Kenneth Holley-Gallegly v. Ta Operating, LLC ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KENNETH HOLLEY-GALLEGLY, No. 22-55950
on behalf of himself and all others
similarly situated, D.C. No.
Plaintiff-Appellee, 5:22-cv-00593-
v. JGB-SHK
TA OPERATING, LLC, DBA Petro
Shopping Center, DBA Travel Centers OPINION
of America, a Delaware corporation,
Defendant-Appellant.
Appeal from the United States District Court
for the Central District of California
Jesus G. Bernal, District Judge, Presiding
Argued and Submitted June 6, 2023
Pasadena, California
Filed July 21, 2023
Before: MILAN D. SMITH, JR., DAVID F.
HAMILTON,* and DANIEL P. COLLINS, Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
*
The Honorable David F. Hamilton, United States Circuit Judge for the
U.S. Court of Appeals for the Seventh Circuit, sitting by designation.
2 HOLLEY-GALLEGLY V. TA OPERATING, LLC
SUMMARY**
Arbitration
The panel vacated the district court’s order denying
defendant TA Operating LLC’s motion to compel arbitration
of employment-related claims brought by Kenneth Holley-
Gallegly and remanded for the district court to order the
arbitrator to decide the issue of arbitrability.
TA moved to compel arbitration pursuant to an
arbitration agreement (the Agreement) that Holley-Gallegly
signed when TA hired him as a truck mechanic. The
Agreement included a delegation clause delegating to the
arbitrator questions regarding the interpretation and
enforceability of the Agreement. The district court ruled that
the parties had delegated issues of arbitrability to the
arbitrator and the delegation was clear and unmistakable, but
that the delegation clause was unconscionable and therefore
unenforceable. The district court then itself addressed
arbitrability and concluded that the Agreement as a whole
was unconscionable and unenforceable.
The panel held that the district court erred in finding that
the arbitration agreement’s delegation clause was
unenforceable because it was substantively unconscionable.
The district court properly considered whether an
“unrelated” jury waiver provision made the delegation
clause unconscionable. Here, though, the jury waiver
provision applied only if the Agreement were determined to
be unenforceable. As such, it could not support the
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
HOLLEY-GALLEGLY V. TA OPERATING, LLC 3
conclusion that an agreement to arbitrate enforceability (i.e.,
the delegation clause) was unenforceable.
COUNSEL
Robert M. Loeb (argued) and Sarah H. Sloan, Orrick
Herrington & Sutcliffe LLP, Washington, D.C.; Max Carter-
Oberstone, Orrick Herrington & Sutcliffe LLP, San
Francisco, California; E. Joshua Rosenkranz, Orrick
Herrington & Sutcliffe LLP, New York, New York; Mia
Farber, Eric Gitig, and Semarnpreet Kaur, Jackson Lewis
PC, Los Angeles, California; for Defendant-Appellant.
Kevin T. Barnes (argued) and Gregg Lander, Law Offices of
Kevin T. Barnes, Greensboro, Georgia; Raphael A. Katri,
Law Offices of Raphael A. Katri, Beverly Hills, California;
for Plaintiff-Appellee.
4 HOLLEY-GALLEGLY V. TA OPERATING, LLC
OPINION
M. SMITH, Circuit Judge:
Defendant-Appellant TA Operating LLC (TA) appeals
the district court’s denial of its motion to compel arbitration
of employment-related claims brought by Plaintiff-Appellee
Kenneth Holley-Gallegly. Because the district court erred in
finding that the arbitration agreement’s delegation clause
was unenforceable, we vacate the district court’s order and
direct it to order the arbitrator to decide enforceability in the
first instance.
FACTS AND PRIOR PROCEEDINGS
TA owns and operates truck stops and convenience
stores. Kenneth Holley-Gallegly worked for TA as a truck
mechanic from November 2018 to September 2021.
When Holley-Gallegly was hired, he was required to
sign as a condition of his employment a “Mutual Agreement
to Resolve Disputes and Arbitrate Claims” (Agreement).
The document is five pages long, single spaced, in 12-point
font. As its name suggests, the Agreement requires
employees to submit all employment-related claims to a
grievance process, and if necessary, to arbitration.
