Mohammed Al-Safin v. Circuit City Stores, Inc., a Virginia Corporation , 394 F.3d 1254 ( 2005 )

TASHIMA, Circuit Judge.

Circuit City Stores, Inc. (“Circuit City”), appeals the district court’s denial of its motion to dismiss and compel arbitration of Mohammed Al-Safin’s employment discrimination claims. The district court held that the arbitration agreement between Circuit City and Al-Safin is unconscionable under Washington state law, and thus unenforceable. Wé have jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(B), see Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 780 (9th Cir.2002), and'we affirm.

BACKGROUND

In June 1997, Al-Safin applied for a job at a Circuit City store in the state of Washington. Before Circuit City would consider his application, Al-Safin was required to sign an arbitration agreement entitled “Circuit City Dispute Resolution Agreement” (“DRA”). By signing the DRA, Al-Safin agreed to resolve all disputes arising out of his employment relationship -with Circuit City through arbitration, in accordance with the “Circuit City Dispute Resolution Rules and Procedures” (“DRRP”).

Rule 19 of the DRRP in effect in 1997 (the “1997 DRRP”) stated that both the DRA and the DRRP could be amended “on December 31st of any year upon giving 30 calendar days written notice to Associates, provided that all claims arising before alteration or termination shall be subject to the [DRA] and corresponding [DRRP] in effect at the time the claim arose.”¹ (Emphasis added.)

While Al-Safin was still employed by Circuit City, the DRRP was amended, effective December 31, 1997 (the “1998 DRRP”). The 1998 DRRP was essentially the sáme as the 1997 DRRP, except that Rule 19 was amended to state that “all claims arising before alteration or termination shall be subject to the [DRA] and corresponding [DRRP] in effect at the time the Arbitration Request Form and accompanying filing fee is received by the Company.” (Emphasis added.) The result of this modification would be that any arbitration filed in 2003 would be governed by the DRRP in effect.in 2003, as opposed to ■ the DRRP in. effect when the claim arose.

Al-Safin continued to work for Circuit City after the 1998 modification until his employment was- terminated in November 1998.

On December 2, 1999, Al-Safin filed a complaint against Circuit City in the United States District Court for the Western District of Washington alleging violations of both federal and state anti-discrimination laws. Circuit City filed a motion to compel arbitration, which was denied, and Circuit City appealed.

In an unpublished disposition, we reversed the district court’s decision and held that: (1) the district court improperly relied on Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir.1998), “to hold that the compulsory arbitration contract was unenforceable;” (2) “to the extent that the district court relied on the ‘knowing waiver’ requirement of Prudential Ins. Co. v. Lai, 42 F.3d 1299 (9th Cir.1994), our examination of the relevant contract reveals that the requirement was met as a matter of law;” and (3) “although we express no opinion as to the enforceability of particular provisions, we are unable to agree with the suggestion that illegal provisions so infected the contract as to render it invalid as a matter of federal law.” Al-Safin v. Circuit City Stores, Inc., 46 Fed.Appx. 446 (9th Cir.2002) (emphasis added) (“Al-Safin I”). We explicitly remanded the case for the district court to consider “the validity of these contracts under state law.” Id. at 447.

Effective December 31, 2002, long after Al-Safin was terminated by Circuit City, and over three years into this litigation, the DRRP was again amended (the “2003 DRRP”). The 2003 DRRP modified many of the provisions that have been deemed unconscionable or unenforceable in other proceedings. See Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir.2003); Ingle, 328 F.3d 1165; Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir.), cert. denied, 535 U.S. 1112, 122 S.Ct. 2329, 153 L.Ed.2d 160 (2002); Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir.2001); see also Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 666 (6th Cir.2003) (expressing “serious doubts about the fairness and reasonableness” of the DRRP’s terms “concerning remedies, the payment of arbitration fees, discovery, and the limitations period for requesting arbitration”).

One week after adopting the 2003 DRRP, Circuit City renewed its motion to compel arbitration and argued that under the new DRRP the arbitration agreement is enforceable. The district court held that the 1997 DRRP, and not the 1998 or 2003 DRRP, applies, and that the arbitration agreement is unenforceable because it is unconscionable under Washington law. After its motion for reconsideration was denied, Circuit City appealed.

STANDARD OF REVIEW

The district court’s denial of a motion to compel arbitration is reviewed de novo. Ingle, 328 F.3d at 1169.

