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Sanchez v. Valencia Holding Co., LLC

Supreme Court of California

August 3, 2015

GIL SANCHEZ, Plaintiff and Respondent,
v.
VALENCIA HOLDING COMPANY, LLC, Defendant and Appellant.

Superior Court of Los Angeles County No. BC433634, 2/1 B228027 Rex Heeseman Judge

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COUNSEL

Tharpe & Howell, Christopher S. Maile, Soojin Kang; Callahan Thompson Sherman & Caudill, Robert W. Thompson, Charles S. Russell; Atkinson, Andelson, Loya, Ruud & Romo, Kellie S. Christianson; Greines, Martin, Stein & Richland, Robert A. Olson, Edward L. Xanders, Meehan R. Rasch and David E. Hackett for Defendant and Appellant.

Sheppard, Mullin, Richter & Hampton and Anna S. McLean for Toyota Motor Credit Corporation and General Motors Financial Company, Inc., as Amici Curiae on behalf of Defendant and Appellant.

Pillsbury Winthrop Shaw Pittman, Richard M. Segal and Nathaniel R. Smith for Nissan Motor Acceptance Corporation as Amicus Curiae on behalf of Defendant and Appellant.

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Littler Mendelson, Henry D. Lederman, Alexa L. Woerner, Anthony Ly; Simpson, Cameron, Medina & Autrey and Erin Nemirovsky Medina for Volt Management Corp. and Volt Information Sciences, Inc., as Amici Curiae on behalf of Defendant and Appellant.

Horvitz & Levy, Lisa Perrochet, Felix Shafir, Robert H. Wright and John F. Querio for California New Car Dealers Association as Amicus Curiae on behalf of Defendant and Appellant.

Severson & Werson, Jan T. Chilton and Donald J. Querio for American Financial Services Association, California Financial Services Association and California Bankers Association as Amici Curiae on behalf of Defendant and Appellant.

Erika C. Frank and Fred J. Hiestand for The California Chamber of Commerce and The Civil Justice Association of California as Amici Curiae on behalf of Defendant and Appellant.

Mayer Brown, Donald M. Falk, Andrew J. Pincus, Evan M. Tager, Archis A. Parasharami and Brian J. Wong for The Chamber of Commerce of the United States of America, The Association of Global Automakers, Inc., and The Alliance of Automobile Manufacturers as Amici Curiae on behalf of Defendant and Appellant.

Deborah J. La Fetra for Pacific Legal Foundation as Amicus Curiae on behalf of Defendant and Appellant.

Toschi, Sidran, Collins & Doyle, David R Sidran, Thomas M. Crowell; Manning Leaver Bruder & Berberich, Robert D. Daniels and Crystal S. Yagoobian for Federated Mutual Insurance Company as Amicus Curiae on behalf of Defendant and Appellant.

Rosner, Barry & Babbitt, Hallen D. Rosner, Christopher P. Barry and Angela J. Smith for Plaintiff and Respondent.

Kreindler & Kreindler, Gretchen M. Nelson and Jacob H. Mensch for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Respondent.

Chavez & Gertler, Mark A. Chavez and Nance F. Becker for Arthur Lovett as Amicus Curiae on behalf of Plaintiff and Respondent.

Aimee Feinberg for Consumers for Auto Reliability and Safety as Amicus Curiae on behalf of Plaintiff and Respondent.

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Arbogast Law and David M. Arbogast for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Respondent.

McKenna Long & Aldridge and J. Alan Warfield for Association of Southern California Defense Counsel as Amicus Curiae on behalf of Plaintiff and Respondent.

OPINION

LIU, J.

The automobile sales contract in the present case has an arbitration agreement that provides, among other things, that arbitral awards of $0 or over $100, 000 as well as grants but not denials of injunctive relief may be appealed to a panel of arbitrators. The arbitration agreement also has provisions that require the party appealing the award to front the costs of the appeal, preserve the right of the parties to go to small claims court and to pursue self-help remedies, and waive the right to class action litigation or arbitration. The agreement further provides that if the class waiver is deemed unenforceable, then the entire arbitration agreement shall be unenforceable.

