Zenia Chavarria v. Ralphs Grocery Company

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

ZENIA CHAVARRIA, individually, and No. 11-56673
on behalf of other members of the
general public similarly situated, D.C. No.
Plaintiff-Appellee, 2:11-cv-02109-
DDP-VBK
v.

RALPHS GROCERY COMPANY, an OPINION
Ohio Corporation,
Defendant-Appellant.

Appeal from the United States District Court
for the Central District of California
Dean D. Pregerson, District Judge, Presiding

Argued and Submitted
August 8, 2013—Pasadena, California

Filed October 28, 2013

Before: Richard C. Tallman, Richard R. Clifton,
and Consuelo M. Callahan, Circuit Judges.

Opinion by Judge Clifton
2 CHAVARRIA V. RALPHS

SUMMARY*

Arbitration

The panel affirmed the district court’s denial of defendant
grocery company’s motion to compel arbitration in an action
asserting claims under California labor law on behalf of the
plaintiff and a proposed class of other grocery employees.

The grocery company sought to compel arbitration of the
plaintiff’s individual claim pursuant to its arbitration policy,
to which all employees acceded upon submitting applications
for employment. The panel affirmed the district court’s
holding that the arbitration policy was unconscionable under
California contract law and therefore unenforceable.

The panel held that the policy was procedurally
unconscionable because it was a condition of applying for
employment and was presented on a “take it or leave it” basis.
In addition, its terms were not provided to the plaintiff until
three weeks after she had agreed to be bound by it.

The panel held that the arbitration policy was
substantively unconscionable because it was unjustifiably
one-sided to such an extent that it “shocked the conscience.”
Specifically, the policy’s arbitrator selection process would
always produce an arbitrator proposed by the defendant in
employee-initiated arbitration proceedings; the policy
precluded institutional arbitration administrators, which have
established rules and procedures to select a neutral arbitrator;

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 CHAVARRIA V. RALPHS 3

and the policy’s arbitrator-fee-apportionment provision would
have the effect of pricing employees out of the dispute
resolution process. The panel distinguished Kilgore v.
KeyBank National Ass’n, 718 F.3d 1052 (9th Cir. 2013) (en
banc) (holding that mere risk that plaintiff will face
prohibitive costs is too speculative to justify invalidating
arbitration agreement), on the basis that the defendant’s
policy’s fee provision stood by other unconscionable terms
and was not speculative.

The panel held that the state law supporting the
unconsionability holding was not preempted by the Federal
Arbitration Act because it applied to contracts generally and
did not in practice impact arbitration agreements
disproportionately. The panel held that the Supreme Court’s
decision in American Express Corp. v. Italian Colors
Restaurant, 133 S. Ct. 2304 (2013) (upholding arbitration
policy with class waiver provision on basis that expense of
proving statutory remedy did not eliminate right to pursue
that remedy), did not preclude it from considering the cost
that the defendant’s arbitration agreement imposed on
employees in order for them to bring a claim.

The panel affirmed the decision of the district court
denying the defendant’s motion to compel arbitration and
remanded the case for further proceedings.
4 CHAVARRIA V. RALPHS

COUNSEL

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

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

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
 CHAVARRIA V. RALPHS 5

“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, 131 S. Ct. 1740 (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.
6 CHAVARRIA V. RALPHS

Paragraph 7 governs the selection of the single arbitrator
who will decide the dispute.1 It provides that, unless the

