The California courts’ post-Concepcion Kabuki theater involving binding arbitration requirements in consumer and employment contracts continues. CBL’s post on the course of events up to mid-July is here.
First, we had Brown v. Ralph’s Grocery Company (2011) ___ Cal.App.4th ___ (2nd Dist., B222689). In Brown, an employment case, the Court of Appeal held that Concepcion only applies to class action waivers in arbitration agreements, not to “representative action waivers,” which are void as against public policy. Last week, the Cal Supremes denied a hearing, so Brown is the law throughout California at least until the US Supremes get their talons into it.
Now we have Sanchez v. Valencia Holding Company, LLC (2011) ___Cal.App.4th___ (2nd Dist., B228027) a consumer case. The short version: an arbitration provision in an automobile dealership Retail Installment Sales Contract was held invalid as procedurally and substantively unconscionable. The long version is after the jump.
The defendant owned a Mercedes dealership. For financed sales, it used a retail installment sales contract (”RISC”) that included the following language, as the last provision on the back of the document, with a black outline around it:
1. Either you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial.
2. If a dispute is arbitrated, you will give up your right to participate as a class representative or class member on any class claim you may have against us including any right to class arbitration or any consolidation of individual arbitrations.
3. Discovery and rights to appeal in arbitration are generally more limited than in a lawsuit, and other rights that you and we would have in court may not be available in arbitration.
Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or dispute), between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship . . . shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action. . . . Any claim or dispute is to be arbitrated by a single arbitrator on an individual basis and not as a class action. You expressly waive any right you may have to arbitrate a class action. You may choose one of the following arbitration organizations and its applicable rules: the National Arbitration Forum . . . (www.arbforum.com), the American Arbitration Association . . . (www.adr.org), or any other organization that you may choose subject to our approval. . . .
Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the applicable rules. The arbitrator shall apply governing substantive law in making an award. The arbitration hearing shall be conducted in the federal district in which you reside . . . . We will advance your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $2500, which may be reimbursed by decision of the arbitrator at the arbitrator’s discretion. Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law. If the chosen arbitration organization’s rules conflict with this Arbitration Clause, then the provisions of this Arbitration Clause shall control. The arbitrator’s award shall be final and binding on all parties, except that in the event the arbitrator’s award for a party is $0 or against a party is in excess of $100,000, or includes an award of injunctive relief against a party, that party may request a new arbitration under the rules of the arbitration organization by a three-arbitrator panel. The appealing party requesting 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. Any arbitration under this Arbitration Clause shall be governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) and not by any state law concerning arbitration.
You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court’s jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit. Any court having jurisdiction may enter judgment on the arbitrator’s award. This Arbitration Clause shall survive any termination, payoff or transfer of this contract. If any part of this Arbitration Clause, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Clause shall be unenforceable.
The trial court ruled that the class action waiver was unenforceable as against public policy, and based on the “poison pill” provision in the above paragraph, knocked out the entire arbitration provision.
Then along came SCOTUS which issued Concepcion.Just like Ralph’s Grocery Company in the Brown case, the defense here was probably feeling pretty smug. If your trial judge holds the class action waiver is void as against public policy, and the highest court in the whole land says state courts can’t do that, you’ve got to be thinking things are looking pretty good on appeall.
But the when the case got to the Court of Appeal, that court took one look at the class waiver issue and said “never mind all of that. Let’s see what else we have here.” And what else they had was this:
- The contract was procedurally unconscionable. No surprise there: nearly all contracts of adhesion are procedurally unconscionable under California law, but that isn’t enough to get them knocked out. They also have to be substantively unconscionable.
- And sure enough, the court found the arbitration provision was substantively unconscionable as well, based on the following:
--A losing party can appeal to a panel of three arbitrators if the award exceeds $100,000. Since a dealership is unlikely to obtain an award in excess of $100,000 against a consumer, this provision is biased in favor of the dealership.
--An appeal is permitted if injunctive relief is awarded. Again, it is unlikely that the dealership is going to get an injunction against the consumer, so here, as well, the Court found a tilt toward the dealership.
--The appealing party must advance the filing fee and other arbitration costs.
--The provision exempts repossession (a dealer or, in real life, a lender’s remedy) while requiring that requests for injunctive relief (most likely a remedy sought by the consumer) be submitted to arbitration.
And the court held that these problems so permeated the arbitration provision that a savings clause couldn’t save it.
It looks to CBL as if three out of four of these problems could be fixed by simply taking the appellate provisions out of the contract, or giving both sides a right to appeal any award and not requiring the appellant to front all the costs. But the repossession provision could pose a problem. RISCs are nearly all assigned to banks, and CBL doesn't know of too many banks that would be interested in waiving the right to repossession when the customer stops paying.
What will the Cal Supremes do with this? What, if anything, will SCOTUS do with this and with Brown?
CBL says, Stay tuned.