In this dispute over the sale of a car, plaintiff Gil Sanchez filed a class action lawsuit against defendant Valencia Holding Company, LLC (Valencia), and Valencia moved to compel arbitration. The trial court denied the motion, finding the class waiver and, in turn, the entire arbitration agreement unenforceable. Subsequently, the United States Supreme Court held in AT&T Mobility LLC v. Conception (2011) 563 U.S. 333 [179 L.Ed.2d 742, 131 S.Ct. 1740] (Conception) that the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts California’s unconscionability rule prohibiting class waivers in consumer arbitration agreements. In deciding Valencia’s appeal from the trial court’s denial of the motion to compel arbitration, the Court of Appeal declined to address whether the class waiver was enforceable and instead held that the arbitration appeal provision and the arbitration agreement as a whole were unconscionably one-sided. Valencia sought our review, relying on Conception.

While circumscribing the ability of states to regulate the fairness of arbitration agreements, Conception reaffirmed that the FAA does not preempt “ ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’ ” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1746].) Under the FAA, these defenses may provide grounds for invalidating an arbitration agreement if they are enforced evenhandedly and do not “interfere[] with fundamental attributes of arbitration." (Conception, at p. __ [131 S.Ct. at p. 1748]; see Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1143–1145 [163 Cal.Rptr.3d 269, 311 P.3d 184] (we will use

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common name, Sonic II).) In the present case, we hold that Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provisions of the arbitration agreement. Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable. Accordingly, we reverse the judgment below.

I.

Plaintiff Gil Sanchez filed this class action in March 2010. Two months later, Sanchez filed a first amended complaint. The complaint arises from Sanchez’s purchase of a 2006 “preowned” Mercedes-Benz S500V in 2008 for $53, 498.60. Sanchez alleged that Valencia violated the Consumers Legal Remedies Act (CLRA) (Civ. Code, §§ 1750–1784) by making false representations about the condition of the automobile. Sanchez also alleged that Valencia violated several other California laws by (1) failing to separately itemize the amount of the down payment that is deferred to a date after the execution of the sale contract, (2) failing to distinguish registration, transfer, and titling fees from license fees, (3) charging the optional Department of Motor Vehicles electronic filing fee without discussing it or asking if he wanted to pay it, (4) charging new tire fees for used tires, and (5) requiring him to pay $3, 700 to have the vehicle certified so he could qualify for the 4.99 percent interest rate, when that payment was actually for an optional extended warranty unrelated to the interest rate. Sanchez alleged violations of the Automobile Sales Finance Act (Civ. Code, §§ 2981–2984.6), the unfair competition law (UCL) (Bus. & Prof. Code, §§ 17200–17210), the Song-Beverly Consumer Warranty Act (Civ. Code, §§ 1790–1795.8), and Public Resources Code section 42885.

The complaint further alleged that a class action was appropriate based on the large number of putative class members who have suffered similar violations, the predominance of common questions of law and fact, the typicality of the claims, and the superiority and benefits of class litigation. He proposed four distinct classes based on the different types of violations Valencia allegedly committed.

Valencia filed a motion to compel arbitration pursuant to an arbitration clause in the sale contract that authorized either party to have any dispute between the parties decided by arbitration. The arbitration clause had a class action waiver: “If a dispute is arbitrated, you will give up your right to participate as a class representative or class member on any class claim you may have against us including any right to class arbitration or any consolidation of individual arbitrations.”

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The arbitration clause further provided: “Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the applicable rules. The arbitrator shall apply governing substantive law in making an award. The arbitration hearing shall be conducted in the federal district in which you reside.... We will advance your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $2500, which may be reimbursed by decision of the arbitrator at the arbitrator’s discretion. Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law.... Arbitrator’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. Any arbitration under this Arbitration Clause shall be governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) and not by any state law concerning arbitration.

“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. Any court having jurisdiction may enter judgment on the arbitrator’s award. This Arbitration Clause shall survive any termination, payoff or transfer of this contract. If any part of this Arbitration Clause, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Clause shall be unenforceable.”

As the Court of Appeal summarized: “The Sale Contract is a preprinted document consisting of one page, 8 1/2 inches wide and 26 inches long. There are provisions on both sides that occupy the entire document, leaving little in the way of margins. Sanchez signed or initialed the front in eight places, each related to a different provision. No signatures, initials, or other handwriting appears on the back. The arbitration provision, entitled ‘ARBITRATION CLAUSE, ’ is on the back at the bottom of the page, outlined by a black box. It is the last provision of the Sale Contract concerning the purchase transaction; a provision related to the assignment of the contract appears below it. The buyer’s final signature appears near the bottom on the front side.”