On the fourth page of the Agreement, under a heading
titled “Applicable Law and Construction/Waiver of Jury
Trial,” is a delegation clause. “A delegation clause is a
clause within an arbitration provision that delegates to the
arbitrator gateway questions of arbitrability, such as whether
the agreement covers a particular controversy or whether the
arbitration provision is enforceable at all.” Caremark LLC
v. Chickasaw Nation, 43 F.4th 1021, 1029 (9th Cir. 2022)
(citing Rent-A-Center,W., Inc. v. Jackson, 561 U.S. 63, 68–
HOLLEY-GALLEGLY V. TA OPERATING, LLC 5
69 (2010)). The delegation clause in the Agreement reads:
“[a]ll challenges to the interpretation or enforceability of any
provision of this Agreement shall be brought before the
arbitrator, and the arbitrator shall rule on all questions
regarding the interpretation and enforceability of this
Agreement.” Holley-Gallegly signed the Agreement in
November 2018, and again in March 2019.
In January 2022, Holley-Gallegly filed a class action
lawsuit against TA in the Superior Court of California. The
complaint alleges violations of various employment and
labor laws.1 After timely removing the action to federal
court, TA moved to compel arbitration. Among other things,
TA argued that because of the Agreement’s delegation
clause the issue of whether the agreement was arbitrable in
the first place “rest[ed] solely with the arbitrator.”
The district court denied TA’s motion. The court found
that “the parties delegated issues of arbitrability to the
arbitrator and the delegation was clear and unmistakable,”
but the delegation clause was unconscionable. The district
court found the clause procedurally unconscionable because
signing the Agreement was a condition of Holley-Gallegly’s
continued employment, and the Agreement was a contract of
adhesion. It found the clause substantively unconscionable
1
Specifically, the complaint alleges: (1) failure to pay all overtime wages
at the legal overtime pay rate; (2) failure to pay premium wages at the
legal pay rate; (3) failure to provide legally-compliant rest periods; (4)
derivative failure to timely furnish accurate itemized wage statements;
(5) derivative violations of Cal. Labor Code §§ 201–202; (6) independent
failure to timely furnish accurate itemized wage statements; (7)
independent violations of Cal. Labor Code §§ 201–202; (8) violations of
Cal. Labor Code § 212; (9) failure to fully reimburse work expenses; (10)
penalties pursuant to Cal. Labor Code § 2699; and (11) unfair business
practices.
6 HOLLEY-GALLEGLY V. TA OPERATING, LLC
because the Agreement required Holley-Gallegly to waive
his right to a jury trial “if th[e] Agreement is determined to
be unenforceable.”
Having concluded that the court—rather than the
arbitrator—was empowered to decide “the matter of
arbitrability,” the district court then considered whether the
Agreement as a whole was enforceable. On the basis of the
aforementioned jury waiver provision and various other
provisions, the court concluded that the Agreement was
“permeated with unconscionability,” and thus
unenforceable. TA timely appealed.
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction pursuant to 9 U.S.C. § 16. We
review de novo a district court’s decision to grant or deny a
motion to compel arbitration. See Bushley v. Credit Suisse
First Bos., 360 F.3d 1149, 1152 (9th Cir. 2004). We review
for clear error any factual findings underlying the district
court’s order. See O’Connor v. Uber Techs., Inc., 904 F.3d
1087, 1093 (9th Cir. 2018).
ANALYSIS
I. Waiver
As a threshold matter, we address Holley-Gallegly’s
contention that TA waived its argument that the delegation
clause should be enforced. A review of the district court
papers shows that TA did not waive this argument. TA
sufficiently raised the argument in both its motion to compel
and its reply and—contrary to Holley-Gallegly’s
assertions—did not simply do so in passing. In a standalone
section of its motion to compel, TA argued that
“[j]urisdiction to decide the enforceability of the agreement
HOLLEY-GALLEGLY V. TA OPERATING, LLC 7
rests solely with the arbitrator,” and that “a court has the
limited authority to determine only whether the parties
entered into the disputed agreement in the first place” in the
face of a delegation clause. Moreover, “when a party takes
a position and the district court rules on it, there is no
waiver.” Yamada v. Nobel Biocare Holding AG, 825 F.3d
536, 543 (9th Cir. 2016). The district court explicitly ruled
on the delegation clause issue in its order denying TA’s
motion to compel. Because TA raised the delegation clause
issue “with sufficient specificity and vigor,” and the district
court decided it, the argument was not waived. Id. at 544.
