CAL SUPREMES DECIDE SANCHEZ V. VALENCIA HOLDINGS – UPHOLD ARBITRATION AGREEMENT

Well, it only took 3 ½ years since the Petition for Hearing was filed, and just a year and a half since the case was fully briefed (see CBL’s posts whining about the long delay here and here) but we finally have a decision in Sanchez v. Valencia Holdings (August 3, 2015) ___Cal.4^th___, S1999119, the eagerly awaited consumer arbitration agreement case.

 

Short version:  the binding arbitration agreement in the Form 553 CA ARB retail installment sale contract predominantly used by California automobile dealers in 2010 was valid and enforceable.  But this is not just important for automobile dealers. The overall decision is important for all consumer goods businesses that want to use class action waiver and binding arbitration provisions. Because it confirms that they can.

More after the jump.

CBL readers may recall that in Sanchez, the Court of Appeal had invalidated the binding arbitration provision between dealer and customer on the basis of three findings of substantive unconscionability:  (1) that a right to appeal awards of $0 or more than $100,000, or for injunctive relief,  unfairly favors the dealer; (2) that requiring a customer to post a filing fee and arbitration costs for three arbitrators for both sides as a condition to appeal puts an unduly harsh burden on the customer (although the dealer was responsible for the first $2,500 of the arbitration costs); and (3) exempting self-help remedies (e.g., repossession) also unfairly favors the dealer.

Long-standing California law provides for a two-prong unconscionability test for contractual provisions (and, as the Supremes confirmed in Sanchez, not just for arbitration clauses): Prong 1:  Are the circumstances of the contract formation procedurally unconscionable?  Prong 2: Are the terms substantively unconscionable? There is a sliding scale – the lower the level of procedural unconsconability, the higher the level of substantive unconscionability necessary to invalidate the provision (citing Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4^th 83, 114.)

California courts have usually held that “contracts of adhesion” (e.g., pre-printed form contracts with no opportunity to negotiate the terms) are procedurally unconscionable, so it is no surprise that the Supremes held “[h]ere the adhesive nature of the contract is sufficient to establish some degree of procedural unconscionability.”  But that isn’t enough to invalidate the contract – it just means the substantive terms have to be examined.

And Sanchez contains a lot of language recognizing the reality of pre-printed form contracts.  For example:

• “Commerce depends on the enforceability, in most instances, of a duly executed written contract.”
• “A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain.”
• “. . . Valencia was under no obligation to highlight the arbitration clause of its contract, nor was it required to specifically call that clause to Sanchez’s attention.”
• And “. . . even when a customer is assured it is not necessary to read a standard form contract with an arbitration clause, ‘it is generally unreasonable, in reliance on such assurances, to neglect to read a written contract before signing it.’” (Citing Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4^th 394, 424.)

 

Getting to the question of substantive unconscionability, the Court knocked down all three challenges.  More important than the specific terms here, however, is the language the Court used in doing so. The Court noted that “[n]ot all one-sided contract provisions are unconscionable,” and that the party with superior bargaining strength is entitled to provide itself with “extra protection for which it has a legitimate commercial need.”  Only an imbalance which “shocks the conscience,” is “overly harsh,” “unduly oppressive” or “unreasonably favorable” would meet the substantive unconscionability threshold, and, the Court advised, these are all the same thing.

Thus, the self-help remedy exemption, applying only to the dealer, did not affect the arbitration clause’s validity. The $0 and $100,000 appeal thresholds were on either fringe of the likely outcome, and not terribly unbalanced.  Finally, in a case involving a $50,000+ used Mercedes Benz, with no evidence concerning the customer’s financial condition, there was no evidence to support a claim of unconscionability based on a requirement that the appealing party make up front payments.

So, after this decision, it seems the only remaining basis to challenge the binding arbitration provision in the 2010 Form 553-CA-ARB is the appeal cost payments provision, and only for customers with limited economic means.

But here are the big takeaways, for both the retail automotive industry and for all others seeking to enforce contractual arbitration clauses:

• The standard form was revised in July, 2013, and the right to appeal was eliminated altogether. The new form, in all other respects the same as the one litigated in Sanchez, should be completely bullet-proof.
• The same language upheld here for motor vehicle retail installment sales should be entirely valid in all consumer contracts.

Binding arbitration doesn’t always lead to the best result for business, and “binding” means “binding.” But there is almost no consumer goods business that wouldn’t like to avoid class litigation. And industry’s ability to do so is now settled.