Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—CalCtApp: Vehicle Sales Contract Arbitration Provision Unconscionable , (Jan 8, 2013)

By Jody Coultas, J.D.

An arbitration provision contained in a vehicle purchaser agreement was procedurally and substantively unconscionable, according to a California appellate court (Natalini v. Import Motors, Inc., January 7, 2013, Simons, J.).

A car purchaser alleged that a dealership sold used cars and tires as new in violation of the California Unfair Competition Law and Consumers Legal Remedies Act. The dealership filed a petition to compel arbitration pursuant to a provision in the car sales contract. However, a trial court held that the arbitration provision was unconscionable.

The dealership argued that, at the time the complaint was filed, the arbitration provision was unenforceable under Discover Bank v. Superior Court (30 Cal.Rptr.3d 76 (2005)), which held that many arbitration provisions in consumer contracts prohibiting class-wide arbitration were unconscionable. In AT&T Mobility LLC v. Concepcion, 563 U.S. ___(2011), the United States Supreme Court overturned Discovery Bank. The court in found that Discover Bank essentially allowed any party to a consumer contract to demand class-wide arbitration, which were inconsistent with the Federal Arbitration Act.

A contract must be both procedurally and substantively unconscionable to be unenforceable. Procedural unconscionability focuses on the existence of oppression or surprise, while substantive unconscionability focuses on overly harsh or one-sided results. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.

Procedural Unconscionability

Based on the manner in which the contract was negotiated and the circumstances of the parties at that time, the court found the arbitration clause to be procedurally unconscionable. The elements of procedural unconscionability focus on oppression and surprise. Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice. Surprise is defined as the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms. The fact that the sales contract was adhesive demonstrated a minimal degree of procedural unconscionability, and there was evidence that the purchaser was unable to negotiate the terms. Furthermore, the purchaser alleged that the dealership did not discuss anything on the back of the contract and he was unaware of any arbitration clause or waiver of rights at or before the purchase.

Substantive Unconscionability

The arbitration provision was substantively unconscionable because it is designed in several ways to systematically favor the car dealer, according to the court. The provision authorized an appeal resulting in a new arbitration before a three-arbitrator panel only for an award of $0 or in excess of $100,000. This type of provision, though neutral on its face, has the effect of benefiting the party that drafted the contract. There was no justification for the $100,000 threshold, other than to relieve the car dealer of liability it deems excessive. The provision was systematically structured to maximize the utility of arbitration in resolving only buyer’s claims, but allowed the car dealer to appeal from a large award or injunctive relief and allowed the dealer to continue to pursue its primary repossession remedy outside arbitration.

The case is No. A133236.

Louis Allen Liberty for Gabriel Natalini. Thomas Martin Crowell for Import Motors, Inc.

Cases: StateUnfairTradePractices CaliforniaNews