Vargas v. SAI Monrovia, BMW, Inc. (2nd Appellate Dist. B237257)
In September of 2008 Jorge Vargas and Guadalupe Carcamo (“Plaintiffs”) went to SAI Monrovia BMW, doing business as BMW Mini of Monrovia, to buy a Mini Cooper S. They looked at a 2008 model on the lot and completed a credit application to obtain financing. In violation of California law they were not given a copy of the signed credit application. Vargas took the car for a test drive and after the test drive plaintiffs told the salesman (Roger) that they were interested in purchasing the car. Roger told them that if they were interested in keeping their monthly car payment below $500 they would have to make a down payment of $1,500 and that the loan would have to be for a period of 6 years. He told them to return the next day to complete the paper work since the finance office was closed. They returned the next day, spoke to the manager and agreed to purchase an extended warranty for another $1,845.00. They were given a retail installment sales contract that was a two sided, preprinted document 8 ½” wide and 26” long. Plaintiffs signed on the front side at 12 places but there were no places on the back side for them to sign. A provision entitled “Arbitration Clause” was the last provision in the sales contract located on the back side of the first page. There was no indication that the buyers had signed any provisions on the back side of the contract. The seller did however have a signature block on the back side of the first page. There were a number of charges that appeared on the back side of the first page, including $8.75 for California tire fees and $28.00 for “optional DMV electronic filing fee”.
The disclosures also violated several provisions of California law including the fact that there was no information about what the monthly payments would be without the service contract. There was an overcharge for the tire fee and the buyers should have been advised that the charges associated with the DMV filing fee were optional. Because of the problems he experienced with the car, Vargas returned the car several times but the problems were not corrected. The buyers even contacted BMW North America to complain about the seller not fixing the car, but nothing was done.
In the subsequent lawsuit filed plaintiffs alleged various violations of California law and also sought to have their claim treated as a class action against the dealer and BMW of North America. They sought injunctive relief against BMW and the dealer as well. JP Morgan Chase Bank, to whom the contract had been assigned, was also named as a defendant. All three defendants moved to compel arbitration under the arbitration agreement. The arbitration agreement provided that the buyers waived their right to proceed with a class action lawsuit and bound them to resolve the dispute through arbitration with a single arbitrator. The arbitration agreement also provided that the dealer would advance the buyer’s filing fees, or other case management fees (up to a maximum of $2,500) which sums were to be reimbursed at the end of the proceeding at the arbitrator’s discretion. The arbitration clause also overruled the arbitration organization’s rules to the extent they were inconsistent with the provisions of the arbitration agreement. The agreement provided that the arbitrator’s award would be final and binding on the parties with three exceptions. If the arbitrator’s award for a party was $0, if the ruling was against any party in excess of $100,000 or if any injunctive relief was imposed, then the aggrieved party could request a new arbitration panel of three arbitrators. Notwithstanding the above, the dealer was entitled to exercise self-help remedies including repossession and was also entitled to seek remedies in small claims court disputes and other claims within that court’s jurisdiction. Plaintiffs moved to have the arbitration agreement disregarded on the grounds that it was both procedurally and substantively unconscionable and should not therefore be enforced. They also noted they were entitled to a class action under the provisions of the California Consumer Legal Remedies Act (CLRA) (Civil Code §§1750 – 1784). The trial court granted the motion to compel arbitration and the motion to strike the class action allegation in the complaint. The plaintiffs appealed.
Unconscionability is a ground under California state law for a court to refuse to enforce an arbitration provision. Defendants had argued that the US Supreme Court decision of ATT Mobility LLC v. Concepcion (2011) 563 US ________ precludes a court from relying on unconscionability as a ground for invalidating an arbitration provision. The Court of Appeal disagreed. It found that the California Supreme Court upheld unconscionability as a ground for refusing to enforce an agreement in a decision decided one year after Concepcion in Pinnacle Museum Tower Association v. Pinnacle Market Development (2012) 55 Cal.4th 223. The Court of Appeals concluded that the doctrine of unconscionability had not been eliminated by Concepcion as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act (“FAA”). According to the California Court of Appeal, Concepcion ruled that a state may not rely on categorical rules that prohibit the arbitration of a particular type of claim. The Court of Appeal also found that California’s principles of unconscionability do not constitute a categorical rule invalidating arbitration agreements. This was to be distinguished from the rule in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 where the Supreme Court had imposed a categorical rule against class action waivers in consumer contracts. That approach is inconsistent with the FAA.
As noted, there are two types of unconscionability – procedural and substantive. Procedural unconscionability typically requires oppression or surprise usually at the time of contract formation. It often occurs when a contract contains provisions hidden in a printed form that are not the result of negotiation and meaningful choice. In Gutierrez v. Auto West, Inc. (2003) 114 Cal.App.4th 77, the Court of Appeal concluded that an arbitration provision in a contract almost identical to the one in the Vargas matter was procedurally unconscionable because the contract was adhesive. The agreement was presented to the plaintiffs for signature on a take it or leave it basis and they were given no opportunity to negotiate any of the preprinted terms of the lease and the arbitration provision was inconspicuous (printed in 8 point type on the opposite side of the signature page of the agreement). The Court concluded this was sufficient for the arbitration clause to be deemed procedurally unconscionable. The evidence before the Court indicated that the plaintiffs had followed the instructions of the finance manager at the dealer to sign at specific places and that he did not turn the contract over which would have revealed the arbitration provision. The Court determined that the dealer controlled the presentation and the signing of the document thus denying the plaintiffs an opportunity to review the entire contract. Moreover, the fact that the plaintiffs had not read the entire contract does not eliminate the issue of enforceability. The Court found the agreement oppressive by its terms. Plaintiffs were presented with a sales contract on a take it or leave it basis with preprinted terms that were not negotiable. The arbitration provision was unnoticeable to buyers because it was printed on the reverse of a two-sided page that was not signed by the buyers. Concluding that there was a high degree of procedural unconscionability, the Court found that under the rule of Pinnacle, supra, the plaintiffs had to make a relatively lower showing of substantive unconscionability. It should be noted that the Court found the level of substantive unconscionability to be very high.
Substantive unconscionability occurs when the focus of the provision is overly harsh or one sided and if it appears that the disputed provision falls outside of the reasonable expectations of the drafting party or is unduly oppressive. The Court concluded that the four clauses in the arbitration provision were substantively unconscionable: (1.) the provision that afforded the right of appeal if the award exceeded $100,000; (2.) the provision affording a right to appeal if the award granted injunctive relief; (3.) the provision requiring the appealing party to pay in advance the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs; (4.) the exemption of rights of repossession and self help from arbitration afforded to the dealer while requiring the request for injunctive relief to be submitted to arbitration by the buyers. The Court examined how these provisions were particularly unfair to a buyer (as distinguished from a dealer) and how one-sided the arbitration provisions were and as a result determined that the arbitration provisions were substantively unconscionable. Having found that there were substantive unconscionable provisions in the arbitration clause, the Court concluded the arbitration clause was permeated by unconscionability and could not be cured by severance, restriction or reformation. As a result, the Court of Appeal reversed the trial court’s decision in its entirety and remanded the case for further proceedings.