California Mediation and Arbitration

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.)

Arbitration/Consumers/FAA/Unconscionability: 9th Circuit Holds Arbitration Clause In Consumer Credit Contract Lacking “Holder Rule” Language Is Not Unconscionable, And Doesn’t Fall Under “Public Injunction” Exception to Arb

Dissenting Judge Pregerson Attaches “Dense, Small Print, And Blurry Nine-Page Contract” As Appendix

     We posted on December 16, 2012 about the Kilgore v. Keybank oral argument to the Ninth Circuit, sitting en banc.  The case involves a putative class action by former students of a failed helicopter flight-training school seeking injunctive relief against the bank that originated their student loans and the loan servicer.  The complaint alleged defendants violated the California Unfair Competition Law (UCL), because the Note and contracts with students failed to include language required by the Federal Trade Commission’s “Holder Rule.”  This rule requires consumer credit contracts to include language that a holder of the consumer credit contract is subject to claims and defenses which the debtor could assert against the seller of goods or services.  In the case of the flight school, students took out loans that the lender quickly resold on the secondary market, and the students of the failed school were left “holding the bag.”  The district court found the contractual arbitration clause to be unconscionable.  The Court of Appeals, sitting en banc, has now reversed, holding that the arbitration requirement, which includes a class waiver, is not unconscionable, and does not fit into the narrow “public injunction” exception to the arbitration requirement.  Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013) (Hurwitz, J., author) (for publication).

     The en banc majority rejected the argument that the Note’s ban on class arbitration is substantively unconscionable under California law; that issue was foreclosed by AT&T Moblility v. Concepcion, 131 S.Ct. 1740 (2011).  The risk that students will be saddled with prohibitive arbitration costs was rejected as “too speculative”.  The procedural unconscionability argument was also rejected, primarily because the arbitration clause allowed “students to reject arbitration within sixty days of signing the Note.” 

      A carve-out from the arbitration requirement has been judicially created in Broughton v. Cigna Healthplans of Cal., 988 P.2d 67 (Cal. 1999).  Where plaintiffs function as a private attorney general, enjoining future deceptive practices on behalf of the general public, injunction claims are not arbitrable.  The hot issue is whether Broughton has also been preempted by the Federal Arbitration Act and Concepcion.  However, the Court avoided deciding this important issue by determining that the students were acting to further their own interests, and the action complained about was past rather than prospective action.  

     Judge Pregerson, dissenting, attaches an an Appendix “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.” 

       Among the points made by Judge Pregerson are that this is a “take it or leave it” consumer contract introducing at least some procedural unconscionability under the circumstances.  Of course, there is the 60 day provision allowing for an opt-out – tough to get around, and never mind that students don’t read the provisions.  As to “substantive unconscionability”, a confidentiality provision requires the parties to maintain confidentiality of any claim they arbitrate.  This works against plaintiffs who can’t share information, and in favor of the defendant that gets to arbitrate separately with each plaintiff.  Filing a civil action costs less than $500; filing the same claim in arbitration runs more than $4000.  Finally – and this is interesting – one of the two arbitrators named in the contract ruled in favor of banks and credit card companies, and against consumers 94 % of the time.  Judge Pregerson is alone in his dissent.

Arbitration/Nonsignatories/Equitable Estoppel: Ninth Circuit Puts Brakes On Toyota’s Attempt To Compel Prius Plaintiffs To Arbitrate Their Claims

District Court Could Decide Whether Nonsignatory Could Compel Arbitration

     Toyota has been enmeshed in arbitration concerning the ABS braking system of its 2010 Prius.  In Kramer v. Toyota Motor Corporation, et al., Case No. 12-55050 (9th Cir. January 1, 2013) (Quist, D. J., author 3-0) (published), owners of 2010 Priuses, parties to arbitration agreements with Toyota dealerships, were able to fend off a motion to compel arbitration by Toyota Motor Corporation and Toyota Motor Sales, U.S.A., Inc. (Toyota), nonsignatories to the arbitration agreement.

