In August, the California Supreme Court handed down a substantial win for car dealers: heavy-handed arbitration provisions and class action waivers in pre-drafted retail installment sales contracts are enforceable.
The case of Sanchez v. Valencia Holding Company LLC concerned a consumer who had purchased a used 2006 Mercedes-Benz S500V from Valencia Holding Company, signing a sales contract that contained a class action waiver and arbitration provision. The contract was offered on a take-it or leave-it basis, and the class action waiver and arbitration provisions were heavily one-sided in favor of the dealer.
When a dispute arose over the sale of the car, Sanchez filed a class action lawsuit against Valencia, and Valencia moved to compel arbitration. Sanchez opposed the motion, claiming that the specific terms of the arbitration provision were “unconscionable.”
In 2011, the U.S. Supreme Court decided the seminal case of AT&T Mobility LLC v. Concepcion, holding that merchants were permitted to have class action waivers and arbitration provisions in consumer agreements. It left open, however, whether such an agreement would be set aside if it was otherwise unconscionable.
The contract at issue in Sanchez was fairly oppressive against consumers: It was offered on a take-it or leave-it basis, it contained a provision limiting appeals to situations where the arbitration award was either $0 (as in the case of a defense verdict) or over $100,000 in favor of the plaintiff, and it required the plaintiff to front all the costs of an appeal.
In ruling on Sanchez, the California Supreme Court held that to set aside an otherwise binding class action waiver and arbitration provision, the contract would have to be both procedurally and substantively unconscionable. The court then found that the contract was procedurally unconscionable because it was an “adhesion” contract, meaning that the consumer had no ability to make changes to the contract, but that even through its terms were one-sided, it was not substantively unconscionable. Parties have the right to make bad deals.
In upholding the waivers in the retail installment sales contract, the Supreme Court has further strengthened the defenses available to dealers throughout the land. If your sales contract does not contain a class action waiver and arbitration provision, get a new contract. The difference in defending a consumer claim will be manifest.