Vargas v. SAI Monrovia B, Inc.
In a case decided earlier this month, the Second District Court of Appeals again questioned whether arbitration clauses are unconscionable. Revisiting its 2012 holding in Sanchez v. Valencia Holding Co., LLC, the court held parts of a retail installment sales contract used to purchase an automobile to be unconscionable and unenforceable. In reaching its decision, the court found the arbitration provision in the boilerplate contract satisfies the two elements of procedural unconscionability: oppression and surprise.
The case began when the plaintiffs filed a class action lawsuit against the auto dealer and the finance company, asserting various claims under the Consumer Legal Remedies Act, the Automobile Sales Finance Act, the Unfair Competition Law, and the Song-Beverly Consumer Warranty Act.
The defendants moved to compel arbitration in the trial court, citing the clause in the retail installment sales contract. The plaintiffs stated they were presented with a stack of documents, and were simply told by the auto dealer employee where to sign. The plaintiffs stressed that the documents were pre-printed forms and they did not realize the form had additional terms on the back side. There was no place for buyers to sign on the back of the forms.
The defendants countered with the fact that, even assuming the placement of the arbitration clause on the back of the contract was unconscionable, the plaintiffs signed next to a provision on the front of the form acknowledging they had read both sides of the contract, including the arbitration clause on the reverse side.
The court considered the plaintiffs’ signed acknowledgement on the front of the form to be insignificant, essentially due to the location and relative obscurity of the acknowledgement on the face of the contract. The court also noted that the auto dealer’s employees told the plaintiffs where to sign, and that the employees’ conduct deprived the plaintiffs of an opportunity to read the documents in full.
The court opined that four clauses in the arbitration provision of the sales contract were substantively unconscionable and imposed an unduly oppressive burden on buyers:
- If an arbitration award exceeded $100,000, the losing party could appeal the decision to a panel of three arbitrators.
- Appeal of arbitration decisions were permitted if an arbitration award included injunctive relief.
- To appeal, a party had to pay, in advance, the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs.
- The provision exempted repossession from arbitration while requiring that a request for injunctive relief had to be submitted to arbitration.
The court noted that, in assessing unconscionability, the emphasis is on the practical effect of a provision, not a facial interpretation.
Going forward, the court’s decision indicates arbitration terms are not likely to be upheld unless the buyer specifically acknowledges each paragraph with a signature or initials.
If you are an auto dealer or lender with concerns about the enforceability of your retail installment sales contracts, seek the advice of experienced legal counsel. Glass & Goldberg provides high quality and cost-effective legal services and advice for clients in all aspects of business litigation, creditors’ rights and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.