Today's Trends in Credit Regulation

Arbitration Decisions Are All Over The Map
By Shelley B. Fowler

It’s hard enough to keep up with the ever-changing state and federal laws and regulations that impact your sales and financing documents without trying to keep up with what appear to be conflicting opinions from courts.

This is especially true in California where, in late March and early April, the Court of Appeal of California was busy filing opinions in cases involving motions to compel arbitration of consumer disputes with car dealers and/or finance companies. Three opinions, two unpublished ones from the Fourth Appellate District – Trabert v. Consumer Portfolio Services, Inc., and Mercedes-Benz Financial Services USA v. Okudan – and a published one from the First Appellate District – Vasquez v. Greene Motors, Inc. – considered the same Retail Installment Sale Contract, form No. 553-CA-ARB, that was produced and sold by Reynolds and Reynolds Company. Interestingly, in 2012, the Supreme Court of California granted petitions for review of two other cases involving the arbitration clause in the same form contract.

Let’s look at what the three recent opinions said about the validity of the arbitration clause.

The Contract

According to the three recent opinions, the contract is a preprinted form commonly used by vehicle sellers in California. It consists of one page and measures eight and one-half inches wide by 26 inches long. There are provisions on both sides that occupy the entire document. The car buyer is required to sign and/or initial the front of the contract in a number of different places, each related to a different provision. No signatures or initials appear on the back of the contract.

Above the final signature line, on the right-hand side of the front of the contract, is a statement in all capital letters acknowledging that the buyer was given an opportunity to take and review the contract and has read both sides of the contract, including the arbitration clause on the reverse side.

The arbitration provision is on the bottom of the back page, outlined by a black border. It is the last provision of the contract concerning the purchase transaction; a provision related to the assignment of the contract appears below it. In all capital letters and bold type at the top is written, “ARBITRATION CLAUSE [¶] PLEASE REVIEW—IMPORTANT—AFFECTS YOUR LEGAL RIGHTS.” Immediately below, three numbered provisions, also in all capital letters, inform the buyer that either party may request arbitration, that arbitration would prevent a court or classwide proceeding, and that arbitration might limit discovery. Below these numbered provisions, in smaller type, are the actual terms of the clause.

Pursuant to these terms, the arbitration may be conducted under the auspices of the National Arbitration Forum or the American Arbitration Association, at the election of the buyer, or by any other mutually agreeable organization; the initial arbitration will be conducted by a single arbitrator and will occur in the federal district of the buyer’s residence; the seller must advance up to $2,500 of the buyer’s arbitration costs; the award is binding unless it is $0 or more than $100,000 or includes injunctive relief, in which case either party can request a second arbitration before three arbitrators by advancing the full costs of the second arbitration, subject to a final determination by the arbitrators of a fair apportionment of costs; and arbitration is not available for self-help remedies and disputes within the jurisdiction of small claims court.

The Issues

In the three recent cases, issues concerning the arbitration clause focused on the use of a preprinted contract without offering the buyer the opportunity to negotiate its terms, the conspicuousness of the arbitration clause, the provisions governing the request for a second arbitration, the cost advance provision for the second arbitration, and the exclusion of self-help remedies and small claims from arbitration.

Where the Recent Opinions Stand on the Issues

Use of Preprinted Contract – All three recent opinions concluded that the contract was oppressive and, therefore, procedurally unconscionable solely because the contract was preprinted and the buyer was not given an opportunity to negotiate its terms but was instead presented with it on a take-it-or-leave-it basis. Nevertheless, one court noted that “given the substantial regulation of many modern consumer transactions, a preprinted contract may be the merchant’s only means of ensuring its compliance with the law, and granting an employee the authority to negotiate puts that compliance at risk.”

Conspicuousness of Arbitration Clause – The three recent opinions did not agree on whether the arbitration clause was conspicuous or whether it was inconspicuous and, therefore, tainted by surprise. The two Fourth District unpublished opinions found that the placement of the arbitration clause on the bottom of the back side of the document was problematic, especially where the buyer did not have to sign or initial anywhere on the back side. Moreover, these two opinions noted that the fact that the buyer was alerted on the front page of the document to the existence of the arbitration clause on the reverse side was insufficient where there was no provision for the buyer’s signature or initials under or adjacent to that language, which was located on the far right of the page – instead, the buyer’s signature appeared on the left side of the page under a provision regarding the lack of a cooling off period. Both of these opinions recognized that “this clause [on the front of the document] would not have notified a reasonable consumer of the existence of the arbitration clause [on the back of the document].”

