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Supreme Court Agrees to Review California Rule Invalidating Contractor Arbitration Agreements

    Client Alerts
  • October 12, 2015
On October 1, the U.S. Supreme Court agreed to hear the appeal of a company whose mandatory arbitration agreements with its contractors were deemed invalid by California state courts. Once again, the Court will determine whether the Federal Arbitration Act (FAA) preempts state attempts to toss out arbitration contracts.

In MHN Gov’t Servs., Inc. v. Zaborowski, the plaintiffs filed a class action lawsuit in federal court, alleging that they had been misclassified as independent contractors instead of employees. The defendant moved to compel arbitration based on agreements signed with the plaintiffs. California courts denied this request on the basis of a number of unconscionable provisions contained in the arbitration agreements. The federal Ninth Circuit Court of Appeals upheld this denial, concluding that the FAA did not preempt California law on this point.

California and some other states hostile to mandatory arbitration have rejected such agreements based on their view of the fairness of provisions in the agreements dealing with subjects such as costs, scope of arbitration and arbitration rules. In this case, the agreement contained a standard severability clause stating that if any provision of the agreement is deemed unenforceable, it will be severed, and the remainder of the agreement continues as enforceable.

California enforces a rule unique to arbitration agreements. If multiple provisions in the agreement are deemed unconscionable, the entire agreement is considered invalid regardless of severability language. The defendant argues that this rule violates the FAA and multiple Supreme Court decisions that emphasize the strong federal preference for arbitration of disputes. Multiple federal appellate circuits have disagreed with the Ninth Circuit on this issue.

The Supreme Court’s acceptance of this case for review may signal its intent to again emphasize the presumption of validity of arbitration agreements. The Court already accepted for review another California case dealing with the state’s invalidation of a commercial arbitration agreement. Decisions on these cases that uphold enforceability of the mandatory arbitration agreements may slow states’ attempts to find creative ways to avoid enforcing their terms.