October 1, 2015

Game on! U.S. Supreme Court to review California anti-arbitration rule

By Deborah J. La Fetra Senior Attorney

Today, in the first order list of the 2015 Term, the Supreme Court granted certiorari in MHN Government Services, Inc. v. Zaborowski, in which the Ninth Circuit Court of Appeals applied a severability rule created by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services to invalidate an arbitration contract.

Severability allows courts to line out provisions of contracts that are determined to be invalid. In California, state statutes specifically authorize courts to sever invalid provisions so long as they do not alter the fundamental nature of the agreement between the parties. Armendariz, however, says that if there is “more than one” invalid provision, those provisions are deemed to “permeate” the contract, requiring the court to strike it down in its entirety. This rule disproportionately—and adversely—affects arbitration contracts, in violation of the Federal Arbitration Act, which protects the freedom of contract. In a larger sense, the case places the continued viability of Armendariz in doubt, given the Supreme Court’s 2011 decision in AT&T Mobility, LLC v. Concepcion, a case arising out of California which held that the FAA preempts state-law rules (common law or statutory) that treat arbitration agreements less favorably than other contracts, or have a “disproportionate impact on arbitration agreements.”

The Supreme Court and the California courts have been engaged in a decades-long tug of war over people’s freedom to decide how they want to resolve disputes. PLF’s amicus brief supporting MHN’s cert petition pointed out that California’s continued defiance of the Court’s holdings and general hostility to arbitration was not limited to California and the Ninth Circuit. As a center of economic trade, contracts across the country often provide that California law controls. And California’s rule undermining arbitration contracts—defeating the parties’ legitimate expectations of arbitral resolution of disputes—damages the rule of law itself.

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