For Whom The Bell Tolls Arbitration Or Class Actions

Familiar scene: a disgruntled auto purchaser visits counsel to complain about having been defrauded by a dealer. After exiting the dealership, the dealer couldn’t place the customer’s retail installment contract and brought him back for a re-write of the deal on less favorable terms. To boot, the car broke down on the way home from the dealership. Counsel fly-specks the financing contract and yells “eureka” when she discovers a technical glitch in the paperwork, followed by a quick prayer to a favorite deity that the infirmity might infect thousands of similar contracts, all sold to a major financial institution.

All that is left is to find a handy consumer protection statute with a “modest” provision for per “victim” statutory damages. A class action is born!

Of course, the technical glitch has caused no harm to anyone, least of all the disgruntled customer whose real beef with the dealer will be largely ignored. Indeed, the customer would not likely understand the nature of the defect, even if class counsel took the time to try to explain it, which she generally wouldn’t. What ensues is a Kabuki theater played out in the complex department of the San Francisco or Los Angeles Superior Court or, thanks to CAFA, the corresponding federal district court. Class counsel amasses as much time as possible to build up a lodestar for computing fees while defense counsel furiously tries to avoid class certification and the accompanying threat of a gargantuan recovery based on the aggregation of the individual statutory damages.

In the end, the case settles based more on the likelihood of certification than the merits of the putative class’ technical statutory claim. The only remaining issue–often the most hotly contested–is the size of the fee award to class counsel. Notice is sent to the class, “objectors” are bought off and court approval generally follows with only cursory scrutiny from an overworked and underfunded bench. Lost in this entire process is the dispute that caused the auto purchaser–now elevated to “class representative”–to seek a lawyer in the first place. Not that the consumer minds, as the settlement will normally provide an “incentive award” to the named plaintiff that is at least as large as his original claim and far in excess of what other class members will receive.

Slowly, the public is becoming aware that something is seriously amiss with this process. The only consumer complaints that get any attention from the plaintiffs’ bar are those that class counsel choose to pursue for their own ends. Repeated legislative and judicial tinkering with the class action rules have reduced some of the most flagrant abuses but have not altered the way in which the allure of the fee jackpot distorts the traditional notions of civil justice–at least not until the U.S. Supreme Court altered the entire landscape with its revolutionary decision in ATT Mobility v. Concepcion, 131 S.Ct. 1740 (2011). In a nutshell, Concepcion allows a financial institution to look to an entirely separate dispute resolution system–arbitration–in dealing with customer complaints. The tradeoff is that a company must agree to a speedy, informal resolution of the customer’s real dispute with virtually no appeal rights if the result is not to its liking.

Because Concepcion was decided under the Federal Arbitration Act, it trumps most state laws that interfere with classic one-on-one arbitration. The only exception are those general state contract doctrines that govern the question of whether an agreement to arbitrate was reached. But California–historically, the state most resistant to the FAA mandate (see, e.g., Southland Corp. v. Keating, 465 U.S. 1 (1984))–isn’t giving up without a fight. As a last ditch effort to avoid Concepcion–please, no Hobby Lobby jokes–the California class action bar has latched onto the contract-avoidance doctrine of unconscionability the way a drowning sailor clings to a life raft. Adding a bit of lift to their argument is Concepcion’s reaffirmation that unconscionability remains a viable defense to arbitration, so long as the application of that doctrine is not specifically targeted to the fundamental nature of arbitration. See Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996).

Traditionally, a contract had to be pretty outrageous to be deemed unconscionable. The first part of the test, procedural unconscionability, was generally met whenever a contract of adhesion was involved. Even so, the California Supreme Court set a high hurdle of “shock the conscience” for the second part of the test, substantive unconscionability. Pinnacle Museum Tower ASSN. v. Pinnacle Market Development, LLC, 55 Cal. 4th 223 (2012). When faced with Concepcion’s threat to displace class actions with arbitration, the response of the California trial and intermediate appellate courts to the unconscionability argument has been all over the map. Compare Sanchez v. Valencia Holding Co., LLC, 135 Cal. Rptr. 3d 19 (2011) (rev. grnt’d 139 Cal. Rptr. 3d 2) with Vasquez v. Greene Motors, INC., 154 Cal. Rptr. 3d 778 (2013) (rev. grnt’d 158 Cal. Rptr. 3d 260). The same arbitration clause is branded as unconscionable by one appellate panel, only to be enforced by another. Fortunately, most of those intermediate appellate opinions have been accepted for review by the California Supreme Court, which automatically resulted in their depublication as precedent.

All eyes are now on the California Supreme Court to see if it will yield to higher authority or continue a rear guard action to undermine the federal arbitration mandate. Two recent decisions suggest the latter. In Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013), the court reversed its own earlier decision denying arbitration, acknowledged that Concepcion trumped the state’s unusual Berman hearing procedure for certain labor claims, but then remanded the case to determine whether the loss of the procedural benefits afforded by a Berman hearing renders the arbitration agreement unconscionable. What’s worse, the lead opinion by Justice Goodwin Liu, despite a strong dissent from Justice Ming Chin, diluted the “shock the conscience” test by noting that it is only one of many other tests the court had previously employed.Similarly, in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), the California Supreme Court recently reversed its own earlier decision–Gentry v. Superior Court, 42 Cal. 4th 443 (2007), which had created numerous special procedural hurdles for enforcing a garden-variety arbitration clause in an employment contract–but then took away the benefit of arbitration by determining that employment claims brought under California’s Private Attorney General Act were immune from arbitration. The case was remanded to the trial court to proceed with the PAGA claim brought by an employee on behalf of his fellow employees, and all without even having to seek class certification. The court reasoned a suit by a PAGA-deputized bounty hunter on behalf of a non-class class fell completely outside of the Concepcion arbitration mandate.

But this is a Three Act Play with the denouement still to come. Sanchez v. Valencia Holding, now fully briefed and awaiting oral argument, raises the question of whether the arbitration clause in the standard retail installment contract used in virtually every auto sale in California is unconscionable. Plaintiff contends that the preservation of self-help remedies, including repossession, and the provision for a special 3-arbitrator appeal right for the losing party in the case of an outlier result (recoveries of $0 or greater than $100,000, or the award of injunctive relief) are stacked against the consumer and render the arbitration clause of that contract irredeemably unconscionable. In an unusual move, the California Supreme Court Justices recently asked for an additional round of briefing on the issue of what “unconscionability” means under California law. It does not take much imagination to guess that, behind the scenes, the debate between Justices Liu and Chin begun in Sonic-Calabasas is continuing and may come to a head in Sanchez. It is also likely that whatever “unconscionability” definition is adopted, the opinion will be result-oriented. And if the result is to loosen the standard for unconscionability, the court will do its best to immunize the result from further U.S. Supreme Court review by remanding the case for further consideration rather than simply denying arbitration.

So, there is far more in play in Sanchez than the legalistic definition of “unconscionability.” What is at stake in Sanchez and for that matter all the other efforts to undermine Concepcion through legislation and regulation (note the CFPB’s continuing pre-regulation study of mandatory arbitration of consumer contracts (Dodd Frank Act § 28)) is which of two systems of resolving consumer complaints will survive. The Kabuki theater of consumer class actions that benefit only the attorneys who make a living bringing and defending those suits? Or the alternative dispute resolution process managed by the likes of AAA and JAMS, that provides a quick, efficient and individualized result for consumers who, in the end, are only asking for a chance to tell their story to a neutral arbiter? For which one will the bell toll?

For more information about recent developments in arbitration law in California, contact Donald J. Querio at djq@severson.com.