Today, the California Supreme Court handed car dealers and auto finance companies an important victory, upholding the arbitration clause in the standard form automobile purchase contract used by most dealers in the Golden State. (Sanchez v. Valencia Holding Co., LLC. (S199119; Aug. 3, 2015).) A copy of the California Supreme Court’s decision can be found here. The California Supreme Court summarized its holding as follows:
While circumscribing the ability of states to regulate the fairness of arbitration agreements, Concepcion reaffirmed that the FAA does not preempt generally applicable contract defenses, such as fraud, duress, or unconscionability.‘ (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1746].) Under the FAA, these defenses may provide grounds for invalidating an arbitration agreement if they are enforced evenhandedly and do not ?interfere[] with fundamental attributes of arbitration.? (Concepcion, at p. __ [131 S.Ct. at p. 1748]; see Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1143–1145 (we will use common name, Sonic II).) In the present case, we hold that Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provisions of the arbitration agreement. Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable. Accordingly, we reverse the judgment below.
Though the purchase contract entailed “some degree of procedural unconscionability” as an adhesion contract, the court held that the arbitration clause was not substantively unconscionable, and therefore upheld its enforceability under California law. (Slip opn., 14-25.) The court found “nothing unconscionable about exempting the self-help remedy of repossession from arbitration. (Slip opn., 24.) The court also held that the contract’s triggers for a three-arbitrator review of an initial single arbitrator’s award were not so heavily weighted in the dealer’s favor as to be unconscionable. The monetary triggers—an initial award of $0 or more than $100,000—do not, on their face, obviously favor the dealer. (Slip opn., 16.) The $0 trigger favors the car buyer; the $100,000 trigger favors the dealer. “But nothing in the record indicates that the latter [trigger] is substantially more likely to be invoked than the former.” So the risks imposed on the parties are not one-sided. (Ibid.) The contract’s allowing three arbitrator review if the initial award includes injunctive relief favors the dealer but is justified by the “potentially far-reaching nature of an injunctive relief remedy.” (Id., 17.) The contract also provided that the party invoking the three-arbitrator review process must front all the costs of that additional arbitration, subject to the arbitrators’ determination of a fair apportionment of costs. This provision, the court said, “has the potential to deter the consumer from using the appeal process,” but “the provision cannot be held unconscionable absent a showing that appellate fees and costs in fact would be unaffordable or would have a substantial deterrent effect in a [particular] case.” (Slip opn., 21-22.) Because Sanchez bought a high-end luxury car and submitted no evidence to show he could not afford to pay appellate arbitration filing fees, he failed to prove that the provision was unconscionable as to him. (Id., 23.) It is anticipated that other car buyers may try to present the proof of unaffordability that Sanchez omitted, but even if they succeed in showing the provision unfairly deters them from seeking three-arbitrator review, the result will simply be that the three-arbitrator review provision will be severed and the rest of the arbitration clause will be enforced. (See Trabert v. Consumer Portfolio Services, Inc. (2015) 234 Cal.App.4th 1154.) On a broader note, the six-justice majority held that no single formulation of the standard for substantive unconscionability enjoys any preferential status; they all mean essentially the same thing, “captur[ing] the notion that unconscionability requires a substantial degree of unfairness beyond ‘a simple old-fashioned bad bargain.’ ” (Slip opn., 9.) Unconscionability is “highly dependent on context,” requiring inquiry into the ‘commercial setting, purpose, and effect’ of the contract or contract provision.” (Ibid.) If justified by a legitimate commercial need, a contract may provide a “margin of safety” or “extra protection” for the drafting party without being unconscionable. (Ibid.) And, “the standard for substantive unconscionability—the requisite degree of unfairness beyond merely a bad bargain—must be as rigorous and demanding for arbitration clauses as for any [other] contract clause.” (Slip opn., 10.) As a whole, the Sanchez decision marks a major step forward for consumer arbitration, particularly in California, which until now has been one of the jurisdictions most hostile to it. Severson & Werson played an important role in Sanchez, filing an amicus brief for the American Financial Services Association, the California Financial Services Association, and the California Bankers Association which the court largely followed in upholding the exemption of self-help remedies from arbitration. The decision also vindicates the firm’s role as an early advocate of including arbitration clauses in consumer and particularly consumer finance contracts.