Arbitration/Unconscionability/Severability: First District, Division 1 Affirms Denial Of Petition To Arbitrate Car Sales Contract Dispute On Grounds Of Unconscionability
The Issue Is Also Pending In The California Supreme Court
The latest in the crop of cases concerning car sales contracts and petitions to compel arbitration is Natalini v. Import Motors, Inc., Case No. A133236 (1st Dist. Div. 1 January 7, 2013) (Simons, J., author) (unpublished). The Court had no trouble affirming the denial of the petition to arbitrate on grounds of procedural and substantive unconscionability. As recently as New Year’s Day, I posted about arbitration, unconscionability, and an auto sales contract involving a Dodge Avenger in another case.
The analysis here in Natalini fits the template for these cases: the contract is an adhesive “take it or leave it” contract, and there is an element of surprise, because the arbitration provision is not particularly conspicuous, on the back of a form, and not pointed out to the buyer. That satisfies the “procedural unconscionability” prong.
As to the “substantive unconscionability” prong, the arbitration provision shares characteristics of other one-sided arbitration provisions designed to favor the car dealer in car sales contracts. Thus, the arbitration provision authorizes an appeal resulting in new arbitration before a three-arbitrator panel only for an award of $0 or in excess of $100,000, the provision authorizes an appeal resulting in a new arbitration before a three-arbitrator panel if the award includes injunctive relief, and the provision exempts self-help remedies, perhaps the car dealer’s most significant remedies. Those provisions, treated as one-sided in other cases, added up to substantive unfairness. And because the arbitration provision can be considered “permeated by unconscionability” if it has more than one unlawful provision, the trial court does not abuse its discretion by declining to sever unconscionable aspects of provision.
Keep in mind that Sanchez v. Valencia Holding Company (S199119) is pending before the California Supreme Court. The issue presented in Sanchez is: “Does the Federal Arbitration Act . . . as interpreted in AT&T Mobility LLC v. Concepcion . . . preempt state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable.”
Arbitration/Section 1295/Section 1281.2: Fourth District, Division 2 Affirms Denial Of Petition To Arbitrate Wrongful Death Claim Against Senior Living Center Outside Context of CCP Section 1295
In Which We Inaugurate A New Side Bar Category: Section 1295 (Medical Malpractice)
“The Patient.” Frederic Dorr Steele, artist. 1901. Library of Congress.
The plaintiff in the next case, Norma Daniels, is alive. Her mother, Margaret Barcenas, is dead. Ms. Daniels sued a residential care facility for the elderly (RCFE), its owners and its operators, for elder abuse and related claims (survivor claims), as well as for wrongful death. The trial court denied defendants’ petition to compel arbitration on the grounds(i) that Daniels was a third party to the arbitration agreement, and also, (ii) that there was a possibility of conflicting rulings if the survivor claims were arbitrated, and the wrongful death claim was not arbitrated. Daniels v. Sunrise Senior Living, Inc., E054472 (4th Dist. Div. 2 January 4, 2013) (King, J., author) (certified for publication).
The Court of Appeal affirmed, despite the fact that the agreement with the RCFE contained a broad arbitration clause, covering all claims relating to the mother’s care received at the RCFE, the clause was binding on the mother’s heirs, and Daniels had signed the agreement. Notwithstanding those bumps in the road, the road to affirmance was relatively direct.
First, Daniels did not sign in her personal capacity, but as her mother’s attorney in fact, allowing her to be treated as a third party to the agreement.
Second, while the survivor claims were brought in Daniel’s capacity as an heir, the wrongful death claim was brought in her personal capacity. “Unlike some jurisdictions wherein wrongful death actions are derivative, Code of Civil Procedure section 377.60 ‘creates a new cause of action in favor of the heirs as beneficiaries, based upon their own independent pecuniary injury suffered by loss of a relative, and distinct from any the deceased might have maintained had he survived. . . . ‘” Horwich v. Superior Court, 21 Cal.4th 272, 283 (1999). In her personal capacity, Daniel retained her third party status.