     The first issue addressed in Kramer was whether the district court or the arbitrator had authority to decide if Toyota, a nonsignatory, could compel arbitration.  This is typically a “threshold issue” determined by the courts, unless the arbitration clause explicitly and clearly delegates the authority to the arbitrator.  Here, the arbitration clause provided that it “applies to any claim or dispute about whether a claim or dispute should be determined by arbitration.”   Okay, that may work to delegate the authority to decide the issue of arbitrability as to signatories.  But as to nonsignatories, “[g]iven the absence of clear and unmistakable evidence that Plaintiffs agreed to arbitrate arbitrability with nonsignatories, the district court had the authority to decide whether the instant dispute is arbitrable.”

      Second, Kramer includes a detailed analysis of whether Plaintiffs were “equitably estopped from avoiding arbitration.”  To determine whether Toyota, a nonsignatory, could invoke equitable estoppel and require arbitration under the Federal Arbitration Act, the Court looked to California state contract law.  In particular, the Court drew on the test in Goldman v. KPMG LLP, 173 Cal.App.4th 209 (2009), whether the claims that the nonsignatory sought to arbitrate were “intimately founded in and intertwined with the underlying contract obligations.”  Id. at 221.  Without getting deep in the weeds, let’s just say that the Court did not find the Prius owners’ claims against Toyota sufficiently intertwined with the underlying contract obligations between the Prius owners and the dealerships to require arbitration of the claims against the nonsignatories.

     The panel affirmed the district court’s order denying Toyota’s motion to compel arbitration.

     Blawg Bonus:  Theodore J. Boutrous Jr., one of Toyota’s attorneys, was the lead attorney for Wal-Mart in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), the case resulting in the decertification of a huge class of Wal-Mart female employees.

Arbitration/Consumers/Fees: Sorry, Wrong Number – Court of Appeal Rejects Cingular Wireless Customer’s Claim That Fees Incurred Successfully Opposing Arbitration Before Concepcion Was Decided Amounted To Damages

Concepcion Looms Large, As Court Summons “Large Animal” and “Tanker of Ink”Images For The Case -- And Its Wake

     The issue in Selby v. Cingular Wireless LLC, Case No. G045769 (4th Dist. Div. 3 January 29, 2013) (Bedsworth, J., author 3-0) (unpublished), was whether the customer of a cell phone carrier could state damage under the California Legal Remedies Act (CLRA) because she had incurred legal fees successfully opposing Cingular’s motion to compel arbitration back in 2005.  Unless the plaintiff suffers some “damage” from enforcement of a contract provision alleged to violate the CRLA, the plaintiff lacks standing to sue under the CRLA.  Meyer v. Sprint Spectrum L.P., 45 Cal.4th 634 (2009).

      Unfortunately for the plaintiff, none of the contractual provisions she claimed violated the CLRA had ever been enforced against her (with one exception), and therefore under Meyer, she could not state a claim for damages as to those claims.  The one exception was that back in 2005, she had successfully opposed Cingular’s motion to compel arbitration, thereby incurring fees -- arguably “transaction costs” constituting damages.

     As to the motion to compel arbitration, however, AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) has changed the legal landscape.   In the colorful language of Justice Bedsworth, Concepcion is “so significant a tanker of ink has been spilled about it in less than two years after it was handed down . . . . Concepcion is the large animal in this room.”

Tanker of oil.  Public domain work of sailor or employee of U.S. Navy.  Wikimedia Commons.

      Concepcion – a case involving the very same defendant, Cingular (called AT&T in the opinion) – held that the Federal Arbitration Act made arbitration agreements valid and enforceable, save “upon such grounds as exist in law or in equity for the revocation of a contract.”  The most common exception under the “savings clause” is unconscionability of the contract.   In Selby, however, the Court believed that it would be “a perversion of state law unconscionability doctrine” to apply the doctrine to a situation in which the consumer “picked the fight in the first place,” making no claims of “any damage” arising from the non-arbitration she attacked.  Her costs, Justice Bedsworth wrote, “are the legal equivalent of a self-inflicted wound, and cannot be regarded as recoverable transaction costs.”  Selby’s claims based on Cingular’s enforcement of its arbitration right, covered by Concepcion and the FAA, lacked merit. 

     Judgment affirmed. 

