California Mediation and Arbitration

Automobiles, Consumers: Buyer’s Arbitration Award Exceeded $100K, And Auto Dealer Gets A “Do-Over” If Not Exactly An Appeal

Dealer Wanted To Go To Three-Arbitrator Panel After Receiving Adverse Arbitration Award, And Everyone Agreed That ADR Arbitral Forum Lacked “Appellate” Rules.  So?

      Plenty of arbitration disputes arise from arbitration clauses in auto sales contracts and leases – hence our sidebar category, “Automobiles.”.  Here’s an unusual one, based on fairly common arbitration provisions.  Condon v. Daland Nissan, Inc., No. A145613 (1/1 filed 11/4/16, order to pub. 11/29/16) (Banke, Humes, Dondero).

     Many auto sales agreements now contain an arbitration provision allowing a party to request a new arbitration under the rules of the arbitration organization if the arbitration award for a party is $0, or against a party in excess of $100K, or includes an award of injunctive relief against a party.  Here, the buyer, Mr. Condon, received an award in excess of $100K (based on attorney’s fees and costs), and the defendants, which were the dealership, the insurer, and the entity acquiring the sales contract, sought a new arbitration with the arbitral forum, ADR, in accordance with the terms of the parties’ arbitration provision. 

      The prevailing party, Mr. Condon, objected, and ADR punted, concluding “it lacked authority to resolve the parties’ disagreement over whether a new arbitration was proper,” absent a court order.  We surmise that ADR and the parties could not agree as to whether a “new arbitration” was an “appeal,” and whether deciding that issue by ADR was within the scope of the arbitration clause.

      The trial court concluded that ADR lacked “a process by which a new arbitration may be had before a three-arbitrator panel,” and denied a request for an order to further arbitrate with a three-member panel.  This was a bit of a head-scratcher, because in fact, ADR does have a process for appointing a three-arbitrator panel following an initial arbitration. 

      The way to make sense of this dispute is to note that the parties and the Court of Appeal addressed whether the arbitration clause provided for “an appeal” – because everyone agreed that ADR did not have rules providing for an appeal.  The Court made sense of the dealership’s request by explaining that the dealership was really asking for a “do-over” or “repeat” of the arbitration with a three-member panel, and that the arbitration clause reference to the “appealing party” in the arbitration context simply meant a do-over of the arbitration with a three-person panel.  

     COMMENT:  If the arbitration clause had referred to the “party requesting new arbitration in the arbitral forum” rather than to the “appealing party requesting new arbitration,” perhaps some confusion would have been avoided.

Arbitration, Enforceability, Consumers: MarketWatch Reports Trump University Could Be Sued In Court Because It Didn’t Have Arbitration Clause With Students

Obama Administration Has Sought Change In Law To Prevent Educational Institutions Getting Federal Funds From Requiring Students To Sign Pre-Dispute Arbitration Clauses.

     Jillian Berman reports on July 22, 2016 in MarketWatch that students were able to sue Trump University in the courts because the students were not required to sign pre-dispute arbitration clauses. 

     In contrast to Trump University, Berman reports:  “ About 98% of students enrolled in for-profit colleges receiving federal financial aid were subject to an arbitration clause, according to a report published earlier this year by the Century Foundation, a progressive think tank.”

     Meanwhile, the Obama Administration has pushed to finalize rules to prevent colleges that receive federal financial aid from requiring students to sign pre-dispute arbitration clauses as a condition for enrollment.  The rules are scheduled to take effect in 2016.

     QUERY:  How easily can the executive branch undo this change in rules after January 20, 2017?

Arbitration, Unconscionability, Consumers: Second District, Division 4 Holds Arbitration Agreement Between Low-Income Mobilehome Owners And Mobile Home Park Is Unconscionable

 

Defendants’ Failure To Disclose Prohibitively Expensive Arbitration Fees To Low Income Plaintiffs Weighed Against Enforcement Of The Arbitration Provision.

     When 61 “primarily low-income mobilehome owners” sued Wildwood Mobile Home Country Club (“Westmont”), naturally Westmont moved to compel arbitration.  After the trial court denied the motion, Westmont appealed.  Unsuccessfully.  Penilla v. Westmont Corporation, B262097 (2/4 9/9/16) (Manella, Epstein, Willhite).

     The Court of Appeal affirmed the order denying arbitration because the arbitration provision was procedurally unconscionable:  it failed to disclose “prohibitively expensive arbitration fees” and it was not provided in a Spanish language copy, nor explained to persons who did not understand written English.  In addition, the arbitration provision was substantively unconscionable because (i) “it imposed arbitral fees that were unaffordable or would have substantially deterred respondents from asserting their claims” and (ii) there were “unreasonably shortened limitations periods.”

