Today's Trends in Credit Regulation

California Supreme Court Renders Favorable Arbitration Decision
By Shawnielle D. Predeoux

California courts have earned a reputation for being hostile toward mandatory arbitration agreements in consumer transactions. Over the last several years, many trial courts and intermediate appellate courts have found language in the agreements to be "unconscionable" (lawyer-speak for "really unfair") and, relying on several different theories, have refused to require consumers to arbitrate their claims against creditors.

Finally, however, one of those lower court cases has worked its way through the California appellate system to the California Supreme Court, and - to the surprise of many observers - that court not only was not hostile to arbitration, it was downright friendly.

Here's how the case developed.

Gil Sanchez bought a pre-owned luxury vehicle from Valencia Holding Company. Sanchez signed a purchase contract that included an arbitration clause governed by the Federal Arbitration Act.

The arbitration clause contained a class action waiver and a provision stating that the entire agreement was unenforceable if the class waiver was deemed unenforceable. The arbitration clause contained another provision stating that the

"[a]rbitrator's award shall be final and binding on all parties, except that in the event the arbitrator's award for a party is $0 or against a party is in excess of $100,000, or includes an award of injunctive relief against a party, that party may request a new arbitration under the rules of the arbitration organization by a three-arbitrator panel. The appealing party requesting new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs."

The arbitration clause contained a third provision stating: "You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court's jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit."

Sanchez filed a class action against Valencia for misrepresentations made during the vehicle sale and alleged violations of the Consumers Legal Remedies Act, the Automobile Sales Finance Act, the Unfair Competition Law, and the Song-Beverly Consumer Warranty Act. Valencia moved to compel arbitration.

The trial court denied the motion after finding that the arbitration clause was unenforceable. Specifically, the trial court determined that the class action waiver was unenforceable under California law. Valencia appealed.

Before Valencia's appeal, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, which held that the FAA preempts California law prohibiting class action waivers in consumer arbitration agreements. That would seem to cut the ground from under the trial court's decision, but it didn't faze the appellate court, which seemed to be looking for any reason to refuse to enforce the arbitration provision.

The appellate court affirmed the denial of the motion to compel arbitration. It rejected the trial court's reasoning, though, and affirmed its result on other grounds, concluding that the entire agreement was unconscionable because it favored the creditor by allowing the losing party to appeal awards over $100,000, allowing a party to appeal injunctive relief, requiring the appealing party to pay costs, and exempting repossession from arbitration but not a request for injunctive relief.

Valencia again appealed. Valencia argued that the Concepcion holding prevents states from determining the fairness of the arbitration process. Valencia also argued that the arbitration clause in the contract was not unconscionable.

The California Supreme Court reversed and remanded the case. The high court first held that whileConcepcion prohibits enforcement of a state law preempted by the FAA, Concepcion does not prevent a state court from evaluating an arbitration agreement using general unconscionability principles.

The high court found procedural unconscionability because the contract was an adhesion contract, but did not find substantive unconscionability. The high court noted that the arbitration appeal provision was not unconscionable because a consumer who gets nothing can appeal and requiring a consumer to request injunctive relief through arbitration is justified due to the possible impact that relief may have on a seller's business.

Next, the high court found that requiring a consumer to front the costs of an appeal may be unconscionable, but a finding of unconscionability requires the consumer to show that the costs are unaffordable. Sanchez did not claim or provide evidence that the appeal costs were actually unaffordable.

Finally, the high court determined that the self-help provision was not unconscionable because those remedies are outside of litigation and expressly authorized by statute.

The net result of the California high court's decision was a clear win for creditors faced with suits in California courts. Because California's court opinions tend to be persuasive elsewhere, this opinion is likely to be used around the country by companies attempting to enforce their arbitration agreements.

Sanchez v. Valencia Holding Company, 2015 Cal. LEXIS 5292 (Cal. August 3, 2015).

Shawnielle D. Predeoux is an associate in the Maryland office of Hudson Cook, LLP. Shawnielle can be reached at 410-865-5425 or by email at

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