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In opposing arbitration, Sanchez submitted a declaration that said: “When I signed the documents related to my purchase of the Subject Vehicle, I was presented with a stack of documents, and was simply told by the Dealership’s employee where to sign and/or initial each one. All of the documents (including the purchase contracts) were pre-printed form documents. When I signed the documents, I was not given an opportunity to read any of the documents, nor was I given an opportunity to negotiate any of the pre-printed terms. The documents were presented to me on a take-it-or-leave-it basis, to either sign them or not buy the car.... There was no question of choice on my part or of my being able to ‘negotiate’ anything. And I had no reason to suspect that hidden on the back of the contracts... was a section that prohibited me from being able to sue the Dealership in court if I had a problem.

“... When I signed the purchase contract and related documents, the Dealership did not ask me if I was willing to arbitrate any disputes with it, did not tell me that there was an ‘arbitration clause’ on the back side of the purchase contract, and I did not see any such clause before I signed the documents. The Dealership did not explain to me what an arbitration clause was. I was not given any opportunity at any time during my transaction with [the] Dealership to negotiate whether or not I would agree to arbitrate any potential disputes. I was not given an option whether to sign a contract with an arbitration clause or one without.”

The trial court denied the motion to compel arbitration. It held the class waiver unenforceable on the ground that the CLRA expressly provides for class action litigation and declares the right to a class action to be unwaivable. (See Civ. Code, §§ 1751, 1781.) Because the arbitration clause provided that “[i]f a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Clause shall be unenforceable, ” the court denied the motion to compel arbitration.

After the trial court’s decision but before the Court of Appeal’s opinion in this case was filed, the United States Supreme Court in Concepcion, supra, 563 U.S. __ [131 S.Ct. 1740] held that the FAA requires enforcement of class waivers in consumer arbitration agreements and preempts state law to the contrary. The Court of Appeal declined to decide whether the class waiver at issue was enforceable and instead affirmed the trial court’s decision on different grounds. First, the court concluded that the agreement contained elements of procedural unconscionability, both oppression and surprise. Second, the court held that four provisions made the agreement unfairly one-sided in favor of Valencia. “First, a party who loses before the single arbitrator may appeal to a panel of three arbitrators if the award exceeds

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$100, 000. Second, an appeal is permitted if the award includes injunctive relief. Third, the appealing party must pay, in advance, ‘the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs.’ Fourth, the provision exempts repossession from arbitration while requiring that a request for injunctive relief be submitted to arbitration. Although these provisions may appear neutral on their face, they have the effect of placing an unduly oppressive burden on the buyer.” We granted review.

II.

To aid understanding of the issues in this case, we begin by discussing general principles of unconscionability. “ ‘One common formulation of unconscionability is that it refers to “ ‘an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.’ ” [Citation.] As that formulation implicitly recognizes, the doctrine of unconscionability has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.’ ” (Sonic II, supra, 57 Cal.4th at p. 1133.)

“ ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’ [Citation.] But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 114 [99 Cal.Rptr.2d 745, 6 P.3d 669] (Armendariz).) Courts may find a contract as a whole “or any clause of the contract" to be unconscionable. (Civ. Code, § 1670.5, subd. (a).)

As we stated in Sonic II: “The unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as ‘ “ ‘overly harsh’ ” ’ (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1532 [60 Cal.Rptr.2d 138]), ‘ “unduly oppressive” ’ (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925 [216 Cal.Rptr. 345, 702 P.2d 503] (Perdue)), ‘ “so one-sided as to ‘shock the conscience’ ” ’ (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), PLC (2012) 55 Cal.4th 223, 246 [145 Cal.Rptr.3d 514, 282 P.3d 1217]

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(Pinnacle)), or ‘unfairly one-sided’ (Little [v. Auto Stiegler, Inc. (2003)] 29 Cal.4th [1064], 1071 [130 Cal.Rptr.2d 892, 63 P.3d 979]). All of these formulations point to the central idea that unconscionability doctrine is concerned not with ‘a simple old-fashioned bad bargain’ (Schnuerle v. Insight Communications Co. (Ky. 2012) 376 S.W.3d 561, 575 (Schnuerle)), but with terms that are ‘unreasonably favorable to the more powerful party’ (8 Williston on Contracts (4th ed. 2010) § 18.10, p. 91). These include ‘terms that impair the integrity of the bargaining process or otherwise contravene the public interest or public policy; terms (usually of an adhesion or boilerplate nature) that attempt to alter in an impermissible manner fundamental duties otherwise imposed by the law, fine-print terms, or provisions that seek to negate the reasonable expectations of the nondrafting party, or unreasonably and unexpectedly harsh terms having to do with price or other central aspects of the transaction.’ (Ibid.)” (Sonic II, supra, 57 Cal.4th at p. 1145.) Because unconscionability is a contract defense, the party asserting the defense bears the burden of proof. (Id. at p. 1148.)

