California Supreme Court Boosts Enforcement Of Arbitration Agreements

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, Gil Sanchez, purchased a car from a car dealership owned by Valencia Holding Co., LLC (“Valencia”). Soon thereafter, Mr. 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 Mr. Sanchez.

In response to the 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 Mr. 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 U.S. 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 Mr. 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 unconscionable. The Court noted, 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 should be proactive by including class waiver clauses and arbitration provisions in their sales contracts.  Unconscionability arguments are now less likely to be a successful defense to the enforcement of such provisions.