Natalini v. Import Motors
Filed 1/7/13 Natalini v.
Import Motors CA1/5
NOT
TO BE PUBLISHED IN OFFICIAL REPORTS
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 This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
FIVE
GABRIEL NATALINI,
Plaintiff
and Respondent,
v.
IMPORT MOTORS, INC.,
Defendant and Appellant.
A133236
(
Super.
Plaintiff and respondent Gabriel
Natalini (respondent), a car buyer, filed this action alleging individual and
class claims against defendant and appellant Import Motors, Inc. (appellant), a
car dealer. Appellant filed a petition
to compel arbitration pursuant to a provision in the car sales contract, but
the trial court denied the petition because it concluded the
unconscionable. We affirm.
Background
In November 2010, respondent filed a
complaint alleging eight causes of action against appellant arising out of his
purchase of a car. Respondent asserted
individual claims for negligent
misrepresentation, violation of the Consumer Legal Remedies Act (CLRA)
(Civ. Code, § 1750 et seq.), and violation of the Rees-Levering Motor
Vehicle Sales and Finance Act (Civ. Code, § 2981 et seq.; hereafter the
Rees-Levering Act). Appellant alleged
the car and tires were sold as new when in fact they were used. Respondent asserted class claims for
violation of the CLRA, violation of the Rees-Levering Act, unfair business
practices (Bus. & Prof. Code, § 17200 et seq.), false or misleading
advertisements (Bus. & Prof. Code, § 17500 et seq.), and declaratory
relief. Respondent alleged that
appellant’s practices relating to consumer car trade-ins were unlawful.
Attached to the complaint as exhibit
1 is a copy of a California Motor Vehicle Retail Installment Contract (Sales
Contract). Paragraph 20 of the Sales
Contract, which appears on the backside of the contract, has the header
“ARBITRATION CLAUSE†and the warning “PLEASE REVIEW - IMPORTANT - AFFECTS MY
LEGAL RIGHTS.†The arbitration provision
states in part, “Either you or I may choose to have any dispute between us
decided by arbitration and not in a court or by jury trial. If a dispute is arbitrated, I will give up my
right to participate as a class representative or class member on any class
claim I may have against you including any right to class arbitration or any
consolidation of individual arbitrations. . . . [¶] Any claim or dispute, whether in
contract, tort, statute or otherwise (including the interpretation and scope of
this clause, and the arbitrability of the claim or dispute,) between me and you
or your employees, agents, successors or assigns, which arise out of or relate
to my credit application, purchase or condition of this Vehicle, this Contract
or any resulting transaction or relationship . . . shall, at your or
my election, be resolved by neutral, binding arbitration and not by a court
action. Any claim or dispute is to be
arbitrated by a single arbitrator on an individual basis and not as a class
action or other mass action. I expressly
waive any right I may have to arbitrate a class action. . . .†Self-help remedies are exempted from the
arbitration requirement: “You and I may
retain any rights to self-help remedies, such as repossession. Neither you nor I waive the right to
arbitrate by using self-help remedies or filing suit.†The arbitration provision also states, “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 provision also contains clauses relating
to selection of the arbitrator, arbitration costs, and other matters.
Appellant argues on appeal that, at
the time the complaint was filed, the arbitration provision in the Sales
Contract was unenforceable under Discover
Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), which held that many arbitration provisions in
consumer contracts prohibiting classwide arbitration are unconscionable. In April 2011, the United States Supreme
Court decided the case of AT&T
Mobility LLC v. Concepcion (2011) 563 U.S. ___
[131 S.Ct. 1740] (Concepcion),
expressly overruling Discover Bank. In May 2011, appellant sent a letter to
respondent demanding arbitration. When
no response was received, appellant filed a petition to compel
arbitration. In September 2011, the
trial court denied the petition on several grounds, including the
unconscionability of the arbitration provision.
This appeal followed.
Discussion
I. Legal Background
“ ‘ “Whether an
arbitration provision is unconscionable is ultimately a question of
law.†’ [Citations.] ‘On appeal, when the
. . . , we review the contract de novo to determine
unconscionability.’ [Citations.]†(Suh v.
Superior Court (2010) 181 Cal.App.4th 1504, 1511-1512.) “Where the trial court’s determination of
unconscionability is based upon the trial court’s resolution of conflicts in
the evidence, or on the factual inferences which may be drawn therefrom, we
consider the evidence in the light most favorable to the court’s determination
and review those aspects of the determination for substantial evidence. [Citation.]â€
(Gutierrez v. Autowest, Inc.