Third, the case is distinguishable from Ruiz v. Podolsky, 50 Cal.4th 838 (2010) and Herbert v. Superior Court, 169 Cal.App.3d 718 (1985), cases holding nonsignatories to an arbitration agreement must arbitrate wrongful death claims against a health care provider when the decedent agreed to arbitrate medical malpractice claims pursuant to Cal. Code Civ. Proc. 1295. Section 1295 governs agreements to arbitrate professional negligence or medical malpractice claims in medical services contracts. Section 1295, however, includes notice safeguards to ensure a person makes an informed choice about arbitration – none of which were present here. The Court explains that “this is the critical distinction between Herbert and Ruiz and the present case.”” Thus, a policy argument based on an analogy to cases involving 1295, which has its own built-in safeguards, held no attraction here. (Note: the Court points out there is no “statutory analog to section 1295, applicable to RCFE’s nonhealth care providers or to claims other than professional negligence . . . “. Perhaps a lobbyist will now step forward to try and plug the gap.)
Fourth, Cal. Code of Civ. Proc. 1281.2(c) allows a court to refuse to compel arbitration if there is a danger of inconsistent rulings on common questions of law or fact. Here, the possibility that survivor claims could be ordered to arbitration, whereas Daniels’s wrongful death claim could not be, presented “a possibility of inconsistent rulings on the claims given that the claims are based on the allegation that Barcenas received inadequate care at Sunrise. . . . Because the trial court’s discretionary ruling does not exceed the bounds of reason, we will not disturb it.”
This case involves no analysis of federal case law or of the Federal Arbitration Act. Perhaps federal law was simply irrelevant, given the Court’s conclusion that Daniels was not a party to an arbitration agreement.
Does anyone believe that the gross facts alleged in this case – pressure sores on heels and ankles, followed by “septic shock, pneumonia, dehydration, and a staph infection”, followed by death of the plaintiff’s 93 year old mother, had any impact on the judges’ decision allowing the plaintiff her day in court?
The Supreme Court and Arbitration – 2012 and 2013
Recommended reading: two posts by attorney Liz Kramer in Arbitration Nation: “2012 in Arbitration Law: Is Class Arbitration Naughty or Nice?” and “Preview of SCOTUS’s 2013 Double Feature on Class Action.”
That Was the Year That Was
In 2012, the big issue was class arbitration, with several states having pro-class-arbitration decisions reversed based on the Supreme Court’s 2011 ruling in Concepcion. In the federal courts, divergent views emerged on how to apply Stolt-Nielsen, a SCOTUS case holding arbitrators exceeded their authority under the Federal Arbitration Act by permitting class-wide arbitration under circumstances where the parties had stipulated that their agreement was silent as to the availability of class-wide arbitration. Ms. Kramer observes that this is a rapidly changing area of law about which SCOTUS seems “passionate”, and concludes, “I can’t wait to see what’s on Scalia’s naughty list in 2013!”
Double Header in 2013
“Two Games Today.” Puck. 1913. Library of Congress.
Based on the preoccupation with class-wide arbitration, and with the split over Stolt-Nielsen, SCOTUS’s work on the arbitration front is cut out for it in two cases it has accepted for 2013: Oxford Health Plans, LLC v. Sutter, and American Express Co. v. Italian Colors Restaurant (Amex III).
On November 20, 2012, I posted about American Express Co. under the heading, “Can An Arbitration Class Action Waiver Be Enforced If The Plaintiff Would Not Be Able To Effectively Vindicate Federal Statutory Rights Through Arbitration?”
“In my view,” writes Liz Kramer, “the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent?” In other words, are economic realities ever a sufficient reason to nix arbitration? The Second Circuit believed the answer was yes, in the case of antitrust litigation. But Ms. Kramer opines that this decision is likely to be reversed.
Oxford Health Plans affords SCOTUS an opportunity to resolve the split over the application of Stolt-Nielsen. Does class-wide arbitration require express authorization, or can it be implied through the traditional methods of contract interpretation by the arbitrator?
Note: I have added Arbitration Nation to my Blogroll.
