Dealers are under assault by consumers and employees who, in a still-recovering economy, too often use the court system as a bonanza to address their own economic troubles, unrelated to anything the dealer did or failed to do. The proliferation of class action lawsuits has some smaller dealers wondering whether all the effort is worth it. Just this week, a frustrated dealer friend of mine facing a class action lawsuit said he might sell his business rather than deal with the drain on his resources and attention that such suits inevitably entail.
The CNCDA has been effective at getting some legislation passed to curb abusive litigation, most notably AB 238 in 2011 which amended the Automobile Sales Finance Act so that the mere failure to properly disclose government fees on a retail installment sale contract will not make the sale contract unenforceable (and subject to rescission).
But this change in the law applies only to retail installment sale contracts entered into after January 1, 2012. Plaintiffs' attorneys argue that AB 238's change to the law won't bar their filing rescission-seeking lawsuits for several more years because the statute of limitations applicable to the Automobile Sales finance Act is four years. I vigorously disagree with this argument, because the California Supreme Court has already held that the rescission remedy under the Automobile Sales Financing Act's precursor is subject to a one-year statute of limitation. But whether the statute of limitation is four years or one, AB 238 will eventually all but eliminate such class action lawsuits, because they won't be worth bringing. The economic value of these cases to plaintiff-class counsel comes from the large attorney-fee awards they stand to generate. To obtain court approval for large attorney's fees awards, class counsel must show that a large value was bestowed on the class. In the absence of a rescission remedy, very little of value can be bestowed on the class, resulting in an insufficient award of prevailing-party attorney's fees.
In the meantime, dozens of so-called "fee lumping" class action lawsuits are pending in courts in California for those consumers who purchased a vehicle before January 1, 2012. So the question is, for these cases (and for additional ones, if the plaintiff's lawyers are right and they can still bring these class action suits for the next four years), what is the most efficient defense against them? In my view, it is a valid and enforceable arbitration clause, containing a class-action waiver, in every vehicle sales contract. Arbitration agreements with class-action waivers should also be included in all employment contracts. If enforced in response to a consumer or employment class action, the plaintiff's class action lawsuit is reduced to a single plaintiff claim that the plaintiff must arbitrate before a private arbitrator, significantly reducing liability exposure for the dealership.
The plaintiff's bar has vigorously argued in state and federal courts that arbitration-clause class-action waivers are (or should be) unenforceable. And until 2011, they were successful, at least in California, in limiting the enforcement of class action waivers under the California supreme court's holdings in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 and Gentry v. Superior Court (2007) 42 Cal.4th 443. In Discover Bank, the court held that where a case involves a defendant's practice of bilking a large number of consumers out of a small individual sum of money, the class action waiver will not be enforceable. In Gentry, the court held that in the employment context, a class action waiver will not be enforced for public policy reasons if certain factors exist.
But 2011's landmark United States Supreme Court decision in AT&T Mobility v. Concepcion invalidated the California Supreme Court decision of Discover Bank. In rejecting the Discover Bank rule, the United States Supreme Court held that state law and public policy can no longer be applied in a manner that disfavors arbitration or that state law or public policy will be deemed to be preempted by the FAA.
Some commentators suggested that Concepcion did not apply to California’s other anti-arbitration decisions, such as Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066 and Cruz v. Pacificare Health Systems, Inc. (2003) 30 Cal.4th 1157, holding that public injunctive relief claims under California’s Unfair Competition Law or Consumers Legal Remedies Act are inarbitrable (the Broughton-Cruz rule), and Gentry v. Superior Court, holding that arbitration agreements that prevent employees from vindicating statutory rights are unenforceable and in violation of California’s public policy. See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825 (applying the Gentry rule to the consumer context). Some commentators have also suggested that California doctrines, such as unconscionability, remain valid defenses against the enforcement of arbitration provisions.
