California Courts of Appeal (First and Sixth Districts) Issue Opinions on Enforcement of Arbitration Clause in Standard Form Automobile RISC

In Gillespie v. Svale Del Grande, Inc., 2014 WL 1509813 (Cal.App. 6 Dist. 2014), the Sixth District Court of Appeal found that Concepcion trumped the CLRA’s anti-class action waiver, but remanded the matter to the superior court to determine whether other unconscionable provisions could be severed.

In this case, pursuant to Concepcion, supra, 131 S.Ct. 1740, we determine that the FAA preempts the CLRA’s class action anti-waiver provision. The CLRA’s prohibition against class action waivers is similar to the Discover Bank rule that certain class arbitration waivers in consumer contracts are unconscionable. Both are state law rules that prevent the enforcement of an arbitration agreement according to its terms. The parties in this case, as in Concepcion, never agreed to classwide arbitration in their arbitration clause. ( Id. at p. 1744.) Further, the limitation on class claims in the parties’ arbitration clause helps to facilitate the benefits of arbitration, including “ ‘lower costs, greater efficiency and speed….’ “ ( Id. at p. 1751.) Enforcing the CLRA’s provision against a class action waiver would essentially allow consumers to demand classwide arbitration and entail complex, costly, and time-consuming arbitration procedures. (Concepcion, at pp. 1750–1751.) Based on the reasoning in Concepcion, the CLRA’s antiwaiver provision “ ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]’ “ and thus we determine that the statutory provision is preempted by the FAA. ( Concepcion, supra, 131 S.Ct. at p. 1753.)  ¶  In an attempt to avoid preemption, Gillespie argues that under the parties’ contract, they agreed to apply California law. According to Gillespie, “this means the parties exercised their right to contractually agree California law applies to the interpretation of the contract, even if it would have otherwise been preempted by the FAA.” We are not persuaded by Gillespie’s argument. The parties’ contract provides generally that “[f]ederal law and California law apply to this contract.” To the extent there is a conflict, the supremacy clause of the United States Constitution mandates that federal law preempts state law. ( Washington Mutual Bank v. Superior Court (2002) 95 Cal.App.4th 606, 612.) We further observe that the arbitration clause specifically states that “[a]ny 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.” To the extent this provision governs the interpretation of the class waiver provisions at issue, the FAA and preemption are applicable. ¶  In sum, the class waiver in the parties’ arbitration clause is enforceable. Consequently, the “poison pill” provision, which states that if the class waiver “is … found to be unenforceable” then “the remainder of this Arbitration Clause shall be unenforceable,” is not triggered. We next consider whether the parties’ arbitration clause is unconscionable as to certain other provisions.

But, the Court of Appeal remanded the matter to the trial court to determine whether the other unconscionable provisions in the RISC Arbitration clause could be severed.

In sum, three of the provisions in the arbitration clause—the exception to arbitral finality for an award in excess of $100,000, the exception to arbitral finality for an award that includes injunctive relief, and the requirement that the appealing party advance both parties’ costs for the second arbitration with a three-arbitrator panel—combine to deny Gillespie the mutual benefits of the arbitration clause. Any arbitration award of significance to the car buyer, that is, in excess of $100,000 or containing injunctive relief, will result in the buyer being subjected to delay and complexity through a second arbitration initiated by the dealership. Further, the cost provision for the second arbitration, which requires the appealing party to advance the full cost of arbitration with a three-arbitrator panel, makes it unlikely that a car buyer seeking a second arbitration, when the buyer obtains a zero award for example, will actually utilize the option of a second arbitration. Considering these three provisions together, we determine that they are “unfairly one-sided” ( Little, supra, 29 Cal.4th at p. 1071) and are otherwise “ ‘so one-sided as to “shock the conscience.” ‘ “ ( Pinnacle, supra, 55 Cal.4th at p. 246.) Based on the sliding scale test (Pinnacle, supra, at p. 247), and in view of our determination that a moderate level of procedural unconscionability exists, we conclude that these three substantively unconscionable provisions cannot be enforced.

In Cheroti v. Harvey & Madding, Inc., here, the First District Court of Appeal found that the unconscionability elements in a standard form RISC were not sufficient to deny enforcement of the arbitration clause.

We agree with the trial court that Cheroti’s procedural arguments are without merit. We also agree with the trial court that the transaction was procedurally unconscionable, since the arbitration agreement was imposed on Cheroti without the opportunity for negotiation. In light of the minimal level of procedural unconscionability and the absence of significant substantive unconscionability, however, we find no basis to decline to enforce the parties’ agreement and reverse the trial court’s denial of the petition to compel.