September 25, 2012

Will freedom of contract survive in the California Supreme Court?

By Deborah J. La Fetra Senior Attorney

Gil Sanchez bought a used Mercedes for $54,000.  He signed a standard sales contract used by dealerships throughout California, that he did not read.  If he had read it, he might have noticed the arbitration provision on the back of the contract, outlined by a black box.  He might also have noticed the class action waiver in its arbitration provision, coupled with a provision that if the waiver were invalidated, the entire arbitration provision would not be enforced.

Despite his signing the contract in which he agreed to have all disputes resolved by arbitration, Sanchez filed a proposed class action alleging, among other things, violations of California’s consumer protections laws and other statutes relevant to used car sales.  He claims the dealer lied to him about various aspects of the transaction and the condition of the car, and charged him improper fees.  When the dealer asked the court to compel arbitration, the court decided the contract was “unconscionable” because of the class action waiver, and therefore voided the whole contract.

After the trial court ruled, the United States Supreme Court in AT&T Mobility v. Concepcion (a case in which PLF participated as amicus), specifically chastised the California courts for their hostility to arbitration such that they were constantly invalidating arbitration contracts on grounds of unconscionability that they applied to no other type of contract.  In light of Concepcion, most courts restricted the scope of unconscionability analysis so as not to stand as an obstacle to the federal public policy favoring freedom of contract implemented in the Federal Arbitration Act.

The Court of Appeal in the Sanchez case, however, stubbornly refused to apply these principles and instead employed a highly subjective, broad application of the inherently flexible unconscionability doctrine.  The worst part of the decision is that the court assumed that consumer incompetence in failing to read the contract was reasonable, and actually justified a finding of unconscionability.  The case is now before the California Supreme Court and PLF filed an amicus brief arguing that neither contract law nor consumer protection laws should immunize a competent adult who chose to sign a contract he did not read, and subsequently came to regret his agreement to submit disputes to arbitration.  The function of the courts is to preserve the public’s interest in a reliable system for contracting, not protecting parties from their own missteps and misjudgments.

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