On August 3, 2015, the California Supreme Court issued its long-awaited decision in Sanchez. v. Valencia Holding Company, LLC (2015) — Cal.4th — (Sanchez). The court provided much-needed clarity for consumers and auto finance companies alike by finding that class action waivers found in consumer car purchase agreements must be enforced. The court also found that the arbitration provision at issue was not unconscionable as a whole. In making this finding, the court reiterated that “[a]n evaluation of unconscionability is highly dependent on context” and should be considered on an individual, case-by-case basis.
Sanchez arose in 2010 after plaintiff Gil Sanchez purchased a used 2006 Mercedes-Benz S-500V. As part of his purchase, Sanchez signed the front of a standard retail installment sale contract (“RISC”), which included an arbitration agreement. Sanchez claimed to have never read or even seen the arbitration agreement. The arbitration agreement included a class waiver and provided that any arbitration decision could be appealed only if the award was exactly $0 or over $100,000.
Sanchez ultimately sued Valencia for, among other things, violation of California’s Consumer Legal Remedies Act (“CLRA”), Automobile Sales Finance Act, unfair competition law, Song-Beverly Consumer Warranty Act, and Public Resources Code. Valencia immediately moved to compel arbitration. The trial court denied the motion, finding that class arbitration cannot be waived under the CLRA. The Court of Appeal did not address the class waiver but affirmed on the grounds that the arbitration agreement as a whole was procedurally and substantively unconscionable.
The court quickly found the class waiver enforceable. Sanchez argued the waiver could not be enforced because the CLRA expressly prohibits class waivers. The court easily disposed of this argument under AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740]. The court noted the importance of the CLRA to consumer rights but then found
Concepcion’s rule that states may not require a procedure that interferes with fundamental attributes of arbitration, ‘even if it is desirable for unrelated reasons’ [Citations] applies equally to requirements imposed by statute or judicial rule. We conclude that the CLRA’s anti-waiver provision is preempted insofar as it bars class waivers in arbitration agreements covered by the FAA. Sanchez’s argument that enforcing the CLRA’s anti-waiver provision merely puts arbitration agreements on an equal footing with other contracts is unavailing. Concepcion held that a state rule can be preempted not only when it facially discriminates against arbitration but also when it disfavors arbitration as applied. [Citations]
As the court found the RISC at issue fell under the FAA, the class waiver was enforceable.
The court took a more nuanced approach to the issue of whether the arbitration agreement as a whole was unconscionable. As an initial issue, the court found that Concepcion requires arbitration agreements to be evaluated using the same standards of unconscionability that are applied to any other contract. Arbitration agreements must not be evaluated under more stringent standards. The court then quickly found the agreement was procedurally unconscionable simply because Valencia did not dispute that Sanchez was not afforded an opportunity to negotiate its terms. The court then moved on to substantive unconscionability. The court reiterated that whether a contract is substantively unconscionable must be determined on a case-by-case basis. As to Sanchez, the contract was not unconscionable because Sanchez could not establish that the cost of arbitration as to him was prohibitively expensive or that he would be ultimately deterred from proceeding with his claim if he were forced to arbitrate. The court found particularly important the fact that Sanchez’s dispute arose out of the purchase of a high-end luxury vehicle.
More generally, the court declined to find the binding nature of the arbitration rendered the contract unenforceable. The fact the arbitration result could be appealed only in the event of a judgment of $0 or more than $100,000 does not unfairly favor the dealer/finance company over the consumer because, the court found, both outcomes are extreme outliers. Neither party is more likely than the other to be able to appeal. In making this finding, the court distinguished outcomes in cases in which it had found similar provisions rendered employment contracts unenforceable.
Justice Chin concurred in the judgment and generally agreed with the court’s reasoning as to the enforceability of the class waiver and substantive unconscionability. However, he strongly disagreed with the court’s analysis of procedural unconscionability. Justice Chin emphasized the burden was on Sanchez to establish procedural unconscionability, and because Sanchez had presented no evidence on the point, the issue of procedural unconscionability was not properly before the court.
Sanchez is most significant for finding that class waivers in consumer auto finance contracts are enforceable. The decision resolves a wide split within the California Court of Appeal. In resolving that split, the Supreme Court has paved the way for lower courts to enforce class waivers, and provides clarity to both auto finance companies and consumers as to their rights. Somewhat less significantly, the court has left it up to the lower courts to determine on a case-by-case basis whether arbitration agreements in RISCs are substantively unconscionable as to particular consumers. While that may appear to be a win for consumers, the court has made clear that the burden will be on the consumers to prove contracts unconscionable in their specific cases. In the court’s view, such a showing will be particularly difficult for consumers such as Sanchez who purchase high-end luxury vehicles and then seek to avoid the terms of the contracts they signed.