Business & Corporate Articles


California Supreme Court Boosts Enforcement of Arbitration Agreements 

By Patrick Klingborg

On August 3, 2015, the California Supreme Court provided greater clarity as to the enforceability of arbitration agreements like those often contained in contracts between businesses and their customers.  In Sanchez v. Valencia Holding Co., LLC, the plaintiff, Sanchez, purchased a car from a car dealership owned by Valencia Holding Co., LLC (“Valencia”). Soon thereafter, Sanchez filed a class action lawsuit against Valencia alleging, among other things, that Valencia violated the Consumer Legal Remedies Act (the “CLRA”), the Song-Beverly Consumer Warranty Act, and the Unfair Competition Law as a result of various statements and charges Valencia made in the course of selling the car to Sanchez.

In response to Sanchez’s suit, Valencia filed a motion to compel arbitration.  The contract governing the sale of the car between Valencia and Sanchez contained a provision allowing either party the option to elect to have any dispute arising out of the contract settled through arbitration. Included in the arbitration provision was a clause further stating Sanchez waived his right to be a class member or class representative in the event of arbitration of any future dispute.  Finally, the arbitration provision also stated the Federal Arbitration Act, not state law, governed its interpretation.

The trial court denied Valencia’s motion to compel arbitration because, among other reasons, the CLRA states the right to a class action lawsuit is unwaivable.  (See Civ. Code, §§ 1751, 1781.) Thus, the trial court reasoned, the arbitration clause was unenforceable because it conflicted with California law.

Shortly after the trial court’s denial of Valencia’s motion to compel arbitration, however, the United States Supreme Court delivered a significant decision regarding the enforceability of arbitration agreements in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion).  In Concepcion, the United States Supreme Court held the Federal Arbitration Act preempts state laws purporting to invalidate class waiver clauses (such as the one in the contract between Sanchez and Valencia) in arbitration provisions.  Concepcion further held states cannot apply unconscionability rules in a manner that disfavors enforcement of arbitration agreements as compared to enforcement of nonarbitration agreements.

Despite the Concepcion decision, the Court of Appeal affirmed the trial court’s denial of Valencia’s motion to compel arbitration. The Court of Appeal did not base its decision on the validity of the class waiver but, rather, held other elements of the arbitration provision were unconscionable and, therefore, unenforceable.  

Upon review, the California Supreme Court reversed and held the arbitration provision in the contract between Sanchez and Valencia was enforceable because 1) the CLRA’s prohibition on class waivers was void after Concepcion and 2) none of the other elements of the arbitration provision qualified as unconcscionable. Court summarized, “A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain.”

The practical significance of the Sanchez v. Valencia decision is that California businesses are significantly more likely to include class waiver clauses in arbitration provisions.  Additionally, unconscionability is now less likely to be a successful defense to the enforcement of an arbitration agreement.  For example, the Sanchez decision held the arbitration provision at issue was not unconscionable even though it was contained in a contract of adhesion, not negotiable by Sanchez, not actually read by Sanchez prior to signing, and even though Valencia admitted it assured Sanchez he did not need to read the contract before signing it. The Sanchez decision effectively shifts California law to be more in line with federal court decisions that more generally favor the enforcement of arbitration agreements.

 

This article is for information purposes and does not contain or convey legal advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.