1
Paragraph 7 provides in full:

This Arbitration Policy, any arbitration proceedings
held pursuant to this Arbitration Policy, and any
proceedings concerning arbitration under this
Arbitration Policy are subject to and governed by the
Federal Arbitration Act, 9 U.S.C. section 1 et seq. (the
“F.A.A.”). In accordance with Section 3 of the F.A.A.,
the Qualified Arbitrator (as defined herein) must
interpret, apply and enforce this Arbitration Policy as
written. Unless the parties agree otherwise, the
“Qualified Arbitrator” must be a retired state or federal
judge (excluding retired administrative law judges and
hearing officers) from the state jurisdiction or federal
judicial district in which the Covered Dispute(s) arose
or will be arbitrated, and neither the American
Arbitration Association (“AAA”) nor the Judicial
Arbitration & Mediation Service (“JAMS”) will be
permitted to administer any arbitration held under or
pursuant to this Arbitration Policy. The parties to any
arbitration as described in this Arbitration Policy will
select and appoint a Qualified Arbitrator by mutual
agreement. If the parties do not mutually agree on the
selection and appointment of a Qualified Arbitrator, the
following selection method will be used to select and
appoint a Qualified Arbitrator: (1) Each party to the
arbitration proceeding will propose a list of three
Qualified Arbitrators that they want appointed to hear
and decide the Covered Dispute(s); and (2) The parties
will alternate in striking one name from any other
party’s list of proposed Qualified Arbitrators, with the
first strike to be made by a party who has not demanded
arbitration pursuant to this Arbitration Policy, followed
by a continuing rotation of alternating adverse parties
until there is only one proposed Qualified Arbitrator
that has not been stricken, who will be deemed to be the
parties’ selected and appointed Qualified Arbitrator to
 CHAVARRIA V. RALPHS 7

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

hear and decide the Covered Dispute(s) that are the
subject of the arbitration proceedings.
2
Paragraph 10 provides in full:

Each party to the arbitration will pay the fees for his,
her or its own attorneys, subject to any remedies to
which that party may later be entitled under applicable
law. Ralphs (or any of them who are parties to the
8 CHAVARRIA V. RALPHS

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

arbitration proceedings) in all cases where required by
settled and controlling legal authority will pay up to all
of the Qualified Arbitrator’s and arbitration fees, as
apportioned by the Qualified Arbitrator at the outset of
the arbitration proceedings in accordance with such
legal authority and after the parties have received notice
and an opportunity to be heard on the subject. In all
instances in which there is a dispute over the
apportionment of the Qualified Arbitrator’s or
arbitration fees, such dispute is a Covered Dispute
under this Arbitration Policy which must be resolved
only by the Qualified Arbitrator, who must apply and
follow only decisions of the United States Supreme
Court in resolving such dispute, which will be deemed
controlling notwithstanding any contrary or differing
decisions of any other court. In the event settled and
controlling legal authority does not require that one
party or another bear a greater share of the Qualified
Arbitrator’s or arbitration fees, such fees will be
apportioned equally between each set of adverse
parties.
 CHAVARRIA V. RALPHS 9

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).

3
Paragraph 13 provides in full:

This Arbitration Policy is the full and complete policy
and agreement between the parties relating to the
formal resolution of Covered Disputes. This Arbitration
Policy may not be modified except in writing, or as
otherwise expressly permitted or required by this
Arbitration Policy or controlling law. The submission
of an application for employment, acceptance of
employment or continuation of employment with the
Company by an Employee is deemed the Employee’s
acceptance of this Arbitration Policy. No signature by
an Employee or the Company is required for this
Arbitration Policy to apply to Covered Disputes.
10 CHAVARRIA V. RALPHS

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., 6 P.3d
669, 690 (Cal. 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.
 CHAVARRIA V. RALPHS 11

A. Unconscionability under California Law

Under California law, a contract must be both
procedurally and substantively unconscionable to be rendered
invalid. Armendariz, 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.,
186 Cal. Rptr. 114, 121–22 (Ct. App. 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., 98 Cal. Rptr. 3d 743, 757 (Ct. App. 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
12 CHAVARRIA V. RALPHS

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 contends,
belies any suggestion of a requirement. Ralphs argues that
Chavarria could have been hired without signing the
agreement.

Ralphs’ argument ignores the terms of the policy itself,
which bound Chavarria regardless of whether she signed the
application. The policy provides that “[n]o signature by an
Employee or the Company is required for this Arbitration
Policy to apply to Covered Disputes.” That Ralphs asked
nicely for a signature is irrelevant. The policy bound
Chavarria and all other potential employees upon submission
of their applications.

