On August 3, 2015, the California Supreme Court reversed an appellate court decision that an arbitration clause in a consumer contract was unconscionable, finding that an arbitration agreement must be significantly more than a “simple old-fashioned bad bargain” to be found unconscionable.
The state high court’s ruling in Sanchez v. Valencia Holding Company, LLC, aligns with the 2011 U.S. Supreme Court decision in AT&T Mobility LLC v. Concepcion, which found that the Federal Arbitration Act (“FAA”) preempts all state-law rules that prohibit arbitration of a specific type of claim since such prohibitions interfere with the intentions of the FAA to enforce arbitration agreements according to their terms.
Plaintiff Gil Sanchez, a luxury car buyer, purchased a Mercedes from car dealer Valencia. Contending that he was misled about the price of the Mercedes, Sanchez sued Valencia under the California Consumer Legal Remedies Act (“CLRA”). The sale contract included an arbitration agreement that:
- Waived class action;
- Provided that a party could not appeal an award unless that award was zero or over $100,000 or included an award of injunctive relief;
- Required the party appealing an award to bear the costs of the appeal;
- Preserved the rights of both parties to pursue remedies in small claims court.
Valencia moved to compel arbitration, which was denied by the trial court on the grounds that the CLRA provides for class action litigation and forbids class action waivers. An appeals court affirmed but for a different reason: that the arbitration agreement was unconscionable.
The California Supreme Court reversed the Court of Appeals ruling, saying that it had erred in finding the arbitration agreement unconscionable. The court found the provision on appeals rights was reasonably balanced since the zero-award limit favored Sanchez and the $100,000+ award limit favored Valencia. The court also ruled that while the injunctive relief clause favored Valencia, because of how injunctive relief could affect Valencia’s business, it was commercially justified.
The court found that the requiring the appealing party to bear the costs of an appeal was not unconscionable since Sanchez had not demonstrated he would be unable to afford these costs. The provision allowing a claim to be brought in small claims court favors the buyer, so this also could not be considered unconscionable.
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