(2003) 114 Cal.App.4th 77, 89 (Gutierrez).) The trial court’s ruling on severance is
reviewed for abuse of discretion. (
(2007) 156 Cal.App.4th 138, 144.)
As explained in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24
Cal.4th 83 (Armendariz), “In 1979,
the Legislature enacted Civil Code section 1670.5, which codified the principle
that a court can refuse to enforce an unconscionable provision in a contract. [Citation.]
As section 1670.5, subdivision (a) 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, or it may so limit
the application of any unconscionable clause as to avoid any unconscionable
result.’ Because unconscionability is a
reason for refusing to enforce contracts generally, it is also a valid reason
for refusing to enforce an arbitration agreement under Code of Civil Procedure
section 1281, which . . . provides that arbitration agreements are
‘valid, enforceable and irrevocable, save upon such grounds as exist for the revocation
of any contract.’ †(
“Unconscionability has a procedural
and a substantive element; the procedural element focuses on the existence of
oppression or surprise and the substantive element focuses on overly harsh or
one-sided results. [Citations.] To be unenforceable, a contract must be both
procedurally and substantively unconscionable, but the elements need not be
present in the same degree.
[Citations.] The analysis employs
a sliding scale: ‘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.’ [Citations.]†(Gatton
v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 579 (Gatton).)
In Discover Bank, supra, 36
Cal.4th 148, the California Supreme Court considered an unconscionability
challenge to an arbitration provision prohibiting classwide arbitration in an
agreement between a credit card company and its cardholders. (Id.
at p. 152.) The court held that, when a
waiver of classwide relief “is found in a consumer contract of adhesion in a
setting in which disputes between the contracting parties predictably involve
small amounts of damages, and when it is alleged that the party with the superior
bargaining power has carried out a scheme to deliberately cheat large numbers
of consumers out of individually small sums of money, then, at least to the
extent the obligation at issue is governed by California law, the waiver
becomes in practice the exemption of the party ‘from responsibility for [its]
own fraud, or willful injury to the person or property of another.’ (Civ. Code, § 1668.) Under these circumstances, such waivers are
unconscionable under California law
and should not be enforced.†(
The United States Supreme Court
overruled Discover Bank in
Bank rule, which classified “most collective-arbitration waivers in
consumer contracts as unconscionable[,]†was preempted by the Federal
Arbitration Act (FAA). (
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.â€
(9 U.S.C. § 2.)
“allows any party to a consumer contract to demand†classwide arbitration (
that “[r]equiring the availability of classwide arbitration interferes with
fundamental attributes of arbitration and thus creates a scheme inconsistent
with the FAA†(Concepcion, at p. 1748).
was inconsistent with the FAA because it imposed classwide arbitration without
both parties’ consent. (
“also discussed at length the substantial and material changes brought about by
the shift from individual to class arbitration [citation], and observed that
‘[a]rbitration is poorly suited to the higher stakes of class litigation’
[citation].†(Truly Nolen of
Appellant contends that
to arbitration provisions.
name="_ftnref1" title="">[1] However, “
unconscionability whenever an arbitration clause is involved. Rather, the [c]ourt reaffirmed that the
[FAA’s] savings clause preserves generally applicable contract defenses such as
unconscionability, so long as those doctrines are not ‘applied in a fashion
that disfavors arbitration.’ †(
2012) 673 F.3d 947, 963, quoting Concepcion,
supra, 131 S.Ct. at p. 1747; see also Truly
Nolen, supra, 208 Cal.App.4th at
p. 506.) Appellant argues that an
unconscionability analysis that focuses on the lack of mutuality or
bilaterality in an arbitration provision is “an example of applying a generally
applicable contract defense in a manner which disfavors arbitration.†Recent California and
federal district court decisions addressing arbitration provisions very similar
to that in the present case and in the identical car purchase context have not
read Concepcion so
broadly. (See Trompeter v. Ally Financial, Inc. (N.D.Cal., June 1, 2012, No. C‑12‑00392 CW) 2012 WL 1980894 [p. *8] [nonpub.
opn.] (Trompeter);
Inc. (S.D.Cal., Mar. 12, 2012, No. 09cv1076 DMS
(BLM)) 2012 WL 834784 [pp. *2-*4] (Smith);
Lau v.