The First District published opinion, however, found that the arbitration clause was conspicuous because it was brought to the buyer’s attention on the front side of the contract and was placed on the back of the contract in a box outlined in black and set forth in bold, capital letters. The court specifically noted that it was unwilling to find procedural unconscionability solely on the basis of the complexity of the sales contract where the complexity is dictated by the highly regulated nature of the transaction.

As the opinion noted:

Many of the provisions are affirmatively required by state and federal law, which closely regulate the terms of vehicle installment sales contracts. The Rees-Levering Automobile Sales Finance Act contains detailed requirements for the disclosures in such contracts. … Section 2982 alone requires over 40 different disclosures. Various provisions specify the exact text, type size, and even type color for some and require at least two disclosures to be acknowledged by the buyer’s signature. … Other terms are prohibited. … A wholly separate federal regulation, Regulation Z … must also be satisfied. … As a result, the seller has only limited discretion in the content and composition of the contract. In this case, the printer of the document has made an apparent effort to enhance the comprehensibility of the document by grouping provisions together in separate, black-outlined boxes, breaking up the monotony of the presentation, and using titles in large, all-capitalized letters describing the subject matter of the provisions.

Provisions Governing Request for Second Arbitration – The three recent opinions disagreed on whether or not the provision governing the request for a second arbitration was unconscionable. The published opinion found that the provision permitting a second arbitration if the first arbitration resulted in injunctive relief or an award of $0 or more than $100,000 was not substantively unconscionable; the failure of a buyer to be able to request a second arbitration if he was denied injunctive relief was mitigated by the provision permitting a second arbitration if the buyer was denied a monetary recovery, which would presumably be the result if he was denied injunctive relief.

However, the two unpublished opinions found that only the seller would realistically benefit from the right to request a second arbitration for an award in excess of $100,000 because it is the only party that would suffer such a large award in a standard case involving the sale of a car. Moreover, the two unpublished opinions found that the ability to seek a second arbitration in the event injunctive relief is awarded but not when injunctive relief is denied benefits only the seller because it is unlikely that the seller would seek injunctive relief against a buyer.

Cost Advance Provision – The three recent opinions did not agree on whether the provision requiring the appealing party to bear the initial responsibility to pay the costs of the second arbitration was unconscionable or not. The published opinion recognized that the provision “was not only evenhanded,” but it was also a reasonable trade for an unsuccessful claimant who might otherwise have the right to seek only a limited review of the arbitrator’s decision in court. On the other hand, the two unpublished opinions noted that the cost of a second arbitration could be substantial and that the inability of a consumer to be able to request a waiver if he could not afford to pay the costs could make the provision unconscionable.

Exclusion of Self-Help Remedies and Small Claims – All three recent opinions agreed that the exclusion of self-help remedies, such as repossession, and small claims from arbitration was not unconscionable. The opinions noted that the small claims exclusion was mutual and that the self-help exclusion, even if it might tend to benefit the seller more than the buyer, was justified because arbitration is intended as a substitute for judicial proceedings. Repossessions operate outside of judicial proceedings in order to promote efficiency, and small claims actions are exempted from full judicial process to achieve efficiency and avoid unnecessary expense. Therefore, exempting these remedies from arbitration, in the words of the published opinion, could not be unconscionable because it merely “preserves the status quo.”

Until the state high court clarifies the issues surrounding the enforceability of the arbitration clause in the form contract, California courts will continue to grapple with and, at times, disagree with each other over whether or not the arbitration clause in the form contract was procedurally and substantively unconscionable, especially given the complex regulation of consumer credit transactions. It’s bound to make those of you who diligently try to keep up with developments a bit crazy.

Vasquez v. Greene Motors, Inc., 2013 Cal. App. LEXIS 243 (Cal. App. March 27, 2013).
Trabert v. Consumer Portfolio Services, Inc., 2013 Cal. App. Unpub. LEXIS 2476 (Cal. App. March 8, 2013).
Mercedes-Benz Financial Services USA v. Okudan, 2013 Cal. App. Unpub. LEXIS 2478 (Cal. App. April 8, 2013).

Shelley B. Fowler is a Managing Editor of Hudson Cook, LLP’s CARLAW and HouseLaw publications. Shelley can be reached at 410-865-5406 or by e-mail at

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