Daily Blast August 3, 2015

The California Supreme Court issued an opinion in Sanchez v. Valencia Holding Company LLC (Aug. 3, 2015, S199119) __ Cal.4th __, analyzing whether the Federal Arbitration Act (9 U.S.C. § 2) (“FAA”) as interpreted in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321, preempts state law rules that invalidate mandatory arbitration provisions in a consumer contract based on procedural and substantive unconscionability. The Supreme Court held that the FAA does not preempt unconscionability rules. (Slip opn., p. 2.)The court explained that it “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. [Citation.]’” (Slip opn., p. 11.)

The court also clarified that the different formulations of substantive unconscionability—whether terms are “overly harsh,” “unduly oppressive,” “so one-sided as to ‘shock the conscience’” or “unreasonably favorable”—all mean the same thing. (Id. at p. 9.) “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.” (Id. at p. 10.)

The court then analyzed whether the arbitration agreement was unconscionable under state law. (Slip opn., p. 12.) The court held that the adhesive nature of the contract evidenced only “some” degree of procedural unconscionability. (Id. at p. 14.) The court explained that the defendant “was under no obligation to highlight the arbitration clause of its contract, nor was it required to specifically call that clause to [plaintiff’s] attention. Any state law imposing such an obligation would be preempted by the FAA.” (Id. at p. 13.) Even if the customer was assured it was not necessary to read a standard form contract with an arbitration clause, “it is generally unreasonable, in reliance on such assurances, to neglect to read a written contract before signing it. [Citation.]” (Id. at p. 14.)

Finally, the court analyzed four provisions the Court of Appeal had held were substantively unconscionable: (1) an appeal provision that provides 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; (2) a provision that required the party appealing the award to front the costs of the appeal; (3) a provision that preserved the right of the parties to go to small claims court and to pursue self-help remedies while requiring that a request for injunctive relief be submitted to arbitration; and (4) a provision waiving the right to class action litigation or arbitration. (Slip opn., pp. 6, 14-27.) The court held that none of these provisions were substantively unconscionable. (Id. at p. 2.)

Justice Chin authored a lengthy opinion concurring in the judgment and dissenting in the majority’s reasoning. Justice Chin stated that allowing multiple formulations to capture the notion of substantive unconscionability will undermine predictability and will subject arbitration and nonarbitration provisions of a contract to different standards. (Conc. & dis. opn., pp. 14-15.) Justice Chin favored a “shock the conscience” formulation. (Id. at p. 14.)