We further observed in Sonic II, and reaffirm today, that “an examination of the case law does not indicate that ‘shock the conscience’ is a different standard in practice than other formulations or that it is the one true, authoritative standard for substantive unconscionability, exclusive of all others.” (Sonic II, supra, 57 Cal.4th at p. 1159.) Nor do we see any conceptual difference among these formulations. Rather, “courts, including ours, have used various nonexclusive formulations to capture the notion that unconscionability requires a substantial degree of unfairness beyond ‘a simple old-fashioned bad bargain.’ ” (Id. at p. 1160, italics added.) This latter qualification is important. Commerce depends on the enforceability, in most instances, of a duly executed written contract. A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided contract provisions are unconscionable; hence the various intensifiers in our formulations: “overly harsh, ” “unduly oppressive, ” “unreasonably favorable.” (See Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, supra, 55 Cal.4th at p. 246 [“A contract term is not substantively unconscionable when it merely gives one side a greater benefit....”].) We clarify today that these formulations, used throughout our case law, all mean the same thing.

An evaluation of unconscionability is highly dependent on context. (See Williams v. Walker-Thomas Furniture Co. (D.C. Cir. 1965) 121 U.S.App.D.C. 315 [350 F.2d 445, 450 [“The test is not simple, nor can it be mechanically applied.”].) The doctrine often requires inquiry into the “commercial setting, purpose, and effect” of the contract or contract provision. (Civ. Code, § 1670.5, subd. (b); accord, Sonic II, supra, 57 Cal.4th at pp. 1147–1148; Walker-Thomas Furniture, at p. 450 [unconscionability must “be considered ‘in the light of the general commercial background and the

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commercial needs of the particular trade or case’ ”].) As we have recognized, “ ‘a contract can provide a “margin of safety” that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable.’ ” (Armendariz, supra, 24 Cal.4th at p. 117; see Walker-Thomas Furniture, at p. 450 [“where no meaningful choice was exercised upon entering the contract, ” the test is “whether the terms are ‘so extreme as to appear unconscionable according to the mores and business practices of the time and place’ ”].) And, as noted, the substantive unfairness of the terms must be considered in light of any procedural unconscionability. The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.

Moreover, our unconscionability standard is, as it must be, the same for arbitration and nonarbitration agreements. (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1747].) Of course, unconscionability can manifest itself in different ways, depending on the contract term at issue. (See, e.g., Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 916–917 [103 Cal.Rptr.2d 320, 15 P.3d 1071) [choice of law clause]); City of Santa Barbara v. Superior Court (2007) 41 Cal.4th 747, 777 [62 Cal.Rptr.3d 527, 161 P.3d 1095] [waivers of liability provision]); Moreno v. Sanchez (2003) 106 Cal.App.4th 1415, 1434 [131 Cal.Rptr.2d 684] [statutes of limitation provision]; Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 495–496 [131 Cal.Rptr. 374. 551 P.2d 1206] [forum selection clause].) But the application of unconscionability doctrine to an arbitration clause must proceed from general principles that apply to any contract clause. In particular, the standard for substantive unconscionability - the requisite degree of unfairness beyond merely a bad bargain - must be as rigorous and demanding for arbitration clauses as for any contract clause.

Valencia broadly contends that under Concepcion, “absent exceptional circumstances, states––either judicially or legislatively––may not, under the guise of unconscionability, judge the supposed fairness of the parties’ agreed arbitration process.” In support of that assertion, Valencia cites “the examples of arbitration-process unconscionability evaluations (ranging from discovery to evidentiary requirements) that the FAA precludes.” (See Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1747].)

We recently considered the effect of Concepcion on state law unconscionability doctrine and observed that “after Concepcion, unconscionability remains a valid defense to a petition to compel arbitration.” (Sonic II, supra, 57 Cal.4th at p. 1142, citing Concepcion, supra, 563 U.S. at p. ___ (131 S.Ct. at p. 1746].) “What is new, ” we said, “is that Concepcion ...


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