No. CV 11–1940 MEJ) 2012 WL 370557 [pp. *6-*7] (Lau); see also Ajamian v.
CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 804, fn. 18.) A conclusion that an adhesive arbitration
provision is unconscionable because it is crafted overly in favor of the
drafter does not rely on any “judicial policy judgment†disfavoring
arbitration. (Truly Nolen, supra, 208 Cal.App.4th at p. 506.)
In any event, the impact of
agreement arbitration provision case, Sanchez
v. Valencia Holding Company (S199119).
The issue presented in that case is “Does the Federal Arbitration Act (9
U.S.C. § 2), as interpreted in AT&T
Mobility LLC v. Concepcion (2011) 563 U. S. ___ [131 S.Ct. 1740], preempt
state law rules invalidating mandatory arbitration provisions in a consumer
contract as procedurally and substantively unconscionable?â€
ruling on the issue, we find persuasive the decisions in Trompeter, Smith, and
of Appeal and Supreme Court decisions analyzing similar claims of substantive
unconscionability. (See
authority on issue not “directly address[ed]†in Concepcion].)
II. Application of Unconscionability Doctrine in the Present Case
A. Procedural
Unconscionability
“The procedural element of the
unconscionability analysis concerns the manner in which the contract was
negotiated and the circumstances of the parties at that time. [Citation.]
The element focuses on oppression or surprise. [Citation.]
‘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.]â€
(Gatton, supra, 152 Cal.App.4th at
p. 581, fn. omitted.)
Both aspects of procedural
unconscionability are present in this case.
Respondent submitted a declaration in support of his opposition to
appellant’s petition to compel arbitration averring that he was not permitted
to negotiate the terms of the Sales Contract.
The fact that the Sales Contract is adhesive alone demonstrates “a
minimal degree of procedural unconscionability.†(Gatton,
supra, 152 Cal.App.4th at p. 586; see
also Szetela v. Discover Bank (2002)
97 Cal.App.4th 1094, 1100 [“When the
weaker party is presented the clause and told to ‘take it or leave it’ without
the opportunity for meaningful negotiation, oppression, and therefore
procedural unconscionability, are present.â€].)
Furthermore, the evidence supports
the trial court’s implied finding that some degree of surprise is present. Respondent averred in his declaration that
appellant’s employees “spent only enough time on the contract to point out
where to sign,†he was “not allowed to read the back of the contract,†he and
appellant’s employees “did not discuss anything on the back of the contract,â€
and he was “not aware of any arbitration clause or waiver of rights at or
before the purchase.†In finding an
arbitration clause in an automobile lease procedurally unconscionable,
similar to those in this case: “The
arbitration clause was particularly inconspicuous, printed in eight-point
typeface on the opposite side of the signature page of the lease. Gutierrez was never informed that the lease
contained an arbitration clause, much less offered an opportunity to negotiate
its inclusion within the lease or to agree upon its specific terms. He was not required to initial the
arbitration clause. [Citation.]†(Gutierrez,
supra, 114 Cal.App.4th at p.
89.) As Lau pointed out in discussing a similar form, “The location of an
arbitration clause on the back of a dense pre-printed form where the purchaser
is not required to sign does relatively little to notify the consumer that such
clause exists.†(Lau, supra, 2012 WL
370557 [p. *8]; see also Trompeter,
B. Substantive
Unconscionability
“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
Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55
Cal.4th 223, 246.) “Where a party with
superior bargaining power has imposed contractual terms on another, courts must
carefully assess claims that one or more of these provisions are one-sided and
unreasonable.†(Gutierrez, supra, 114
Cal.App.4th at p. 88.) We focus on the
practical effect of a provision, not whether the one-sidedness is apparent on
the face of the provision. (
1074, 1079-1080.)
We conclude that the arbitration
provision in the present case is substantively unconscionable because it is
designed in several ways to systematically favor the car dealer. First, the provision authorizes an appeal
resulting in a new arbitration before a three-arbitrator panel only for an
award of $0 or in excess of $100,000.
its face, has the effect of benefiting the party that drafted the contract,
here, the car dealer. In
Cal.4th 1064 (Little), an employment
case, the arbitration provision allowed either party to appeal an initial award
to a second arbitrator if it exceeded $50,000.
The Supreme Court found the provision unconscionable, stating: The employer and its amici curiae “claim that
the arbitration appeal provision applied evenhandedly to both parties and that
. . . there is at least the possibility that an employer may be the
plaintiff, for example in cases of misappropriation of trade secrets. [Citation.]