DISCUSSION

The Federal Arbitration Act (“FAA”) was enacted “to reverse the longstanding judicial hostility to arbitration agreements ... and to place arbitration agreements upon the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). The FAA applies to arbitration agreements, like the one here, that cover employment-related claims. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001). The FAA provides that arbitration agreements generally “shall be valid, irrevocable, and enforceable,” but courts may decline to enforce them when grounds “exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening” federal law. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

Accordingly, we review Al-Safin’s arbitration agreement with Circuit City in light of the “liberal federal policy favoring arbitration agreements,” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), and consider its enforceability according to the laws of the state of contract formation, see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); Ingle, 328 F.3d at 1170.

The parties dispute whether: (1) we previously decided that the arbitration agreement is enforceable; (2) the agreement is unconscionable under Washington law; and (3) any unenforceable contract provisions are severable.²

1. Law of the Case

Circuit City contends that our prior decision instructed the district court to determine if any particular contract terms are unenforceable under Washington law, while enforcing the core contractual obligation to arbitrate. See Al-Safin I, 46 Fed.Appx. 446. We disagree.

“The law of the case doctrine requires a district court to follow the appellate court’s resolution of an issue of law in all subsequent proceedings in the same case.” United States ex rel. Lujan v. Hughes Aircraft Co., 243 F.3d 1181, 1186 (9th Cir.2001). The doctrine applies to both the appellate court’s “explicit decisions as well as those issues decided by necessary implication.” United States v. Cote, 51 F.3d 178, 181 (9th Cir.1995) (quoting Eichman v. Fotomat Corp., 880 F.2d 149, 157 (9th Cir.1989)). However, “[t]he doctrine does not apply to issues not addressed by the appellate court.” Lujan, 243 F.3d at 1186.

Our prior disposition consists of two paragraphs. The first addresses the validity of the arbitration agreement under federal law. By citing Duffield, 144 F.3d 1182, and Prudential Ins. Co. v. Lai, 42 F.3d 1299, we determined that Circuit City could compel arbitration of Al-Safin’s federal employment discrimination claims, and that Al-Safin knowingly agreed to arbitrate his federal claims. Al-Safin I, 46 Fed.Appx. at 446. Although we expressed “no opinion as to the enforceability of particular provisions,” we concluded that we were. “unable to agree with the suggestion that illegal provisions so infected the contract as to render it invalid as a matter of federal law.” Id. (emphasis added).

The second paragraph discusses what we did not decide. We began with the general proposition that to be enforceable, an arbitration contract “must meet the requirements of generally applicable state [contract] law.” Id. We then remanded the case for the district court to determine the “validity of [the agreement] under [Washington] state law.” Id. at 446-47.

The plain meaning of our decision is that: (1) the arbitration agreement is valid under federal law; but (2) the district court was to determine in the first instance whether it is valid under state contract law. We did not address whether the arbitration agreement is enforceable under state law and the district court followed our mandate by determining unconsciona-bility under Washington law.

II. Washington Law of Unconsciona-bility

“Unconscionability is a doctrine under which courts may deny enforcement of all or part of an unfair or oppressive contract based on abuses during the process of forming a contract or within the actual terms of the contract itself.” David K. DeWolf, et al., 25 Wash. Practice Series, Contract Law & Practice § 9.5 (2003). Washington recognizes two classifications of unconscionability, substantive and procedural. See Zuver v. Airtouch Communications, Inc., 103 P.3d 753, 759, 2004 WL 3016484, at *3 (Wash.2004) (citing Nelson v. McGoldrick, 127 Wash.2d 124, 896 P.2d 1258, 1262 (1995), and Schroeder v. Fageol Motors, Inc., 86 Wash.2d 256, 544 P.2d 20, 23 (1975)).

“Substantive unconscionablity involves those cases where a clause or term in the contract is alleged to be one-sided or overly harsh.... ” “ ‘Shocking to the conscience’, ‘monstrously harsh’, and ‘exceedingly calloused’ are terms sometimes used to define substantive uncon-scionability.” Procedural unconsciona-bility is the “lack of a meaningful choice, considering all the circumstances surrounding the transaction including “ ‘[t]he manner in which the contract was entered,’ ” whether the party had “a reasonable opportunity to understand the terms of the contract,” and whether “ ‘the important terms[were] hidden in a maze of fíne print.’ ” ”

Zuver, 103 P.3d at 759, 2004 WL 3016484, at *3 (quoting Schroeder, 544 P.2d at 23, and Nelson, 896 P.2d at 1262) (emendations in the original). See also Adler v. Fred Lind Manor, 103 P.3d 773, 781, 2004 WL 3016302, at *4 (Wash.2004).

