Mercedes-Benz Financial Services v.
Okudan
Filed 4/8/13 Mercedes-Benz Financial Services v. Okudan
CA4/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
MERCEDES-BENZ FINANCIAL
SERVICES USA,
LLC,
Plaintiff, Cross-defendant and Appellant,
v.
OZZY O. OKUDAN,
Defendant, Cross-complainant and Respondent.
D061669
(Super. Ct. No. 37-2010-00093994-
CU-CL-CTL)
APPEAL from
an order of the Superior Court
of
County, Luis R. Vargas, Judge.
Reversed with directions.
Mercedes-Benz
Financial Services USA, LLC (Financial) appeals an order denying its petition
to compel arbitration of its lawsuit with Ozzy Okudan. Financial contends the court erred by
determining the arbitration clause in an automobile purchase contract was
unconscionable and therefore unenforceable.
We reverse with directions.
name="_ftnref1" title="">[1]
FACTUAL
AND PROCEDURAL BACKGROUND
In August
2007, Okudan purchased a 2006 BMW M-5 from a Mercedes Benz dealer under an
installment sale contract requiring Okudan to make monthly payments. The dealer later assigned the contract to Financial. The total price of the vehicle was
approximately $72,000.
In December
2008, Financial repossessed the vehicle based on its claim that Okudan failed
to make the required monthly payments.
Financial provided Okudan with a statutory notice of intent to sell the
vehicle (NOI) that included Okudan's reinstatement rights. Financial then sold the vehicle at an auction
for $19,000.
In June
2010, Financial filed a superior court action against Okudan seeking to collect
the deficiency balance owed on the vehicle, alleged to be $64,239.85. About one year later, in June 2011, Okudan
filed a cross-complaint seeking declaratory relief in the form of an order that
Financial's NOI did not comply with Civil Code section 2983.2 and therefore
Financial was precluded from obtaining a deficiency balance.
About five
months later, in November 2011, Okudan filed an amended cross-complaint seeking
to represent a class of California
residents "to whom [Financial] sent NOIs . . . whose vehicles were
repossessed by or voluntarily surrendered to [Financial], and against whom
[Financial] has asserted a deficiency claim." Okudan added numerous causes of action,
including for violation of the Rosenthal Fair Debt Collections Practices Act,
Consumer Credit Reporting Agencies Act, Consumer Legal Remedies Act (CLRA),
Fair Credit Reporting Act, and Unfair Competition Law (UCL) based on a
violation of the Rees-Levering Act. (See
Civ. Code, §§ 1750
et seq., 1785.1 et seq., 1788 et seq.; Bus. & Prof. Code, § 17200; 15
U.S.C. § 1681
et seq.)
Within
several days, Financial moved to compel arbitration under an arbitration clause
in Okudan's installment sale contract.
Financial attached a digitally-reduced copy of the sales contract, in
which the terms were essentially illegible.
Okudan
opposed the arbitration request, arguing:
(1) Financial did not meet its burden to produce evidence of a valid and
enforceable arbitration clause; (2) Financial waived its right to seek
arbitration by filing the lawsuit, filing a summary judgment motion, and
propounding written discovery; and (3) the arbitration provision was
unconscionable.
In support
of his unconscionability argument, Okudan presented evidence that the sales
contract was the "Reynolds & Reynolds, 553-CA-ARB" form document
widely used in the industry. According
to this evidence, the arbitration clause contained in the parties' agreement
read as follows:
CLAUSE
PLEASE
REVIEW-IMPORTANT-AFFECTS YOUR LEGAL RIGHTS
"1. EITHER
YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US DECIDED BY ARBITRATION AND
NOT IN COURT OR BY JURY TRIAL.
"2.
IF A DISPUTE IS ARBITRATED, YOU WILL GIVE UP YOUR RIGHT TO PARTICIPATE AS A
CLASS REPRESENTATIVE OR CLASS MEMBER ON ANY CLASS CLAIM YOU MAY HAVE AGAINST
CLASS ARBITRATION OR ANY CONSOLIDATION OF INDIVIDUAL ARBITRATIONS.
TO APPEAL IN ARBITRATION ARE GENERALLY MORE LIMITED THAN IN A LAWSUIT, AND
OTHER RIGHTS THAT YOU AND WE WOULD HAVE IN COURT MAY NOT BE AVAILABLE IN
ARBITRATION.
"Any claim or dispute, whether in contract,
tort, statute or otherwise (including the interpretation and scope of this
Arbitration Clause, and the arbitrability of the claim or dispute), between you
and us or our employees, agents, successors or assigns, which arises out of or
relates to your credit application, purchase or condition of this vehicle, this
contract or any resulting transaction or relationship (including any such
relationship with third parties who do not sign this contract) shall, at your
or our election, be resolved by neutral, binding arbitration and not by a court
action. If federal law provides that a claim or dispute is not subject to
binding arbitration, this Arbitration Clause shall not apply to such claim or
dispute. Any claim or dispute is to be arbitrated by a single arbitrator on an
individual basis and not as a class action. You expressly waive any right you
may have to arbitrate a class
action. You may choose one of the following arbitration organizations and its
applicable rules: the National Arbitration Forum . . . . (www.arbforum.com),
the American Arbitration Association . . . (www.adr.org), or any other
organization that you may choose subject to our approval. You may get a copy of the rules of these
organizations by contacting the arbitration organization or visiting its
website.