But if that is the case, they fail to explain adequately the reasons for
the $50,000 award threshold. From a
plaintiff’s perspective, the decision to resort to arbitral appeal would be
made not according to the amount of the arbitration award but the potential
value of the arbitration claim compared to the costs of the appeal. If the plaintiff and his or her attorney
estimate that the potential value of the claim is substantial, and the
arbitrator rules that the plaintiff takes nothing because of its erroneous
understanding of a point of law, then it is rational for the plaintiff to
appeal. Thus, the $50,000 threshold
inordinately benefits defendants. Given
the fact that [the employer] was the party imposing the arbitration agreement
and the $50,000 threshold, it is reasonable to conclude it imposed the
threshold with the knowledge or belief that it would generally be the
defendant.†(Little, at p. 1073.) The
court continued, “Although parties may justify an asymmetrical arbitration
agreement when there is a ‘legitimate commercial need’ [citation], that need
must be ‘other than the employer’s desire to maximize its advantage’ in the
arbitration process. [Citation.] There is no such justification for the
$50,000 threshold.†(
The same analysis applies here. The buyer will rarely benefit from the clause
permitting an appeal of an award exceeding $100,000 because the buyer, not the
dealer, is more likely to recover an award of that size. Under the Sale Contract, respondent is
obligated to make monthly payments on a car purchase price of $63,650, with
payments ultimately totaling $92,000, factoring in the financing. In contrast, appellant’s obligations under
the Sale Contract and California law
are to sell a vehicle in working condition, to avoid misleading or false
representations, and to comply with various consumer laws, the violation of
which could result in substantial damages and civil penalties. A violation of the “new tire†statute alone
(Pub. Res. Code, § 42885) arguably could result in civil penalties up to
$125,000 if the car dealer knowingly misstated that each of the tires,
including the spare, were new. In short,
there is no justification for the $100,000 threshold, other than to relieve the
car dealer of liability it deems excessive.
(See Trompeter,
2012 WL 370557 [p. *10]; Smith,
Second, the arbitration provision
authorizes an appeal resulting in a new arbitration before a three-arbitrator
panel if the award includes injunctive relief.
burdens the buyer because the buyer, not the car dealer, is more likely to
obtain an injunction. “[I]mmediate
injunctive relief [is often] essential to protect consumers against further
illegal acts of the defendant.†(
(1977) 20 Cal.3d 10, 20.) In litigation
by consumers, “the importance of providing an effective injunctive remedy
becomes manifest.†(Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94,
107.) Not surprisingly, it is the buyer,
not the car dealer, who would be seeking preliminary or permanent injunctive
relief, primarily to enforce consumer laws like the CLRA. It is difficult to conceive of a situation
where a car dealer would be requesting injunctive relief against a buyer. If an injunction is issued against a dealer,
the arbitrator has favorably reviewed the merits of the buyer’s claims and
determined that the interests of consumers will be irreparably injured without
injunctive relief. Nevertheless, here,
the arbitration provision allows the car dealer to delay the effect of an
injunction by commencing a new arbitration.
By authorizing appeals from injunctive relief, only the car dealer is
benefited, making the clause one-sided.
(See Trompeter,
Thus, when it serves the car
dealer’s interests the buyer’s right to appeal is greatly constrained, and the
car dealer touts the benefits of mandatory arbitration: “efficient, streamlined procedures,†and “the
informality of arbitral proceedings . . . , reducing the cost
and increasing the speed of dispute resolution.†(Concepcion,
supra, 131 S.Ct. at p. 1749.) But when those factors do not benefit the car
dealer—if there is a large award or injunctive relief against it—then delay,
complexity, and higher costs take precedence, and the buyer is subjected to an
appeal and new arbitration, denying the weaker party of the benefits of the
arbitration agreement.
Third and finally, the arbitration
provision expressly exempts self-help remedies including repossession, which is
perhaps the most significant remedy from the car dealer’s perspective.
self-help remedies against a car dealer, and none of the buyer’s remedies are
exempt from arbitration. Yet one of the
most important remedies to a consumer—injunctive relief—is subject to arbitration.
