Chavarria v. Ralphs Grocery Co.

• Decision Date: 28 October 2013
• Docket Number: No. 11–56673.,11–56673.
• Citation: 733 F.3d 916
• Parties: Zenia CHAVARRIA, individually, and on behalf of other members of the general public similarly situated, Plaintiff–Appellee, v. RALPHS GROCERY COMPANY, an Ohio Corporation, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

733 F.3d 916

Zenia CHAVARRIA, individually, and on behalf of other members of the general public similarly situated, Plaintiff–Appellee,

v.RALPHS GROCERY COMPANY, an Ohio Corporation, Defendant–Appellant.

No. 11–56673.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 8, 2013.

Decided Oct. 28, 2013.

Steven B. Katz (argued), Linda S. Husar, and Mara Matheke, Reed Smith LLP, Los Angeles, CA, for Defendant–Appellant.

Glenn A. Danas (argued), Capstone Law, Los Angeles, CA; Mark Yablonovich, Neda Roshanian, and Michael D. Coats, Law Offices of Mark Yablonovich, Los Angeles, CA, for Plaintiff–Appellee.

Appeal from the United States District Court for the Central District of California, Dean D. Pregerson, District Judge, Presiding. D.C. No. 2:11–cv–02109–DDP–VBK.

Before: RICHARD C. TALLMAN, RICHARD R. CLIFTON, and CONSUELO M. CALLAHAN, Circuit Judges.

OPINION

CLIFTON, Circuit Judge:

Defendant Ralphs Grocery Company appeals the district court's denial of its motion to compel arbitration. Plaintiff Zenia Chavarria filed an action alleging violations of the California Labor Code and California Business and Professions Code §§ 17200 et seq. She asserted claims on behalf of herself and a proposed class of other Ralphs employees. Ralphs moved to compel arbitration of her individual claim pursuant to its arbitration policy, to which all employees acceded upon submitting applications for employment with Ralphs. The district court denied the motion, holding that Ralphs' arbitration policy was unconscionable under California law and therefore unenforceable.

Ralphs argues that its policy is not unconscionable under California law and in the alternative that the Federal Arbitration Act (“FAA”) preempts California law. The FAA provides that arbitration agreements must be enforced except “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA preempts a contract defense, such as unconscionability, that may be generally applicable to any contract but disproportionately impacts arbitration agreements. AT&T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).

We affirm. We conclude that Ralphs' arbitration policy is unconscionable under California law, and that the state law supporting that conclusion is not preempted by the FAA.

I. Background

Plaintiff Zenia Chavarria completed an employment application seeking work with Defendant Ralphs Grocery Company. Chavarria obtained a position as a deli clerk with Ralphs and worked in that capacity for roughly six months. After leaving her employment with Ralphs, Chavarria filed this action, alleging on behalf of herself and all similarly situated employees that Ralphs violated various provisions of the California Labor Code and California Business and Professions Code §§ 17200 et seq. Ralphs moved to compel arbitration of her individual claim pursuant to an arbitration policy incorporated into the employment application. Chavarria opposed the motion, arguing that the arbitration agreement was unconscionable under California law.

By completing an employment application with Ralphs, all potential employees agree to be bound by Ralphs' arbitration policy. The application contains an acknowledgment that the terms of the mandatory and binding arbitration policy have been provided for the applicant's review. Ralphs' policy contains several provisions central to this appeal.

Paragraph 7 governs the selection of the single arbitrator who will decide the dispute.¹ It provides that, unless the parties agree otherwise, the arbitrator must be a retired state or federal judge. It explicitly prohibits the use of an administrator from either the American Arbitration Association (“AAA”) or the Judicial Arbitration and Mediation Service (“JAMS”).

If the parties do not agree on an arbitrator, the policy provides for the following procedure:

(1) Each party proposes a list of three arbitrators;

(2) The parties alternate striking one name from the other party's list of arbitrators until only one name remains;

(3) The party “who has not demanded arbitration” makes the first strike from the respective lists; and

(4) The lone remaining arbitrator decides the claims.

In practice, the arbitrator selected through this process will invariably be one of the three candidates nominated by the party that did not demand arbitration.