"Arbitrators shall be attorneys or retired
judges and shall be selected pursuant to the applicable rules. The arbitrator
shall apply governing substantive law in making an award. The arbitration hearing shall be conducted in
the federal district in which you reside. . . . We will
advance your filing, administration, service or case management fee and your
arbitrator or hearing fee all up to a maximum of $2500, which may be reimbursed
by decision of the arbitrator at the arbitrator's discretion. Each party shall be responsible for its own
attorney, expert and other fees, unless awarded by the arbitrator under
applicable law. If the chosen
arbitration organization's rules conflict with this Arbitration Clause, then
the provisions of this Arbitration Clause shall control. The arbitrator's award shall be final and
binding on all parties, except that in the event the arbitrator's award
for a party is $0 or against a party is in excess of $100,000, or includes an
award of injunctive relief against a party, that party may request a new
arbitration under the rules of the arbitration organization by a
three-arbitrator panel. The appealing party requesting new
arbitration shall be responsible for the filing fee and other arbitration
costs subject to a final determination by the arbitrators of a fair
apportionment of costs. Any
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.
"You and we retain any
rights to self-help remedies, such as repossession. You and we retain
the right to seek remedies in small claims court for disputes or claims within
that court's jurisdiction, unless such action is transferred, removed or
appealed to a different court. Neither you nor we waive the right to arbitrate
by using self-help remedies or filing suit. Any court having
judgment on the arbitrator's award. This Arbitration Clause shall survive any termination,
payoff or transfer of this contract. If any part of this Arbitration Clause,
other than waivers of class action rights, is deemed or found to be
unenforceable for any reason, the remainder shall remain enforceable. If a
waiver of class action rights is deemed or found to be unenforceable for any
reason in a case in which class action allegations have been made, the
remainder of this Arbitration Clause shall be unenforceable." (Italics added.)
The
evidence showed the entire sales agreement was contained on a single sheet of
paper that is about 26 inches long with numerous provisions close together on
the front and back side. The arbitration
provision is located on the bottom of the back side and is outlined in black
lines, as are several other provisions.
The provision is printed in at least 8-point type. Okudan signed the bottom of the front side
and initialed the contract on several places on the front side, but there are
no signatures or initials by Okudan on the back of the contract.
Okudan also
presented his declaration in which he described his execution of the sales
agreement. The declaration states in
part:
"When I was asked to sign the purchase documents,
the dealer representative never actually gave me the sales contract to read. He spent no more than five to ten minutes
having me sign the purchase contract and several other sales documents. The sales person did not explain the contract
to me prior to signing it, and did not discuss anything on the back of the
contract. I could not read the back of
the contract because he never turned it over.
I was not asked to sign anywhere on the back of the contract. I was not told there was additional language
on the back. The sales person did not
turn the contract over at all during the signing.
. . . The sales person held the contract flat on the
desk with one hand and with the other pointed to the various places on the
front of the contract for me to sign.
The way he held his hands on the contract kept me from reading much of
the language on the front of the contract.
In addition, there were probably 7 or 8 other documents to be
signed. No one at the dealership ever
discussed an arbitration clause with me prior to the sale. I did not know there was any arbitration
clause until my attorney told me [Financial] is trying to force
arbitration. . . . [¶] The contract was presented to me on a
take it or leave it basis.
. . . I have never heard of the National Arbitration
Forum or the American Arbitration Association.
I am unfamiliar with their rules and was never given a copy of the
rules. I cannot afford to pay
arbitration fees. If I had been told
that I would have to forfeit my right to go to court I would not have bought
the vehicle. I no longer have my copy of
the contract because it was misplaced when I moved in 2009."
Based on
this evidence, Okudan argued the court should deny Financial's motion to compel
because the arbitration agreement was identical to the arbitration clause found
procedurally and substantively unconscionable by the Sanchez court (which had not yet been granted review by the
California Supreme Court). (See fn. 1,
The Sanchez court had found
four portions of the arbitration clause to be unconscionable: (1) providing the parties with the right to a
second arbitration before a three-arbitrator panel if the award exceeds
$100,000; (2) providing the parties with the right to a second arbitration
before a three-arbitrator panel if the award includes injunctive relief; (3)
the requirement that the appealing party advance
all arbitration costs; and (4) the exemption for self-help remedies (e.g.,
repossession).
title="">[2]
In reply,
Financial argued Sanchez was wrongly
decided and the agreement was neither procedurally nor substantively
unconscionable, and in any event severance is the proper remedy. Financial also argued it did not waive its
arbitration right, noting that it filed its motion immediately after Okudan
filed the amended cross-complaint adding the class allegations. Financial asserted that "the filing of a
class action cross-complaint is in itself a dramatic change in the nature and
scope of the case justifying [Financial] to change strategy and move to compel
arbitration," and Okudan did not suffer any prejudice from the delayed
motion.
After
considering the parties' submissions and conducting a hearing, the court denied
Financial's motion to compel arbitration based on its conclusion that the
provision was substantively and procedurally unconscionable under
With respect to substantive unconscionability, the court followed the
challenged portions of the arbitration provision were unfairly one-sided and
oppressive. The trial court also denied
Financial's severance request, stating that "consistent with the holding
in Sanchez, . . . the arbitration provision is permeated with
unconscionability, which cannot be cured by severing the offensive provisions
from the Contract." The court also
overruled Okudan's evidentiary objections and did not reach Okudan's waiver
arguments.
Financial
filed a notice of appeal on March 19, 2012.
Two days later, the California Supreme Court granted a petition for
review of the Sanchez decision. (See fn. 1, ante.) While Financial's
appeal was pending, this court filed the Goodridge
decision (see fn. 1, ante), in
which we held that an identical arbitration provision in a vehicle purchase
contract was procedurally and substantively unconscionable, adopting much of
appeal, the California Supreme Court granted a petition for review in the
(See fn. 1, ante.)