So while class action waivers appear to be valid and enforceable after Concepcion, the battle has shifted to focus on the enforceability of the arbitration agreement as a whole, with plaintiffs' attorneys seeking to preserve traditional defenses to the enforcement of arbitration agreements and defense counsel seeking a broad interpretation of Concepcion's preemption analysis to preempt such defenses to their enforcement.
As a result, numerous decisions have been published on the issue, exposing a tug-of-war in state and federal courts over Concepcion's scope and breadth. For the most part, federal courts have adopted a broad interpretation (with the notable exception of the Second Circuit). Some state courts, and particularly California courts, have reasoned that Concepcion and its progeny should be construed narrowly, so that arbitration agreements can still be held unenforceable. This tug-of-war over the scope of Concepcion should soon be resolved. I believe that it should, and will, be resolved in favor of a broader interpretation holding state laws and public policies like the Broughton-Cruz and Gentry rules preempted, but leaving a nuanced and narrow test for determining when an arbitration agreement is unconscionable and therefore unenforceable.
The California Supreme Court is poised to decide this issue in two cases, one in the employment context and the other in the consumer context.
On April 3, 2013, the California Supreme Court heard oral argument in Sonic-Calabasas A, Inc. v. Moreno, a case in which the state high court will consider the reach of Concepcion in the employment context. In Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, the California Supreme Court previously held: (1) an employee's "statutory right to seek a Berman hearing [a wage hearing before the DLSE or Labor Commissioner], with all the possible protections that follow from it, is itself an unwaivable right that an employee cannot be compelled to relinquish as a condition of employment;" (2) waiver of an employee's right to seek a Berman hearing is a substantively unconscionable contract term; and (3) the Federal Arbitration Act does not preempt the Court's holdings on points one and two.
The Supreme Court of the United States granted review and vacated that decision, remanding the case for further consideration in light of Concepcion.
The issues presented are as follows:
- Can a mandatory employment arbitration agreement be enforced prior to the conclusion of an administrative proceeding conducted by the Labor Commissioner concerning an employee's statutory wage claim?
- Was the Labor Commissioner's jurisdiction over employee's statutory wage claim divested by the Federal Arbitration Act under Preston v. Ferrer (2008) __ U.S. __, 128 S.Ct. 978, 169 L.Ed.2d 917?
After oral argument, some observers commented that the justices seemed to accept a broad reading of Concepcion in favor of enforcing arbitration agreements, but might allow the unconscionability doctrine to survive, though in some more limited fashion than the manner in which it has been applied in California. Given the California Supreme Court's history in this area, I believe the high court will re-define the test or "factors" giving rise to unconscionability, but I doubt the court will adopt a bright-line rule that the parties’ agreements as to arbitration procedures are immune from unconscionability analysis. A decision should be issued before Summer.
Meanwhile, Sanchez v. Valencia Holding Company, California Supreme Court Case No. S199119, previously cited at (2011) 201 Cal.App.4th 74 is fully briefed and ready for oral argument. According to the California Supreme Court's website, it will decide whether the Federal Arbitration Act (9 U.S.C. s. 2), as interpreted in Concepcion, preempts state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable? At issue there is the LAW 553-CA-ARB form (the version in circulation before July of last year).
As you may know, the LAW 553-CA-ARB retail installment sale contract contains a class action waiver provision that protects automotive dealers from overreaching consumer attorneys seeking to require the dealer to buyback all sale contracts over a period of years for a mere formal or technical violation of the law, even when the dealer received no benefit from the violation. Other high-end retailers sometimes include similar terms in their arbitration clauses, particularly in the consumer electronics and computer industry.
