Reinsurance Focus

A purchaser filed a putative state class action against a car dealer alleging state law violations related to the sale of automobiles. The car dealer filed a motion to compel arbitration pursuant to a provision in the sales contract, which also contained a class action waiver. The trial court determined that the class action waiver was unenforceable, and, based upon this denial, a “poison pill” clause in the contract went into effect making the entire arbitration provision unenforceable. The trial court’s invalidation of the class arbitration waiver provision arguably could not stand in light of the US Supreme Court’s recent decision in AT&T Mobility LL v. Concepcion, 131 S.Ct. 1740 (2011). However, the Court of Appeals affirmed based upon another ground, that the arbitration provision itself was a product of adhesion and unequal bargaining power and hence unconscionable. The court found that Concepcion preserved the ability of state courts to invalidate entire arbitration provisions on the basis of unconscionability. However, the California “Discover Bank rule” disapproved by the Supreme Court in Concepcion was premised on a conclusion that the class arbitration waiver was the product of adhesion, and the Supreme Court found that justification insufficient to overcome the objectives of the Federal Arbitration Act. The Sanchez court’s invalidation of the entire arbitration provision on the same ground may raise a question as to whether this decision is consistent with the principles articulated by the Supreme Court in Concepcion. Sanchez v. Valencia Holding Co., LLC, No. BC433634 (Cal. Ct. App. Oct. 24, 2011). The Court of Appeals granted a petition for rehearing and issued a modified opinion affirming the lower court’s decision. In the new opinion, the Court of Appeals emphasized that unconscionability itself survived the Concepcion ruling, and that here, the unconscionability permeated the entire agreement with numerous unconscionable clauses. Again, the Court of Appeals took pains to limit the scope of the Supreme Court’s Concepcion opinion. Sanchez v. Valencia Holding Co., LLC, B228027 (Cal. Ct. App. Nov. 23, 2011).

This post written by John Black.