Margate Elephant, Margate City, Atlantic County, N.J.  U.S. Government photo.  Library of Congress.

Arbitration/Consumers/Class Actions/FAA: Second District, Division 8 Rules That Consumer Legal Remedies Act’s Prohibition Against Class Waivers Is Preempted By The Federal Arbitration Act

“Saving Clause” of the FAA Doesn’t Save Consumer’s Unwaivable Statutory Rights Here

     A hot arbitration topic is whether in various circumstances the Federal Arbitration Act (FAA) preempts “unwaivable statutory rights” under state law.  That was an important question in Flores v. West Covina Auto Group, Case No. B238265 (2nd Dist. Div. 8 January 11, 2013) (Flier, J., author) (unpublished).  The lawsuit arose from the purchase of a previously owned automobile from West Covina Auto Group, LLC (WCT).  WCT successfully moved to compel arbitration based on an arbitration provision in the auto sales contact, and the consumer appealed.

     The consumer argued that arbitration was inappropriate:  “(1) a ‘poison pill’ provision in the arbitration clause prohibits arbitration; (2) WCT waived its right to arbitration; (3) the arbitration clause is unconscionable; (4) there was no meeting of the minds or mutual consent regarding the arbitration clause; and (5) as an unexpected term in an [sic] contract of adhesion, the arbitration clause is unenforceable.”  All the arguments went down in flames.

     The Federal Arbitration Act provides arbitration agreements “shall be valid, irrevocable, and enforceable,” except on “such grounds as exist at law or in equity for the revocation of any contract” – the last phrase being the so-called “saving clause” of the Act.  The consumers here argued, in effect, that their unwaivable statutory rights under the CLRA constituted grounds under the savings clause to avoid arbitration.  But the savings clause of the Act was not enough to save them from arbitration here.

     Significantly, the Court of Appeal held that the ruling in Fisher v. DCH Temecula Imports LLC, 187 Cal.App.4th 601 (2010), holding that the right to a class action lawsuit or classwide arbitration was an unwaivable statutory right under the California Consumer Legal Remedies Act, has been preempted by the Federal Arbitration Act, following the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

     No waiver by the auto dealer of the right to arbitrate was found to have occurred, despite extensive litigation.  Here, timing was important:  Fisher was decided just after the plaintiffs filed their original complaint, precluding arbitration, and within two weeks after the filing of Concepcion, the auto dealer informed the trial court that it intended to compel arbitration.  In concluding that the auto dealer had not waived its right to arbitrate, the Court “decline[d] to establish a rule that WCT should have done everything possible to compel arbitration, no matter how futile, expensive, or protracted the process.”

     Despite the fact that the contract contained a number of clauses that other courts have found to be one-sided, prejudicial, and unconscionable, the Court here found no prejudice or unconscionability.  I note the Court stated, “appellants have not shown prejudice” – and therein lies a clue as to how consumers must attack such arbitration clauses if they are to have any hope of avoiding arbitration.  They must make particularized showings, based on admissible evidence, that in their case, the contractual provisions are unduly prejudicial or unconscionable.  Given the post-Concepcion legal trend, a general argument that waiver of a statutory right to a class action is unconscionable, without a particularized showing based on evidence, is going to be a tough, if not impossible, argument to win.

Arbitration/Unconscionability/Severability: First District, Division 1 Affirms Denial Of Petition To Arbitrate Car Sales Contract Dispute On Grounds Of Unconscionability

The Issue Is Also Pending In The California Supreme Court

     The latest in the crop of cases concerning car sales contracts and petitions to compel arbitration is Natalini v. Import Motors, Inc., Case No. A133236 (1st Dist. Div. 1 January 7, 2013) (Simons, J., author) (unpublished).  The Court had no trouble affirming the denial of the petition to arbitrate on grounds of procedural and substantive unconscionability.  As recently as New Year’s Day, I posted about arbitration, unconscionability, and an auto sales contract involving a Dodge Avenger in another case. 

      The analysis here in Natalini fits the template for these cases:  the contract is an adhesive “take it or leave it” contract, and there is an element of surprise, because the arbitration provision is not particularly conspicuous, on the back of a form, and not pointed out to the buyer.  That satisfies the “procedural unconscionability” prong. 

