In Sanchez v. Valencia Holding Company, LLC, Court slays arbitration agreement, comments on Concepcion and Armendariz
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With AT&T Mobility LLC v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740 (2011) in the bank and earning interest, the new defense playbook includes a renewed, direct assault on Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). But in Sanchez v. Valencia Holding Company, LLC (October 24, 2011), the Court of Appeal (Second Appellate District, Division One) stongly declared the ongoing viability of Armendariz after Concepcion. In other words, Concepcion is to state law unconscionability analysis as tap water is to vampires - no effect.
The allegations are easy to summarize. Plaintiff Sanchez wanted to buy a used Mercedes. The dealer charged him $3,700 to have the vehicle "certified" as eligible for a lower interest rate. That was a lie. The charge was for an undisclosed and optional extended warranty. The dealer charged him new tire fees when not all of the tires were new. Plaintiff was also told that the vehicle was a "certified" used Mercedes, having been through a rigorous inspection and maintenance process. That was also a lie. Sanchez filed a class action alleging, among other things, violations of the CLRA, ASFA, UCL, Song-Beverly Act, and Public Resources Code section 42885.
Valencia moved to compel arbitration. The trial court denied the motion, stating that the CLRA expressly provides for class actions and declares the right to a class action to be unwaivable. (See Civ. Code, §§ 1781, 1751.) As a consequence, the class action waiver in the arbitration provision was unenforceable. Further, because the agreement included a poison pill clause, the unenforceability of the class action waiver made the entire arbitration provision unenforceable. The trial court therefore denied the motion. Valencia appealed.
The Court of Appeal began its discussion by summarizing its conclusion:
We do not address whether the class action waiver is unenforceable. Rather, we conclude the arbitration provision as a whole is unconscionable: The provision is procedurally unconscionable because it is adhesive and satisfies the elements of oppression and surprise; it is substantively unconscionable because it contains terms that are one-sided in favor of the car dealer to the detriment of the buyer. Because the provision contains multiple invalid terms, it is permeated with unconscionability and unenforceable. Severance of the offending terms is not appropriate. It follows that the case should be heard in a court of law.
Slip op., at 10. Next, focusing on Concepcion and Armendariz, the Court said:
Before applying Armendariz to the present case, we note that Concepcion, supra, 131 S.Ct. 1740, does not preclude the application of the Armendariz principles to determine whether an arbitration provision is unconscionable. Concepcion disapproved the "Discover Bank rule," stating: "In Discover Bank, the California Supreme Court applied [the doctrine of unconscionability] to class-action waivers in arbitration agreements and held as follows: [¶] '[W]hen the [class action] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party "from responsibility for [its] own fraud, or willful injury to the person or property of another." Under these circumstances, such waivers are unconscionable under California law and should not be enforced.'" (Concepcion, at p. 1746, italics added.) With the exception of the Discover Bank rule, the Court acknowledged that the doctrine of unconscionability is still a basis for invalidating arbitration provisions. (Concepcion, at pp. 1746, 1747; see Kanbar v. O’Melveny & Myers (N.D.Cal. 2011) 2011 U.S. Dist. Lexis 79447, pp. *15–*16, *23–*24, 2011 WL 2940690, pp. *6, *9.) Thus, Concepcion is inapplicable where, as here, we are not concerned with a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purposes of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1–16). (See Concepcion, at pp. 1748–1753.)
Slip op., at 11-12. In the balance of the opinion, the Court found procedural unconscionability (one-sided and surprise) and substantive unconscionability (several terms favoring dealer). The Court then concluded that some of the substantive defects could not be cured by striking provisions.
The Court explicity declined to address the issue of whether the CLRA rendered the class action waiver provision unenforceable.
Justice Rothschild concurred in the judgment.