     COMMENT:  There are now a number of California cases in which language confusion has become a factor in finding procedural unconscionability.  You can find my discussion of several of those cases by using the left-hand sidebar of this website and searching for “Spanish” in the “Search This Blog” rectangle. 

     The California courts have been sorting through the problem of figuring out when to take into consideration the ability of a person to pay for arbitration.  California Code of Civil Procedure section 1284.3(b)(1) entitles “indigent consumers” to qualify for a fee waiver.  The amount of income earned by the plaintiffs – average gross annual income of $35,600, and median annual income of approximately $32,000 in Penilla – placed them within the meaning of “indigent” under the statute. 

      Interestingly, the statute does not actually define “consumer.”  However, the courts seem to be assimilating persons with low income who enter into adhesive contracts into the developing jurisprudence concerned with the high costs of arbitration for consumers.  One of the primary arguments in support of mandatory consumer arbitration is “that it is less costly than civil litigation.”  Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899, 919 (2015).  Here, however, the evidence was that JAMS arbitrator rates (which were not disclosed) ranged from $500 to $800 per hour, or $5,000 to $10,000 per day, plus a mandatory $400 arbitration filing fee.  The low cost of arbitration can be an aspiration rather than a reality, especially when claims are small, and there is a class action waiver.

Arbitration, Unconscionability, Consumers: Ninth Circuit Holds Arbitration Clause in 23andMe Terms Of Service Is Not Unconscionable

Consumers With Neanderthal DNA And A Bone To Pick With 23andMe Will Need To Bring Their Clubs To Arbitration.

The Neanderthal man, member of the hunting race inhabiting central France in Mousterian times.  Philip Brigandi, photographer.  1924.  Library of Congress. 

        Tompkins v. 23andMe, Inc., No 14-16405 (9th Cir. Aug. 23, 2016) (Ikuta, Trott; Watford, conc.) provides a well-stocked arsenal for eviscerating claims that arbitration is unconscionable in a consumer contract.  The Ninth Circuit panel, in an opinion authored by Judge Ikuta, affirmed the district court’s order granting 23andMe, Inc.,’s¹ motion to compel arbitration, over arguments that the arbitration provision was unconscionable.

       The bilateral attorneys’ fees shifting clause was not found to be unconscionable.  The Court relied on Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899 (2015) [see our August 4, 2015 post], which requires a case-specific analysis of the consumer’s ability to pay, and found the plaintiffs had not carried the burden of showing that they couldn’t pay, or that their ability to arbitrate had been thwarted.  The San Francisco forum was reasonable – that’s where 23andMe is headquartered, and plaintiffs were in California.  The provision excluding intellectual property claims from mandatory arbitration was not unconscionable because the corporation had a reasonable justification for the arrangement.  A one-year statute of limitations did not make the arbitration provision unconscionable, nor did a unilateral right to modify the agreement make the provision unconscionable – the covenant of good faith and fair dealing reins in the modification that can be made unilaterally.

        COMMENT:  Judge Ikuta also relied on language in the recent case,  Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237 (2016) [see our March 28, 2016 post]:  “[A] contract can provide for a margin of safety that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable.”  Id. at 1250.  Look for more corporations with superior bargaining strength to rely on this language in consumer and employment disputes, when defending against claims that the arbitration clause they drafted is unconscionable. 

________

¹23andMe has been the subject of class action lawsuits claiming it has made misleading statements about the validity of its tests.

Arbitration, Homeowners: Failure To Comply With B&P Section 7191 Requirements For Prominence and Formatting Makes Arbitration Provision For Work On Residence Unenforceable

Placement and Prominence Requirements Are Key To Implementing Statutory Disclosure And Knowing Waiver Objectives

     In Anna-Becky Redlich v. Reliance Management Group, Inc., Case No. A140313 (1/2 March 11, 2015) (Banke, Margulies, Dondero) (unpublished), the Court of Appeal agreed with the trial court that arbitration provisions between plaintiff homeowner, and defendants design firm and construction management firm, did not sufficiently comply with Business and Professions Code section 7191, which regulates arbitration provisions in a a contract for work on residential property with four or fewer units.  The Court identified various problems, such as failure to include a title “ARBITRATION OF DISPUTES”, a reference to the Code of Civil Procedure in the contract that should have been to the Business and Professions Code, lack of bold, colored, or capitalized text, and defective placement of certain provisions.  Analyzing the lack of statutory compliance under a “substantial compliance” standard, the Court of Appeal concluded that, given the disclosure and knowing waiver objectives of the statute, substantial compliance was lacking.

