To combat class action abuses and to take advantage of the efficiencies of arbitration, businesses often include arbitration provisions in consumer agreements that not only call for private dispute resolution, but limit the ability of aggrieved parties to seek relief on behalf of a class. Although state courts historically often invalidated such provisions, the United States Supreme Court made clear in Concepcion that the Federal Arbitration Act precludes states from holding such waivers per se unconscionable. See AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). But the Court left open to states the ability to apply general unconscionability principles, which do not discriminate against arbitration, to assess such contracts containing these arbitration provisions. In Sanchez v. Valencia Holding Company, 353 P.3d 741 (Cal. 2015), a case closely monitored by stakeholders on both sides, the California Supreme Court upheld the validity of a class action arbitration waiver under Concepcion and state law.
In Sanchez, the plaintiff brought suit claiming, on behalf of himself and others similarly situated, that Valencia, a pre-owned luxury car dealership, engaged in numerous practices that violated California law. Valencia sought to compel the plaintiff to arbitrate based on a boilerplate contract of sale entered between them. The arbitration provision in the contract included: (i) a class action waiver with a "poison pill" provision declaring invalid the entirety of the arbitration provision if the class action waiver was found unenforceable; (ii) a limitation of appeals to a panel of arbitrators to only those cases in which a party was awarded no recovery or recovery in excess of $100,000; (iii) a provision requiring an appealing party to pay all costs of the appeal unless otherwise later apportioned; and (iv) the reservation of all self-help remedies, including small claims court and repossession.
The California Supreme Court reversed the Court of Appeal's determination that the arbitration provision was unenforceable. The Court first explained that while unconscionability was defined using a multitude of substantively similar formulations, at bottom there is "both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results." The court cautioned: "All of these formulations point to the central idea that [the] unconscionability doctrine is concerned not with 'a simple old-fashioned bad bargain,' but with terms that are 'unreasonably favorable to the more powerful party.'"
With the basic construct in place, the California Supreme Court then discussed each of the contract provisions in detail. The Court reasoned that the fact that the sale contract was one of adhesion, standing alone, did not render the agreement unconscionable. Neither did the other provisions, which the Court found in most instances benefitted both parties. For example, the agreement retained the right of the parties to bring suit in small claims court (which the Court viewed as likely benefitting the consumer) and the right to repossession (which benefitted the seller). Nor was the requirement to pay appeal fees unconscionable, at least in the context of a dispute about a luxury car where plaintiff produced no evidence of an inability to pay. The Court also pointed out that slight advantages to the party with more bargaining power are not fatal: contract provisions are not unconscionable when they "furnish a margin of safety that provides the party with superior bargaining strength a type of protection for which it has a legitimate commercial need." This justified, for example, the right to appeal an injunction (which likely benefitted Valencia) because the far-reaching implications of an injunction could have an effect on Valencia's business far in excess of the case being arbitrated.
Sanchez illustrates that the determination of whether a consumer arbitration contract is unconscionable will entail a detailed, context-specific analysis. Nevertheless, Sanchez provides some guidance as to the type of provisions that may be sustained and gives a modicum of comfort that state courts will increasingly uphold such provisions in the post-Concepcion world.