In a victory for Sheppard Mullin and its client, in Trabert v. Consumer Portfolio Serv., Inc., __ Cal. App. 4th. __, 2015 WL 880949 (4th Dist. Mar. 3, 2015), the California Court of Appeal compelled arbitration and enforced a class action waiver after severing an arbitration term.

The case involves an auto finance contract widely used throughout California.  The contract contains an arbitration provision under the Federal Arbitration Act (“FAA”) with a class action waiver.  Under controlling U.S. Supreme Court authority, the class action waiver is enforceable, but consumers have continued to try to avoid the class action waiver by arguing that arbitration provisions are unenforceable for other reasons.  Courts throughout California have disagreed on the enforceability of the form auto finance arbitration provision and the issue is currently pending before the California Supreme Court in Sanchez v. Valencia Holding Company.

In Trabert, the trial court held that this form arbitration provision is unenforceable.  On the first of two appeals, the Court of Appeal held that one term is unconscionable—a “finality” term allowing a second arbitration in the event an award is $0, exceeds $100,000, or includes injunctive relief.  According to the Court of Appeal, this finality term unfairly favors a corporate defendant over a consumer.  The Court of Appeal remanded the case for a determination of whether the finality term can be severed, so that the arbitration provision is otherwise enforceable.

The trial court refused to sever, finding that unconscionability “permeates” the arbitration provision and that it would not be in the interests of justice to sever and otherwise enforce the arbitration provision.  In its second decision, the Court of Appeal reversed, holding that the trial court had abused its discretion by not severing the finality term.  The appellate court reasoned that the finality provision is “collateral to the core purpose of both the arbitration agreement and the sales contract.”  The court also noted that it “has long been the rule in this state that that courts should make every effort to uphold the valid portion of the contract if it can be separated from that which is bad” and that there is a “strong legislative and judicial preference to sever the offending term and enforce the balance of the agreement.”  Severance is also consistent with the Federal Arbitration Act and the parties’ written intentions.

The appellate court also rejected the idea that severance would require a re-writing of the arbitration provision.  According to the Court of Appeal, the finality provision could simply be stricken so as not to allow for a second arbitration.  Instead, as with most arbitrations, there would be only one arbitration, which would be final and binding.  The court concluded that severing “would ensure the parties received the benefit of the bargain (an arbitration instead of trial) and obtain a dispute resolution form that provides the parties with the fundamental attributes of arbitration.”