Circuit City Stores Inc. v. Mantor

• Decision Date: 22 July 2003
• Docket Number: No. 02-55230.,02-55230.
• Citation: 335 F.3d 1101
• Parties: CIRCUIT CITY STORES, INC., a Virginia Corporation, Petitioner-Appellee, v. Paul MANTOR, an individual, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

335 F.3d 1101

CIRCUIT CITY STORES, INC., a Virginia Corporation, Petitioner-Appellee, v. Paul MANTOR, an individual, Respondent-Appellant.

No. 02-55230.

United States Court of Appeals, Ninth Circuit.

Submitted March 7, 2003.¹

Decided July 22, 2003.

COPYRIGHT MATERIAL OMITTED

Michael H. Crosby, San Diego, California, for the respondent-appellant.

Rex Darrell Berry, Livingston & Mattesich, Sacramento, California, for the petitioner-appellee.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-01-10115-MLR.

Before PREGERSON, THOMAS, Circuit Judges, and OBERDORFER,² Senior District Judge.

OPINION

PREGERSON, Circuit Judge:

Paul Mantor appeals from the district court's grant of Circuit City Stores, Inc's (Circuit City) motion to compel arbitration. Mantor argues on appeal that Circuit City's arbitration agreement is unenforceable under California law of unconscionability. We agree and therefore reverse and remand.

Facts and Procedural Background

Paul Mantor worked for Circuit City from August 1992 until October 2000, when Circuit City terminated his employment. When Circuit City hired Mantor, it had no arbitration program. In 1995, Circuit City implemented an arbitration program called the "Associate Issue Resolution Program" (AIRP).³ Circuit City emphasized to managers the importance of full participation in the AIRP, claiming that the company had been losing money because of lawsuits filed by employees. Circuit City management stressed that employees had little choice in this matter; they suggested that employees ought to sign the agreement or prepare to be terminated. Although Circuit City circulated the forms regarding the AIRP in 1995, Mantor was able to avoid either signing up or openly refusing to participate⁴ in the AIRP for three years. In 1998, Circuit City District Manager Brad Weiland and Circuit City's Personnel Manager for Northern California Karen Craig arranged a meeting with Mantor to discuss Mantor's participation in the AIRP. During this meeting, Mantor asked Weiland and Craig what would happen should he decline to participate in the arbitration program. The Circuit City managers responded to the effect that he would have no future with Circuit City. On February 13, 1998, Mantor agreed to participate in the AIRP, acknowledging in writing his receipt of (1) an "Associate Issue Resolution Handbook," (2) the "Circuit City Dispute Resolution Rules and Procedures," and (3) a "Circuit City Arbitration Opt Out Form."

On October 10, 2001, a year after Circuit City terminated his employment, Mantor brought a civil action in state court, alleging twelve causes of action.⁵ On October 17, 2001, to preserve his right to arbitrate his claims in the event that a court determined that his claims were subject to arbitration, Mantor submitted an Arbitration Request Form and a cashier's check in the amount of seventy-five dollars to Circuit City's Arbitration Coordinator.⁶

On November 26, 2001, Circuit City petitioned the district court to compel arbitration under 9 U.S.C. § 4 (2000). On December 27, 2001, following briefing and oral arguments, the district court granted Circuit City's motion to compel arbitration and stayed the state court action pending arbitration. On January 25, 2002, Mantor filed a timely notice of appeal with this court. On appeal, Mantor argues that the district court erred in granting the order to compel arbitration because the arbitration agreement is unconscionable under California contract law. Mantor also contends that this court's decision in Duffield v. Robertson Stephens Co., 144 F.3d 1182 (9th Cir.1998), which precludes compulsory arbitration of claims under Title VII and California's Fair Employment and Housing Act (FEHA), compels the conclusion that the arbitration agreement is unenforceable.⁷

Discussion

We have jurisdiction to review an order compelling arbitration under 9 U.S.C. § 16(a)(3) (2000). Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 84-89, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000); Prudential Ins. Co. of Am. v. Lai, 42 F.3d 1299, 1302 (9th Cir.1994), cert. denied, 516 U.S. 812, 116 S.Ct. 61, 133 L.Ed.2d 24 (1995). We review de novo the district court's order compelling arbitration. Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 n. 2 (9th Cir.2002) (Adams III).

I.

