United States: The California Supreme Court Holds Consumer Class Action Waivers In Arbitration Provisions Are Enforceable Under Federal Law

On August 3, 2015, the California Supreme Court issued its long-awaited arbitration decision in Sanchez v. Valencia Holding Co., LLC, No. B228027.  The Court held that the arbitration provision found in a standard form auto finance and sales contract widely used by auto dealerships and lenders throughout California is not unconscionable.  Not surprisingly, the Court acknowledged the recent U.S. Supreme Court authority holding that the Federal Arbitration Act ("FAA") preempts conflicting state law, and affirmed that California law must now recognize the enforceability of class action waivers contained in arbitration provisions under the FAA.  Nevertheless, arbitration provisions can be rendered unenforceable, depending on a fact intensive analysis of unconscionability.  The Court refused to apply a uniform, bright-line standard.  The ruling is unlikely to stem the tide of litigation over the enforceability of arbitration provisions in high stakes class action litigation.

In Sanchez, the plaintiff car buyer brought a class action against a dealership alleging violations of California's consumer protection laws for making false representations about the condition of the car and failing to disclose certain charges and fees.  The defendant moved to compel arbitration under the arbitration provision in the sales contract, which also contained a class action waiver.  The trial court held that the class action waiver was unenforceable because consumers have a statutory right to bring class actions under California law.  The California Court of Appeal affirmed the lower court's decision.  Meanwhile, many other state and federal courts in California issued conflicting rulings on the enforceability of this same arbitration provision.

In its ruling, the California Supreme Court reversed the Court of Appeal, holding that the arbitration provision containing the class action waiver was enforceable.  The Court affirmed that to show unconscionability a consumer must prove both procedural and substantive unconscionability, based on a sliding scale, with a lower showing of procedural unconscionability requiring a higher showing of substantive unconscionability, or vice versa.  Procedural unconscionability focuses on the presence of oppression or surprise relating to the formation of the contract—i.e., is it a take-it-or-leave-it contract of adhesion, are the key terms buried in the fine print of a long contract, is the consumer given an opportunity to review prior to signing, etc.  Substantive unconscionability focuses on whether particular terms at issue are overly harsh or one-sided in favor of the drafter.

Based on the adhesive nature of the consumer contract alone, the Court found at least some degree of procedural unconscionability.  This contrasts with recent federal authority under the FAA acknowledging that virtually all consumer contracts are contracts of adhesion and holding that this alone does not support a finding of procedural unconscionability.

The Court, however, went on to hold that the terms of the arbitration provision were not substantively unconscionable.  The Court first addressed the appropriate standard, holding that the differing language used by courts such as overly harsh, unduly oppressive, unreasonably unfair, unfairly one-sided, and even "shocks the conscience" all mean the same thing.  According to the Court, to be unconscionable, the degree of unfairness must be "beyond merely a bad bargain"—but how far beyond a bad bargain remains unclear.  This may lead to ongoing confusion and litigation, with courts imposing different and subjective notions of what arbitration terms are sufficiently unfair.  In contrast, the U.S. Supreme Court under the FAA enforces arbitration agreements according to their terms and does not second guess the agreement of the parties.

In holding that the arbitration agreement was not substantively unconscionable, the Court analyzed three separate clauses of the agreement.  The Court first looked at the "appeal" clause, providing that the arbitrator's award shall be final and binding, except for a right to a new arbitration with a three-arbitrator panel in the event of an initial arbitration award of $0, over $100,000, or an award that includes injunctive relief.

The Court held that this clause does not unduly favor either party because it reasonably allowed a second arbitration only in the event of outlier results and was otherwise balanced.  Since the contract relates to an auto sale usually involving far less than $100,000, allowing a second arbitration for awards above this amount was reasonable.  Though allowing a second arbitration for an award of injunctive relief favors auto dealerships and lenders, additional review is justified given the potential broad impact of injunctive relief on a business.  Further, this term is balanced by the term allowing further review for an award of $0, which favors consumers.

Second, the Court analyzed the clause stating that the party which appeals to a three-arbitrator panel shall be responsible for all arbitration fees and costs subject to a final determination by the arbitrators.  The Court held that a consumer's inability to afford arbitration fees and costs can be grounds to render an arbitration provision unenforceable, but that the plaintiff in this case failed to make a sufficient showing.  In light of this decision, consumers will likely focus on this argument and seek to invalidate arbitration provisions on the grounds that they cannot afford arbitration.

Third, the Court held that a clause excepting self-help remedies, such as repossession, from arbitration is not substantively unconscionable.  The Court reasoned that while the repossession remedy favors auto dealerships and lenders, this term is balanced by the term excepting small claims court proceedings from arbitration, which favors consumers.  The Court also held that self-help remedies such as repossession are expressly authorized by statute, and are equally unaffected by arbitration or litigation.  The Court also recognized that repossession of collateral is an integral part of the business of selling cars on credit and "fulfils a commercial need."

Finally, the Court acknowledged that California's Consumers Legal Remedies Act ("CLRA") provides a statutory right to a class action that cannot be waived under California law.  However, the Court recognized the U.S. Supreme Court decisions holding that the FAA, when applicable, preempts state laws that limit the ability of parties to agree to the terms of arbitration.  The Court held that the FAA preempts any statutory right under the CLRA to a class action.

This decision marks a grudging acceptance by the California Supreme Court that class action waivers are enforceable under the FAA.  However, the Court's decision, while favorable to corporate defendants overall, provides fertile grounds for continued litigation over the enforceability of arbitration provisions in consumer contracts generally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
31 Jan 2019, Other, Los Angeles, United States

Invites you to join us for a private cooking class hosted by Parties that Cook!

31 Jan 2019, Conference, Los Angeles, United States

The Southern California Association of Corporate Counsel's In-House Counsel Conference

6 Feb 2019, Other, Los Angeles, United States

Please join Sheppard Mullin for cocktails & hors d'oeuvres during The Wind Power Finance & Investment Summit 2019

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions