Trabert v. Consumer Portfolio Services
Filed 4/8/13 Trabert v. Consumer Portfolio Services 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 This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115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
SHAUN TRABERT,
Plaintiff and Respondent,
v.
CONSUMER PORTFOLIO SERVICES,
INC.,
Defendant and Appellant.
D060491
(Super. Ct. No. 37-2010-00096763-
CU-BT-CTL)
APPEAL from
an order of the Superior Court
of
County, John S. Meyer, Judge.
Reversed with directions.
Consumer
Portfolio Services, Inc. (Portfolio) appeals an order denying its petition to
compel arbitration of its lawsuit with Shaun Trabert. Portfolio contends the court erred by
determining the arbitration clause in
an automobile purchase contract was unconscionable and therefore
unenforceable. We reverse with directions.
FACTUAL
AND PROCEDURAL BACKGROUND
In August
2008, Trabert purchased a used 2007 Chevrolet Malibu from a Honda dealer under
an installment sale contract requiring Trabert to make monthly payments. The total purchase price of the vehicle was
$16,709.87. Trabert made a downpayment
of $1,500, and the remainder was financed by the dealer at 18.45 percent
interest. The dealer then assigned the
contract to Portfolio.
Portfolio
later repossessed the vehicle when Trabert stopped making the monthly payments. After Portfolio provided Trabert with a
statutory notice of intent to sell the vehicle (NOI), Portfolio sold the
vehicle and then sought a deficiency balance of approximately $6,900.
On July
2010, Trabert filed a class action complaint alleging that Portfolio failed to
provide notices required by law, including a proper NOI. Trabert alleged Portfolio violated the
Consumer Legal Remedies Act (Civ. Code, § 1750 et seq.) and the Unfair Competition Law
(Bus. & Prof. Code, § 17200). Trabert
sought to represent a class of California
residents whose vehicles were repossessed by, or surrendered to, Portfolio, and
against whom Portfolio had asserted a deficiency claim.
Several
months later, Portfolio moved to compel arbitration based on an arbitration
clause in Trabert's purchase agreement.
Portfolio attached a copy of the agreement, which was a single sheet
about 26 inches long with numerous provisions in small print 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
arbitration provision is printed in at least 8-point type. Trabert signed the contract on about 10 places
on the front side, but there are no signatures or initials by Trabert on the
back of the contract.
The
arbitration provision reads 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
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
may enter 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.)
In August
2011, Trabert filed an opposition to Portfolio's motion, arguing: (1) Portfolio did not meet its burden to
produce admissible evidence of a valid and enforceable arbitration clause; and
(2) the arbitration provision was procedurally and substantively
unconscionable. On the substantive
unconscionability claim, Trabert raised several arguments, including that the
agreement was not mutual because it excluded certain remedies (small claims
court and repossession) that would be used only by Portfolio.
Trabert
presented evidence that the National Arbitration Forum no longer administers
consumer arbitrations and submitted documents relating to the American
Arbitration Association (AAA) rules and fee schedules. Trabert also submitted the declaration of his
counsel, who said that arbitrator and expert fees "usually run in the $400
and $600 per hour range" and that "[f]iling and service fees alone
for arbitration are often well in excess of $2,500." Trabert's counsel also said that based on his
extensive experience, he has "found that the vast majority of car dealers
in California use an arbitration clause"; consumers are generally
"surprised" regarding the existence of this clause on the back of the
preprinted contract document; and he has "never seen a dealership allow a
customer to change pre-printed language on a contract, even if
asked."
In reply,
Portfolio argued that even if there was a minimal level ("a 'bit' ")
of procedural unconscionability based on the nature and form of the purchase
agreement, the challenged provisions were not substantively unconscionable.
After
considering the parties' submissions and conducting a hearing, the court denied
Portfolio's motion to compel arbitration based on its conclusion that the
provision was substantively and procedurally unconscionable. The court explained its reasoning as
follows:
"[T]he plaintiff was not given a meaningful
opportunity to negotiate or reject the terms of the contract. . . . [¶] The clause is contained on the back of a
lengthy contract of adhesion. The
contract document contains single-spaced small print and measures over 2 feet
in length. Furthermore, the placement of
the arbitration clause is questionable.
A review of the contract shows that Plaintiff was required to review and
sign in ten different locations on the front of the contract before the
contract was operative. Nothing on the
back of the contract, which includes the arbitration clause, required a
signature or even initials. While the
front of the contract states 'you acknowledge that you have read both sides of
this contract, including the arbitration clause on the reverse side,' this
particular notification did not require Plaintiff to sign or initial that he
read or even saw it. The failure to draw
attention to the provision via signature or initials is questionable and
contributes to the procedural unconscionability of the arbitration clause.
"The Court considers the arbitration clause
substantively unconscionable for several reasons. In addition to the arguments set forth by
Plaintiff, the terms of the clause are one-sided. For instance, it states '[y]ou and we retain
any rights to self-help remedies, such as repossession,' which provides a
benefit to Defendant only. Additionally,
'[y]ou and we retain the right to seek remedies in small claims court for disputes
or claims within that court's jurisdiction. . . .' Again, this fails to assist a plaintiff
seeking injunctive relief, which is unavailable in small claims court. Additionally, it states '[n]either you nor we
waive the right to arbitrate by using self-help remedies or filing suit,' which
again provides Defendant with significant tactical and remedial advantages
unavailable to Plaintiff."
name="_ftnref3" title="">[3]
Portfolio
filed a notice of appeal in September 2011.
While the appeal was pending, the California Supreme Court granted
petitions for review of two Court of Appeal decisions (Sanchez and Goodridge)
arbitration provision was substantively and procedurally unconscionable. (See fn. 1, ante.) This court authored
the Goodridge decision. Additionally, several federal courts (in
unpublished decisions) found identical arbitration
provisions in vehicle sale contracts to be unconscionable (see, e.g.,
June 1, 2012, No. C 12-00392
CW) 2012 WL 1980894 (Trompeter); Lau
v. Mercedes-Benz USA, LLC (N.D.Cal., Jan. 31, 2012, No. CV 11-1940 MEJ)
2012 WL 370557 (Lau); see also
Sept. 28, 2012, No. CV 11-03717 LB) 2012 WL 4497369 [substantively but not
procedurally unconscionable]), and
(in a published decision) rejected an unconscionability challenge (
(2013) 212 Cal.App.4th 895).
DISCUSSION
I. Applicable
Legal Principles
The
parties' agreement is expressly governed by the
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. (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.] [¶]
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.]" (Id. at
pp. 246-247.)
name="_ftnref4" title="">[4]
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 (
On the
record before us, we conclude there is a reasonable basis supporting the trial
court's findings of oppression and surprise.
The industry-drafted purchase agreement is contained on a lengthy
two-sided preprinted form that is about two feet long. Both sides of the agreement are filled with
legal verbiage and numerous admonishments.
The arbitration provisions are on the bottom of the back side of the
form. Trabert signed the front of the
document in about 10 different places, but there are no signatures on the back
of the document, nor is there any indication that Trabert saw or read the back
of the document containing the arbitration
provisions. Numerous courts have
found contract provisions to be procedurally unconscionable under similar
circumstances. (See, e.g.,
Cal.App.4th 77, 89 (Gutierrez);
(N.D.Cal. 2012) 854 F.Supp.2d 712, 724; Trompeter,
supra, 2012 WL 1980894, pp. *3-*4; Lau,
supra, 2012 WL 370557, pp. *8-*9; see also Gatton, supra, 152 Cal.App.4th at pp. 581-586.)
As its
primary appellate argument, Portfolio contends Trabert did not meet his burden
to show surprise or oppression because he never filed a declaration explaining
the circumstances surrounding his execution of the purchase agreement. We agree the specific facts of the transaction
are highly relevant in determining the existence and degree of procedural
unconscionability. However, under the
particular circumstances here, the absence of a declaration is not fatal to
Trabert's procedural unconscionability challenge.
First, Portfolio
forfeited the argument by failing to raise it in the trial court
proceedings. Although Portfolio
mentioned in a footnote in its trial court reply brief that Trabert had not
presented evidence to dispute Portfolio's claim that he had choices with respect
to the purchase decision, Portfolio never argued that Trabert could not
establish procedural unconscionability unless he submitted a declaration
discussing the facts surrounding his execution of the agreement. On this record, Trabert did not have a fair
opportunity to respond factually to Portfolio's argument and thus we deem the
argument to be waived. (See
208 Cal.App.4th 685, 696-697.)
Additionally,
the courts have recognized that "[a]bsent unusual circumstances, evidence
that one party has overwhelming bargaining power, drafts the contract, and
presents it on a take-it-or-leave-it basis is sufficient to demonstrate
procedural unconscionability . . . , even if the other
party has market alternatives." (
Cal.App.4th 89, 109; accord, Gatton,
supra, 152 Cal.App.4th at p. 586; Pardee
Construction Co. v. Superior Court (2002) 100 Cal.App.4th 1081,
1088-1090.) The record before us
supports that Trabert was the substantially weaker party in the
transaction. Trabert purchased a used
vehicle for $16,709.87 at 18.45 percent interest from a retail automobile
dealer, and the sales contract was a preprinted standard industry form
document. Even without a supporting
declaration, it is reasonable to infer that the transaction was the typical
consumer-dealer contract with standard terms dictated by the automobile
dealership and presented on a "take-it-or-leave-it" basis. This was supported by Trabert's counsel's
declaration (which was unchallenged by Portfolio in the proceedings below) that
in the typical automobile purchase transaction, dealers do not allow customers
to modify preprinted language or engage in negotiation over the nonprice
terms.
In this
regard, Portfolio's reliance on Crippen
v. Central Valley RV Outlet (2004) 124 Cal.App.4th 1159 is misplaced. In Crippen,
the plaintiff purchased a used motor home from a dealer under a contract
that contained an arbitration agreement on a separate attached page. (Id.
at pp. 1162-1163, 1165.) The court found
the plaintiff failed to meet his burden to show procedural unconscionability
based on two factors. (
or rely on any evidence of the circumstances surrounding the execution of the
agreement, so he could not show inequality of bargaining power, lack of
negotiation, or lack of meaningful choice." (Id.
at p. 1165.) Second, the court found the
form of the document did not "show any procedural unconscionability"
because the "[a]rbitration [a]ddendum was not set in small type or hidden
in a prolix form. It was printed on a
separate page, in ordinary type, with 'Arbitration Addendum' on top, and was
(Id. at p. 1165, italics
added.)
The circumstances
here are materially different. Unlike
the purchase of a motor home, it can be reasonably presumed that when a
consumer purchases a used vehicle for $16,709.87 with 18.45 percent interest
under an industry-drafted contract, the consumer was the economically weaker
party and had no meaningful opportunity to negotiate the standard terms (other
than price). (See Concepcion, supra, 131
S.Ct. at p. 1750 ["the times in which consumer contracts were anything
other than adhesive are long past"].)
Equally significant, this case differs from Crippen because the arbitration clause in Crippen was plainly set forth on a separate page and was separately
acknowledged and signed by the plaintiff.
Here, the arbitration clause was on the back page on a prolix form with
no space for a signature or acknowledgment by the buyer.
Portfolio
alternatively argues that Trabert 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 Trabert'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. Contrasted
with the numerous signature lines on the front of the document, the lack of
such lines adjacent to this provision or next to the arbitration provision on
the back of the document supports a conclusion that the arbitration provision
was not presented in a manner that would trigger the consumer to review the
detailed arbitration rules before signing the purchase agreement.
Portfolio
argues that automobile dealers are statutorily mandated to include copious
amounts of information in a sales contract and the contract here satisfies the
legal requirements regarding content and print size. (See Civ. Code, §§ 2982, 2981.9.) Although we agree with these observations,
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 without any evidence that Trabert would have been
reasonably alerted to this clause before signing and consenting to the
agreement, the record supports a finding that Trabert was surprised by the
provision.
Based on
the nature of the transaction, the form contract, the specific location of the
arbitration provision within that contract, and counsel's declaration, we
conclude there was a sufficient showing of oppression and surprise to establish
a moderate level of procedural unconscionability. 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
Portfolio
contends the court erred in finding the arbitration provision substantively
unconscionable. Trabert counters that
several portions of the arbitration agreement are one-sided and unduly
oppressive: 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 reject
Trabert's contention regarding 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 other 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.
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 conducting the
substantive unconscionability analysis, 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;
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 because it was
so one-sided. (See fn. 1,
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 Pinnacle, we apply
the "shock the conscience" standard and recognize that it imposes a
significant burden on a party seeking to prevail on an 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."
Trabert
contends this provision, in practical effect, benefits only Portfolio 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 could elect to bring
any such claim in the arbitration process.
In this
respect, Trabert'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. (Id. at p. 849.) The loan documents
contained a broad arbitration clause requiring arbitration of all disputes
between the parties, except the
agreement preserved the 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 here
unconscionable. The Flores arbitration 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. (
In Pinnacle, the court
rejected the argument that an arbitration provision is necessarily
substantively 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.)
Trabert
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 court erred in finding the self-help and small claims court exclusions to
be unconscionable.
C. Finality
Provisions
Trabert
also challenges the fairness and mutuality of the arbitration clause's finality
rules, which state:
"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."
Trabert argues this provision was unconscionable in three
respects: (1) it provides an exception
to finality if the arbitration award is "$0" or exceeds $100,000; (2)
it provides an exception to finality if the arbitration award "includes an
award of injunctive relief"; and (3) it requires the appealing party to
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
(the automobile dealer) to the detriment of the weaker party (the consumer) and,
in doing so, defeat an essential purpose of the FAA, which is to encourage
efficient and speedy dispute resolution.
(Concepcion, supra, 131 S.Ct.
at p. 1749; see also Pinnacle, supra,
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 Trabert 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. Trabert
argues that although this provision on its face applies to both parties, its
practical effect is to favor Portfolio because Portfolio is the only party that
will 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.
We agree
that Portfolio is the only party that would realistically benefit from the
$100,000-plus finality exception. Even
if Portfolio prevailed on a collection action with interest, the arbitration
award against Trabert would not reach $100,000 because the total purchase price
of this vehicle was less than $20,000 and California law generally prohibits
arbitrators from awarding prevailing party attorney fees against a
consumer. (Code Civ. Proc.,
§ 1284.3.) On the other hand, if
Trabert prevailed in a consumer fraud type case, an arbitration award could be
more than $100,000 when considering the protective consumer laws, potential
statutory penalties, and prevailing attorney fee provisions in the parties'
contract. 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.)
In
Cal.4th 1064, the California Supreme Court found an arbitration agreement in an
employment agreement was unconscionable because it set forth a minimum monetary
appellate threshold and the practical effect was to substantially benefit the
economically stronger party (the employer).
(Id. at pp. 1071-1074; 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].) Portfolio argues that this case is different
from Little because here either party
is permitted to appeal an award of "$0" and this rule "favors
the consumer, because it grants the consumer the chance to contest an award of
no damages." Although the
arbitration provision here contains this additional finality exception, this
rule does not favor only the consumer.
Although both parties are permitted to appeal a zero-damages award, this
does not alter the fact that the $100,000-plus exception favors only the
seller/creditor.
Portfolio
also argues that the $100,000 minimum reflects a legitimate business decision
because it will eliminate "outlier" awards. However, in the context of consumer actions,
a $100,000 award against Portfolio is not necessarily an outlier award,
particularly when considering prevailing party attorney fees that would be
included in the award. Moreover, there
are no equivalent exceptions for a consumer who receives an "outlier"
award in the form of a substantially reduced amount (that is more than zero) as
compared to the value of his or her claim.
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.
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 an injunctive relief
claim.
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 statutes
specifically provide for injunctive relief, regardless of the amount of
damages/restitution awarded. Under such
circumstances, a seller/creditor who receives an award against it between $0
and $100,000 will have the right to appeal the entire award if the award "includes" injunctive
relief.
There is no
reasonable possibility that a consumer can take similar advantage of this
finality exception because it is unlikely that a car dealer/creditor will seek
or obtain injunctive relief against a buyer.
If a creditor seeks immediate or equitable relief after a default, the
seller/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. 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
*6.)
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 (but more than zero), is not a slight departure from mutuality. It systematically tilts the playing field in
favor of the seller/creditor. (See
*6.)
The
unfairness inherent in the arbitration agreement's appellate 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 Trabert were to challenge an arbitration award,
he would be responsible for advancing the costs and fees of that appeal for both
parties, including the fees for the three-arbitrator panel. Given the evidence showing the common hourly
rates of private arbitrators are between $400 and $600, it is reasonable to
conclude that Trabert would face the prospect of advancing a minimum of $10,000
to appeal an arbitration award. Further,
the arbitration provision does not inform Trabert 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 Trabert could not afford to pay these fees.
Under
analogous circumstances, a California Court of Appeal has 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
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"].)
Portfolio
argues that in this case, unlike in Gutierrez,
Trabert 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.) Trabert presented no evidence regarding his
ability to pay fees when he signed the sales contract. We agree that the absence 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
three-arbitrator panel, is an important factor in the unconscionability
analysis. (See Gutierrez, supra, 114 Cal.App.4th at pp. 90-92.)
Portfolio
relies on Green Tree Financial Corp.-Ala.
v. Randolph (2000) 531 U.S. 79 (Green
Tree), to argue that 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 that an arbitration agreement silent on
arbitration costs is not per se unenforceable without a showing 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 Trabert 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 Trabert 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 procedurally
unconscionable.
IV. Severance
Portfolio
contends the offending provisions can be severed from the remainder of the
arbitration provision and the remaining provision can be enforced.
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. (
156 Cal.App.4th 138, 144.)
In this
case, Portfolio never asked the trial court to exercise its discretion to sever
the unconscionable provisions. Typically
this would constitute a waiver. However,
because we have found the court erred in finding the self-help/small-claims
exceptions unconscionable but that certain other provisions are unconscionable,
we conclude the severance analysis has necessarily changed. Accordingly, we remand to permit the court to
consider the severance issue.
V. Trabert's
Additional Argument
We reject
Trabert's argument that the court erred in finding Portfolio adequately proved
the arbitration agreement by submitting a copy of the sales contract without
specific foundational information. For
purposes of the motion to compel, substantial evidence supports the
authenticity of the document and the trial court's factual finding that the
parties entered into this purchase agreement.
DISPOSITION
The court is ordered to vacate its order denying
Portfolio'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 enforce the remainder of the
arbitration agreement and grant Portfolio's motion to compel 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 [briefing deferred
pending Sanchez case].) This case involves the same form contract
that was at issue in the Sanchez and
name="_ftn2" title="">[2]
Although the provision contained
a class action waiver, Trabert did not argue the waiver was unconscionable. (See AT&T
Mobility LLC v. Concepcion (2011) __ U.S. __ [131 S.Ct. 1740] (
