California Court Avoids Concepcion By Striking Arbitration Agreement Without Considering Class Action Waiver

A recent decision by the California Court of Appeal underscores the importance of making arbitration provisions with class action waivers as consumer-friendly as possible - even after the U.S. Supreme Court's landmark ruling in AT&T Mobility v. Concepcion, which held that state laws barring the enforcement of class action waivers in consumer arbitration agreements are preempted by the Federal Arbitration Act.

The October 24 decision in Sanchez v. Valencia Holding Co. upheld a trial court's refusal to enforce an arbitration agreement with a class action waiver in an automobile sales contract, but on different grounds. The trial court, in a ruling prior to Concepcion, held that the class action waiver was unconscionable under California law and that the arbitration agreement was therefore unenforceable - a ruling squarely contrary to Concepcion.

But the appellate court in Sanchez sidestepped the Concepcion issue by concluding that the agreement as a whole was procedurally and substantively unconscionable under California law, regardless of the waiver. Concepcion is simply "inapplicable," the Sanchez court concluded, where the validity of a class action waiver is not at issue.

In our view the Sanchez court construed the scope of Concepcion's holding too narrowly. For example, the court held that the arbitration agreement was procedurally unconscionable because it was a contract of adhesion, but, in doing so, disregarded that adhesion was part of the test for class action waivers that was struck down in Concepcion.

The court also found that four clauses in the arbitration agreement were substantively unconscionable:

• A party who loses may appeal if the award exceeds $100,000
• A party can appeal if the award includes injunctive relief
• The appealing party must pay the arbitration appeal costs in advance subject to apportionment by the arbitrators
• The exemption of repossession from arbitration while requiring that requests for injunctive relief be arbitrated

Although the court found these clauses to be one-sided in favor of the dealer, it acknowledged that all of them were neutral on their face. In our view, by refusing to enforce facially neutral contract provisions because they were contained in an arbitration agreement, the Sanchez court contravened the Supreme Court's admonition in Concepcion that courts may not rely on the uniqueness of an arbitration agreement as a basis for finding unconscionability.

The justices were clear in Concepcion, saying "the 'principal purpose' of the FAA is to ensure that private arbitration agreements are enforced according to their terms" and that "nothing in it [the FAA] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives."

Nevertheless, as a practical matter, companies and employers operating in California whose arbitration agreements contain features like the ones invalidated in Sanchez should promptly revise their arbitration agreements, and others should consider doing so. Ballard Spahr has already counseled clients about ways to revise their arbitration agreements to avoid the result in Sanchez.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs), its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For further information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; Mark J. Levin, 215.864.8235 or levinmj@ballardspahr.com; or Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com.

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