These circumstances are similar to others where we have
held agreements to be procedurally unconscionable. In Davis
v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007), we
held that an arbitration agreement was procedurally
unconscionable under California law because it was imposed
upon employees as a condition of their continued
employment. Id. at 1074–75. We explained, “where . . . the
employee is facing an employer with ‘overwhelming
bargaining power’ who ‘drafted the contract and presented it
 CHAVARRIA V. RALPHS 13

to [the employee] on a take-it-or-leave-it basis,’ the clause is
procedurally unconscionable.” Id. at 1075 (quoting
Nagrampa, 469 F.3d at 1284). Likewise, in Pokorny v.
Quixtar, Inc., 601 F.3d 987 (9th Cir. 2010), we held that “a
contract is procedurally unconscionable under California law
if it is ‘a standardized contract, drafted by the party of
superior bargaining strength, that relegates to the subscribing
party only the opportunity to adhere to the contract or reject
it.’” Id. at 996 (citing Ting v. AT&T, 319 F.3d 1126, 1148
(9th Cir. 2003)). Chavarria could only agree to be bound by
the policy or seek work elsewhere. Ralphs’ policy meets the
standard under which we have previously found arbitration
provisions in employment contracts to be procedurally
unconscionable.

Further, we have held that the degree of procedural
unconscionability is enhanced when a contract binds an
individual to later-provided terms. Pokorny, 601 F.3d at 997.
Ralphs did not provide Chavarria the terms of the arbitration
policy until her employment orientation, three weeks after the
policy came into effect regarding any dispute related to her
employment. The employment application merely contains
a one-paragraph “notice” of the policy. The policy itself is a
four-page, single-spaced document with several complex
terms. See Harper v. Ultimo, 7 Cal. Rptr. 3d 418, 422
(Ct. App. 2003) (holding that a contract was procedurally
unconscionable because the customer was forced to obtain the
terms from another source “to find out the full import of what
he or she is about to sign”). Ralphs’ arbitration policy fits
squarely within these decisions, so the district court did not
err when it held that the policy was procedurally
unconscionable.
14 CHAVARRIA V. RALPHS

2. Substantive Unconscionability

Chavarria must also demonstrate that Ralphs’ arbitration
policy is substantively unconscionable under California law.
A contract is substantively unconscionable when it is
unjustifiably one-sided to such an extent that it “shocks the
conscience.” Parada v. Super. Ct., 98 Cal. Rptr. 3d 743, 759
(Ct. App. 2009) (quoting Morris v. Redwood Empire
Bancorp, 27 Cal. Rptr. 3d 797, 809 (Ct. App. 2005)).

The district court found that several terms rendered
Ralphs’ arbitration policy substantively unconscionable.
First, the court noted that Ralphs’ arbitrator selection
provision would always produce an arbitrator proposed by
Ralphs in employee-initiated arbitration proceedings.
Second, the court cited the preclusion of institutional
arbitration administrators, namely AAA or JAMS, which
have established rules and procedures to select a neutral
arbitrator. Third, the court was troubled by the policy’s
requirement that the arbitrator must, at the outset of the
arbitration proceedings, apportion the arbitrator’s fees
between Ralphs and the employee regardless of the merits of
the claim. The court identified this provision as “a model of
how employers can draft fee provisions to price almost any
employee out of the dispute resolution process.” The
combination of these terms created a policy, according to the
court, that “lacks any semblance of fairness and eviscerates
the right to seek civil redress. . . . To condone such a policy
would be a disservice to the legitimate practice of arbitration
and a stain on the credibility of our justice system.”

Ralphs contests the district court’s conclusion and argues
that the policy is not unconscionable. Indeed, Ralphs goes a
step further and argues that the provisions relied upon by the
 CHAVARRIA V. RALPHS 15

district court actually disadvantage Ralphs and are intended
to benefit the employee. Ralphs’ strained construction of its
policy is unpersuasive. In fact, the policy includes further
provisions that add to its unconscionability.

