New dawn for unconscionability in California arbitration agreements

A simple old-fashioned bad bargain is not necessarily unconscionable.

For many years California courts have had a good time scrutinizing arbitration agreements and concluding that they are unconscionable under state law. This has been especially true in cases involving employees and consumers.

It has been apparent to the most casual observer that California courts have long been applying a different set of unconscionability rules in arbitration cases than they apply in other cases. They seemed to go out of their way to find arbitration clauses "unconscionable" when actually there was nothing more than "a bad bargain."

The California Supreme Court has now announced a principle that ought to have been hornbook law from the very beginning: "our unconscionability standard is, as it must be, the same for arbitration and nonarbitration agreements." Sanchez v. Valencia Holding Company (California 08/04/2015).

Basic facts:

Gil Sanchez bought a used Mercedes from a dealer for $53,498.60 and signed a retail instalment contract that contained an arbitration agreement. The arbitration agreement had a class action waiver. It also provided a process for appealing the decision of a single arbitrator to a panel of three arbitrators.

In the courts:

Later Sanchez sued the dealer claiming a whole bunch of legal violations. The trial court denied the dealer's motion to compel arbitration on the ground that the class action waiver was unconscionable. (Later action by the US Supreme Court made that conclusion untenable due to preemption by the Federal arbitration Act.) At the Court of Appeal level the court found the arbitration agreement unconscionable on other grounds.

The California Supreme Court unanimously reversed. They simply did not see "a substantial degree of unfairness beyond 'a simple old-fashioned bad bargain.'"

What is "unconscionability," anyhow?

The California Supreme Court has spewed out a number of word formulas over the years: "unfairly onesided," "overly harsh," "unduly oppressive," "shocks the conscience." Now they tell us all these things mean the same thing. (One Justice vainly pleaded with the court to just settle on a single formula – "shocks the conscience.") Anyhow, this requires much more than a bad bargain.

Takaways from the Sanchez decision:

• Unconscionability law can be applied to arbitration agreements, but arbitration agreements cannot be singled out for special treatment.
• A contract is not unconscionable simply because it is one-sided.
• Class action waivers are not unconscionable.
• A contract is not unconscionable merely because it is an adhesion contract.
• You didn't read the contract? Well, that's too bad.
• There's no requirement that the arbitration clause be highlighted or called to the consumer's (or employee's) attention.
• A provision that appears to be one-sided is OK if it "provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need."
• When assessing the financial burden of a provision that requires a consumer/employee to advance arbitration costs up front, "A family in search of a job confronts a very different set of burdens than one seeking a new vehicle." And, the consumer/employee must show that "fees and costs in fact would be unaffordable or would have a substantial deterrent effect."
• Unconscionability is judged at the time the contract is made, not later. So the burden of paying fees is based on what the parties reasonably expected the consumer/employee to be able to afford. (Sanchez bought a "high-end luxury item," so he's out of luck.)
• The court saw nothing unconscionable about exempting the self-help remedy of repossession from arbitration.
• The standard for finding "unconscionability" remains as vague as it was when you were in law school.