II. Enforcement of the Delegation Clause
Turning to the merits, Holley-Gallegly argues that the
delegation clause is unenforceable because it is
unconscionable. To establish an unconscionability defense
under California law,2 “the party opposing arbitration must
demonstrate procedural and substantive unconscionability.”
Lim v. TForce Logistics, LLC, 8 F.4th 992, 1000 (9th Cir.
2021). “Substantive unconscionability examines the fairness
of a contract’s terms.” Id. at 1001.
In Rent-A-Center, West, Inc. v. Jackson, the Supreme
Court addressed how courts should analyze
2
The Agreement provides that “all disputes regarding the enforcement
of this Agreement, any of the provisions of this Agreement or whether a
party’s claim is subject to this Agreement shall be determined in
accordance with the law of the State of Delaware.” TA, however, never
asserted that Delaware law should govern the unconscionability analysis
either before the district court or before this court. In fact, all of TA’s
enforceability arguments rely on California law. Accordingly, any
contention by TA that Delaware law governs enforceability of the
delegation clause has been waived. Lim v. TForce Logistics, LLC, 8
F.4th 992, 1004 (9th Cir. 2021).
8 HOLLEY-GALLEGLY V. TA OPERATING, LLC
unconscionability challenges to arbitration agreements
containing delegation clauses. 561 U.S. 63 (2010). In that
case, Antonio Jackson signed an agreement containing a
delegation clause prior to bringing a discrimination suit
against his former employer, Rent-A-Center. Id. at 65.
Rent-A-Center moved to compel arbitration, and Jackson
opposed that motion on the basis that the arbitration
agreement in question was unconscionable. Id. at 66.
As a threshold issue, the Court considered whether to
enforce the delegation clause and thus delegate the question
of arbitrability to the arbitrator. The Court explained that
delegation clauses are essentially severable mini-agreements
within agreements to arbitrate. Id. at 70–73. As such, it
refused to entertain arguments about the unconscionability
of the arbitration agreement as a whole, because Jackson
needed to “challenge[ ] the delegation provision
specifically” for any court to decide arbitrability. Id. at 72
(emphasis added). The Court reached back into Jackson’s
opposition to Rent-A-Center’s motion to compel filed in the
district court, and noted that “[n]owhere . . . did he even
mention the delegation provision.” Id. Because Jackson did
not “challenge[] the delegation provision specifically,”
before either the district court or the court of appeals, and
did not provide additional briefing on the issue at the
Supreme Court, the Court considered any challenges made
concerning delegation forfeited. Id. at 75–76, 76 n.5; see
also Caremark, LLC, 43 F.4th at 1034 (rejecting arguments
regarding “the enforceability of the arbitration provision as
a whole,” where the Chickasaw Nation “d[id] not call into
question the district court’s authority to enforce the
delegation clause,” in particular) (emphasis in original);
Brennan v. Opus Bank, 796 F.3d 1125, 1132 (9th Cir. 2015)
(affirming district court’s decision to dismiss claims in favor
HOLLEY-GALLEGLY V. TA OPERATING, LLC 9
of arbitration because plaintiff did not challenge delegation
clause specifically).
In this case, the district court held that the delegation
clause was substantively unconscionable because of the
following sentence, which is placed a few lines after the
delegation clause:
IF THIS AGREEMENT IS DETERMINED
TO BE UNENFORCEABLE, ANY
CLAIMS BETWEEN YOU AND THE
COMPANY RELATED TO YOUR
EMPLOYMENT SHALL BE SUBJECT
TO A NON-JURY TRIAL IN THE
FEDERAL OR STATE COURT THAT
HAS JURISDICTION OVER THE
MATTER.
The district court explained that under California law this is
a “prototypically unconscionable pre-dispute jury trial
waiver.” It stated although “an arbitration itself is a waiver
of a jury trial . . . the provision [here] reaches beyond that,
because it limits Plaintiff’s rights to a jury trial even if the
Agreement is unenforceable.” It provided no other reason
for finding the delegation clause substantively
unconscionable.
TA argues that the district court erred because its
conclusion “was not based on any feature of the delegation
clause, but rather on an entirely unrelated” provision of the
Agreement. Underlying this contention is the assumption
that a party resisting arbitration is confined to the text of the
delegation clause to argue that the clause is unconscionable.