In Washington, a contract generally may be invalid based on either substantive or procedural unconscionability. See M.A. Mortenson Co. v. Timberline Software Corp., 140 Wash.2d 568, 998 P.2d 305, 314-16 (2000) (en banc); Tjart v. Smith Barney, Inc., 107 Wash.App. 885, 28 P.3d 823, 830 (2001) (recognizing that a contract may be unenforceable based on procedural unconscionability only); see also Zuver, 103 P.3d at 759 n. 4, 2004 WL 3016484, at *3 n. 4. In the employment context, the Washington Supreme Court, while “hold[ing] that substantive unconscionability alone can support a finding of uncon-scionability,” has recently “decline[d] to consider whether [procedural unconsciona-bility] alone will support a claim of uncon-scionability.” Adler, 103 P.3d at 782, 2004 WL 3016302, at *5.

III. Substantive Unconscionability

Whether a contract is substantively unconscionable is a question of law determined as of the time the contract was made, as opposed to the time when the contract is enforced. Schroeder, 544 P.2d at 24.

A. Which DRRP Controls

As a threshold issue, Circuit City contends that Rule 19 of the DRRPs permitted it to amend the arbitration agreement each year, and that under the 1998 DRRP, Al-Safin’s dispute is governed by the rules in effect when he files for arbitration. Because Al-Safin has not yet filed for arbitration, Circuit City contends that his dispute is governed by the most recent rules and procedures and that we should analyze the 2003 DRRP to determine whether the agreement is enforceable.

We are not persuaded. Even if we assume that Circuit City validly amended the 1997 DRRP and is seeking to enforce Rule 19 of the 1998 DRRP, we could not conclude that the 2003 DRRP applies to Al-Safin.³

First, we have held that the modification provision of Rule 19 of the 1998 DRRP is unenforceable under California law. See Mantor, 335 F.3d at 1107; Ingle, 328 F.3d at 1179. The modification provision allows Circuit City to alter the rules and procedures governing arbitration almost at will. For example, here, Circuit City has attempted to implement new rules and procedures over three years after the onset of this litigation, and over four years after terminating Al-Safin’s employment. We conclude that Rule 19, which permits this conduct, is substantively unconscionable under Washington law and that the modification provision is therefore unenforceable.

Second, even if we were to accept that the 1998 DRRP requires us to look at the DRRP in effect when Al-Safin files for arbitration, we would conclude that the 2003 DRRP is not effective as to Al-Safin.

Under Washington law, contract modifications are subject to the general “requisites of contract formation, offer, acceptance and ’ consideration.” Thompson v. St. Regis Paper Co., 102 Wash.2d 219, 685 P.2d 1081, 1087 (1984). Employers in Washington have been pérmitted to “unilaterally amend or revoke policies and procedures ' established in an employee handbook.” Gaglidari v. Denny’s Rests., Inc., 117 Wash.2d 426, 815 P.2d 1362, 1367 (1991) (en banc).

[T]he handbook language constitutes the offer; the offer is communicated by the dissemination of the handbook to the employee; the employee’s retention of employment constitutes acceptance; and by continuing to stay on the job, although free to leave, the employee supplies the necessary consideration.

Id. (citing Pine River State Bank v. Mettille, 333 N.W.2d 622 (Minn.1983)). “However, an employer’s unilateral change in policy will not be effective until employees receive reasonable notice of the change” and accept the change. Id.

Applying the principles set forth in Gaglidari, we conclude that Circuit City did not properly amend the 1998 DRRP, at least as to Al-Safin. Circuit City’s offer to amend the 1998 DRRP consisted of posting a written notice at Circuit City locations and by including a copy of the modification in its Applicant Packet. Even if this provided “reasonable notice” to current and prospective employees, it was not “reasonable notice” to former employees like Al-Safin. That is, it is not reasonable to expect former employees of Circuit City to check the postings at a Circuit City store every December, nor is it reasonable to expect that a terminated employee would review an Applicant Packet, to determine if Circuit City decided to amend its arbitration rules and procedures. Thus, as to former employees like Al-Safin, there was no valid offer to amend the 1998 DRRP. Moreover, Al-Safin did not continue his employment with Circuit City, sign an acceptance, or accept the modification of the 1998 DRRP in any other way.⁴