Arbitration/Consumers/Unconscionability: Second Dist. Div. 3 Affirms Order Denying Petition To Compel Arbitration Of Consumer Dispute Over Used Car
Procedural and Substantive Unconscionability Drive The Result
Arbitration clauses, automobile purchases and leases provide a ripe area for dispute. In 2012, I reported on a number of those disputes. See my posts of April 12, 2012 (Kolev v. Euromoters West/The Auto Gallery; opinion withdrawn by 9th Cir.), August 1, 2012 (Caron v. Mercedes-Benz Financial Services USA LLC), August 26, 2012 (Goodridge v. KOI Automotive), and October 16, 2012 (Sherf v. Rusnak/Westlake). In our next case, the purchaser sued after encountering problems with his used Dodge Avenger. Defendants, the finance corporation and dealership, appealed the denial of their petition to compel arbitration. Norton v. Ford of Santa Monica, et al., Case No. B237273 (2nd Dist. Div. 3 Dec. 28, 2012) (Kitching, J., author) (unpublished).
These consumer cases typically turn now on the issue of whether the arbitration clause is “unconscionable.” In Norton, the arbitration provision crashed.
Used cars for sale. Marion Post Wolcott, photographer. Dec. 1940. Library of Congress
The arbitration clause was procedurally unconscionable because it contained “elements of surprise.” Specifically, the arbitration clause was “inconspicuous” because it was located on the back side of a page, and did not have to be initialed. The dealer did not draw the buyer’s attention to the clause.
Substantive unconscionability resulted from the one-side nature of the arbitration provision – though it might appear superficially neutral on its face, it primarily benefited the dealer. Example: “A car buyer does not benefit from a provision allowing the dealership to seek a new arbitration of an award of more than $100,000 because the buyer, not the dealer, will be the party more likely to recover an award of that size. If the buyer obtains an award under the $100,000 threshold but believes it is too low, the buyer has no option to request a new arbitration unless the award is $0.” Additionally, the “arbitration provision requiring the party requesting a new arbitration to advance filing fees and arbitration costs is unconscionable because it allows a financially strong automobile dealership to request a new arbitration while discouraging or preventing a cash-strapped consumer from doing so.”
Thus, the Court of Appeal readily affirmed the trial court’s order denying the petition to arbitrate, based on procedural and substantive unconscionability.
Arbitration/Federal Arbitration Act: District Two, Division Three Holds Section 9 Of The Federal Arbitration Act Is Not An Impediment To Enforcement Of Award In State Court
Beware of 9 U.S.C. Section 9: It Provides For Judicial Confirmation Of Arbitral Awards Only Upon Consent Of The Parties
Swissmex-Rapid S.A. de C.V. and SP Systems, LLC arbitrated a commercial dispute concerning backpack agricultural sprayers manufactured by Swissmex, a Mexican corporation. The arbitration resulted in a net award in favor of Swissmex in the amount of of $1,424,039, which award was confirmed by the trial court. SP appealed, arguing “that the parties did not agree in their arbitration agreement that the award could be judicially confirmed, and therefore the trial court erred in confirming the award.” Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC, Case No. B238054 (2nd Dist. Div. 3 Dec. 28, 2012) (Klein, J., author) (published).
Why, you may well ask, is this even a problem? After all, the trial court has statutory jurisdiction to enforce an arbitration agreement entered into in California, and that includes entering judgment on an award under the agreement. Code of Civil Procedure section 1293. Alas, the Federal Arbitration Act (FAA) works differently. Because this matter involved international commerce, it implicated the FAA. Unlike the California Arbitration Act (CAA), the FAA provides for judicial confirmation of arbitral awards only upon consent of the parties.
Thus, the questions presented in Swissmex are whether the FAA rule, requiring consent of the parties for judicial enforcement of an arbitral award, preempts California law, and if so, whether the parties had in fact consented to judicial confirmation of the arbitral award.
First, the Court of Appeal held that Section 9 of the FAA is procedural and therefore inapplicable to state court proceedings (the procedural rule would only apply in federal court). The fundamental substantive rule of the FAA is that courts are to enforce arbitration agreements, and that fundamental substantive rule preempts state law. But purely procedural aspects of the FAA, which apply in federal court, do not preempt. In footnote 6 of the Swissmex opinion, the Court of Appeal notes that “various other courts have characterized section 9 of the FAA as ‘substantive.’ . . . . However, those decisions are not binding on this court.” Given this footnote, it would seem prudent to cover the bases and consider the consequences if Section 9 of the FAA is viewed as substantive and preemptive of state law, rather than as merely procedural. That is exactly what the Court did next.
