Wednesday, April 10, 2013

FYI: Cal App Ct Holds Consumer Arbitration Agreement Enforceable, Finding Only "Minimal Unconscionablity"

Reversing the lower court, the California Court of Appeal, First District, recently ruled that, because an arbitration agreement in a retail installment sales contract was only "minimally unconscionable," it was improper to deny the defendants' petition to compel arbitration.   In so ruling, the Court determined that, in light of the absence of "surprise or other sharp practices" to render the contract procedurally unconscionable, a substantial degree of substantive unconscionablity would be required to defeat enforcement of the arbitration agreement, but was lacking in this case.


A copy of the opinion is available at:


Plaintiff consumer ("Consumer") bought a used car from a car dealer ("Dealer") and signed a retail installment sales agreement.  A few days after the sale, Dealer allegedly contacted Consumer, asking Consumer to execute a second retail installment sales contract (the "RIC"), because Dealer had supposedly been unable to procure financing for the sales transaction.  The RIC was on a two-page pre-printed form identical to the first agreement, but contained slightly different terms.  Dealer later sold and assigned the RIC to defendant financing company ("Company").  


On the second page of the RIC was an arbitration clause with provisions governing requests for "appeals" of arbitration decisions and advancing certain arbitration costs.  The arbitration clause also contained a class-action waiver and exempted  from arbitration small claims disputes and the statutorily-governed remedy of repossession.  Immediately above the arbitration clause was the heading in all capital letters and bold type, stating "ARBITRATION CLAUSE . . . PLEASE REVIEW – IMPORTANT – AFFECTS YOUR LEGAL RIGHTS."  Immediately below were three numbered provisions all in capital letters informing the buyer that either party may request arbitration, that the clause would prevent a court proceeding or class-action, and might limit discovery.  The actual terms of the clause followed in smaller type. 


Seeking damages and injunctive and other relief, Consumer filed a lawsuit against Dealer and Company, alleging that the RIC violated California's consumer protection laws, including the Rees-Levering Automobile Sales Finance Act, Cal. Civ. Code § 2981 et seq. and the Consumers Legal Remedies Act, Cal. Civ. Code § 1750 et seq.   Also among the allegations was the assertion  that Dealer had backdated the RIC causing the financing terms to be inaccurate and the disclosed annual percentage rate to vary by more than what is permitted under the federal Truth in Lending Act's Regulation Z, 12 C.F.R. § 226.1, et seq. 


Dealer and Company filed a petition to compel arbitration pursuant to the RIC's arbitration clause.  Consumer opposed the petition on various grounds, including that the arbitration clause was unconscionable, asserting that at the closing of the purchase transaction, he had been presented with a large stack of pre-printed form documents and was not given the opportunity to read any of the documents or to negotiate any of the terms.


Agreeing with Consumer that the arbitration clause was unconscionable because of "adhesion, oppression, and surprise," the lower court denied the petition to compel.   Dealer and Company appealed.


The Appellate Court reversed, ruling that the arbitration clause was only "minimally procedurally unconscionable" and lacked significant substantive unconscionablity to render it unenforceable.


Analyzing the arbitration clause in terms of both procedural and substantive unconscionablity, the Appellate Court observed that each of these elements is examined on a sliding-scale basis according to which the more substantively oppressive the clause, the less evidence of procedural unconscionablity is required to conclude that the arbitration clause is unenforceable.   See Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 114 (2000).  The Court further noted that procedural unconscionablity focuses on oppression and surprise, whereas substantive unconscionablity focuses on fairness of the terms of the agreement and on whether they are overly harsh or one-sided.


