In a long-awaited decision, the California Supreme Court held that SCOTUS’s decision in Concepcion requires enforcement of the class action waiver but does not limit the unconscionability rules applicable to other provisions of the arbitration agreement. Sanchez v. Valencia Holding Company, LLC,(August 3, 2015) __ Cal. 4th __, S1999119. Both the trial court and the Court of Appeals found the arbitration clause, which was in a standard automobile contract, unconscionable. The Court, in a thorough analysis of each of the arbitration agreement’s provisions, did not find any of the challenged terms unconscionable.

Plaintiff Sanchez filed a class action against Valencia arising out of his purchase of a ‘preowned’ Mercedes for $53,498.60. Sanchez alleged that Valencia made false representations about the condition of the car and violated several California laws regarding fees and financing practices. He alleged that a class action was appropriate based on the number of people who suffered similar violations. Valencia filed a motion to compel arbitration pursuant to the arbitration clause in the sales contract.

The following aspects of the arbitration clause were in issue:

  • The sales contract was admittedly a contract of adhesion.
  • The clause provided for an appeal to a panel of three arbitrators but only if the arbitrator’s award for a party is $0 or against a party is in excess of $100,000, or includes an award of injunctive relief against a party.
  • The clause provided that Valencia would advance certain of the car buyer’s arbitration fees up to a maximum of $2,500, but, in the case of an appeal to a three-arbitrator panel, the appealing party was responsible for certain arbitration costs.
  • The seller retained the right to repossess the car, but both parties retained the right to go to small claims court.
  • The clause contained a class action waiver and a ‘poison pill’ that stated if the class action waiver was found to be unenforceable, the remainder of the arbitration clause was unenforceable.

To aid in understanding the issues at stake, the Court began its analysis by discussing the general principles of unconscionability. To start, both procedural and substantive unconscionability must be present for a court to refuse to enforce a contractual provision. However, a sliding scale analysis is used so that, for example, the more substantively oppressive the contractual term, the less evidence of procedural unconscionability is required to conclude that the term is unconscionable. The unconscionability doctrine ensures that contracts, especially contracts of adhesion, do not impose terms that are overly harsh, unduly burdensome, or unfairly one-sided—all the same standard. Unconscionability requires a “substantial degree of unfairness beyond ‘a simple old-fashioned bad bargain.’ ” Not all one-sided contracts are unconscionable; rather each must be considered in context.

Valencia did not dispute that the contract was adhesive. While Sanchez did not read the entirety of the agreement, including the arbitration clause, Valencia was under no obligation to highlight the arbitration clause or specifically bring it to Sanchez’s attention. However, the adhesive nature of the contract was sufficient to establish some degree of procedural unconscionability necessitating the court’s scrutiny of the substantive terms of the contract to ensure they were not manifestly unfair.

The Court first examined the appellate provision and found that the appeal threshold provision did not, on its face, obviously favor the drafting party. In all likelihood, the ability to appeal a $0 award favors the buyer while the ability to appeal a $100,000 favors the seller. As nothing in the record indicates that the latter provision is more likely to be invoked than the former, the Court could not conclude that the risks imposed were one-sided much less unfairly so.

As to injunctive relief, the Court found persuasive Valencia’s argument that the injunctive relief sought by buyers may well have an effect on the dealer’s business practices that extend beyond the scope of the transaction at issue. The Court determined that “[t]he potentially far-reaching nature of an injunctive relief remedy…is sufficiently apparent here to justify the extra protection of additional arbitral review.”

The Court then turned to filing fees and the California law that addresses fees and costs in consumer arbitrations. Finding that the Legislature adopted an “ability-to-pay approach”, the provision requiring that the party seeking the appeal advance costs cannot be held unconscionable absent a showing that appellate fees and costs, in fact, would be unaffordable or would have a substantial deterrent effect on Sanchez’s ability to appeal. Here, the dispute involved a high-end luxury item and there was no evidence that the fees were unaffordable or a deterrent in the limited circumstances where an appeal is available. Thus, the arbitral appeal fee provision was not unconscionable.

The Court next determined that there was nothing unconscionable about exempting the self-help remedy of repossession from arbitration. While the remedy of repossession favors the car dealership, the arbitration clause preserves the ability of the parties to go to small claims court which is likely to favor the buyer. The remedy of repossession was also authorized by statute and fulfills a legitimate commercial need for those in the business of selling automobiles on credit.

Finally, the Court concluded that California’s Consumer Legal Remedies Act’s anti-waiver provision was preempted by the FAA insofar as it bars class waivers in arbitration agreements. Because the class action waiver was enforceable, the agreement’s poison pill was inoperable.

While California is now on board with the enforceability of class action waivers under the FAA, the Court’s decision provides both grounds for future litigation over specific arbitration provisions as well as guidance for arguments made regarding unconscionability.