     COMMENT:  Several statutory schemes have prominence and formatting requirements for arbitration clauses.  Prominent examples relate to health care service plans, Health and Safety Code section 1363.1, certain real estate contracts, Code of Civil Procedure, section 1298, and contracts for work on small residential properties, Business and Professions Code section 7191.  Aim for strict compliance with the statute.  One person’s “technical defect” is another’s “failure of substantial compliance.”

Arbitration/Enforceability/Consumers: Reasonable Person Wouldn’t Understand Purchasing A Vehicle Would Simultaneously Bind To Contract With Satellite Radio Service And Require Arbitration

Lack Of Consent Is The Problem With The Arbitration Agreement Here.

     In an opinion authored by Judge Pregerson, the Ninth Circuit reverses the district court’s order dismissing a putative class action and granting Sirius XM Radio Inc.’s motion to compel arbitration.  Knutson v. Sirius XM Radio Inc., No. 12-56120 (9th Cir. Nov. 10, 2014) (Pregerson, Murphy, Berzon).

     The customer purchased a vehicle from Toyota, and received unwanted solicitation calls from Sirius XM.  He sued Sirius XM Radio Inc., alleging the unwanted telemarketing calls were violations of the Telephone Consumer Protection Act.  Sirius XM Radio Inc. successfully petitioned to compel arbitration, and plaintiff appealed.

     The Ninth Circuit panel held Sirius XM failed to prove the existence of an agreement to arbitrate.  A reasonable person could not be expected to understand that purchasing the vehicle would simultaneously bind him to a contract with Sirius XM, and that the contract would require arbitration.  The fact that the plaintiff received some benefit by listening to the radio did not manifest consent to an agreement the plaintiff didn’t know about.

     COMMENT:  I have asked on other occasions whether “consent” is something of a fiction in the arbitration context, given that a procedurally unconscionable agreement involving surprise and ambush, but that is not substantively unconscionable, can nevertheless survive scrutiny.  Let’s just say that being able to apply the label  “lack of consent” can still effectively kill an arbitration agreement, whereas applying the label “procedurally unconscionable” is not dispositive.  The line between “lack of consent” and “procedurally unconscionable” is not necessarily a bright line.

     Also, note that Judge Pregerson dissented in 2013 in Kilgore v. Keybank, attaching as an Appendix to his dissent,  “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.”  [Kilgore is the subject of my April 12, 2013 post].  The Kilgore case rejected an argument that the arbitration clause at issue was procedurally unconscionable.  However, in the Knutson case, the Court of Appeals did not address substantive unconscionability, because its analysis hinged instead on lack of consent.  This time, Judge Pregerson, rather than being the dissenter, penned the opinion.

Consumer Arbitration/Employees/Enforceability/ Fees: CCP 1284.3 Prohibits Fee Shifting In Employee Arbitrations But Not On The Facts Of This Case

Court of Appeal Was Unable To Find Precedent On Whether CCP 1284.3, Pertaining To Consumer Arbitrations, Applies To Employer-Employee Arbitrations, And Reaches Its Own Conclusion

     On March 12, 2014, I posted about an earlier Court of Appeal decision involving the same parties and the same arbitration agreement as here, in which the Court held that, with the exception of a claim for unpaid wages, other claims in the case could be arbitrated. Unfortunately, the decision in that case apparently came down too late to offer guidance to the trial judge in this case, who denied plaintiff’s motion to compel the former employee to arbitrate, only to be reversed on appeal. Francis Capital Management LLC v. Martin Keith Lane, Jr., B253559 (2/1 Sept. 9, 2014) (Manella, Epstein, Willhite) (unpublished).

     The most interesting issue presented by the case is the application of Cal. Code of Civ. Proc., section 1284.3. (I posted about 1284.3 earlier on May 1, 2014). Subpart (a) of this provision states:

“No neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party, if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider, organization, attorney, or witnesses.”

     The parties had designated the AAA as the arbitration organization. The issue presented by section 1284.3 was whether a prevailing party fee shifting provision in the arbitration agreement prohibited the AAA from arbitrating the dispute. The trial court concluded that the answer was “yes”, but the Court of Appeal concluded here, on the facts, that the answer was “no.”

     A threshold question is whether employee-employer arbitrations even qualify as “consumer arbitrations.” Finding an absence of case law, and looking to guidance in California Rules of Court, Ethics Standard for Neutral Arbitrators, promulgated pursuant to section 1281.85, the Court of Appeal answered the threshold question in the affirmative.