Paragraph 10 concerns attorney and arbitration fees and costs.² It specifies that each party must pay its own attorney fees, subject to a later claim for reimbursement under applicable law. The provision regarding arbitration fees, including the amount to be paid to the arbitrator, is more than a little convoluted. Ultimately, it provides that the arbitrator's fees must be apportioned at the outset of the arbitration and must be split evenly between Ralphs and the employee unless a decision of the U.S. Supreme Court directly addressing the issue requires that they be apportioned differently.

Paragraph 13 of the policy permits Ralphs to unilaterally modify the policy without notice to the employee. The employee's continued employment constitutes acceptance of any modification.³

The district court held that Ralphs' arbitration policy was unconscionable under California law, and it accordingly denied Ralphs' motion to compel arbitration. Ralphs appeals the district court's denial under 9 U.S.C. § 16.

II. Discussion

Ralphs argues that the district court erred when it held that the arbitration policy was unconscionable under California law. Ralphs also contends that federal law requires that the policy be enforced in accordance with its terms, even if the policy is unconscionable under California law, and that therefore the district court was required to compel arbitration. We review de novo the denial of a motion to compel arbitration. Bushley v. Credit Suisse First Boston, 360 F.3d 1149, 1152 (9th Cir.2004).

The FAA provides that any contract to settle a dispute by arbitration shall be valid and enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. This provision reflects both that (a) arbitration is fundamentally a matter of contract, and (b) Congress expressed a “liberal federal policy favoring arbitration.” Concepcion, 131 S.Ct. at 1745 (citation and internal quotation marks omitted). Arbitration agreements, therefore, must be placed on equal footing with other contracts. Id.

Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability. Id. at 1746. A defense such as unconscionability, however, cannot justify invalidating an arbitration agreement if the defense applies “only to arbitration or [derives its] meaning from the fact that an agreement to arbitrate is at issue.” Id. The U.S. Supreme Court has held that state rules disproportionately impacting arbitration, though generally applicable to contracts of all types, are nonetheless preempted by the FAA when the rule stands as an obstacle to the accomplishment of Congress's objectives in enacting the FAA. Id. at 1748.

No single rule of unconscionability uniquely applicable to arbitration is at issue in this case. We must therefore apply California's general principle of contract unconscionability. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000); see Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir.2006) (en banc) (applying California's general principle of unconscionability to an arbitration agreement). The parties dispute whether the Ralphs arbitration policy is unconscionable under California contract principles.

A. Unconscionability under California Law

Under California law, a contract must be both procedurally and substantively unconscionable to be rendered invalid. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. California law utilizes a sliding scale to determine unconscionability—greater substantive unconscionability may compensate for lesser procedural unconscionability. Id. Applying California law, the district court held that the arbitration agreement in this case was both procedurally unconscionable and substantively unconscionable. We agree.

1. Procedural Unconscionability

Procedural unconscionability concerns the manner in which the contract was negotiated and the respective circumstances of the parties at that time, focusing on the level of oppression and surprise involved in the agreement. Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 783 (9th Cir.2002); A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 186 Cal.Rptr. 114, 121–22 (1982). Oppression addresses the weaker party's absence of choice and unequal bargaining power that results in “no real negotiation.” A & M Produce, 186 Cal.Rptr. at 122. Surprise involves the extent to which the contract clearly discloses its terms as well as the reasonable expectations of the weaker party. Parada v. Super. Ct., 176 Cal.App.4th 1554, 98 Cal.Rptr.3d 743, 757 (2009).

The district court held that Ralphs' arbitration policy was procedurally unconscionable for several reasons. The court found that agreeing to Ralphs' policy was a condition of applying for employment and that the policy was presented on a “take it or leave it” basis with no opportunity for Chavarria to negotiate its terms. It further found that the terms of the policy were not provided to Chavarria until three weeks after she had agreed to be bound by it. This additional defect, the court held, multiplied the degree of procedural unconscionability.

Ralphs argues that the policy is not procedurally unconscionable because Chavarria was not even required to agree to its terms. Ralphs bases this contention on a provision in the employment application that provides, “Please sign and date the employment application ... to acknowledge you have read, understand & agree to the following statements.” The word “please,” Ralphs...