Several
federal courts (in unpublished decisions) have found identical arbitration
provisions in vehicle sale contracts to be unconscionable. (See Trompeter
v. Ally Financial, Inc. (N.D.Cal., June 1, 2012, No. C 12-00392 CW) 2012 WL
1980894; Lau v. Mercedes-Benz USA, LLC (N.D.Cal., Jan. 31, 2012, No. CV
11-1940 MEJ) 2012 WL 370557 (Lau);
see also Mance v. Mercedes-Benz USA (N.D.Cal.,
Sept. 28, 2012, No. CV 11-03717 LB), 2012 WL 4497369 [substantively but not
procedurally unconscionable]), and
(in a published decision) has rejected an unconscionability challenge (
895).
DISCUSSION
I. Applicable
Legal Principles
The
parties' agreement is expressly governed by the Federal Arbitration Act (FAA),
which reflects a strong federal policy favoring the enforcement of arbitration
agreements. Under the FAA, arbitration
agreements "shall be valid, irrevocable, and enforceable save upon such
grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.) State laws inconsistent with the federal
act's provisions and objectives are preempted.
(Perry v. Thomas (1987) 482
U.S. 483, 489.)
In 2011,
the United States Supreme Court reiterated the strong public policy favoring
the enforceability of arbitration agreements under the FAA and reaffirmed that
a state law contract defense is unenforceable if it applies only to arbitration
or if it derives its meaning from the fact that an agreement to arbitrate is at
issue. (See Concepcion, supra, 131 S.Ct. at pp. 1745-1746.) The court further made clear that the
principal purpose of the FAA is to " 'ensur[e] that private
arbitration agreements are enforced according to their terms.' " (Id.
at p. 1748.) However, the Supreme Court
also recognized that state laws regarding arbitration are enforceable to the
extent they are not in conflict with the FAA.
(Ibid.; see Doctor's Associates,
Inc. v. Casorotto (1996) 517 U.S. 681, 687; Truly Nolen of America v. Superior Court (2012) 208 Cal.App.4th
487, 498.)
One basis
for revoking a contract under California law is a showing that the contract is
unconscionable. This unconscionability
defense is codified in Civil Code section 1670.5, subdivision (a), which
states: "If the court as a matter
of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the
unconscionable clause . . . ."
Following
reaffirmed that this statutory unconscionability defense " 'may be
applied to invalidate arbitration agreements without contravening' the
FAA." (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012)
55 Cal.4th 223, 246 (Pinnacle).) The Pinnacle
court also reiterated well-settled principles governing the analysis of
unconscionability claims under California law:
"Unconscionability consists of both
and substantive elements. The procedural
element addresses the circumstances of contract negotiation and formation,
focusing on oppression or surprise due to unequal bargaining power. [Citations.]
Substantive unconscionability pertains to the fairness of an agreement's
actual terms and to assessments of whether they are overly harsh or
one-sided. [Citations.] A contract term is not substantively
unconscionable when it merely gives one side a greater benefit; rather, the
term must be 'so one-sided as to "shock the conscience." ' [Citation.]
[¶]
resisting arbitration bears the burden of proving unconscionability. [Citations.]
Both procedural unconscionability and substantive unconscionability must
be shown, but 'they need not be present in the same degree' and are evaluated
on ' "a sliding scale." '
[Citation.] '[T]he 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.'
[Citation.]" (
Unconscionability
is ultimately a question of law, which we review de novo when no meaningful
factual disputes exist as to the evidence.
(Parada v. Superior Court (2009) 176 Cal.App.4th 1554,
1567.) We review the court's resolution
of disputed facts for substantial evidence.
(Ibid.) When the trial
court makes no express findings, we infer that it made every implied factual
finding necessary to support its order and review those implied findings for
substantial evidence. (Ibid.)
II. Procedural
Unconscionability
unconscionability requires oppression or surprise. " 'Oppression arises from an inequality
of bargaining power that results in no real negotiation and an absence of
meaningful choice.' [Citation.] 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." ' [Citation.]"
(Gatton v. T-Mobile USA, Inc. (2007)
152 Cal.App.4th 571, 581, fn. omitted.)
Viewing the
factual record in the light most favorable to Okudan, both aspects of
procedural unconscionability are present in this case. The purchase agreement is contained on a
lengthy two-sided preprinted form that is about two feet long, and the
arbitration provisions are on the back side on the bottom of the form. Okudan signed only the front of the
document. He also placed his initials
next to several clauses, but each of those clauses was on the front of the
document. Okudan submitted a declaration
stating he had no opportunity to read the contract or negotiate the terms, and
the contract was presented to him on a "take it or leave it
basis." He also said he was unaware
of the arbitration clause, and the salesperson did not call his attention to,
or explain, the provision. Okudan said
the salesperson "held the contract flat on the desk with one hand and with
the other pointed to the various places on the front of the contract for me to
sign. The way he held his hands on the
contract kept me from reading much of the language on the front of the
contract."