     As to the “substantive unconscionability” prong, the arbitration provision shares characteristics of other one-sided arbitration provisions designed to favor the car dealer in car sales contracts.  Thus, the arbitration provision authorizes an appeal resulting in new arbitration before a three-arbitrator panel only for an award of $0 or in excess of $100,000, the provision authorizes an appeal resulting in a new arbitration before a three-arbitrator panel if the award includes injunctive relief, and the provision exempts self-help remedies, perhaps the car dealer’s most significant remedies.  Those provisions, treated as one-sided in other cases, added up to substantive unfairness.  And because the arbitration provision can be considered “permeated by unconscionability” if it has more than one unlawful provision, the trial court does not abuse its discretion by declining to sever unconscionable aspects of provision.

      Keep in mind that Sanchez v. Valencia Holding Company (S199119) is pending before the California Supreme Court.  The issue presented in Sanchez is: “Does the Federal Arbitration Act . . . as interpreted in AT&T Mobility LLC v. Concepcion . . . preempt state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable.”

Arbitration/Consumers/Unconscionability: Second Dist. Div. 3 Affirms Order Denying Petition To Compel Arbitration Of Consumer Dispute Over Used Car

Procedural and Substantive Unconscionability Drive The Result

     Arbitration clauses, automobile purchases and leases provide a ripe area for dispute.  In 2012, I reported on a number of those disputes.  See my posts of April 12, 2012 (Kolev v. Euromoters West/The Auto Gallery; opinion withdrawn by 9th Cir.), August 1, 2012 (Caron v. Mercedes-Benz Financial Services USA LLC), August 26, 2012 (Goodridge v. KOI Automotive), and October 16, 2012 (Sherf v. Rusnak/Westlake).  In our next case, the purchaser sued after encountering problems with his used Dodge Avenger.  Defendants, the finance corporation and dealership, appealed the denial of their petition to compel arbitration.  Norton v. Ford of Santa Monica, et al., Case No. B237273 (2nd Dist. Div. 3 Dec. 28, 2012) (Kitching, J., author) (unpublished). 

     These consumer cases typically turn now on the issue of whether the arbitration clause is “unconscionable.”  In Norton, the arbitration provision crashed.

 

 

 

Used cars for sale.  Marion Post Wolcott, photographer.  Dec. 1940.  Library of Congress

     The arbitration clause was procedurally unconscionable because it contained “elements of surprise.”  Specifically, the arbitration clause was “inconspicuous” because it was located on the back side of a page, and did not have to be initialed.  The dealer did not draw the buyer’s attention to the clause.

     Substantive unconscionability resulted from the one-side nature of the arbitration provision – though it might appear superficially neutral on its face, it primarily benefited the dealer.  Example:  “A car buyer does not benefit from a provision allowing the dealership to seek a new arbitration of an award of more than $100,000 because the buyer, not the dealer, will be the party more likely to recover an award of that size. If the buyer obtains an award under the $100,000 threshold but believes it is too low, the buyer has no option to request a new arbitration unless the award is $0.”  Additionally, the “arbitration provision requiring the party requesting a new arbitration to advance filing fees and arbitration costs is unconscionable because it allows a financially strong automobile dealership to request a new arbitration while discouraging or preventing a cash-strapped consumer from doing so.”

     Thus, the Court of Appeal readily affirmed the trial court’s order denying the petition to arbitrate, based on procedural and substantive unconscionability.

Arbitration/Class/Waiver/Consumers/Enforceability: Second District Division 6 Reverses Denial of Automobile Dealership’s Motion to Compel Arbitration

 

Ducks Addressing Viability of Gentry v. Superior Court By Distinguishing It As Case Dealing With Employment Issues, Not Consumer Issues

     Plaintiff purchased a BMW, and filed a complaint alleging a violation of the Consumers Legal Remedies Act (CLRA) and other consumer protection statutes, because some BMWs do not come with a spare tire, but are equipped instead with tires that allow one to drive a short time after a tire is punctured.  The trial court denied the dealership’s motion to compel arbitration, on the ground that the arbitration agreement included an unenforceable class action waiver.  The dealership appealed.  Sherf v. Rusnak/Westlake, Case No. B237275 (2nd Dist. Div. 6 Oct. 16, 2012) (Perren, J.) (unpublished).

