Court Deems Arbitration Provision With Class Action Waiver Unconscionable

Following Concepcion v. ATT, the enforceability of arbitration provisions containing class action waivers has continued to be a focus of attention. See our recent posts here and here.

 Last week, in Sanchez v. Valencia Holding Company, LLC (“Sanchez”), the California Court of Appeal let a car buyer’s class action proceed, despite the fact that the sales contract he signed contained an arbitration clause with a class action waiver. The trial court decided that the class action waiver was unenforceable because a consumer is statutorily entitled to bring a class action under California’s Consumer Legal Remedies Act (“CLRA”) which expressly provides that the right to a class action is unwaivable. The arbitration provision in the car buyer’s sales contract said that if the class action waiver was declared unenforceable, the whole arbitration provision was unenforceable(referred to by the appellate court as a “poison pill”). As a result, the trial court denied the car dealer’s motion to compel arbitration.

 The fact that the car dealer appealed was not much of a surprise. Sanchez affirmed the trial court’s decision to let the case proceed as a class action, but for a different reason. It deemed the arbitration clause “unconscionable” as a matter of law, labeling the clause procedurally “adhesive-involving oppression and surprise due to unequal bargaining power”, and said the contract  was substantively unconscionable because it contained “harsh one-sided terms that favor the car dealer to the detriment of the buyer.”  Under the California Civil Code, a court can refuse to enforce an unconscionable clause in a contract. As the California Supreme Court observed in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83, the U.S. Supreme Court has recognized that unconscionability can be the reason to invalidate arbitration agreements, too. Under Armendariz, both procedural and substantive unconscionability must be established to invalidate the offending provision, though they do not have to be present in the same degree.  Sanchez observed that Concepcion does not preclude the Armendariz principles from being applied to determine the unconscionability of an arbitration provision.

 In his papers opposing the dealer’s motion to compel, plaintiff Sanchez said, among other things, that when he signed his purchase documents, he was presented with a stack of papers with writing on both sides of the pre-printed forms but wasn’t given an opportunity to read or negotiate the terms. He was unaware of the existence of the arbitration clause (and no one explained what an arbitration clause was) which was on the back side of the purchase contract, rather than on a page he had to sign.

Sanchez found 4 clauses unconscionable because of the harsh burden placed on the car buyer: 1) that a party who loses before the arbitrator may appeal if the award exceeds $100,000; 2) that an appeal is permitted if the award includes injunctive relief; 3) that the appealing party must pay certain fees and costs in advance; and 4) repossession, perhaps the most significant remedy to the dealer, is exempted from the arbitration provision, whereas no buyer’s remedy is exempt.

 Sanchez determined that the offending language so permeated the arbitration provision, it could not be severed and that, regardless of the validity of the class action waiver, the lower court correctly declined to compel arbitration. The appellate court determined Concepcion to be inapplicable because Sanchez “did not concern a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purpose of the Federal Arbitration Act.”

 Based on the Sanchez reasoning, you’d think virtually every consumer contract would be deemed unconscionable. Aren’t all the arbitration clauses in consumer contracts by auto dealers, phone companies, etc. one-sided provisions that favor the sellers? Just show me one that’s even-handed. And since when is the bargaining power even?

 It will be interesting to see whether other courts follow Sanchez. We’ll continue to report on the development of post-Concepcion law.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.