Thus, looking first at the procedural aspects of the purchase transaction in this case, the Appellate Court initially concluded that the RIC was procedurally unconscionable under California law in light of the "take-it-or-leave-it" basis in which it was presented to Consumer.  See Gentry v. Superior Court, 42 Cal.4th 443, 469 (2007)("Ordinary contracts of adhesion . . . contain a degree of procedural unconscionablity even without notable surprises).  Nevertheless, despite the inequality of bargaining power between the parties in the transaction, the Appellate Court ultimately determined that Dealer's conduct did not demonstrate a high degree of procedural unconscionablity that warranted non-enforcement of the arbitration clause.  In so doing, the Court considered:  (1) the common, industry-wide use of preprinted nonnegotiable  form contracts; (2) the high number of state and federal regulatory requirements associated with consumer transactions as to both substance and form of disclosures; and (3) merchants' use of preprinted contracts to ensure compliance with those requirements.  


Further, with regard to Consumer's argument that he was not given the opportunity to read the documents, the Appellate Court noted that Consumer never contended that Dealer actively interfered with his ability to review the RIC or that Dealer made any affirmative misrepresentations about its terms.   Comparing the consumer transaction at issue here with the situation in which an employer seeks to impose an arbitration agreement on an employee, the Court noted that, unlike the employment context where the burdens of disclosure and informed consent fall on the employer, "conduct found objectionable in the employment context does not carry the same stigma in an ordinary consumer transaction." 


Among other things, the Appellate Court also found lacking the element of surprise, given that the arbitration clause was obvious and prominent, even if it was located on the reverse side of a two-page contract, and that Consumer had in his possession an identical preprinted contract for several days before being presented with the RIC at issue here.


Turning to substantive unconscionablity, the Appellate Court applied the standard set forth in a California Supreme Court opinion that in order to render a contract term unenforceable, it must "'be so one-sided" as to "shock the conscience."   See Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223, 246 (2012).   Thus, reviewing the arbitration clause according to that standard and further noting that the minimal amount of procedural unconscionablity present in this case required a substantial degree of substantive unconscionablity to declare the arbitration clause unenforceable, the Court concluded that there was no such basis here for declining to enforce the arbitration agreement. 


In so ruling, the Appellate Court looked at such factors as:  Consumer's failure to present evidence as to his financial resources, anticipated cost of arbitration, and potential award to show how the requirement that Consumer advance certain costs was unconscionable;  the balancing of interests incorporated in the arbitration clause's "appeal" provision as well as in the exemption for repossession and small claims disputes.   See Green Tree Financial Corp.-Ala. V. Randolph, 531 U.S. 79, 91092 (2000)(declining to invalidate arbitration on grounds of expense, noting party resisting arbitration bears burden of proving that claims at issue are unsuitable for arbitration).  See also Cal. Code of Civ. Pro. § 1284.3, subdiv. (a)(proscribing arbitration clauses requiring the non-prevailing consumer party to pay costs of prevailing opposing party).  Moreover, in examining the respective interests of Consumer and Dealer incorporated into the arbitration clause, the court took into account the practical application of various potential remedies available to each party, such as the effect of injunctive or monetary relief, as well as certain procedural requirements such as the different thresholds each party must meet in order to qualify for a second arbitration.


Notably, the Appellate Court also pointed out that, like arbitration, repossession and other self-help remedies operate outside judicial proceedings and, further, that exempting repossession from arbitration preserves the efficiency of the remedy, which, in the Court's view, would be frustrated if a car seller had to arbitrate its right to repossess.  See Cal. Bus. & Prof. Code § 7500 et seq.; Cal. Civ. Code § 2983.2 (provisions governing repossession).    Additionally, according to the Appellate Court, considerations of efficiency similarly supported the exclusion of small claims from arbitration.


Finally, with regard to the waiver of class-action rights and the requirement to arbitrate so-called "public" state-law consumer protection claims, the Appellate Court, citing a decision by the U.S. Supreme Court, ruled that claims, such as those based on California's statutory ban on class-action waivers, would be preempted by federal law.  See AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011)(Federal Arbitration Act preempted state-law claims). 


Accordingly, finding "minimal unconscionablity," the Appellate Court reversed the lower court's denial of the petition to compel arbitration, and remanded.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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