On August 3, 2015, the California Supreme Court clarified the standard of unconscionability needed to invalidate an arbitration agreement. In Sanchez v. Valencia Holding Company, LLC, a dispute arose over the sale of a car for which the contract at issue contained an arbitration agreement and class action waiver. The plaintiff filed a class action lawsuit against the car dealership, and the car dealership promptly moved to compel arbitration.
In holding that the appellate court erred in determining that the arbitration agreement was unconscionably one sided, the California Supreme Court stressed that "the standard for substantive unconsionability -- unfairness beyond merely a bad bargain -- must be as rigorous and demanding for arbitration clauses as for any contract clause." The court examined the specific arbitration provisions of the contract, noted that the terms did not unreasonably favor the drafting party, and concluded that the arbitration agreement was not unconscionable.
The case attracted significant attention because of its potentially far-reaching implications on class action waivers and arbitration agreements, particularly in the wake of the US Supreme Court's 2011 opinion in AT&T Mobility LLC v. Concepcion. In Concepcion, the court held that California's unconscionability rule prohibiting class waivers in consumer arbitration agreements was preempted by the Federal Arbitration Act. While Sanchez provides some clarity and predictability in the realm of arbitration agreements, unconscionability is a highly context-specific inquiry and remains a valid defense to enforceability. Accordingly, contract drafters should take care in avoiding arbitration provisions that are unreasonably favorable to one party.