“Yellow Flags” In Arbitration Clause Functioned As Friendly Warnings, And Did Not Make Clause Unconscionable

     Plaintiff/Respondent Boese, pursuant to a subscription agreement, invested several hundred thousand dollars with Couch Oil & Gas, Inc., and sued for securities violations.  After the trial court denied Couch Oil’s petition to compel arbitration on the ground that the arbitration agreement was unconscionable, Couch Oil appealed. Boese v. Couch Oil & Gas, Inc., A138323 (1st Dist. Div. 1, Feb. 28, 2014) (Banke, Margulies, Dondero) (unpublished).

     The Court of Appeal reversed, and two points appear to have been pivotal.

     First, the stock investment was not an ordinary “take-it-or-leave-it” consumer purchase:  “[A]ll the evidence shows here is a short form agreement with a highlighted arbitration provision prepared by the seller of a nonessential product, which Boese had every opportunity to review.”  

     Second, even if there was a modicum of procedural unconscionability, requiring that the Court consider the amount of substantive unconscionability, the Court of Appeal concluded that there was no substantive unconscionability.  Whereas the trial court had concluded that numerous warnings about arbitration in the agreement helped establish substantive unconscionability, the Court of Appeal concluded quite the opposite:  “We do not see how inclusion of these general cautionary provisions, approved by an important regulatory watchdog, can create substantive unconscionability.  On the contrary, they are akin to a banner of yellow warning flags and are consumer friendly.” 

Yellow Flag.