The Supreme Court never articulated such a rule in Rent-A-
Center, however. Instead, the Court explained that if a party
10 HOLLEY-GALLEGLY V. TA OPERATING, LLC
cites provisions outside of the delegation clause in making
an unconscionability challenge, it must explain how those
provisions make the fact of an arbitrator deciding
arbitrability unconscionable. Id. at 74.
For example, to argue that Rent-A-Center’s delegation
clause was unconscionable based on discovery procedures
stipulated in the arbitration agreement, “Jackson would have
had to argue that the limitation upon the number of
depositions cause[d] the arbitration of his claim that the
Agreement is unenforceable to be unconscionable.” Rent-A-
Center, 561 U.S. at 74 (emphasis added). Similarly, the
Court noted that “the unfairness of the fee-splitting
arrangement may be more difficult to establish for the
arbitration of enforceability than for arbitration of more
complex and fact-related aspects of the alleged employment
discrimination.” Id. at 74 (emphasis added). A party is
therefore permitted under Rent-A-Center to challenge the
enforceability of a delegation clause by explaining how
“unrelated” provisions make the delegation unconscionable.
Nonetheless, the district court erred in its
unconscionability analysis, for a different reason. The
Agreement’s jury waiver provision applies only “if th[e]
agreement is determined to be unenforceable.” As such, it
cannot support the conclusion that an agreement to arbitrate
enforceability (i.e., the delegation clause) is unenforceable.
To illustrate this point, imagine that the delegation clause
is valid, and Holley-Gallegy argues before the arbitrator that
the Agreement is unenforceable. If the arbitrator agrees with
Holley-Gallegly, then Holley-Gallegly would be free to
pursue his claims in either federal or state court. And, if TA
were to try to enforce the jury waiver provision in that forum,
Holley-Gallegly would have an opportunity to argue why the
HOLLEY-GALLEGLY V. TA OPERATING, LLC 11
provision should not be enforced. On the other hand, if the
arbitrator disagrees with Holley-Gallegly and concludes that
the Agreement is enforceable, the jury waiver provision
becomes irrelevant, because Holley-Gallegly would have to
pursue his claims in arbitration, and by doing so waives a
jury trial anyway.
Neither of the above outcomes has any bearing on
whether the delegation of arbitrability to the arbitrator
would be unconscionable, because the jury waiver would
only have an effect—if any—after it has been determined
that the Agreement is unenforceable. Accordingly, the
district court erred in concluding that the provision made the
delegation clause substantively unconscionable. Cf.,
Caremark, 43 F.4th at 1034 n.13 (rejecting challenges to
discovery limitations and available damages “to the extent
this argument specifically challenges the enforceability of
the delegation clause” because “[m]ost of the challenged
arbitration procedures do not implicate at all the Nation’s
ability to arbitrate the delegated gateway issues.”).3
3
For the first time on appeal, Holley-Gallegly also argues that the
delegation clause is substantively unconscionable because (1) the
Agreement states that the issue of enforceability must be decided under
Delaware law, and (2) the provision requiring each party to bear its own
attorneys’ fees in arbitration is unconscionable. He has forfeited both
arguments.
First, before the district court, Holley-Gallegly only mentioned
“Delaware law” in the context of arguing that California law should
govern the issue of enforceability of the Agreement as a whole—not in
the context of arguing that the delegation clause was unconscionable.
Cf. Lim, 8 F.4th at 1004 (“TForce waived this argument by not raising it
in connection with its motion to compel arbitration in the district court.”).
Second, Holley-Gallegly likewise argued before the district court that the
Agreement’s attorneys’ fees provision made the entire agreement, rather
12 HOLLEY-GALLEGLY V. TA OPERATING, LLC
CONCLUSION
For the foregoing reasons, the district court’s order
denying TA’s motion to compel is VACATED. We “direct
the district court to order the arbitrator to decide” the
arbitrability issue. Winery, Distillery & Allied Workers
Union, Loc. 186 v. E & J Gallo Winery, Inc., 857 F.2d at
1358 (9th Cir. 1988).
VACATED and REMANDED.
than the delegation clause specifically, unconscionable. Holley-Gallegly
therefore forfeited this argument. See Rent-A-Center, 561 U.S. at 76.