These facts
contract, supports that there was a lack of negotiation or meaningful choice
before Okudan signed the contract. (See
Cal.App.4th 77, 89 (Gutierrez);
Financial
argues that Okudan could not have been "surprised" by the arbitration
requirement because a clause on the front side of the contract
"alerted" him to the arbitration provision on its reverse side. Specifically, towards the bottom of the front
side of the form and on the far right of the printed page, the following
provision appears in capital letters (although in substantially smaller type
than what appears here):
"YOU AGREE TO THE TERMS OF THIS CONTRACT. YOU CONFIRM THAT BEFORE YOU SIGNED THIS
CONTRACT, WE GAVE IT TO YOU, AND YOU WERE FREE TO TAKE IT AND REVIEW IT. YOU ACKNOWLEDGE YOU HAVE READ BOTH SIDES OF
THIS CONTRACT, INCLUDING THE ARBITRATION CLAUSE ON THE REVERSE SIDE. BEFORE SIGNING BELOW, YOU CONFIRM THAT YOU
RECEIVED A COMPLETELY FILLED-IN COPY WHEN YOU SIGNED IT."
The trial
court did not err in finding this clause would not have notified a reasonable
consumer of the existence of the arbitration clause. There is no provision for Okudan's signature
or initials under or adjacent to that language.
Rather, his signature appears on the opposite side of the page under a
larger, boxed-in provision regarding the lack of a cooling-off period that
appears to the left of the quoted language in the two-thirds width of the page
adjacent to the left margin. Further,
based on the manner in which the salesperson held his hand on the contract while
Okudan was placing the required signature/initials, the trial court had a
reasonable basis to conclude that Okudan did not have a fair opportunity to
read this clause in a careful manner that would have provided sufficient
information to refer Okudan to the arbitration provision on the back side.
We
recognize that automobile dealers are statutorily mandated to include copious
amounts of information in a sales contract and the contract here met the legal
requirements regarding content and print size.
(See Civ. Code, §§ 2982, 2981.9.)
However, there is no statutory requirement that the arbitration
provision be placed on the bottom of the back of the form without any provision
for a consumer signature or initials to ensure the buyer has read and/or
understood the provision. Because the arbitration
provision was contained on the back of the contract containing dense
contractual language and there was no evidence that Okudan knew of the
provision or would have been reasonably alerted to this clause before signing
and consenting to the agreement, the court's finding of surprise was supported.
Based
on the totality of the circumstances, there was a moderate degree of procedural
unconscionability in this case. However,
this is not the end of the analysis because a contract is unconscionable only
if it is both procedurally and substantively unconscionable.
III. Substantive
Unconscionability
Financial
contends the court erred in finding four portions of the arbitration provision
were substantively unconscionable: three
concern the finality of the arbitrator's decision and one concerns the parties'
rights to seek relief outside the arbitration process thorough self-help
remedies or small claims court.
We conclude
Financial's contention has merit with respect to the self-help and small claims
court remedies. As explained, there is
nothing unfair or unreasonable in allowing the parties to retain their rights
to these remedies outside the arbitration process.
But we
conclude the remaining challenged provisions pertaining to the finality of the
arbitration decision are moderately unconscionable because they primarily
benefit the economically-stronger party and substantially burden the weaker
party. Viewing together the moderate levels of procedural and substantive
unconscionability, we determine these provisions cannot be enforced. However, because the objectionable provisions
are contained solely in two sentences of the lengthy arbitration agreement and
pertain to a single part of the arbitration clause (concerning the finality of
the arbitration award), they can potentially be severed from the remaining
portions of the agreement. We thus
remand for the trial court to exercise its discretion on the severance issue
without including the erroneous determination regarding the self help/small claims
provisions.
A. Summary
of Substantive Unconscionability Standard
"Substantive
unconscionability pertains to the fairness of an agreement's actual terms and
to assessments of whether they are overly harsh or one-sided. [Citations.]
A contract term is not substantively unconscionable when it merely gives
one side a greater benefit; rather, the term must be 'so one-sided as to
"shock the conscience." '
[Citation.]" (Pinnacle,
supra, 55 Cal.4th at p.
246.) Moreover, even though a provision
is unduly one-sided, it may not be unconscionable when the party who is
imposing the provision offers a legitimate business justification based on
" 'business realities.' "
(Armendariz v. Foundation Health Psychcare Services, Inc. (2000)
24 Cal.4th 83, 117-118.) However,
" 'unless the "business realities" that create the special
need for such an advantage are explained in the contract itself,' " they
" 'must be factually established.' "
(Id. at p. 117.) In
determining substantive unconscionability, we are required to consider the
circumstances at the time the agreement was executed, and not the particular
dispute between the parties. (Civ. Code,
§ 1670.5; American Software, Inc. v.
Ali (1996) 46 Cal.App.4th 1386, 1391.)
In our
prior Goodridge decision, we expressly
declined to apply the "shock the conscience" standard in examining
whether the arbitration provision was unconscionable. (See fn. 1, ante.) However, the
California Supreme Court has since made clear that this standard governs the
substantive unconscionability analysis.
(Pinnacle, supra, 55 Cal.4th
at p. 246.) Following
conscience" standard and recognize that it imposes a significant burden on
a party seeking to prevail on a substantive unconscionability claim. Thus, our analysis in this case differs
somewhat from our analysis in the Goodridge
case.
B. Self-Help
and Small Claims Remedies
The final
paragraph of the arbitration provision begins:
"You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies
in small claims court for disputes or claims within that court's jurisdiction,
unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate
by using self-help remedies or filing suit."
Okudan
contends this provision, in practical effect, benefits only Financial because
car dealers/creditors are the only parties that use self-help remedies (i.e.,
repossession). We agree repossession is
a common recourse for sellers against a defaulting buyer, and buyers do not
have an equivalent self-help remedy.
