Tuesday, October 25, 2011

Second District Upholds Order Finding Arbitration Provision Unconscionable, Post-Concepcion: Sanchez v. Valencia Holding Co.

On October 24, 2011, the Second District (Division 1) upheld a trial court order denying a motion to compel arbitration of a class action case, post Concepcion, in Sanchez v. Valencia Holding Co., __ Cal.App.4th __ (2011). Although the trial court had denied the defendant’s motion on the grounds that the class action waiver was unenforceable because it violated statutory rights under CLRA, the Court of Appeal did not affirm the trial court’s order on these grounds, finding instead that the arbitration agreement was unconscionable under the Armendariz balancing test. As held by the Court, this test continues to survive notwithstanding Concepcion:
Before applying Armendariz to the present case, we note that Concepcion, supra, 131 S.Ct. 1740, does not preclude the application of the Armendariz principles to determine whether an arbitration provision is unconscionable. Concepcion disapproved the "Discover Bank rule," stating: "In Discover Bank, the California Supreme Court applied [the doctrine of unconscionability] to class-action waivers in arbitration agreements and held as follows: [¶] '[W]hen the [class action] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party "from responsibility for [its] own fraud, or willful injury to the person or property of another." Under these circumstances, such waivers are unconscionable under California law and should not be enforced.'" (Concepcion, at p. 1746, italics added.) With the exception of the Discover Bank rule, the Court acknowledged that the doctrine of unconscionability is still a basis for invalidating arbitration provisions. (Concepcion, at pp. 1746, 1747; see Kanbar v. O'Melveny & Myers (N.D.Cal. 2011) 2011 U.S. Dist. Lexis 79447, pp. *15-*16, *23-*24, 2011 WL 2940690, pp. *6, *9.) Thus, Concepcion is inapplicable where, as here, we are not concerned with a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purposes of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16). (See Concepcion, at pp. 1748-1753.)
Slip Opinion, at 11-12.

The Court's decision joins a growing list of potential exceptions to the U.S. Supreme Court’s ruling in Concepcion. (See previous posts here and here)

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