Wednesday, December 10, 2003
C.A. Finds Arbitration That Would Cost $10,000 Unconscionable
By DAVID WATSON, Staff Writer
An agreement under which the purchaser of a vehicle would have to pay at least $10,000 to arbitrate a dispute, and which contained no provision for a fee waiver, was unconscionable, the First District Court of Appeal ruled yesterday.
In an opinion certified for partial publication, Div. Five reversed San Francisco Superior Court Judge James J. McBride’s denial of a petition to compel arbitration brought by Autowest, Inc. Justice Mark B. Simons explained that McBride properly found the costs provision of the arbitration agreement unconscionable, but erred in finding that he lacked authority to sever it.
Ryan and Jamie Gutierrez sued Autowest after leasing a Dodge Durango from the company, claiming they were victims of a “bait and switch” and did not get the benefit of an advertised offer. Autowest sought to enforce the arbitration provisions of the lease, which required arbitration under the rules of the American Arbitration Association.
The appellate court opinion reproduced the provision in Arial Narrow eight-point type, noting that it appeared that way in the lease.
McBride found that since the complaint included causes of action for violation of the California Vehicle Leasing Act, Unfair Competition Law, fraud, negligent misrepresentation, violation of the California Consumers Legal Remedies Act, and false advertising and sought damages of at least $500,000, and since under AAA rules arbitration fees depend on the size of the claim involved, it would cost the Gutierrezes at least $10,000 to arbitrate—without counting attorney fees. Because the amount in controversy exceeded $10,000, the AAA’s Commercial Arbitration Rules would apply, the judge found.
“The trial court’s implicit conclusion that the arbitration clause in the automobile lease is adhesive is supported by substantial evidence,” Simons wrote. “The lease was presented to plaintiffs for signature on a ‘take it or leave it’ basis. Plaintiffs were given no opportunity to negotiate any of the preprinted terms in the lease. The arbitration clause was particularly inconspicuous, printed in eight-point typeface, on the opposite side of the signature page of the lease. Gutierrez was never informed that the lease contained an arbitration clause, much less offered an opportunity to negotiate its inclusion within the lease or to agree upon its specific terms. He was not required to initial the arbitration clause—.He either had to accept the arbitration clause and the other preprinted terms, or reject the lease entirely. Under these circumstances, the arbitration clause was procedurally unconscionable.”
“We conclude that where a consumer enters into an adhesive contract that mandates arbitration, it is unconscionable to condition that process on the consumer posting fees he or she cannot pay. It is self-evident that such a provision is unduly harsh and one-sided, defeats the expectations of the nondrafting party, and shocks the conscience. While arbitration may be within the reasonable expectations of consumers, a process that builds prohibitively expensive fees into the arbitration process is not.”
Ability to Pay
The Gutierrezes, Simons said, presented evidence that they were not able to pay the prospective cost of the arbitration, and neither the lease nor the AAA rules contained provisions for a waiver. While the rules did say that fees could be deferred or reduced in the event of “extreme hardship,” he noted, he added that “[e]ven a litigant in possession of the AAA rules would not know how to seek a fee waiver.”
The justice commented:
“A comparison with the judicial system is striking. While imposing far lower mandatory fees, the judicial system provides parties with the opportunity to obtain a judicial waiver of some or all required court fees.”
“We do not mean to suggest that an arbitration agreement requiring the posting of fees to initiate the process must provide a cost-waiver procedure that duplicates the judicial waiver procedure. But the agreement must provide some effective avenue of relief from unaffordable fees. This one does not.”
But Simons said that under Civil Code section 1670.5, McBride had the authority to enforce the contract without the unconscionable provision, or to limit its application to avoid an unconscionable result. Under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, a single unconscionable term justifies refusal to enforce an arbitration agreement only if the agreement was drafted in bad faith, the justice said.
On remand, he said, McBride would have to make a bad faith determination and decide whether to sever the fees provision.
Justice Linda M. Gemello and Presiding Justice Barbara J.R. Jones concurred.
The case is Gutierrez v. Autowest, Inc., A098704.
Copyright 2003, Metropolitan News Company