However, the exclusion of this remedy from the scope of arbitration is
not oppressive or unfair because self-help remedies are, by definition, outside
the judicial system. In other words, the
fact that the buyer has no corresponding self-help remedy is not a consequence
of the arbitration agreement. Under the
applicable statutes and the parties' contract, a seller has the right to
repossess a vehicle when the buyer defaults and required payments are not being
made. (See Civ. Code, § 2983.3,
subd. (b).) The creditor may exercise
its rights to this self-help remedy without bringing this claim to court. There is nothing harsh or one-sided about exempting
repossession from arbitration when it is exempt from the judicial process.
To the extent the seller/creditor seeks to obtain a deficiency after the
repossession and sale, this is not a self-help remedy, and the seller/creditor
would be required to resolve that claim in the arbitration process.
In
this respect, Okudan's reliance on Flores
v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846 is
misplaced. In Flores, the plaintiffs obtained a reverse mortgage on their home
from the defendant lender. (
arbitration clause requiring arbitration of all disputes between the parties,
lender's right to "foreclose against the Property (whether judicially or non-judicially . . . ), to exercise self-help remedies such
as set-off, or to obtain injunctive relief for the appointment of a
receiver." (Id. at
p. 850, italics added.) The court found
this broad exclusion unconscionable because the lender was not required to
bring any of its claims to arbitration and the "clear implication is that
[the lender] has attempted to maximize its advantage by avoiding arbitration of
its own claims." (
argument that the self-help exclusion renders the arbitration clause
unconscionable. The Flores agreement exempted from arbitration not only claims outside
the judicial process (nonjudicial foreclosure) but also claims that must be
brought in court (judicial foreclosure).
Thus, the broad exclusion affirmatively provided the lender with the
unilateral opportunity to bring certain of its claims in court, even during the
pendency of the arbitration process. The
exemption for true self-help remedies (i.e., repossession) does not have a
similar effect because the remedy is by definition already outside the judicial
process.
Moreover,
the recent Pinnacle decision creates
some doubt as to the continuing validity of the Flores court's reasoning. (
the court rejected the argument that an arbitration provision is
necessarily unconscionable merely because it requires the homeowners
association and property owners to arbitrate all construction disputes with the
developer without requiring the developer to arbitrate any of its
nonconstruction-related claims against these parties. (Id.
at pp. 248-249.) In so concluding, the
court reiterated that "arbitration clauses may be limited to a specific
subject or subjects and that such clauses are not required to 'mandate the
arbitration of all claims between [the parties] in order to avoid invalidation
on grounds of unconscionability.' "
(Id. at p. 248.)
Okudan also
failed to meet his burden to show the exemption of small claims disputes is so
harsh or one-sided that it "shocks the conscience." (See Pinnacle,
supra, 55 Cal.4th at p. 246.) The
provision is neutral and applies to any party's claim that falls within the
small claims court's jurisdiction. On
its face and in practical application, the provision is mutual. (See Arguelles-Romero
v. Superior Court (2010) 184 Cal.App.4th 825, 845, fn. 21.) Vehicle purchasers frequently have small
claims disputes with sellers—for example, for the cost to repair a defective
condition of the vehicle—and it would not be unfair that this dispute would be
exempt from arbitration. Consumers
benefit from this exception by having a faster and much less expensive dispute
resolution forum to resolve claims under a certain monetary amount without
needing to retain an attorney. The fact
that injunctive or other forms of equitable relief are not available in small
claims court does not make the small claims exclusion particularly unfair or
one-sided with respect to the claims that do fall within the court's jurisdiction. As Pinnacle
held, substantive unconscionability does not arise merely because an
arbitration clause limits the type of claims subject to arbitration, even if
those limitations mean that one party's claims are more likely to fall within
the scope of the arbitration clause. (
248-249.)
We conclude
the trial court erred in finding the self-help and small claims court
exclusions to be unconscionable.
C. Finality
Provisions
The court
also found unconscionable the arbitration clauses' finality provision, which
reads as follows:
"The arbitrator's award shall be final and binding
on all parties, except that in the event the arbitrator's award for a party is
$0 or against a party is in excess of $100,000, or includes an award of
injunctive relief against a party, that party may request a new arbitration
under the rules of the arbitration organization by a three-arbitrator panel.
The appealing party requesting new arbitration shall be responsible for the
filing fee and other arbitration costs subject to a final determination by the
arbitrators of a fair apportionment of costs."
The court
determined three portions of this provision were oppressive and one-sided: (1) the exception to finality if the
arbitration award is "$0" or exceeds $100,000; (2) the exception to
finality if the arbitration award "includes an award of injunctive
relief"; and (3) the requirement that the appealing party advance all
costs for the second arbitration proceeding.
Reviewing
these challenged provisions together,
we find they are moderately unconscionable because they create a situation in
which the arbitration appellate rules benefit the economically stronger party
(Financial) to the detriment of the weaker party (Okudan) and, in doing so,
defeat an essential purpose of the FAA, which is to encourage efficient and
speedy dispute resolution. (
Pinnacle, supra, 55 Cal.4th at p. 235, fn. 4.) Where, as here, an arbitration agreement
provides for broad exceptions to finality and these exceptions generally favor
only one party, the private and public policy advantages of the arbitration
process no longer exist. Viewing the
totality of the circumstances, we cannot say that Okudan fairly agreed to an
arbitration process that provides for a second arbitration under the
circumstances set forth in the arbitration provision.
The first
exception to the finality rule is the provision that either party is entitled
to compel a second arbitration before a three-person arbitration panel if the
award is in excess of $100,000 or is zero.
Okudan argues that although the provision on its face applies to both
parties, its practical effect is to favor Financial because Financial is the
party most likely to suffer an award against it in excess of $100,000, and the
provision unfairly precludes him from appealing a monetary award that is too
low but is more than zero.
