California Court Avoids Concepcion By Voiding Entire Arbitration Clause
What is it about the People's Republic of California that makes one feel as if everything he learned in law school is exactly wrong?
Get this: a guy walks into a car dealership. He buys a used car -- A USED MERCEDES BENZ WORTH NEARLY $50,000 -- AND HE DOESN'T READ THE CONTRACT!!!!! The contract has an arbitration provision. It's at the end of the contract -- where you'd expect an arbitration provision to be, since you'd logically discuss all of the contract terms and required performances first, before discussing what happens if the whole deal breaks down. It isn't in 16-point type, but it's in a box entitled "ARBITRATION CLAUSE" and captioned with the admonition to "PLEASE REVIEW -- IMPORTANT -- AFFECTS YOUR LEGAL RIGHTS." And remember, it's a guy who doesn't care enough about his $50,000 purchase to even read the contract. Absent something extraordinarily awful in the substance of the arbitration provision, those of you who didn't sleep through first year contracts class would assume that the arbitration provision would be enforceable, right?
Not in the PRC, my friend! California's Second District Court of Appeal just issued an opinion holding that such an arbitration provision was procedurally unconscionable. Why? Well, first because it was a contract of adhesion: the poor fellow spending $50,000 wasn't allowed to negotiate the terms of the clause he didn't read, and it wasn't clear that he could go elsewhere and spend $50,000 on a used (er, "pre-owned") car with a dealer who wouldn't also insist on an arbitration clause. (No, I'm not twisted enough to make this stuff up.) Second, the clause's location on the back page of the contract made it unnoticeable to the guy who didn't bother reading the contract in the first place. See Sanchez v. Valencia Holding Company, 2011 WL 5027488 (Cal. App. 2d Dist. Oct. 24, 2011).
I suppose if you're a used (er, "pre-owned") car dealer in California after Sanchez, you should put your arbitration provision on the front page of the contract, hold a gun to your customer's head while he reads it, and then offer him the option of paying $10,000 more for the car if he wants it without an arbitration provision.
Was Sanchez really just a nutty opinion, or was there something else going on? Well, earlier this year the US Supreme Court decided AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), in which it held that the PRC could not invalidate class action waivers as a condition to enforcing arbitration provisions. The Supreme Court stressed enforcing the parties' agreement as written, and if the defendant had not agreed to arbitrate a class action, the PRC could not force it to.
The arbitration clause at issue in Sanchez had a class action waiver provision. In fact, that provision said that if the class action waiver was held to be unenforceable, the whole arbitration provision was unenforceable. That's hardly unreasonable for a defendant that wanted to make clear it was not consenting to adjudicating class actions through the arbitration process.
The trial court had held that the class action waiver was unenforceable under California law and, based on this "poison pill" provision, refused to enforce the arbitration clause. Subsequently, Concepcion came down, making the class action waiver enforceable.
The Court of Appeal in Sanchez refused to consider whether the class action waiver was enforceable. Instead, it skinned the cat a different way, by declaring the entire arbitration provision to be unconscionable, thus allowing for a potential class action to proceed in state court.
Aside from "procedural unconscionability," the court in Sanchez also identified four ways in which the arbitration provision was purportedly "substantively unconscionable."
First, the court found unconscionable the provision that allowed for either party to appeal if the award was $0 or over $100,000. Despite the fact that this provision, as drafted, would benefit a customer who recovered nothing, the court held that it really benefitted the seller unfairly. Remember, of course, that the used (er, "pre-owned") car was worth a little less than $50,000. So the $100,000 threshold was more than two times the value of the car. Nevertheless, the court (citing cases that had thresholds of $25,000 and $50,000) held that the clause was unconscionable because the dealer's obligations under various consumer laws could lead to awards well in excess of $100,000. "A truly bilateral clause would allow a buyer to appeal an award below $100,000," the court concluded.
Second, the court held that it was unconscionably one-sided to allow an appeal if the arbitrator issued an award containing injunctive relief, since injunctive relief likely would only be issued against the dealer.
Of course, the third independent reason the court held the arbitration provision substantively unconscionable was that it preserved and exempted from arbitration the dealer's -- and only the dealer's -- self-help remedies, such as repossessing the car. "As several courts have held, arbitration provisions are unconscionable if they provide for the arbitration of claims most likely to be brought by the weaker party but exempt from arbitration claims most likely to be filed by the stronger party," the court reasoned.
Reasons two and three, however, leave the dealer on the horns of a dilemma. If it can't use self-help to preserve the status quo (and the car itself), then it may well need to seek preliminary injunctive relief in arbitration to do so. That, of course, would make the appeal rights truly two-sided. But the court did not consider this, and was unwilling to invalidate just one provision, like the self-help provision.
Fourth, the court found the fee clauses in the appeal provision to unfairly benefit the dealer. The arbitration provision allowed either party to seek an appeal to a three-arbitrator panel if it recovered nothing. "The appealing party requesting a new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs." The Sanchez court noted that under California's Consumer Legal Remedies Act, a consumer does not have to pay arbitration costs or fees that she cannot afford or that are prohibitively high. It held that having the appealing party -- who may be the consumer -- advance both side's costs violated this provision, in part because there was no procedure in place for the party to challenge his ability to pay.
The court refused to simply strike those clauses it found unconscionable; rather, it held the entire arbitration agreement to be unconscionable. In doing so, it achieved the same result as the trial court, which had been effectively overruled by the US Supreme Court in Concepcion.
After Concepcion, many journalists and commentators questioned whether that decision spelled the end of consumer class actions. Sanchez suggests that -- at least in California -- it may not.
