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Wednesday, June 20, 2012

Sanchez v. Valencia Holding Co: Court of Appeal Invalidates Arbitration Agreement on Unconscionability Grounds

In Sanchez v. Valencia Holding Company, LLC (11/23/11) 200 Cal.App.4th 11, a car buyer brought a putative class action against a car dealer, alleging violations of the Consumers Legal Remedies Act ("CLRA"), the Unfair Competition Law ("UCL"), and other California statutes.  The dealer moved to compel individual arbitration based on its sales contract, which contained an arbitration clause and class action waiver.  The trial court (Los Angeles Superior, Judge Rex Heeseman) denied the motion, holding that the buyer had a statutory right to maintain a class action under the CLRA.  Because the arbitration clause contained a "poison pill" -- a statement that it was not to be enforced if the class action waiver was found unenforceable -- the court denied the motion.  

The dealer appealed, and the Court affirmed, although on different grounds.  Rather than addressing the class action waiver, the Court held that other aspects of the arbitration provision were procedurally and substantively unconscionable, and that unconscionability permeated the agreement such that it could not be enforced.  

The Court began by reviewing unconscionability law in California and by holding that "
Concepcion ... does not preclude the application of the unconscionability doctrine to determine whether an arbitration provision is unenforceable."  Id. at 23, citing Rent–A–Center, West, Inc. v. Jackson (2010) ––– U.S. –––– (given language in arbitration agreement authorizing arbitrator to decide the agreement's “enforceability,” the arbitrator, rather than the trial court, should decide whether the agreement was unconscionable and therefore unenforceable). 
Thus, Concepcion is inapplicable where, as here, we are not addressing 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 Court went on to find that the arbitration agreement was procedurally unconscionable in that the defendant presented it on a 'take it or leave it' basis with no opportunity to negotiate, and it was placed on the back of the last page in small font with reduced line spacing.  Id. at 24-25.  The Court found the agreement substantively unconscionable in that it contained four one-sided provisions, separate and apart from the class action waiver:  
First, a party who loses before the single arbitrator may appeal to a panel of three arbitrators if the award exceeds $100,000. Second, an appeal is permitted if the award includes injunctive relief. Third, the appealing party must pay, in advance, "the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs." Fourth, the provision exempts repossession from arbitration while requiring that a request for injunctive relief be submitted to arbitration. Although these provisions may appear neutral on their face, they have the effect of placing an unduly harsh burden on the buyer. 
Id. at 26.  Finally, the Court declined to strike these provisions from the agreement and instead held that the trial court properly refused to compel arbitration.  

The opinion is available here

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