Financial
counters that in this case where the cost of the vehicle was approximately
$72,000 and a substantial portion of the vehicle was financed by the seller, it
is just as likely that Financial could recover $100,000 and thus that Okudan
could benefit from the $100,000-plus award finality exception. Financial also points out that the $0 award
exception would have the same effect on both parties because the parties are
equally likely to be awarded no monetary damages on a claim.
We agree
that because of the cost of the vehicle, it is possible that Okudan could
suffer an adverse award of more than $100,000.
Although a nonprevailing consumer is not required to bear the prevailing
party's attorney fees in an arbitration (Code Civ. Proc., § 1284.3, subd.
(a)), a seller/creditor who prevails on a collection claim against a consumer
may be awarded the amount of the claim plus interest. A defaulting consumer who purchased a $72,000
vehicle with a minimal downpayment may ultimately owe more than $100,000 if the
award includes interest. Moreover, there
is nothing one-sided about a rule permitting either party to appeal when the
arbitration award does not include any money damages.
However,
even if under some circumstances Okudan could exercise his appellate rights to
a second arbitration, we agree with Okudan that—when viewing the contract at
the time it was signed—it was much more likely that these rights would be
exercised by the dealer/creditor. A
consumer who proves a claim that a $72,000 vehicle does not work as promised or
that the defendant engaged in some form of fraud or unfair business practice
would likely receive an award of more than $100,000, particularly when
considering the consumer may be entitled to compensatory damages, statutory
penalties and attorney fees. (See, e.g.,
Civ. Code, § 1780.) Although an
arbitrator is precluded from awarding prevailing party attorney fees against a
consumer, this same rule does not apply where a prevailing consumer seeks to
recover attorney fees against the seller/creditor. (See Code Civ. Proc., § 1284.3.)
Moreover, a
conclusion that both parties may possibly exercise appellate rights is not the
end of our analysis. In
Cal.4th 1064, the California Supreme Court held a similar provision in an
employment arbitration agreement was unenforceable because it was unconscionably
one-sided. (Id. at pp. 1071-1074.) In
employment contract provided that if the arbitration award was more than
$50,000, either party could appeal the award to a second arbitrator who would
"proceed according to the law and procedures applicable to appellate
review by the California Court of Appeal . . . ." (Id.
at p. 1071.) Little held that even if there was a possibility that the employee
would benefit from the appeal provision because the employer could be a
plaintiff in a trade secrets case, the provision was unconscionable because the
employer (the drafting party) failed to adequately explain the business
justification for the $50,000 threshold.
(Id. at p. 1073.) In particular, the court found fault with the
$50,000 trigger because it would not be a relevant factor in the employee's
decision to appeal, which the court said would be typically based on the
"potential value of the arbitration claim" compared with "the
costs of the appeal," rather than on an arbitrary monetary threshold. (Ibid.;
see also Saika v. Gold (1996) 49 Cal.App.4th 1074, 1080 [finding
unconscionable a $25,000 award minimum to trigger a de novo arbitration].)
In this
case, Financial argues that the $100,000 minimum reflects a legitimate business
decision because it will eliminate "outlier" awards. However, where, as here, a consumer purchases
a vehicle for $72,000, a $100,000 award against either party would not
necessarily be considered an outlier award.
It appears more likely that the drafters of the arbitration provision
included the $100,000-plus finality exception to ensure that the
seller/creditor would have a second chance at arbitration if an award is
sufficiently large to support the expense of a second arbitration. Although this may be a reasonable business
justification, this purpose would generally benefit only the appealing
seller/creditor and not the appealing consumer.
As reflected in Little's
necessarily a rational basis for a consumer's decision to appeal an arbitration
award. A consumer's decision is instead
based primarily on the value of the claim and the likely costs of the
appeal.
In any
event, we need not decide if the $100,000-plus exception is unconscionable by
itself because the second finality exception (the injunction exception) raises
even stronger concerns regarding the one-sided nature of the arbitration
clause's finality rules. This exception
provides a party with a right to compel a second arbitration before a
three-person arbitration panel if the first award "includes . . . injunctive relief." (Italics added.) This exception does not provide equivalent
appellate rights to the party who does not prevail on a request for injunctive
relief.
The
exception advantages only the seller/creditor.
Consumers frequently seek injunctive relief because it is a remedy to
protect the public from further unlawful actions by a defendant. (See People
v. Pacific Land Research Co. (1977) 20 Cal.3d 10, 16-20;
7 Cal.3d 94, 103-108.) When buyers bring
statutory consumer claims against sellers/creditors, many of the applicable
statutes specifically provide for injunctive relief, regardless of the amount
of damages/restitution awarded. Under
such circumstances, a seller/creditor who obtains a judgment between $0 and
$100,000 will have the right to appeal the entire
award if the award "includes" injunctive relief.
However,
there is no reasonable possibility that a consumer can take advantage of this
exception because it is unlikely that a seller/creditor will seek or obtain
injunctive relief against a buyer. If a
creditor seeks immediate or equitable relief after a default, the
dealer/creditor has the option to exercise its repossession rights or seek a
writ of prohibition in superior court while the arbitration proceeding is
pending. (See Code Civ. Proc.,
§§ 512.010, 1281.8, subd. (b).)
Consumers have no equivalent rights, and must bring their claims for
provisional or permanent equitable relief in the arbitration proceedings.
