Class Action Arbitration Waivers in California

In March 2010, Plaintiff Gil Sanchez purchased a preowned Mercedes Benz S500V from Defendant Valencia Holding Company LLC (Valencia).  He later sued claiming that Valencia had violated California’s Consumer Legal Remedies Act (CLRA) (California Civil Code sections 1750-1784) California Civil Code sections 1750- making false representations about the condition of the automobile.  He also alleged that Valencia had violated California’s Automobile Sales Finance Act (Civil Code sections 2981-2984.6), its unfair competition law (UCL) contained in Business and Professions Code sections 17200-17210, the Song-Beverly Consumer Warranty Act (Civil Code sections 1790-1795.8) and the Public Resources Code section 42885.  As part of his action, plaintiff sought class action status.

Valencia filed a motion to compel arbitration pursuant to the terms in the automobile retail installment sales contract (RISC). As was typical at the time, the arbitration clause provided that plaintiff waived the right to bring his dispute as a class action.   As is relevant to this litigation, the arbitration clause further provided:

 “Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the applicable rules. The arbitrator shall apply governing substantive law in making an award. The arbitration hearing shall be conducted in the federal district in which you reside . . . . We will advance your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $2500, which may be reimbursed by decision of the arbitrator at the arbitrator‘s discretion. Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law. . . . Arbitrator‘s award shall be final and binding on all parties, except that in the event 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, that party may request a new arbitration under the rules of the arbitration organization by a three-arbitrator panel. The appealing party requesting new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs. Any arbitration under this Arbitration Clause shall be governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) and not by any state law concerning arbitration.

You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court‘s jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit. Any court having jurisdiction may enter judgment on the arbitrator‘s award. This Arbitration Clause shall survive any termination, payoff or transfer of this contract. If any part of this Arbitration Clause, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Clause shall be unenforceable.” (Id. at 4-5.)

 The trial court denied the motion to compel arbitration finding that the class action waiver was unenforceable ( pursuant to the CLRA expressly forbidding waiver of class action arbitration) and thus the agreement to arbitrate was unenforceable.  While this matter was on appeal, the U.S. Supreme Court decided Concepcion, supra.  The Court of Appeals declined to address the issue of whether the class action waiver was enforceable, instead holding that the arbitration appeal provision and the arbitration agreement as a whole were unconscionably one sided and thus unenforceable. (Id. at 1-7.)

The California Supreme Court reversed, holding, “…that Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provisions of the arbitration agreement.” (Id. at 2.)

In reaching this conclusion, the Court determined that while the RISC was a contract of adhesion, it was not procedurally unconscionable; that is, containing elements of both oppression and surprise. (Id. at 6.) It was not “overly harsh”, “unduly oppressive”, or “so one-sided as to ‘shock the conscience’”. (Id at 8.)

The Court then addressed whether the RISC was substantively unconscionable, that is, whether it was “…sufficiently unfair, in light of all relevant circumstances.” (Id at 10.) The Court concluded that the “… risks imposed on the parties” were not so “one-side or so unreasonable” to make the RISC substantively unconscionable.

Of great importance to consumers in California, the Court then addressed the enforceability of the class action waiver clause which stated that any arbitration could not be brought on a class action basis. The Court noted that Civil Code section 1751 of California’s Consumer Legal Remedies Act provides that “Any waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void.” It then noted that Section 1781 (a) of this same act permits a plaintiff to bring a class action. Thus, under the CLRA, a waiver of the right to bring a class action in an arbitration context is seemingly void and unenforceable.

The Court held that the Supreme Court’s opinion in Concepcion preempted this statutory mandate thereby rendering this portion of the CLRA to be invalid: “We conclude that the CLRA’s anti-waiver provision is preempted insofar as it bars class waivers in arbitration agreements covered by the FAA.” (Id at 26.)

Finally, the court concluded that the “poison pill” provision (providing that if the class action waiver was unenforceable then the whole arbitration clause was unenforceable) was inoperable. “Because we conclude in light of Concepcion that the FAAA preempts the trial court’s invalidation of the class waiver on unconscionability grounds, the agreement’s poison pill provision is inoperable.  (Id. at 27.)

Justice Chin filed a concurring and dissenting opinion in which he agreed with the judgment but not with the reasoning behind it.  In his view, Justice Chin believed that, taking the arbitration clause as a whole and not each part in isolation as does the majority, plaintiff failed to establish substantive unconscionability. Thus, he believed it was unnecessary for the majority to discuss the issue of procedural unconscionability.  (See Concurring opinion, et passim.) Thus, agreeing that Sanchez did not establish substantive unconcionability, he concurred in the judgment.

Consequently, California which has always been known as being very consumer oriented, is a little less so today, thanks to the U.S. and California   Supreme Courts.

…Just something to think about.