Second, the Court of Appeal considered the possibility that Section 9 of the FAA was applicable, and concluded the result would be the same, because here the parties agreed to submit to the Commercial Arbitration rules of the American Arbitration Association. Under Rule R-48(c) the parties are deemed to consent to judicial confirmation of an award. Idea Nuova, Inc. v. GM Licensing Group, Inc., 617 F.3d 177 (2d Cir. 2010) “is on point.”
That left just one last hurdle (or maybe pebble) to get over. The matter was administered by the International Centre for Dispute Resolution (ICDR) of the AAA. SP contended the arbitration was conducted in accordance with the AAA’s International Dispute Resolution Procedures, not the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award. The Court of Appeal resolved this last conundrum by focusing on the ICDR’s notification to the parties “that the matter would be ‘administered under the International Dispute Resolution Procedures . . . unless the parties agree otherwise.’” Here, the parties did “agree otherwise” by incorporating the Commercial Arbitration Rules. Thus, the matter could be administered by the ICDR, but arbitrated under the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award.
Presto! Judgment affirmed.
Drafting tip: If the arbitration is likely to be covered by the FAA, expressly provide that the arbitral award can be enforced in state or federal courts of competent jurisdiction.
Arbitration/Waiver: Post-Judgment Post-Appeal Post-Concepcion Request To Arbitrate Comes Too Late
Issue Presented Is One Of First Impression And Perhaps Sui Generis
Our next case presents as a “threshold matter” an arbitration issue that turns out to be one of first impression. Guitierrez v. Wells Fargo Bank, N.A., Case Nos. 10-16959 and 10-17468 (9th Cir. Dec. 26, 2012) (McKeown, J.) (published). Wells Fargo sought to compel arbitration in a case after certain issues had been decided adversely to it, arguing that it would have been futile to seek to compel arbitration before the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) (holding that the Federal Arbitration Act preempted California’s Discover Bank rule that had rendered class-wide arbitration waivers unenforceable in consumer cases involving unequal bargaining power and large numbers of small consumer claims). However, Wells Fargo litigated at length before seeking to arbitrate after Concepcion was decided. “The effect of Concepcion, as intervening Supreme Court law, on a judgment on appeal after trial, is an issue of first impression.”
The Ninth Circuit waiver of arbitration test is a three-factor test requiring: “(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986).
Wells Fargo’s strongest argument was that any “existing right” could exist only after Concepcion. However, the Ninth Circuit believed that the futility of an arbitration demand was “not clear cut here” because “[i]n contemporaneous consumer litigation, litigants did succeed in compelling arbitration despite the existence of the Discover Bank rule.” (Note: For a discussion of a California case, Sprint v. Phillips, in which the court concluded a pre-Concepcion effort to arbitrate would have been futile, see my September 27, 2012 post). This allowed the Court to focus on readily apparent prejudice to plaintiffs – time, expense, delay and uncertainty – given “Wells Fargo’s invocation of arbitration five years into this litigation . . . “
But the Fisher analysis was not the only argument in favor of rejecting the belated effort to invoke arbitration. The Court believed that belated arbitration here would be inconsistent with “the overarching purpose of the FAA . . . to facilitate streamlined proceedings.” Concepcion, 131 S.Ct. at 1748.
Finally, on the facts, denying arbitration seemed consistent with contractual intent. The arbitration clause was only “permissive”, not mandatory. Either party could demand arbitration, but was not required to do so. And Wells Fargo “never made a demand for arbitration, raised it as a defense, or even mentioned it until after the Concepcion decision, at which point the trial was over and the district court had issued its judgment.”
The Court has suggested that its ruling on the arbitration issue is likely to be limited: “This is an unusual, perhaps sui generis, case in which the specific circumstances counsel this result.”
By the way, the main ruling in the case is interesting. Wells Fargo was sued for engaging in a practice of posting payments to checking accounts in a particular order (highest to lowest amounts) so as to maximize the number of overdrafts and the amount of overdraft fees. The panel held that the bank’s decision to post payments to checking accounts in a particular order is a federally authorized pricing decision, and that the National Bank Act preempted affirmative disclosure requirements and liability based on nondisclosure. But the National Bank Act does not preempt claims for affirmative misrepresentations under the fraudulent prong of California’s Unfair Competition Law.