Financial
argues that "[i]n non-class arbitration, a car buyer will rarely seek or
obtain injunctive relief . . . since the car buyer cannot show a risk that he
or she will be affected by the dealer's same practice in the future." However, in asserting this argument Financial
ignores the various statutory consumer statutes, including California's UCL and
CLRA that specifically provide for injunctive relief to prevent similar harm to
others, even in cases brought individually.
(See, e.g., Bus. & Prof. Code, § 17200 et seq.; Civ. Code, §§ 1750, 1780, subd.
(a), 1784.)
We also
find unpersuasive Financial's argument that "there is an obvious and
powerful business justification" for the injunctive relief exception
because "[a]wards of that type are unusual and could potentially be
devastating to a dealer's continued operation as a business" and the
"awards are just the sort of 'outlier' results that the parties could
legitimately think required a second look."
This
argument is not supported by any citation to the record or legal authority, nor
is it logically persuasive. Because
consumers alleging wrongful conduct frequently seek equitable remedies, an
arbitration award that includes injunctive relief cannot be fairly
characterized as an "outlier."
Moreover, an injunction would not necessarily impose substantial
financial burdens on a seller/creditor.
For example, in this case, Okudan brought a Business and Professions
Code section 17200 claim seeking to enjoin Financial from continuing to send
NOI's that violate the applicable statutes.
If the evidence shows that the NOI's used by Financial do not comply
with applicable law, an injunction would be appropriate, but would not
necessarily "be devastating to a dealer's continued operation as a
business." Significantly, there is
no equivalent exception permitting an appeal for awards against a consumer if
the award would be financially "devastating," including awards that
are less than $100,000 but more than the consumer can afford to pay.
Additionally,
as one federal district court recently recognized, allowing an appeal of an
arbitration award merely because it includes preliminary or permanent
injunctive relief would create substantial delay, undermining the urgency of
that type of remedy and defeating the goals of arbitration to provide a
relatively prompt and efficient method for obtaining necessary relief. (See Trompeter,
supra, 2012 WL 1980894, p. *6.)
Financial
argues that even if the injunctive relief exception to the finality rule is not
mutual, it is merely a "slight departure" from the bilateral nature
of the contract. We disagree. Allowing the seller/creditor to challenge any
arbitration award merely because it contains some form of injunctive relief,
while denying the consumer the right to appeal when an injunction is denied or
when the amount of the award is less than $100,000, is not a "slight"
departure from mutuality. It
systematically tilts the playing field in favor of the seller/creditor. (See Trompeter,
supra, 2012 WL 1980894, p. *6.)
The
unfairness inherent in the arbitration agreement's finality rules is further
evidenced by the requirement that the appealing party advance the full costs of
the second arbitration, including the
costs of the three-arbitrator panel.
Under this provision, if
arbitration award, he would be responsible for advancing the costs and fees of
that appeal for both parties, including the fees for the private
arbitrators. Given the common hourly
rates of private arbitrators (in the hundreds of dollars), it is reasonable to
conclude that Okudan would face the prospect of advancing a minimum of $10,000
to appeal an arbitration award. This
payment would be required after he
was unsuccessful in obtaining any monetary award or was found liable for more than $100,000. Further, the arbitration provision does not
inform Okudan of the exact amount required to file an appeal and therefore may
have the effect of discouraging him from appealing. Additionally, there is nothing in this
arbitration agreement providing for a waiver of these upfront fees if Okudan
could not afford to pay these fees.
Under
analogous circumstances, a California Court of Appeal held a consumer
arbitration agreement unconscionable where the agreement imposed a
"substantial [upfront] administrative fee" and "there [was] no
effective procedure for a consumer to obtain a fee waiver or
reduction." (Gutierrez, supra, 114 Cal.App.4th at p. 91.) The Gutierrez
court explained: "A comparison with
the judicial system is striking. While
imposing far lower mandatory fees, the judicial system provides parties with
the opportunity to obtain a judicial waiver of some or all required court fees." (Ibid.) Although Gutierrez
arose in the context of an initial fee (rather than a fee to appeal), the logic
of its holding extends to the cost provision challenged here. If the fee for an appeal is so high that it
is unlikely that the consumer could bear it, the exceptions to the finality
provision are not mutually beneficial to both parties and become solely
one-sided. (See Lau, supra, 2012 WL
370557, p. *10 ["[s]uch a provision places an unduly harsh burden on
consumers and further discourages them from enforcing their rights"].)
Financial
argues that in this case, unlike in Gutierrez,
Okudan did not present any evidence that he could not afford the upfront
second-arbitration fees. Generally, in
evaluating the fairness of an arbitration agreement under a substantive
unconscionability analysis, the ability to pay must be evaluated at the time
the agreement is signed. (Civ. Code,
§ 1670.5; Parada v. Superior Court,
supra, 176 Cal.App.4th at p. 1583; Gutierrez,
supra, 114 Cal.App.4th at p. 91.) In
his declaration, Okudan said he "cannot afford to pay arbitration
fees." However, Okudan presented no
evidence regarding his ability to pay fees when he signed the sales contract,
nor did he present any evidence of the projected cost amount if he were to request
a second arbitration. We agree the lack
of this evidence is a factor in determining whether a cost provision in an
arbitration agreement is unconscionable.
However, even without this evidence, the lack of an effective procedure
for a consumer to obtain a waiver of a cost requirement before the consumer
must pay in advance the entire costs
of an arbitration proceeding, which
include the costs of a three-arbitrator panel, is an important factor in
the unconscionability analysis. (See
91-92.)
