Court of Appeal Reverses Order Compelling Arbitration

The California Court of Appeal for the Second Appellate District held in Vargas v. SAI Monrovia B, Inc. that an arbitration provision in a sale contract for the purchase of a vehicle was not enforceable because it was both procedurally and substantively unconscionable.

In Vargas, plaintiffs purchased a new car at a dealership owned by defendant SAI Monrovia B, Inc. The sale contract, which contained an arbitration clause, was assigned to Chase Auto Finance Corporation, a second defendant. Plaintiffs alleged that they experienced problems with the car shortly after the sale. Despite taking the car to the dealership and contacting the manufacturer, the third defendant, plaintiffs alleged the problems were not remedied. Plaintiffs filed a putative class action complaint alleging violations of the Consumer Legal Remedies Act, the Automobile Sales Finance Act, the California Unfair Competition Law, the Song-Beverly Consumer Warranty Act, and the California Tire Recycling Act. The dealer and Chase moved to strike class allegations and to compel arbitration. The trial court granted defendants’ motion to strike as well as the motion to compel for eight of the nine causes of action. Plaintiffs appealed.

The Court of Appeal reversed. The Court began its analysis by identifying the elements necessary to render a contract term procedurally and substantively unconscionable and therefore unenforceable: procedural unconscionability requires either oppression or surprise due to unequal bargaining power; substantive unconscionability requires that a contract term be either overly harsh or shocks the conscience.

Applying these tests here, the Court held that the agreement was procedurally unconscionable. It was a contract of adhesion, and the contract itself was on a two-sided page with the arbitration provision printed on the back and signature lines printed on the front. The Court also held the agreement was substantively unconscionable, because it unjustifiably tilted its terms in favor of the car dealership. Plaintiffs were required to pay expenses of both sides in advance upon appeal, and the agreement exempted repossession from arbitration, while allowing an appeal of injunctive relief. The provision allowed defendants to appeal an adverse monetary award it considered too high, while disallowing the plaintiffs from appealing a monetary award it considered too low.

The Court distinguished AT&T Mobility LLC v. Concepcion, holding that because California’s principles of unconscionability do not rely on categorical rules, Concepcion did not apply. 

Editor's note: This article was co-authored by Jennifer Lien, a summer law clerk in the Firm's San Francisco office.

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