Therefore, because no contract was formed between Circuit City and Al-Safin regarding the 2003 DRRP, the 2003 DRRP never went into effect as to Al-Safin and the 1998 DRRP controls the parties’ dispute.⁵

B. Substantive Unconscionability of the 1998 DRRP

In Mantor, Ingle, and Adams, we held that Circuit City’s arbitration agreement is substantively unconscionable under California law and rejected contract provisions: (1) forcing employees to arbitrate claims against Circuit City, but not requiring Circuit City to arbitrate claims against employees, Ingle, 328 F.3d at 1173; Adams, 279 F.3d at 893-94; (2) limiting remedies, Ingle, 328 F.3d at 1178-79; Adams, 279 F.3d at 894; (3) splitting costs and fees, Mantor, 335 F.3d at 1107; Ingle, 328 F.3d at 1177-78; Adams, 279 F.3d at 894; (4) imposing a one-year statute of limitations, Mantor, 335 F.3d at 1107; Ingle, 328 F.3d at 1175; Adams, 279 F.3d at 894; (5) prohibiting class actions, Mantor, 335 F.3d at 1107; Ingle, 328 F.3d at 1175-76; (6) regarding the filing fee and waiver of the fee, Mantor, 335 F.3d at 1107-08; Ingle, 328 F.3d at 1177; and (7) giving Circuit City the unilateral right to terminate or modify the agreement, Mantor, 335 F.3d at 1107; Ingle, 328 F.3d at 1179.

California applies virtually the same definition of substantive unconseionability as Washington. Compare Ingle, 328 F.3d at 1172 (stating that under California law, substantive unconseionability refers to whether terms of the agreement “are so one-sided as to shock the conscience”) (quoting Kinney v. United Healthcare Servs., Inc., 70 Cal.App.4th 1322, 83 Cal.Rptr.2d 348, 353 (1999)) with Nelson, 896 P.2d at 1262 (stating that under Washington law, substantive unconseionability refers to contract terms that are “one-sided or overly harsh” and “shocking to the conscience” (quoting Schroeder, 544 P.2d at 23)). Each of the provisions we held unconscionable under California law is present in the 1998 DRRP at issue here. Thus, we conclude that Mantor, Ingle, and Adams are persuasive authority that the arbitration agreement is substantively unconscionable under Washington law. And, in fact, the Washington Supreme Court recently cited Ingle, 328 F.3d at 1175, and Adams, 279 F.3d at 894-95, with approval, in holding that a 180-day limitations provision in an employment arbitration agreement was substantively unconscionable. See Adler, 103 P.3d at 787, 2004 WL 3016302, at 11 (stating that “[w]e agree with the Ninth Circuit”).⁶

Moreover, the United States Supreme Court has explained that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Gilmer, 500 U.S. at 26, 111 S.Ct. 1647 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).). Gilmer requires arbitration agreements to embody “basic procedural and remedial protections so that claimants can effectively pursue their statutory rights.” Adams, 279 F.3d at 895. In Adams, we explained that Circuit City’s arbitration agreement does not meet these minimum requirements because it limits the remedies that would otherwise be available in a judicial forum, and fails to ensure that employees do not have to pay unreasonable fees, costs, or expenses “as a condition of access to the arbitration forum.” Id. Here, we again conclude that Circuit City’s arbitration agreement requires employees to forgo essential substantive and procedural rights and that the clauses regarding coverage of claims, remedies, arbitration fees, cost-splitting, the statute of limitations, class actions, and modifications, render the arbitration agreement excessively one-sided and unconscionable.

IV. Severability

Like California law, Washington law grants courts discretion to sever unconscionable contract provisions or refuse to enforce the entire contract. Compare Ingle, 328 F.3d at 1180 (explaining that under California law the court may “refuse to enforce the'Contract in its entirety”) with Schroeder, 544 P.2d at 24 (stating that under Washington law “the court may refuse to enforce the contract” (quoting Wash. Rev.Code § 62A.2-302)).

