I previously summarized a decision out of the California Court of Appeals, Fourth Appellate District, Fisher v. DCH Temecula Imports LLC, in which the court held that a consumer’s right to bring a class action under the California Legal Remedies Act (the “CLRA”) constitutes an unwaivable statutory right. In this blog, I will discuss a parallel case from the California Court of Appeals, Second Appellate District, Sanchez v. Valencia Holding Co., LLC, that has been simultaneously working its way through the courts. A review of my prior September 21, 2010 entry would be helpful to understanding this update: Unwaivable Right.
Like the Fisher court, the trial court in Sanchez concluded that a class action waiver embedded in the arbitration clause of a conditional sales contract was unenforceable, because a consumer is statutorily entitled to maintain a CLRA suit as a class action. Moreover, as in Fisher, because the arbitration clause contained a “poison pill” provision (a provision stating that if the waiver of class action lawsuits or classwide arbitration was found unenforceable, then the entire arbitration clause would become unenforceable), the court invalidated the entire arbitration clause. Before Sanchez reached the court of appeals, however, the U.S. Supreme Court decided AT&T Mobility v. Concepcion. In that case, the Supreme Court held that federal law (the Federal Arbitration Act) preempts any state law that refuses enforcement of an arbitration clause merely because the clause prohibits class-wide arbitration. Despite the above ruling, the court of appeal surprisingly upheld the trial court’s decision. The court held that regardless of the validity of the class action waiver, the trial court properly declined to compel arbitration, because the arbitration clause, as a whole, is unconscionable. Thus, the Court found that AT&T Mobility does not eliminate typical defenses to enforcement of a contract.
Under California law, “unconscionability has 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.” See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114. The prevailing opinion is that “both must be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability . . . but they need not be present in the same degree.” See id. The court found that the arbitration clause was both. It was procedurally unconscionable, because it was a contract of adhesion and was printed in small font on the back of the sales contract. It was substantively unconscionable, because the provisions of the arbitration clause related to an appeal that contained harsh one-sided terms that favored the car dealer to the detriment of the buyer.
The Sanchez opinion has been certified for publication and is binding on all trial courts. As such, while an appeal is pending, dealers using LAW 553-CA-ARB should consult with legal counsel prior to filing a motion to compel arbitration based on the arbitration clause contained within said conditional sales contract form. Carmel & Naccasha has attorneys proficient in this area of the law.
Erica A. Stuckey