     The Court of Appeal reversed the trial court’s order denying arbitration.   AT&T Mobility LLC v. Concepcion, ___ U.S. ___ , 131 S.Ct. 1740 (2011) preempts state law prohibiting a consumer from waiving class action rights.  However, the Court of Appeal remanded to the trial court to determine whether the arbitration agreement was unconscionable under California law.

     Along the way, the Court of Appeal pointed out that the California Supreme Court “has relied on statutory rights to invalidate a class action waiver in the context of employee rights.” Gentry v. Superior Court, 42 Cal.4th 443 (2007).  Rather than address the continuing viability of Gentry, the Court of Appeal simply ducked that issue by pointing out that Gentry dealt with employment issues, not consumer issues.  Besides, the California Supreme Court has granted review for Iskanian v. CLS Transp. Los Angeles, 208 Cal.App.4th 949 (2012), a case that concluded that Concepcion invalidated Gentry.  So the issue of using unwaivable statutory rights to nix enforcement of arbitration agreements should come up again soon. 

Spare wheels and tires.  Between 1940 and 1946.  Alfred T. Palmer, photographer.  Library of Congress.

Arbitration/Res Judicata/Waiver/Consumers/Class Action: 2006 Denial Of Mediation Is Reversed In 2011 And Reversal Is Affirmed In 2012–Concepcion Made The Difference

Court of Appeal Says It Would Have Been Futile To Seek Reversal Earlier

     In Phillips v. Sprint, Case No. A134371 (First Dist. Div. 3 Sept. 26, 2012) (Pollak, J., author) (published), the Court of Appeal considered a situation in which the trial court denied a request to arbitrate in 2006 in a consumer class action, but granted the request in 2011, following the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, ___ U.S. ___ ,131 S.Ct. 1740 (2011)(Concepcion).  In 2011, Concepcion abrogated the California rule, and upheld the validity of class action waivers in consumer contracts requiring arbitration.

     Plaintiffs in Phillips v. Sprint argued the failure to appeal the earlier denial was “res judicata.”  But a motion does not result in a judgment, and therefore the earlier decision was not res judicata. 

     Plaintiffs also argued that the failure to appeal the earlier denial constituted a waiver of arbitration.  “However, as Sprint argues, pursuing an appeal would have been futile given the state of law at the time. ‘Waiver should not be found on the basis of a party’s failure to undertake a futile act.’ (In re Apple & AT&TM Antitrust Litigation (N.D. Cal. 2011) 826 F.Supp.2d 1168, 1174.)”

     Phillips v. Sprint is in line with Reyes v. Liberman Broadcasting Inc., Case No. B235211 (2nd Dist. Div. 1 Aug. 31, 2012), a case we posted about on September 2, 2012.  The court in Reyes also held that an employer that quickly asserted its right to arbitrate after Concepcion was decided did not waive its right to arbitrate.

Arbitration/Consumers: Consumer Advocates Urge Consumers To Take Advantage Of Opt-Outs In Nursing Home Agreements

    

     On March 27, 2012, we posted about Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012).  Marmet Health, a Supreme Court case, concluded the Federal Arbitration Act does pre-empt the state public policy of West Virginia against predispute arbitration agreements applying to personal injury or wrongful death claims against nursing homes.  So if you check Mom or Dad into a nursing home, and an arbitration clause is signed, Mom or Dad can generally be compelled to arbitrate (unless the clause is found to be unconscionable for reasons other than that it offends a pre-empted state policy against such clauses).

     A September 18, 2012 article by Michelle Andrews on the National Public Radio website points out many such arbitration clauses have “opt-out” agreements giving the party additional time to back out of the arbitration agreement.  It’s good business, because if the arbitration agreement is not “take it or leave it”, it is more likely to be enforceable.  Consumer advocates, however, advise against signing the arbitration agreement, arguing arbitration results in additional costs, and results in smaller awards for plaintiffs.