In Sanchez v. Valencia Holding Co. (Aug. 3, 2015), the California Supreme Court held that arbitration agreements must be “overly harsh,” unduly oppressive,” or “shock the conscience” to be invalid. It is not enough for a party challenging the agreement to allege that it turned out to be a “bad deal.”
The contract at issue in Sanchez was a sale contract for a used Mercedes. Despite signing an arbitration agreement with a class action waiver, the plaintiff, Paul Sanchez, filed a class action lawsuit in court claiming that the defendant dealership had made false representations about the Mercedes. The dealership moved to compel arbitration and the motion was denied. On appeal, Sanchez argued that the contract was unconscionable because it was presented to him on a take-it-or-leave it basis, the arbitration clause was hidden on the back-bottom of one of the pages he signed, the arbitration clause was never called to his attention, and he never read it.
The California Supreme Court reversed finding that Sanchez’ failure to read the contract was unreasonable. Moreover, while the dealership did not specifically call the arbitration clause to Sanchez’s attention, this is not required by California law and even though this was admittedly an adhesion contract, it was not enough to invalidate the agreement without a showing of actual substantive unconscionability.
Sanchez argued that the arbitration agreement was substantively unconscionable because it contained one-sided terms including a provision requiring the appealing party to bear all fees and costs associated with the appeal. The Supreme Court disagreed because Sanchez failed to show that the fees and costs would have actually been unaffordable for him (indeed, at issue was his purchase of a $50,000 Mercedes). The Court specifically noted, however, that this outcome would differ in the employment context where employers must bear any costs of arbitrations with employees.
Employees frequently argue that they were somehow bullied into signing arbitration agreements with class action waivers. In light of Sanchez, employers can defend themselves by showing that arbitration agreements are not unconscionable merely because an employee failed to read the arbitration agreement, the agreement was not specifically called out to the employee, or was non-negotiable, or because the arbitration procedures might marginally benefit the employer.