United States: Man Bites Dog: California Supreme Court unanimously rejects unconscionability challenge to consumer arbitration provision

The California Supreme Court has a reputation for hostility to arbitration, especially in the consumers and employment context. Much of the arbitration docket of the United States Supreme Court over the past 30 years has involved reversals of California Supreme Court decisions refusing to enforce arbitration agreements, most recently (and perhaps most notably) in AT&T Mobility v. Concepcion (in which the authors were counsel). Even when seemingly compelled to enforce an arbitration provision in the face of recent U.S. Supreme Court authority, the California court has often found a way to carve out some exception to arbitration in the particular case or to offer suggestions to plaintiffs seeking to avoid arbitration in a future case. A prime example is the 2014 decision in Iskanian v. CLS Transportation, which exempted from arbitration all wage-and-hour civil-penalty claims under the Private Attorney General Act.

The decision in Sanchez v. Valencia Holding Co. (pdf) represents a welcome break from this pattern, upholding an arbitration agreement against an array of unconscionability challenges without finding it necessary to sever even a single clause to render the agreement enforceable. Although every point decided in Sanchez is consistent with recent U.S. Supreme Court authority applying the Federal Arbitration Act, however, the opinion's emphasis on the specific factual setting may seed further efforts to evade arbitration agreements . As so often is the case, the devil is often in the details.

Sanchez arose from the plaintiff's purchase of a used Mercedes from Valencia. Although he signed a standard auto finance agreement containing an arbitration clause, Sanchez later brought a putative class action alleging that Valencia had misrepresented the condition of the vehicle and that the sales contract did not comply with regulatory requirements relating to fees and disclosures. Valencia sought to compel arbitration, which the trial court denied based on the provision's class waiver. Although Concepcion overturned that basis for objection while Valencia's appeal was pending, the California Court of Appeal nonetheless affirmed, finding that several other provisions rendered the agreement so pervasively unconscionable that it could not be enforced.

In an opinion by Justice Liu for six Justices, the California Supreme Court rejected each of the challenges that had been raised below. But the opinion is as notable for what it left open as for what it decided. The court sought supplemental briefing, by parties and amici alike, addressing whether the court should settle on a single universal standard for unconscionability, and what the governing formulation should be. Yet the majority ultimately sidestepped this issue, discerning no "conceptual difference" among the broad array of phrases it and other courts had used, which range from "so one-sided as to 'shock the conscience" (the standard Justice Chin's separate opinion would have adopted) to "overly harsh" or "unduly oppressive." The majority decided that the analysis ultimately depends on adverbs, which it helpfully emphasized:

A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided contract provisions are unconscionable; hence the various intensifiers in our formulations: "overly harsh," "unduly oppressive," "unreasonably favorable."

In the majority's view, "shocks the conscience" and the adverbial formulations "all mean the same thing." Thus, defendants can still argue that a provision is not unconscionable unless it shocks the conscience. And plaintiffs can argue about how intensifying the effect of an adverb must be in order to invalidate any clause that (like most provisions in contracts involving the exchange of asymmetrical obligations) is more favorable to one side than to the other. It's it's safe to say that California's law of unconscionability—at least in the arbitration context—will remain murky and unpredictable.

The other elephant in the room was the continuing validity of the California Supreme Court's Broughton-Cruz line of decisions, which exempt from arbitration claims for so-called "public" injunctive relief under California's Unfair Competition Law and Consumer Legal Remedies Act. Those decisions appear irreconcilable with the U.S. Supreme Court's decisions in Concepcion and American Express v. Italian Colors Restaurant, as we have argued in a pair of amicus  briefs (pdf) and the Ninth Circuit has all but concluded. Although Broughton-Cruz, if not abrogated, arguably would apply to Sanchez's claims for injunctive relief under those two statutes, he did not argue the point in his briefing, and the court chose not to address it. That leaves the argument available to other plaintiffs, at least in state court—almost all federal district courts have rejected it. In fact, that is the next arbitration issue pending before the California Supreme Court in McGill v. Citibank.

In the arguments it did address, the California Supreme Court turned back one unconscionability challenge after another, though some of its holdings are carefully couched in the big-ticket-purchase context of the case. Thus, in rejecting a challenge to the provision requiring the appellant to bear the costs of an arbitral appeal, the court held that Sanchez—who was fighting over "a high-end luxury item"—had not shown that he qualified for the protection of a California statute limiting how much indigent consumers could be charged for arbitration (Cal. Code Civ. Proc. § 1284.3), that his access to an appeal would be thwarted, or that the fee provision would have a "substantial deterrent effect" on his exercise of arbitral rights. The last factor is likely to be the subject of future litigation, especially given the disagreement between the majority and Justice Chin on that point.

The California Supreme Court also rejected the challenge to a provision limiting arbitral appeals to awards of zero or more than $100,000. In the context of auto-purchase disputes (which would rarely exceed $100,000 in value), the court found that provision not even one-sided, let alone unreasonably so. The court also upheld the provision allowing for arbitral appeals of awards of injunctive relief because (a) the provision could operate in the consumer's favor because the dealer in some circumstances would need injunctive relief to repossess (more precisely, to continue to hold) a car, and (b) the potentially sweeping effects of an injunction against the dealer warranted an additional layer of protection. These analyses were very fact-specific, suggesting that similar provisions might not be upheld in other contexts.

The court also upheld the carve-out for statutory nonjudicial repossession, noting that nothing in the agreement barred the provisional injunctive relief normally available pending arbitration under California law. In an important holding, the court determined that the unconscionability of an arbitration provision must be evaluated in the context of the remedies available if there were no arbitration agreement. Thus it was critical that the repossession self-help remedy, which the Legislature created and endorsed, is outside the litigation process altogether.

Finally, the court rejected Sanchez's argument that the severability clause in the arbitration provision amounted to a poison pill that invalidated the arbitration agreement. The clause said that the arbitration clause was unenforceable "[i]f a waiver of class action rights is deemed or found to be unenforceable for any reason." Sanchez contended that the erroneous pre-Concepcion holding of the trial court was sufficient to trigger this clause. The California Supreme Court disagreed: "[P]lainly the quoted provision was not meant to apply when a trial court erroneously holds the class waiver unenforceable and the error is corrected on appeal."

The bottom line is that the Sanchez opinion makes clear that businesses have a number of options available to them in crafting arbitration clauses tailored to particular types of consumer transactions. That said, the court's helpful steps in eliminating or undermining some common attacks on arbitration provisions may not necessarily lead to predictable results in other cases. In particular, the court's reliance on vague adverbs like "unduly" or "unreasonably," and its focus on the context of Sanchez's particular dispute, arguably leave room for California courts to scrutinize the particular features of particular arbitration provisions under the circumstances of each individual case.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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