     Several factors here saved the fee shifting provision from the clutches of section 1284.3.

     First, the fee shifting was not “mandatory,” but rather “discretionary.” The clause provided that the arbitrator “may” award reasonable fees.

     Second, the arbitrator was given authority to award costs and fees “authorized by law.” That meant that if 1284.3 didn’t allow for fee shifting, then the arbitrator lacked the authority to shift fees. DRAFTING TIP: the phrase “authorized by law” can be useful to save a questionable provision.

     Third, there was a severability provision.

     Fourth, plaintiff had agreed to waive fees.

     In short, the Court of Appeal concluded “no legal bar prohibits the AAA from accepting the arbitration.” The Court remanded the matter to the trial court “to enter an order granting FCM’s motion to compel Lane to submit to arbitration of FCM’s claims.”

     If published, this case would provide useful guidance about section 1284.3 to parties drafting fee clauses in consumer arbitration agreements, and to arbitrators having to confront the impact of such clauses on their ability to accept the arbitration.

Arbitration/Class Action Waiver/FAA/Consumers: Court of Appeal Holds That Agreement Inviting Consideration Of Unenforceability Of Class Arbitration Procedures Allowed Trial Court To Invalidate Class Action Waiver

 

Sticking To Its Contract Interpretation Guns, Second District, Division One, Shoots Down Federal Decisions

     The Court of Appeal has upheld a trial court order denying a motion to dismiss or stay class action litigation and to compel arbitration, basing its conclusion on principles of contract interpretation.  Imburgia v. DIRECTV, Inc., B239361 (2nd Dist. Div. 1 April 7, 2014) (Rothschild, Chaney, Miller).

     AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S.Ct. 1740 (2011) (Concepcion) held that the Federal Arbitration Act (FAA) preempts the rule of Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which case held that class action waivers in consumer contracts may be unconscionable and unenforceable.  (Under California law, the Consumer Legal Remedies Act would also preclude waiver of the right to bring a class action under the CRLA). 

     But Concepcion does not necessarily invalidate all class action waivers.  The objective of the FAA is to carry out the intent of the parties, and contract interpretation may lead to the conclusion that the parties intended to proceed under state law rules that allow for the invalidation of class action waivers.  In Imburgia v. DIRECTV, Inc., the Court of Appeal concluded that here, the parties intended to proceed under California state law, allowing the trial judge to invalidate the class action waiver.

     The Court of Appeal summarized:  “the 2007 customer agreement provides that ‘if . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration] section is unenforceable.’  The class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.” 

      To reach its conclusion, the Court of Appeal applied two principles of contract interpretation. 

     First, in case of inconsistency, the specific provision takes precedence over the general provision in a contract.  Here,  the contract generally adopted the FAA, but specifically adopted “the law of your state” with respect to the specific issue of enforceability of class action waivers.  Therefore, California state law took precedence over the FAA with respect to the specific issue of enforceability of the class action waiver.

     Second, if the contract was ambiguous, then it had to be interpreted against the drafter, namely, against DIRECTV, Inc. 

      The Court of Appeal disagreed with two federal decisions, In re DIRECTTV Early Cancellation Fee Marketing and Sales Practices Litigation, 810 F.Sup.2d 1060, 1071 (C.D.Cal. 2011), and Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), finding that the courts that rendered those decisions failed to properly apply important principles of contract interpretation.  Because “the dispositive issue” was the intent of the contracting parties, contract interpretation was highly relevant and deserved more weight than the federal courts had given to it.  (See my August 4, 2013 post on Murphy.)

      While consumer advocates may have found a gap in the fortress wall in Imburgia, allowing the consumers, at least for now, to beat arbitration and a class action waiver, one can count on DIRECTV, Inc. and other corporations finding drafting solutions to plug the gap in the future.   And one can also count on ever imaginative consumer advocates searching for new ways to scale the fortress wall.

Unconscionability/Preemption/Class/Consumers: Ninth Circuit Upholds Denial Of Arbitration In Two Cases

      Ninth Circuit Judge William Fletcher is the author of two recent Ninth Circuit opinions affirming district court denials of motions to arbitrate against class action plaintiffs. Like his mother, the distinguished late Ninth Circuit Judge Betty Binns Fletcher, W. Fletcher was born in the State of Washington, and the next two cases involve Washington law.

Beware the “Click” Signature!

