Founder and Managing Partner
Senior Automotive Counsel
Today, the California Supreme Court has issued its long-awaited ruling in the case of Sanchez v. Valencia Holding Company LLC with respect to the arbitration clause in the Form 553 CA ARB retail installment sale contract. In that case, Sanchez argued that the arbitration clause was unenforceable because it was unconscionable (unfairly one-sided) both procedurally (unfair surprise to the consumer) and substantively (the arbitration clause’s terms). In a ruling generally favorable to dealers, the court held that the arbitration clause was not unconscionable, as explained below, and also reaffirmed that the class-action waiver in the arbitration clause was valid.
The court initially noted that a contract must be both procedurally and substantially unconscionable to be rendered unenforceable. In discussing the appropriate standard for determining unconscionability, the court stated that unconscionability requires more than a “bad bargain,” or a contract provision which is merely one-sided or favors one party, but instead requires a contract which is overly harsh, unduly oppressive or unreasonably favorable, all of which the court said mean essentially the same thing.
The court started its analysis with procedural uncnscionability. Without detailed explanation, the court held that the Form 553 was a contract of adhesion (a standard, pre-printed form), and that was sufficient to establish “some degree of procedural unconscionability.” The court then noted that this alone did not render the 553’s arbitration clause invalid, since a finding of substantive unconscionability was also required.
For substantive unconscionability, the court focused on three provisions which Sanchez had cited as unconscionable: that a party had the right to appeal only if the arbitration award was $0 or more than $100,000, or included an award of injunctive relief; that the clause exempted self-help repossession from arbitration; and that in any appeal, the appealing party was responsible to pay any filing fee and arbitration costs subject to the arbitration panel’s later determination of apportioning those costs. On the first two provisions, the court specifically held that those provisions were not unconscionable, i.e., were not unreasonably or unduly one-sided or harsh. However, as to the third item (up front payment of arbitration fees and cost on appeal), the court adopted an ability-to-pay approach whereby the trial court would have to decide in each case whether or not the arbitration fees and costs on appeal would be affordable to the consumer in that case. (In Sanchez, the court noted that Sanchez had purchased a luxury car and also supplied no evidence that such fees were not affordable for him, so ruled for purposes of the case that the appellate cost provision was not unconscionable.)
Because the court did not have to address the issue of severance, the opinion was silent on the applicability of the severance doctrine to sever offensive or unconscionable provisions of an arbitration clause while enforcing the remainder of the arbitration clause.
The court’s adoption of the ability-to-pay approach to determine whether the appellate cost provision is or is not unconscionable may leave consumers and their lawyers the opportunity to argue in current and future petitions to compel arbitration that the cost provision is unconscionable because such costs are not affordable to the consumer bringing the action. That may require supporting declarations from the consumer, leaving it up to the court in each case to make a factual determination of affordability. Your counsel will have to develop strategies to combat unaffordability claims and analyze the availability and usefulness of the severance doctrine, leading to further argument and, potentially, appeals concerning the adequacy of the consumer’s evidentiary showing and other issues.