California Court Performs Surgery on Auto Sales Contract to Find Arbitration Provision Unconscionable
A recent decision from a California appellate court highlights the lengths to which California courts will go to scrutinize retail installment sales contracts (“RISCs”) to invalidate arbitration provisions based on “unconscionability”. The Second Appellate District’s decision inVargas v. SAI Monrovia B, Inc., No. B237257, issued on June 4, 2013, is available here.
The plaintiffs in Vargas filed a class action lawsuit against the dealer and the finance company that was assigned the plaintiffs’ RISC, asserting various claims under the Consumer Legal Remedies Act, the Automobile Sales Finance Act, the Unfair Competition Law, and the Song-Beverly Consumer Warranty Act. After the defendants moved to compel arbitration in the trial court, the plaintiffs filed declarations stating that they “were presented with a stack of documents, and were simply told by Assael BMW’s employee where to sign and/or initial each one.” These declarations also stressed that the sale documents “were pre-printed form documents,” and that the plaintiffs “were not given an opportunity to negotiate any of the pre-printed terms.” The plaintiffs also claimed that they “did not even realize the contract had a second, back side with additional terms,” and that they “had no reason to suspect” that the back of the RISC contained an arbitration provision containing a class action waiver.
On appeal, the court held that the arbitration provision was unconscionable. The court explained that as part of the sale, the plaintiffs signed a RISC that was “a preprinted document consisting one page, eight and one-half inches wide and 26 inches long.” There were “extensive provisions on both sides of the [RISC], leaving little in the way of margins.” (All emphasis quoted herein is from the original). While the plaintiffs “signed or initialed the front side in 12 places, each relating to a different provision . . . no signatures or initials of the buyers were required on the back; there were no places on the back for the buyers to initial or sign.” Indeed, “[t]he buyers’ final signatures appeared near the bottom of the front side.”
The court rejected the defendants’ argument that, even assuming the placement of the arbitration clause on the back of the RISC was unconscionable, the plaintiffs signed the front of the RISC near a provision stating that “[y]ou acknowledge that you have read both sides of this contract, including the arbitration clause on the reverse side, before signing below .” The court, in holding that this language lacked significance, explained that it (1) “was located 22 inches from the top of the page . . . flush to the right margin in a space measuring about two inches wide and one inch high; (2) was located next to “boxed text discussing the lack of a cooling-off period,” which was “approximately six inches wide and one inch high”; and (3) was located underneath a bolded provision discussing the annual percentage rate. The signature line, meanwhile, “appeared flush to the left margin under . . . boxed text discussing the lack of a cooling-off period, not under the provision referring to the ‘arbitration clause on the reverse side.’” The court also emphasized that the plaintiffs’ declarations stated that the dealerships’ employees told them where to sign, and that the dealership’s conduct deprived plaintiffs of an opportunity to read the RISC.
The Vargas case highlights the lengths to which California courts sometimes go to invalidate plainly-worded arbitration clauses, and the corresponding perceived need for procedural perfection in the drafting and execution of arbitration agreements in California in order for them to be confirmed and enforceable. For example, to avoid dissection of RISCs by California courts analyzing for unconscionability, the Vargas court appears to require that buyers sign, at least, on every side of every page of a RISC, if not next to each paragraph.
Troutman Sanders attorneys have extensive experience advising leading consumer automotive retailers and automotive finance clients on compliance with state and federal laws and regulations. Troutman Sanders also regularly defends such entities in litigation against both class and individual claims.
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