The U.S. Supreme Court has granted certiorari in a California arbitration case where the Ninth Circuit affirmed a district court decision to refuse to compel arbitration. The question before the high court is concise: “…whether California’s arbitration-only severability rule is preempted by the Federal Arbitration Act.”
The Ninth Circuit’s ruling in MHN Government Services, Inc. v. Zaborowski was a 2-1 unpublished decision that affirmed a district court’s refusal to compel arbitration. In the case, counselors hired by MHN to provide services to members of the military alleged that MHN improperly classified them as independent contractors rather than employees. The counselors had signed an arbitration agreement with MHN which they argued was unconscionable under California law.
In its decision, the district court summarized the provisions that the counselors found unconscionable: “MHN shall choose three arbitrators, and the [counselor] shall choose one amongst them; each party may depose one individual and any opposing expert witness; arbitration must be initiated within six months of the claim’s occurrence; the arbitrator may not modify or refuse to enforce any agreements; the parties may not be awarded punitive damages; and the prevailing party or substantially prevailing party’s costs are borne by the other party.”
The court found that many of the provisions the plaintiffs objected to were substantively unconscionable; however, the court refused to sever those provisions, concluding that the arbitration agreement was “so permeated with unconscionability that it is not severable.”
The Ninth Circuit affirmed the district court ruling in a 2-1 unpublished decision, saying that while it may have reached a different conclusion than the district court, the lower court did not abuse its discretion to rule as it did.
In its petition for certiorari, petitioners stated, “This is not a one-time problem. California courts routinely display the flagrant hostility to arbitration that the FAA was designed to end. The Ninth Circuit routinely allows this to occur. And the severability issue presented here arises literally every time a court finds one or more provisions of an arbitration agreement to be invalid under California law.”
Plaintiffs’ response contends that, “California’s severance doctrine derives from statutes that apply to all contracts and from cases dealing with contracts of various sorts—not just arbitration agreements. The doctrine applies to all contracts equally, consistent with the FAA and this Court’s precedent. Where there are multiple unconscionable provisions, the doctrine neither requires nor prohibits severance, but instead vests discretion in the trial court.”
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