     The consumer in Lee v. Intelius Inc. v. Adaptive Marketing LLC  v. Adaptive Marketing LLC, No. 11-35810 (9th Cir. Dec. 16, 2013) purchased a background check on the Internet from Intelius – and inadvertently purchased a “Family Safety Report” by clicking a button on the website.  Plaintiff filed a state-law class action against Intelius, and Intelius then sued Adaptive, the company that actually provided the unwanted Family Safety Report.  Adaptive moved to compel arbitration of Plaintiff Lee’s and Intelius’s claims, and the district court denied the motion to compel.

     The Ninth Circuit affirmed the denial.  Buttons on the website were confusing, there was “small, light grey print that did not stand out prominently from the beige background’, the text was long, and there were multiple hyperlinks. However, “Washington courts have not decided whether or under what circumstances a ‘click’ constitutes a signature.”  Therefore, the Court rested its conclusion on the safer ground that the webpage insufficiently identified Adaptive as a contracting party. 

     As to the specific arbitration provision embedded in Adaptive’s terms and conditions, the “careful consumer would reasonably have understood . . . that the hyperlink to ‘Terms and Conditions’ was to Intelius’s rather than Adaptive’s terms and conditions.”  

Court Recognizes That Plaintiffs Who Don’t Want To Arbitrate Don’t Raise The Issue In Their Complaint

     Under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), the court gets to decide whether the arbitration clause is invalid, but the arbitrator gets to decide whether the whole contract is invalid, when the complaint attacks the validity of the contract as a whole, rather than just the arbitration clause. 

     What happens when plaintiff doesn’t want to arbitrate, files a complaint that doesn’t address arbitration, and then opposes a motion to compel?  The district court gets to consider the validity of the arbitration clause, where the arbitration clause’s invalidity is entirely distinct from the contract claims in the case.  Smith v. Jem Croup, Inc., No. 11-35964 (9th Cir. Dec. 12, 2013).  As Judge Fletcher notes, many contracts provide for compulsory arbitration at the choice of one or both parties, but if neither party asks for arbitration, the dispute may be brought as a lawsuit.  Under those circumstances, it would be unrealistic to expect the plaintiff to challenge the arbitration clause in its complaint, but it would make sense to challenge the clause in the context of opposing a motion to compel.

     Moreover, the arbitration clause here was found to be unconscionable – under Washington law.  Here, I note that there appears to be a difference between Washington and California law, as Judge Fletcher writes that “[u]nder Washington law, a contractual provision is unenforceable if it is procedurally unconscionable.”  Under California law, a finding of unconscionability requires procedural and substantive unconscionability.

     The opinion also provides a rationale for why the Federal Arbitration Act and Concepcion do not preempt Washington procedural unconscionability law, including among other factors, that Washington law applicable to the disclosure of material terms in an attorney retainer agreement “is not specifically aimed at  arbitration clauses.”

    

Arbitration/Automobiles/Unconscionability: Second District, Div. 1 Revisits Ruling In Sanchez v. Valencia Holding Company, And Again Concludes That Arbitration Provision In Automobile Sales Contract Is Unconscionable

Split In Appellate Opinion

     I have a separate sidebar category on “automobiles” because the auto industry spawns many decisions about the enforceability of arbitration clauses in sales contracts.  As I have previously posted on August 26, 2012, and January 7, 2013, Sanchez v. Valencia Holding Co. LLC, 201 Cal.App.4th 74 (2012) is pending before the California Supreme Court, and presents as an issue whether unconconscionability defenses to arbitrating auto sales disputes are preempted by AT&T Mobility v. Concepcion, 563 U.S. __ , 131 S.Ct. 1740 (2011).

     In Vargas v. Sai Monrovia B, Inc., B237257 (June 4, 2013) (Mallano, J., author; Rothschild, J. writing separate concurrence) (for publication), the Second District, Division 1 has revisited its ruling in Sanchez.  Unsurprisingly, it concludes that unconscionability defenses are not preempted.  As in Sanchez, the Court again concludes “that the identical sale contract does not require the arbitration of disputes between a purchaser and a dealer because it is permeated by unconscionability.”

     The split in appellate opinion is expressly noted in footnote 4:  “In Goodridge and Natalni, the Courts of Appeal concluded the Sale Contract was unconscionable.  In Flores and Vasquez, the Courts of Appeal reached the opposite conclusion.”

 

Above: 1965 Monte Carlo Rally winner: 1964 Morris Mini Cooper S.  Source:  Wikimedia Commons/License.  Author:  “DeFacto.”  (Note:  The subject of Vargas v. Sai Monrovia B, Inc. was a Mini Cooper S.)