Sanchez held that the arbitration provision in the LAW 553-CA-ARB form contract was unenforceable due to California’s unconscionability doctrine. InSanchez's wake, consumer attorneys rushed into courts across California seeking to overturn previous orders compelling arbitration of disputes between car dealers and their customers and trying to force unreasonable settlements on dealers faced with daunting class action litigation. Since the California Supreme Court has granted review -- effectively de-publishing the court of appeal's anti-dealer ruling -- trial courts have not been consistent in ruling on dealers' motions to compel arbitration. And regardless of the how the trial court rules on a dealer's motion to compel arbitration, the losing party routinely appeals that ruling, resulting in numerous stayed cases around the State, while everyone -- consumer and dealer attorneys alike -- collectively hold their breath, waiting for the California Supreme Court's decision in Sanchez.
As in Moreno, the battle now turns to convincing the California Supreme Court that Sanchez should be reversed because, like the Discover Bank rule and the Broughton-Cruz rule, the Sanchez court’s reasoning applies California’s state laws and public policy in a manner that disfavors arbitration and is preempted by the Federal Arbitration Act (FAA).
Since the court of appeal’s Sanchez decision, the Ninth Circuit weighed in with Kilgore v. KeyBank, N.A., No. 09-16703, 2012 WL 718344 (March 7, 2012), wherein it held that California’s Broughton-Cruz rule is preempted by the FAA under Concepcion. That decision was taken by the Ninth Circuit en banc.
On April 11, 2013, the Ninth Circuit issued its en banc decision in Kilgore v. Keybank, National Association, No. 09-16703, declining to resolve whether the FAA preempts California’s Broughton-Cruz rule prohibiting arbitration of injunctive relief claims. While the Broughton-Cruz rule likely did not survive Concepcion, Kilgore gives further fodder for the plaintiffs' argument in Sanchez.
Central to the en banc panel's decision in Kilgore was the fact that the bank was no longer engaged in the purportedly unlawful activity, so there was no need for an injunction to stop the supposed illegal practice. This allowed the court to duck the issue -- reasoning that if there is no conduct to enjoin, there is no need to determine whether public policy prohibits arbitration of a claim seeking to enjoin such conduct. By ducking the issue, the court avoided the central question in the case.
But public policy rules like the Broughton-Cruz rule and the Gentry rule have been stricken down in other jurisdictions as preempted by the FAA under Concepcion. For example, in Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (February 21, 2012), the United States Supreme Court, in a Per Curiam decision, overruled a similar West Virginia Supreme Court rule refusing to enforce a pre-dispute arbitration agreement governed by the FAA based on a state public policy, holding West Virginia’s public policy preempted by the FAA.
And the U.S. Supreme Court has since reminded other courts of its “emphatic federal policy in favor of arbitral dispute resolution.” KPMG LLP v. Cocchi, 565 U.S. ---, 2011 WL 5299457 (Nov. 7, 2011). There, the U.S. Supreme Court reversed the Florida Court of Appeal’s decision to invalidate an arbitration agreement on the ground s that it found only some of the claims at issue were subject to arbitration. In doing so, the Supreme Court emphasized that under the FAA, arbitration agreements “must be enforced in state and federal courts, “ and that state courts “have a prominent role to play as enforcers of agreements to arbitration.” This dispels any doubt as to whether Concepcion is applicable in state court.
It is also promising that the U.S. Supreme Court may determine whether the concept of "vindication of statutory rights" trumps the FAA in deciding whether to enforce a class action waiver when those statutory rights can only be pursued in litigation. The case is In re American Express Merchants Litigation, Case No. 12-133 (cert. granted November 9, 2012) (“AMEX Merchants”). Twice before, the U.S. Supreme Court struck down the Second Circuit's holding invalidating the class action waiver in that case. Oral argument was recently heard and a decision is expected this spring.
Based on these recent holdings, made in the wake of Concepcion, dealers and other retailers should remain hopeful that Moreno and Sanchez will be reversed and the California Supreme Court will rule consistent with Concepcion that generally available contract defenses cannot be used to invalidate otherwise enforceable arbitration agreements under the FAA unless that contract defense is used in a manner that does not disfavor arbitration.