Financial
relies on Green Tree Financial Corp.-Ala.
v. Randolph (2000) 531 U.S. 79 (Green
Tree), to argue that these arbitration costs are not relevant to show
unconscionability. In
federal statutory consumer claim against a lender and contended the arbitration
agreement between the parties (which was silent on the cost of arbitration) was
unenforceable because the arbitration would be too expensive. (Id. at
pp. 82-84.) Rejecting this claim, the
United States Supreme Court held an arbitration agreement silent on arbitration
costs is not per se unenforceable without a showing that the plaintiff will
actually be required to bear the costs of the proceeding. (Id.
at pp. 89-92.) The court reasoned that
although "[i]t may well be that the existence of large arbitration costs
could preclude a litigant . . . from effectively vindicating her federal
statutory rights," the litigant bears the burden of showing the likelihood
of incurring such costs. (
record does not show that [the litigant] will bear such costs if she goes to
arbitration" and thus the " 'risk' that [the litigant] will be
saddled with prohibitive costs is too speculative to justify the invalidation
of an arbitration agreement." (
1575-1576.)
argument that a requirement that a consumer bear the advance costs of a second
arbitration has no relevance to California's unconscionability analysis or that
we cannot consider the issue without a full factual record of the consumer's
ability to pay. Here, unlike in
provides that if Okudan wishes to appeal an award, he will be required to pay
in advance all costs, which (as explained above) are certain to be
substantial. This is a relevant factor
in the unconscionability analysis.
In sum, we
have determined that when considered together, three provisions relating to the
finality of the arbitration award combine to deny Okudan the mutual benefits of
the arbitration agreement and are substantively unconscionable: (1) the exception to finality for awards that
are more than $100,000; (2) the exception to finality for an award that
"includes" injunctive relief; and (3) the requirement that the
appealing party advance both parties' costs for the second arbitration with a
three-arbitrator panel. The parties'
arbitration agreement provides a streamlined and efficient procedure when it
serves the needs of the seller/creditor, but when such needs are not served—for
example when the award is more than $100,000 or includes injunctive relief—the
buyer is then subjected to delay and complexity. Moreover, without any waiver for a consumer
who cannot afford to pay for an appeal, the requirement that the appealing
party advance the full cost of the arbitration (including the fees for the
three arbitrators) makes it likely that the seller/creditor will be the only
party to take advantage of the appeal procedures. Considered together, these three challenged
provisions are moderately substantively unconscionable. Under the sliding-scale test, these
provisions cannot be enforced because we have found that the contract was also
moderately procedurally unconscionable.
IV. Severance
Civil Code
section 1670.5, subdivision (a) provides:
"If the court as a matter of law finds the contract or any clause
of the contract to have been unconscionable at the time it was made the court
may refuse to enforce the contract, or it may enforce the remainder of the
contract without the unconscionable clause, or it may so limit the application
of any unconscionable clause so as to avoid any unconscionable
result." A trial court has broad
discretion to determine whether severance is appropriate in a particular
case. (Murphy v. Check 'N Go of California, Inc. (2007) 156 Cal.App.4th
138, 144.)
The trial
court refused to sever the unconscionable provisions because it found the
arbitration agreement was "permeated with unconscionability" and this
problem could not "be cured by severing the offensive provisions . . .
." This conclusion was based on the
court's finding that there were multiple unconscionable provisions. In this opinion, we have concluded that the
court erred in finding the self-help/small-claims exceptions are
unconscionable, and that the unconscionable portions of the arbitration
agreement relate solely to the rules regarding the finality of an arbitration
award. On remand, the court should reconsider
its severance ruling based on a correct analysis of which provisions are
unconscionable.
V. Okudan's
Additional Arguments
Okudan
contends an alternate basis for affirming the court's order is to determine
that Financial waived its right to seek arbitration by waiting until Okudan
amended his complaint to add class allegations.
Because the waiver issue is a matter for the trial court's discretion in
the first instance, it would not be appropriate for this court to reach
Okudan's contentions before the trial court has had the opportunity to address
the issue. If, on remand, the court
finds that the unconscionable portions of the agreement can be severed and thus
the agreement is enforceable, the court should address the waiver argument.
We also reject
Okudan's argument that the court erred in finding that Financial adequately
proved the arbitration agreement by its submission of its collections manager's
declaration. Substantial evidence
supports the trial court's factual finding that the parties entered into the
arbitration agreement and that the contract was the industry standard form
contract. For purposes of the motion to
compel, there was no dispute over the contents of the agreement.
DISPOSITION
The court is ordered to vacate its order denying
Financial's motion to compel arbitration and to consider whether to sever the
provisions found unconscionable in this opinion. If the court finds the unconscionable
provisions can be severed, the court should consider and rule on Okudan's
argument that Financial waived its right to compel arbitration. If the court finds the provisions can be
severed and that there was no waiver, it should grant Financial's motion to
compel the arbitration.
The parties to bear their own costs on appeal.
HALLER, Acting P. J.
WE CONCUR:
AARON, J.
IRION, J.
name="_ftn1" title="">[1]
Many of the same legal issues in
this case are before the California Supreme Court in two pending cases. (Sanchez
v. Valencia Holding Co., LLC (2011) 201 Cal.App.4th 74, review granted Mar.
21, 2012, S199119 (Sanchez);
(2012) 209 Cal.App.4th 325, review granted Dec. 19, 2012 (Goodridge) [briefing deferred pending Sanchez case].) This case
involves the same form contract that was at issue in the Sanchez and Goodridge
cases.
name="_ftn2" title="">[2]
Although the arbitration clause
included a class action waiver, Okudan did not argue the waiver was
unconscionable. (See
(2011) __ U.S. __ [131 S.Ct. 1740] (Concepcion).)