In each of the California cases — Mantor, Ingle, and Adams — we held that the unconscionable terms rendered the arbitration agreement unenforceable. In Ingle, we specifically determined that the 1998 arbitration agreement was “permeated with unconscionable provisions” and was unenforceable in its entirety because “[a]ny earnest attempt to ameliorate the unconscionable aspects of Circuit City’s arbitration agreement would require this court to assume the role of contract author rather than interpreter.” Ingle, 328 F.3d at 1180; see also Adams, 279 F.3d at 895-96 (reaching the same result regarding an earlier version of the arbitration agreement). Applying Washington law, we also conclude that the unconscionable provisions of the 1998 DRRP pervade the entire arbitration agreement and any attempt to sever those provisions would render the procedure unworkable.

The recent cases of Zuver and Adler are not to the contrary. Although in those cases the Washington Supreme Court severed the unconscionable provisions and enforced the remainder of the arbitration agreements, that was because only two discrete provisions of the respective agreements were held to be unconscionable. See Zuver, 103 P.3d at. 768, 2004 WL 3016484, at *11 (“We can easily excise the confidentiality and remedies provisions but enforce the remainder.”); Adler, 103 P.3d at 788, 2004 WL 3016302, at *12 (“In this case, however,[the] arbitration agreement contains just two substantively unconscionable provisions.”). The Washington Supreme Court, however, “acknowledge[d] that in instances where an employer engages in an ‘insidious pattern’ of seeking to tip the scales in its favor in employment disputes by inserting numerous unconscionable provisions in an arbitration agreement, courts may decline to sever the unconscionable provisions.” Id. (citing Ingle, 328 F.3d at 1180).⁷ Because this agreement is “permeated with unconscionable provisions,” Ingle, 328 F.3d at 1180, we hold that the entire arbitration agreement is unenforceable.

CONCLUSION

For the foregoing reasons, we conclude that the arbitration agreement between Circuit City and Al-Safin is substantively unconscionable. Although we have serious doubts about whether the agreement is procedurally unconscionable as well, we do not decide this issue because the agreement’s substantive unconscionability alone renders it invalid under Washington law. See Adler, 103 P.3d at 782, 2004 WL 3016302, at *5. Therefore, the judgement of the district court is

AFFIRMED.

1 . "Circuit City refers to all job applicants and to current and former employees as ‘Associates.' ” Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1169 n. 1 (9th Cir.2003).

2 . Our decision in EEOC v. Luce, Forward, Hamilton & Scripps, 345 F.3d 742 (9th Cir. 2003) (en banc) forecloses Ai-Safin’s arguments that Duffield prohibits enforcement of the arbitration agreement. See id. at 745 (overruling Duffield).

3 . Al-Safin does not dispute that Circuit City effectively implemented the 1998 DRRP. Therefore, we assume that the 1997 DRRP was properly amended and that Circuit City can enforce the 1998 DRRP.

4 . The dissent asserts that "[n]othing in Gagli-dari varied the well-settled common-law principles of at-will employment: the terms of employment and of its termination are set by the employer.” Dissent, Op. at 1266. That assertion, however, does not address what happened in this case. Here, Circuit City attempted to change "the terms of employment and of its termination” after Al-Safin’s employment had been terminated.

5 . Circuit City has not cited any case, and our research has revealed none, where a party was permitted unilaterally to amend a contract midway through litigation concerning that contract. Rather, courts addressing whether an arbitration agreement can be amended after it has been challenged during litigation have declined to permit the amendment. See e.g., Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 697 (2000) (“No existing rule of contract law permits a party to resuscitate a legally defective contract •merely by offering to change it.”).

6 . The dissent is critical of our reliance on "Ninth Circuit cases that purport to interpret California law.” Dissent, Op. at 1268. In addition to the Washington Supreme Court's agreement with Ingle and Adams, as shown in the text, above, in Zuver, the Washington Supreme Court cited with approval Ting v. AT & T, 319 F.3d 1126, 1151-52 (9th Cir.) (construing California law), cert. denied, 540 U.S. 811, 124 S.Ct. 53, 157 L.Ed.2d 24 (2003), in holding a confidentiality provision substantively unconscionable, Zuver, 103 P.3d at 763-66, 2004 WL 3016484, at *8-*10, and a California case, Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 694, in holding a remedies limitation provision substantively unconscionable, Zuver, 103 P.3d at 765-68, 2004 WL 3016484, at *10-*11.

7 . The Washington Supreme Court’s recent decisions in Zuver and Adler have erased any "doubt about the relevance of Ingle and Mantor," dissent, Op. at 1269, so that, if it ever was warranted, certifying the question to the Washington Supreme Court is no longer warranted.