Mantor contends that Circuit City's arbitration agreement⁸ is unconscionable under California contract law. Federal law provides that arbitration agreements generally "shall be valid, irrevocable, and enforceable" except when grounds "exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (2002); Ingle, 328 F.3d at 1170. But federal law "does not supplant state law governing the unconscionability of adhesive contracts." Ingle, 328 F.3d at 1174 n. 10. In California, courts may refuse to enforce an arbitration agreement if it is unconscionable.⁹ Cal. Civ.Code § 1670.5 (1999). Unconscionability exists when one party lacks meaningful choice in entering a contract or negotiating its terms and the terms are unreasonably favorable to the other party. Ingle, 328 F.3d at 1170; A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 486, 186 Cal.Rptr. 114 (1982). Accordingly, a contract to arbitrate is unenforceable under the doctrine of unconscionability when there is "both a procedural and substantive element of unconscionability." Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 783 (9th Cir.2002); accord Armendariz v Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000). But procedural and substantive unconscionability "need not be present in the same degree." Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. "[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." Id.

A.

To determine whether Circuit City's arbitration agreement with Mantor is procedurally unconscionable we must evaluate how the parties negotiated the contract and "the circumstances of the parties at that time." Ingle, 328 F.3d at 1171 (quoting Kinney v. United Healthcare Servs., Inc., 70 Cal.App.4th 1322, 1329, 83 Cal.Rptr.2d 348, 352-53 (1999)). One factor courts consider to determine whether a contract is procedurally unconscionable is whether the contract is oppressive. Id. Courts have defined oppression as springing "from an inequality of bargaining power[that] results in no real negotiation and an absence of meaningful choice." Stirlen v. Supercuts, Inc., 51 Cal. App.4th 1519, 1532, 60 Cal.Rptr.2d 138, 145 (1997) (internal quotation marks and citations omitted). Another factor courts look to is surprise, defined as "the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Id.

Circuit City argues that because Mantor was given an opportunity to "opt-out" of the arbitration agreement, the agreement was not oppressive — and therefore not procedurally unconscionable. In support of its argument, Circuit City cites our decisions in Circuit City Stores, Inc. v. Najd, 294 F.3d 1104 (9th Cir.2002), and Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (9th Cir.2002). We do not agree that Najd and Ahmed guide our analysis here; in both Najd and Ahmed, the arbitration agreement did not prove procedurally unconscionable specifically because both Najd and Ahmed had a meaningful opportunity to opt-out of the arbitration program. See Najd, 294 F.3d at 1108; Ahmed, 283 F.3d at 1200. Mantor had no such meaningful opportunity.

In 1995, Mantor was given an "opt-out" form by which he could elect not to participate in the arbitration program. But Circuit City management impliedly and expressly pressured Mantor not to opt-out, and even resorted to threatening his job outright should Mantor exercise his putative "right" to opt-out.¹⁰ The fact that Circuit City management pressured and even threatened Mantor into assenting to the arbitration agreement demonstrates that he had no meaningful opportunity to opt-out of the program. When a party to a contract possesses far greater bargaining power than another party, or when the stronger party pressures, harasses, or compels another party into entering into a contract, "`oppression and, therefore, procedural unconscionability, are present.'" See Ingle, 328 F.3d at 1172 (quoting Ferguson, 298 F.3d at 784). A meaningful opportunity to negotiate or reject the terms of a contract must mean something more than an empty choice. At a minimum, a party must have reasonable notice of his opportunity to negotiate or reject the terms of a contract, and he must have an actual, meaningful, and reasonable choice to exercise that discretion. In light of Circuit City's insistence that Mantor sign the arbitration agreement — under pain of forfeiting his future with the company — the fact that in 1995 Mantor was presented with an opt-out form does not save the agreement from being oppressive, for Mantor had no meaningful choice, nor any legitimate opportunity, to negotiate or reject the terms of the arbitration agreement. Thus, this court's decisions in Ingle and Adams III, rather than our decisions in Najd and Ahmed, govern this appeal. Accordingly, because Circuit City presented the arbitration agreement to Mantor on an "adhere-or-reject" basis we conclude that the arbitration agreement was procedurally unconscionable.¹¹ See Ingle, 328 F.3d at 1172; Adams III, 279 F.3d at 893.

B.

We turn now to consider whether the arbitration agreement is substantively unconscionable. Substantive unconscionability concerns the "`terms of the agreement and whether those terms are so one-sided as to shock the conscience.'" Ingle, 328 F.3d at 1172 (quoting Kinney, 70 Cal. App.4th at 1330, 83 Cal.Rptr.2d at 353 (citations...