Regarding the arbitrator selection provision, Ralphs does
not deny that its policy precludes the selection of an arbitrator
proposed by the party demanding arbitration. Nor does it
deny that the party selecting the arbitrator gains an advantage
in subsequent proceedings. Ralphs’ opening brief
affirmatively acknowledges as much: “Section 7 of the
[arbitration policy] disadvantages the party seeking
arbitration in the arbitrator selection process, by ensuring that
the party resisting arbitration is guaranteed an arbitrator of its
choosing.” Ralphs simply argues that it won’t always be the
party that is guaranteed an arbitrator of its choosing.

In particular, Ralphs argues that the district court erred in
assuming that an employee will always be the party that
demands arbitration. Ralphs contends that the opposite is
true. In Ralphs’ view, Chavarria, the employee in this case,
will wind up with an arbitrator of her choosing because it is
Ralphs that demanded arbitration. Ralphs’ logic is thus:

(1) Chavarria brought a claim in federal court;

(2) Ralphs filed a motion to compel arbitration;

(3) If the court grants the motion, then the case will go to
arbitration; and

(4) Ralphs will have “demanded” arbitration and thereby
relinquished the first strike to Chavarria.
16 CHAVARRIA V. RALPHS

Chavarria will, under Ralphs’ scenario, strike all three of the
arbitrators on Ralphs’ list, and the last remaining arbitrator
will necessarily be from Chavarria’s list.

It doesn’t take a close examination of Ralphs’ argument
to reveal its flaws. To begin with, Ralphs’ argument invites
an employee to disregard the arbitration policy and to file a
lawsuit in court, knowing that the claim is subject to
arbitration. Even if Ralphs is willing to waste its time and
money for that detour, it is not one that makes any sense for
the court. We cannot endorse an interpretation that
encourages the filing of an unnecessary lawsuit simply to
gain some advantage in subsequent arbitration.

Perhaps more to the point, Ralphs’ argument relies on a
fanciful interpretation of its arbitration policy. Ralphs’
motion to compel arbitration does not constitute a “demand
for arbitration” as provided in the policy. Paragraph 9 of the
arbitration policy provides that “[a] demand for arbitration
. . . must be made in writing, comply with the requirements
for pleadings under the [Federal Rules of Civil Procedure]
and be served on the other party.” (emphasis added). Ralphs’
motion to compel arbitration is not a demand for arbitration
under the terms of Ralphs’ policy because it does not comply
with the Federal Rules of Civil Procedure requirements
governing pleadings. See Fed. R. Civ. P. 7(a) (providing that
“[o]nly these pleadings are allowed” before listing types of
pleadings); Fed. R. Civ. P. 8 (stating the general rules of
pleading).

A fair construction of the agreement suggests that an
employee, even after filing a frivolous claim in federal court,
nonetheless must serve on Ralphs a demand for arbitration
that complies with the Federal Rules. Accordingly, as the
 CHAVARRIA V. RALPHS 17

district court found, Ralphs gets to pick the pool of potential
arbitrators every time an employee brings a claim.

Even if it were the case that Ralphs’ policy does not
guarantee that Ralphs will always be the party with the final
selection, the selection process is not one designed to produce
a true neutral in any individual case. As noted above, Ralphs
has not argued that the selection process is fair,
acknowledging that the process “disadvantages the party
seeking arbitration.” Ralphs simply argues that sometimes
the process may work to its disadvantage. But that is no
consolation to the individual employee who is disadvantaged
in her one and only claim. Forcing her into an arbitration
process where Ralphs has an advantage cannot be justified by
the possibility that some other employee might someday get
the upper hand in that employee’s arbitration against Ralphs.

Ralphs also argues that there is nothing of concern in its
cost allocation provision because it simply follows the
“American Rule” that each party shall bear its own fees and
costs. Ralphs misses the point. The troubling aspect of the
cost allocation provision relates to the arbitrator fees, not
attorney fees.

