Sanchez v. Valencia Holding Co: Cal. Supreme Court Addresses Unconscionability, Enforceability of Consumer Arbitration Agreement

In Sanchez v. Valencia Holding Company, LLC (8/3/15) --- Cal.4th ---, the California Supreme Court has addressed a number of issues involving the enforcement of an arbitration provision in a car dealer's sales contract. 

In the underlying decision, Sanchez v. Valencia Holding Company, LLC (11/23/11) 200 Cal.App.4th 11 (discussed here), the Court of Appeal found the arbitration provision unenforceable as procedurally and substantively unconscionable. The Court held that AT&T Mobility LLC v. Concepcion, 563 U. S. __, 131 S.Ct. 1740 (2011), did not apply because the question was not "the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the arbitration provision and the purposes of the Federal Arbitration Act (FAA)." 

The Supreme Court granted review in 2012, stating the issue as whether the FAA, under Concepcion, preempts unconscionability analysis of an arbitration provision in a consumer contract. 

After granting review, the Court issued its decision in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (discussed here), in which it held that unconscionability remains a valid defense to petitions to compel arbitration, provided that they not facially discriminate against arbitration, that they are enforced evenhandedly, and that they do not disfavor arbitration by imposing procedural requirements that interfere with fundamental attributes of arbitration. 

Also after granting review, the Court ordered the parties to brief questions regarding the proper test for finding substantive unconscionability: 

[T]his court has used a variety of terms, including "unreasonably favorable" to one party (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145); "so one-sided as to shock the conscience" (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246); "unfairly one-sided" (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071-1072); "overly harsh" (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 114); and "unduly oppressive" (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925). 

Which, the Court asked, is the proper test? 

Answering these questions, the Supreme Court reversed the decision of the Court of Appeal, holding as follows: 

A party must show both procedural and substantive unconscionability in order to void a contract. The analysis is "highly dependent on context," and the standard for substantive unconscionability may be stated in any number of different ways, including each of those set forth above. The standard is, "as it must be, the same for arbitration and nonarbitration agreements." 

The contract at issue was one of adhesion. Although not all contracts of adhesion are procedurally unconscionable, the "adhesive nature of the contract is sufficient to establish some degree of procedural unconscionability" and require analysis of substantive unconscionability. 

The contract provided that an award could not be appealed unless: it were for $0; it exceeded $100,000; or it granted a request for injunctive relief. This provision was not substantively unconscionable. The right to appeal awards of $0 or more than $100,000 is not "significantly more beneficial to the seller," the party drafting the contract. And given the "broad impact that injunctive relief may have on the car seller's business," it would not be unreasonable to allow the seller to appeal an award granting injunctive relief. 

The contract provided that the seller would advance the consumer's arbitration fees up to $2,500, subject to apportionment by the arbitrator, and the appealing party would pay the appellate fees and costs, subject to apportionment by the appellate panel. While this clause would be unconscionable in the context of unwaivable statutory employment rights, California allows arbitration fees and costs to be charged to consumers, except those who are indigent. Cal. Code Civ. Proc. 1284.3. As a result, a consumer attacking this clause would need to present evidence of his inability to pay these fees. The plaintiff here did not do so, and the clause therefore is not unconscionable. 

The contract provided that the parties retained their rights to self-help remedies, such as repossession. This was not unconscionable because: it is offset by a provision that allows the parties to go to small claims court; self-help remedies are always sought outside of the litigation process; and repossession fulfills a legitimate business need in the auto industry. 

The Consumer Legal Remedies Act (CLRA) provides that a consumer's waiver of his or her right to bring a class action is "unenforceable and void." This provision is preempted "insofar as it bars class waivers in arbitration agreements covered by the FAA." 

Justice Chin concurred in the result but dissented from the reasoning. He argued: the FAA requires enforcement of the class action waiver; unconscionability remains a valid defense after Concepcion; the consumer failed to establish either procedural unconscionability here; to be substantively unconscionability, a contract -- taken as a whole -- must "shock the conscience," and other formulations of the standard should not be used; and neither the individual clauses challenged nor the arbitration agreement as a whole was substantively unconscionable under any standard endorsed by the majority. 

The opinion is available here.