In Flores v. Transamerica
HomeFirst, Inc. (2001) 93 Cal.App.4th 846, the plaintiffs obtained a
reverse mortgage on their home. The loan
agreement contained an arbitration clause requiring the arbitration of all
controversies with the exception of self-help remedies, stating: “ ‘[T]his Section does not limit [the
lender’s] right to foreclose against the Property (whether judicially or
non-judicially by exercising [its] right of sale or otherwise), to exercise
self-help remedies such as set-off, or to obtain . . . appointment of
a receiver from any appropriate court, whether before, during or after any
arbitration.’ †(
and the lender moved to arbitrate the case.
The Court of Appeal affirmed denial of the motion, stating that “[a]s a
practical matter, by reserving to itself the remedy of foreclosure, [the
lender] has assured the availability of the only remedy it is likely to
need.†(Id. at p. 855.) “The clear
implication is that [the lender] has attempted to maximize its advantage by
avoiding arbitration of its own claims.â€
(Ibid.) By exempting repossession—to which only the
car dealer would resort—from arbitration, while subjecting a request for
injunctive relief to arbitration, the Sale Contract creates an unduly
oppressive distinction in remedies. (See
Trompeter, supra, 2012 WL 1980894 [p. *5]; Smith,
supra, 2012 WL 834784 [p. *4].)
In sum, the arbitration provision is
substantively unconscionable. This is
not because certain discrete provisions are of greater benefit to appellant;
what renders the arbitration provision substantively unconscionable is the fact
that the provision is systematically structured to maximize the utility of
arbitration in resolving only buyer’s claims, while allowing the car dealer to
appeal from a large award or injunctive relief and allowing the dealer to
continue to pursue its primary repossession remedy outside of arbitration. (See Armendariz,
supra, 24 Cal.4th at p. 120 [“It does not disfavor arbitration to hold that
an employer may not impose a system of arbitration on an employee that seeks to
maximize the advantages and minimize the disadvantages of arbitration for
itself at the employee’s expense.â€].)
C. Severance
“If the court as a
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 as to avoid any unconscionable
result.†(Civ. Code, § 1670.5,
subd. (a).) We have the authority “under
this statute to refuse to enforce an entire agreement if the agreement is
‘permeated’ by unconscionability.
[Citations.] An arbitration
agreement can be considered permeated by unconscionability if it ‘contains more
than one unlawful provision . . . . Such multiple defects indicate a systematic
effort to impose arbitration . . . not simply as an alternative to
litigation, but as an inferior forum that works to the [stronger party’s]
advantage.’ [Citations.] ‘The overarching inquiry is whether
“ ‘the interests of justice . . . would be furthered’ †by
severance.’ [Citation.]†(Lhotka
v. Geographic Expeditions, Inc. (2010) 181 Cal.App.4th 816, 826.)
Appellant suggests that, if this
court finds aspects of the arbitration provision substantively unconscionable,
those clauses could be severed from the provision. Here, the arbitration provision suffers from
at least three defects, all of which tilt the arbitration unfairly in favor of
the car dealer. First, the dealer may
appeal an adverse monetary award that only the buyer is likely to receive—an
award exceeding $100,000. While the
dealer may appeal such an adverse award, the buyer cannot appeal a monetary
award it considers too low, other than a total loss. Second, the dealer may appeal an award of
injunctive relief—a remedy only the buyer would seek. Third, the remedy of most importance to the
dealer—repossession—is exempt from arbitration.
These defects lead us to conclude that the arbitration provision is
permeated with unconscionability. (See
Accordingly, we conclude the
arbitration provision is procedurally and substantively unconscionable. Because the provision is permeated with
unconscionability, the trial court did not abuse its discretion in declining to
sever the unconscionable aspects of the provision.
Disposition
The trial court’s order is
affirmed. Costs on appeal are awarded to
respondent.
SIMONS,
J.
We concur.
JONES, P.J.
NEEDHAM, J.
appellant filed its petition to compel arbitration shortly after the
change in law resulting from Concepcion,
appellant had waived its right to enforce the arbitration provision by failing
to seek to enforce it earlier. On
appeal, appellant contends it would have been futile to file the petition
before Concepcion, because the
provision was unenforceable under Discover
Bank. Respondent argues it was not
clear that Discover Bank
applied. Because we conclude the
provision is unconscionable, we need not reach the waiver issue. Neither need we address respondent’s
contention that appellant failed to demonstrate the existence of the
arbitration agreement.
Supreme Court granted review in Goodridge
v. KDF Automotive Group, Inc., S206153, another car purchase agreement
arbitration provision case. Briefing in
that case is deferred pending the decision in Sanchez v. Valencia Holding Co., S199119.