The policy mandates that the arbitrator apportion those
costs on the parties up front, before resolving the merits of
the claims. Further, Ralphs has designed a system that
requires the arbitrator to apportion the costs equally between
Ralphs and the employee, disregarding any potential state law
that contradicts Ralphs’ cost allocation. Only a decision of
the United States Supreme Court that directly addresses the
issue can alter Ralphs’ cost allocation term. This pseudo
18 CHAVARRIA V. RALPHS

“AEDPA deference”4 has no place in employment claims
governed by state law. There is no justification to ignore a
state cost-shifting provision, except to impose upon the
employee a potentially prohibitive obstacle to having her
claim heard. Ralphs’ policy imposes great costs on the
employee and precludes the employee from recovering those
costs, making many claims impracticable.

The significance of this obstacle becomes more apparent
through Ralphs’ representation to the district court that the
fees for a qualified arbitrator under its policy would range
from $7,000 to $14,000 per day. Ralphs’ policy requires that
an employee pay half of that amount—$3,500 to $7,000—for
each day of the arbitration just to pay for her share of the
arbitrator’s fee. This cost likely dwarfs the amount of
Chavarria’s claims.5

The specific allocation of costs distinguishes this
arbitration agreement from the provision we upheld in
Kilgore v. KeyBank National Ass’n, 718 F.3d 1052, 1058
(9th Cir. 2013) (en banc). In that case, plaintiffs asserted only
two arguments supporting unconscionability: (1) that a class
waiver provision was unconscionable under California law;
and (2) that students may not be able to afford arbitration

4
Referring to the Antiterrorism and Effective Death Penalty Act of
1996, Pub. L. No. 104-132, 110 Stat. 1214. See 28 U.S.C. § 2254(d)(1)
(providing that, in the context of habeas corpus, courts must look to
“clearly established Federal law, as determined by the Supreme Court of
the United States”).
5
As the district court noted, Chavarria worked as a deli clerk for roughly
five to six months and alleges she was not paid for rest and meal breaks
as required by California law. Her monetary claims likely would not
approach the cost of the arbitrator fees.
 CHAVARRIA V. RALPHS 19

fees. Id. The first argument was expressly foreclosed by the
U.S. Supreme Court in Concepcion, 131 S. Ct. at 1753. We
rejected the second argument because the Court has held that
the mere risk that a plaintiff will face prohibitive costs is too
speculative to justify invalidating an arbitration agreement.
Kilgore, 718 F.3d at 1058 (citing Green Tree Fin. Corp.-Ala.
v. Randolph, 531 U.S. 79, 90–91 (2000)). But in this case,
not only does the cost provision stand beside other
unconscionable terms, there is nothing speculative about it.
Ralphs’ term requires that the arbitrator impose significant
costs on the employee up front, regardless of the merits of the
employee’s claims, and severely limits the authority of the
arbitrator to allocate arbitration costs in the award.

The district court focused its substantive
unconscionability discussion on these terms, and it was
correct in doing so because the terms lie far beyond the line
required to render an agreement invalid. We therefore need
not discuss at length the additional terms in Ralphs’
arbitration policy, such as the unilateral modification
provision, which we have previously held to support a finding
of substantive unconscionability. See Ingle v. Circuit City
Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. 2003) (holding
that a unilateral modification provision, which provided more
notice than required in Ralphs’ policy, was substantively
unconscionable).

3. The Sliding Scale of Unconscionability

Excessive procedural or substantive unconscionability
may compensate for lesser unconscionability in the other
prong. But here we have both. Ralphs has tilted the scale so
far in its favor, both in the circumstances of entering the
agreement and its substantive terms, that it “shocks the
20 CHAVARRIA V. RALPHS

conscience.” Parada, 98 Cal. Rptr. 3d at 763. Accordingly,
Ralphs’ arbitration policy cannot be enforced against
Chavarria under California law.

B. Preemption by the FAA

Federal law preempts state laws that stand as an obstacle
to the accomplishment of Congress’s objectives.
Concepcion, 131 S. Ct. at 1753. Accordingly, the FAA
preempts state laws that in theory apply to contracts
generally but in practice impact arbitration agreements
disproportionately. Id. at 1747.

