A California appellate court recently found an arbitration clause in an automobile retail installment contract to be unconscionable and unenforceable. Vargas v. Sai Monrovia B, Inc., No. B237257 (Cal. App. 2nd Dist. June 4, 2013). (Click here for a copy of the opinion.) The car buyer filed a class action against the local dealership, the finance company, and BMW, alleging several causes of action in connection with the purchase of a Mini Cooper. The dealership and finance company responded to the lawsuit by asking the court to enforce an arbitration clause in the retail installment contract, and the arbitration clause contained a class action waiver.
The lower court granted the motion to compel arbitration with respect to all the claims, except for a claim against BMW, which was not a party to the installment contract.
The appellate court reversed, finding the arbitration agreement to be unconscionable. The agreement was procedurally unconscionable because the arbitration provisions were buried on the back page of the contract, and the finance manager rushed the buyer and instructed the buyer where to sign without giving a real opportunity to read the agreement. The appellate court also found that several arbitration provisions were one-sided.
There is typically no right to appeal an arbitrator’s award, and judicial review of an arbitrator’s award has been called the narrowest review known to the law. This lack of appellate review is often used as a criticism against arbitration, particularly in the employment and consumer context. Consumers and employees would normally have broad rights to appeal if litigating in court. The automobile contract at issue is interesting because it created an appellate procedure within arbitration. However, the appellate arbitration procedures were one-sided and tended to favor the dealership and finance company. There was a right to an appellate arbitration proceeding if the award exceeded $100,000. The court reasoned that this provision was one-sided because the dealership and finance company could appeal an adverse award they considered too high, but the buyer would not be able to appeal a monetary award it considers too low. Also, a party could appeal an award of injunctive relief, but this provision would favor the defendants because only the buyer would likely seek injunctive relief, and such appeals would undermine a valuable remedy for the buyer. The appellate arbitration provisions also required the appealing party to pay the expenses of both sides in advance, and the appellate court found this requirement would be unduly harsh for consumers.
In this case, it seems that the one-sided nature of many of the appellate arbitration provisions doomed the enforceability of the arbitration clause. Had the arbitration clause not provided for an appellate arbitration proceeding at all (or if the appellate arbitration procedures were not so one-sided), the court may have been willing to enforce the arbitration agreement in this case. In a post-Concepcion world, I expect companies concerned with class actions would try to make an arbitration clause very consumer friendly in order to take advantage of Concepcion and avoid class action liability. Perhaps adding an appellate proceeding within arbitration, with expenses to be paid by the corporation, would be viewed as a procedural benefit for a consumer who normally would have no recourse with a wrongly-decided arbitration award. However, in this case, the appellate arbitration procedures were not consumer friendly.