of arbitration, are to be borne by the other
party, including reasonable attorney’s fees.]1
1
Although for purpose of illustrating severance, all unconscionable
provisions of the arbitration agreement, as found by the district court and affirmed
3
The district court’s decision not to sever the unconscionable provisions of
the arbitration agreement relying on Armendariz is in my view based on an
erroneous interpretation and an inaccurate view of Concepcion and the FAA.
Beltran-Gutierrez, 19 F.3d at 1289; Richard S., 317 F.3d at 1085–86.
Accordingly, in my view the district court’s decision not to sever the
unconscionable provisions of the arbitration agreement should have been reversed,
preserving to the parties their basic agreement to arbitrate disputes, and furthering
the policies of the FAA as implemented in Concepcion. I respectfully dissent in
part as to the disposition’s affirmance of the district court on the severance issue.
by this panel, were severed, some of these provisions are arguably not
unconscionable and apparently entered into in good faith, such as the six-month
limitations period and the punitive damages waiver provisions. The provisions to
be severed constitute a relatively small portion of the arbitration agreement and
should not be used to eliminate the parties’ ability to arbitrate their disputes.
I recognize that one can imagine an arbitration agreement where the number and
content of unconscionable provisions are so pervasive that they rebut the
presumption in favor of severance. If that were so, it would then be within a
district court’s discretion not to sever the unconscionable provisions and not to
enforce the arbitration agreement. But I do not view the challenged provisions
here as being sufficient to rebut a presumption in favor of severance that I urge
should arise under Concepcion on the facts here.
4