California’s unconscionability doctrine applies to all
contracts generally and therefore constitutes “such grounds at
law or in equity for the revocation of [a] contract.” 9 U.S.C.
§ 2. But specific application of rules within that doctrine may
be problematic. See Concepcion, 131 S. Ct. at 1753 (holding
that California’s rule making class waivers unconscionable
was preempted by the FAA).

In this case, California’s procedural unconscionability
rules do not disproportionately affect arbitration agreements,
for they focus on the parties and the circumstances of the
agreement and apply equally to the formation of all contracts.
The application of California’s general substantive
unconscionability rules to Ralphs’ arbitration policy,
however, warrants more discussion.

The Supreme Court’s recent decision in American
Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304
(2013), does not preclude us from considering the cost that
Ralphs’ arbitration agreement imposes on employees in order
for them to bring a claim. In that case, plaintiffs argued that
 CHAVARRIA V. RALPHS 21

the class waiver term of the arbitration agreement at issue
effectively foreclosed vindication of the plaintiffs’ federal
rights: specifically, their rights under the Sherman Antitrust
Act. Id. at 2310. Plaintiffs could not pursue their antitrust
claims, they argued, because the experts required to prove an
antitrust claim would cost hundreds of thousands of dollars,
while the individual recovery would not exceed $40,000. Id.
The class waiver provision did not foreclose effective
vindication of that right, the Court reasoned, because “the fact
that it is not worth the expense involved in proving a statutory
remedy does not constitute an elimination of the right to
pursue that remedy.” Id. at 2311. The Court explicitly noted
that the result might be different if an arbitration provision
required a plaintiff to pay “filing and administrative fees
attached to arbitration that are so high as to make access to
the forum impracticable.” Id. at 2310–11.

Ralphs’ arbitration policy presents exactly that situation.
In this case, administrative and filing costs, even disregarding
the cost to prove the merits, effectively foreclose pursuit of
the claim. Ralphs has constructed an arbitration system that
imposes non-recoverable costs on employees just to get in the
door.

The Supreme Court’s holding that the FAA preempts state
laws having a “disproportionate impact” on arbitration
cannot be read to immunize all arbitration agreements from
invalidation no matter how unconscionable they may be, so
long as they invoke the shield of arbitration. Our court has
recently explained the nuance: “Concepcion outlaws
discrimination in state policy that is unfavorable to
arbitration.” Mortensen v. Bresnan Commc’ns, LLC,
722 F.3d 1151, 1160 (9th Cir. 2013) (emphasis added). We
think this is a sensible reading of Concepcion.
22 CHAVARRIA V. RALPHS

This case illustrates the distinction. In addition to the
problematic cost provision, Ralphs’ arbitration policy
contains a provision that unilaterally assigns one party
(almost always Ralphs, in our view, as explained above) the
power to select the arbitrator whenever an employee brings
a claim. Of course, any state law that invalidated this
provision would have a disproportionate impact on arbitration
because the term is arbitration specific. But viewed another
way, invalidation of this term is agnostic towards arbitration.
It does not disfavor arbitration; it provides that the arbitration
process must be fair.

If state law could not require some level of fairness in an
arbitration agreement, there would be nothing to stop an
employer from imposing an arbitration clause that, for
example, made its own president the arbitrator of all claims
brought by its employees. Federal law favoring arbitration is
not a license to tilt the arbitration process in favor of the party
with more bargaining power. California law regarding
unconscionable contracts, as applied in this case, is not
unfavorable towards arbitration, but instead reflects a
generally applicable policy against abuses of bargaining
power. The FAA does not preempt its invalidation of Ralphs’
arbitration policy.

III. Conclusion

The arbitration policy imposed by Ralphs on its
employees is unconscionable under California law. That law
is not preempted by the FAA. We affirm the decision of the
district court denying Ralphs’ motion to compel arbitration,
and we remand for further proceedings.

AFFIRMED and REMANDED.