California is changing its tune.  Although previously known for decisions that flouted federal arbitration law, its decision yesterday in Sanchez shows the current California Supreme Court will abide by SCOTUS’s interpretation of the FAA.  After a trial court and intermediate appellate court had ruled that the arbitration clause in a consumer contract was unconscionable, the California Supreme Court reversed, finding the clause was enforceable.  Sanchez v. Valencia Holding Co., LLC, __ P.3d __, 2015 WL 4605381 (Aug. 3, 2015).

The arbitration clause at issue was part of a contract to buy a used Mercedes-Benz.  The buyer alleged that the seller made false representations about the car’s condition and violated California laws about various fees and charges.  The buyer wanted to pursue a class action with other affected car buyers.  The seller moved to compel arbitration.  The trial court denied the motion and the Court of Appeals affirmed, but on different grounds.  The California Supreme Court then granted review.

At issue were the following aspects of the arbitration clause:

  • It was offered on a take-it-or-leave-it basis.
  • The arbitration clause was on the back of the contract, but the buyer only signed the front.
  • The arbitration clause allowed an appeal to a panel of three arbitrators only if the award was $0 or greater than $100,000, or included injunctive relief, and the appealing party would be responsible for the fees and costs of the arbitral appeal.  [In contrast, the seller would advance the first $2500 of fees and costs in the initial arbitration.]
  • The seller retained its ability to repossess the car; both parties retained the ability to go to small claims court.
  • The arbitration clause precluded the buyer from arbitrating on a class or consolidated basis (and stated that if that waiver was invalid, the arbitration clause was invalid, the “poison pill”).

The California Supreme Court began its decision by reminding readers that California’s unconscionability doctrines live on, despite the FAA, as long as those standards are facially “the same for arbitration and nonarbitration agreements” and as long as they do not disfavor arbitration as applied.  It also clarified that “a simple old-fashioned bad bargain” is not unconscionable, instead it must be overly harsh, or unduly oppressive, or unreasonably favorable, or shock the conscience.  (All of those phrases mean the same thing, the court notes, so don’t get hung up on which is worse.)

After providing that context, the court found that because the buyer could not negotiate the provisions of the sales contract, he had established “some degree of procedural unconscionability.”  (The buyer did not have to prove he tried to negotiate the arbitration clause.)  The court could then address the buyer’s claims of substantive unconscionability.

The court found that none of the challenged aspects of the arbitration clause made it substantively unconscionable.  With respect to “appeals” being limited to injunctions, or awards at $0 or over $100,000, the court found those thresholds do not “obviously favor the drafting party.”  Instead, the clause allowed appeals from “extreme” awards for either party (as the car cost about $50K, both $0 and $100K would be “outliers”).  It also found that requiring the appealing party to be responsible for the costs of that arbitral appeal was not unconscionable.  Although California statutes have provisions intended to keep arbitration affordable, the court found the buyer here had not proven the appellate fees and costs would be unaffordable or even a deterrent.  In light of the buyer purchasing a “high-end luxury item,” he could hardly claim the arbitration costs were unaffordable.

Furthermore, the court concluded that allowing the seller to retain its rights to repossess the car was not unconscionable.  While that provision favored the seller, the provision allowing claims to proceed in small claims court favored the buyer and evened the score.

With respect to the class action waiver and poison pill, the court noted that Concepcion prevents any finding that the waiver is unconscionable.  Therefore, the provision of California’s Consumer Legal Remedies Act that precludes a waiver of class action rights was preempted by the FAA, and the class action waiver was enforceable (so the poison pill was unnecessary).

This decision puts California squarely in the mainstream on the unconscionability of arbitration agreements.  It also offers very useful guidance for California courts (or those applying California contract law) facing future arguments about the unconscionability of arbitration clauses.