Mercedes-Benz Financial Services v. Okudan CA4/1 ( 2013 )

Filed 4/8/13 Mercedes-Benz Financial Services v. Okudan CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MERCEDES-BENZ FINANCIAL D061669
SERVICES USA, LLC,
Plaintiff, Cross-defendant and
Appellant, (Super. Ct. No. 37-2010-00093994-
CU-CL-CTL)
v.
OZZY O. OKUDAN,
Defendant, Cross-complainant and
Respondent.
APPEAL from an order of the Superior Court of San Diego County, Luis R.
Vargas, Judge. Reversed with directions.
Mercedes-Benz Financial Services USA, LLC (Financial) appeals an order
denying its petition to compel arbitration of its lawsuit with Ozzy Okudan. Financial
contends the court erred by determining the arbitration clause in an automobile purchase
contract was unconscionable and therefore unenforceable. We reverse with directions.1
FACTUAL AND PROCEDURAL BACKGROUND
In August 2007, Okudan purchased a 2006 BMW M-5 from a Mercedes Benz
dealer under an installment sale contract requiring Okudan to make monthly payments.
The dealer later assigned the contract to Financial. The total price of the vehicle was
approximately $72,000.
In December 2008, Financial repossessed the vehicle based on its claim that
Okudan failed to make the required monthly payments. Financial provided Okudan with
a statutory notice of intent to sell the vehicle (NOI) that included Okudan's reinstatement
rights. Financial then sold the vehicle at an auction for $19,000.
In June 2010, Financial filed a superior court action against Okudan seeking to
collect the deficiency balance owed on the vehicle, alleged to be $64,239.85. About one
year later, in June 2011, Okudan filed a cross-complaint seeking declaratory relief in the
form of an order that Financial's NOI did not comply with Civil Code section 2983.2 and
therefore Financial was precluded from obtaining a deficiency balance.
About five months later, in November 2011, Okudan filed an amended cross-
complaint seeking to represent a class of California residents "to whom [Financial] sent
1 Many of the same legal issues in this case are before the California Supreme Court
in two pending cases. (Sanchez v. Valencia Holding Co., LLC (2011) 201 Cal.App.4th
74, review granted Mar. 21, 2012, S199119 (Sanchez); Goodridge v. KDF Automobile
Group, Inc. (2012) 209 Cal.App.4th 325, review granted Dec. 19, 2012 (Goodridge)
[briefing deferred pending Sanchez case].) This case involves the same form contract
that was at issue in the Sanchez and Goodridge cases.
2
NOIs . . . whose vehicles were repossessed by or voluntarily surrendered to [Financial],
and against whom [Financial] has asserted a deficiency claim." Okudan added numerous
causes of action, including for violation of the Rosenthal Fair Debt Collections Practices
Act, Consumer Credit Reporting Agencies Act, Consumer Legal Remedies Act (CLRA),
Fair Credit Reporting Act, and Unfair Competition Law (UCL) based on a violation of
the Rees-Levering Act. (See Civ. Code, §§ 1750 et seq., 1785.1 et seq., 1788 et seq.;
Bus. & Prof. Code, § 17200; 15 U.S.C. § 1681 et seq.)
Within several days, Financial moved to compel arbitration under an arbitration
clause in Okudan's installment sale contract. Financial attached a digitally-reduced copy
of the sales contract, in which the terms were essentially illegible.
Okudan opposed the arbitration request, arguing: (1) Financial did not meet its
burden to produce evidence of a valid and enforceable arbitration clause; (2) Financial
waived its right to seek arbitration by filing the lawsuit, filing a summary judgment
motion, and propounding written discovery; and (3) the arbitration provision was
unconscionable.
In support of his unconscionability argument, Okudan presented evidence that the
sales contract was the "Reynolds & Reynolds, 553-CA-ARB" form document widely
used in the industry. According to this evidence, the arbitration clause contained in the
parties' agreement read as follows:
"ARBITRATION CLAUSE
PLEASE REVIEW-IMPORTANT-AFFECTS YOUR LEGAL RIGHTS
3
"1. EITHER YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US
DECIDED BY ARBITRATION AND NOT IN COURT OR BY JURY TRIAL.
"2. IF A DISPUTE IS ARBITRATED, YOU WILL GIVE UP YOUR RIGHT TO
PARTICIPATE AS A CLASS REPRESENTATIVE OR CLASS MEMBER ON ANY
CLASS CLAIM YOU MAY HAVE AGAINST US INCLUDING ANY RIGHT TO
CLASS ARBITRATION OR ANY CONSOLIDATION OF INDIVIDUAL
ARBITRATIONS.
"3. DISCOVERY AND RIGHTS TO APPEAL IN ARBITRATION ARE GENERALLY
MORE LIMITED THAN IN A LAWSUIT, AND OTHER RIGHTS THAT YOU AND
WE WOULD HAVE IN COURT MAY NOT BE AVAILABLE IN ARBITRATION.
"Any claim or dispute, whether in contract, tort, statute or otherwise (including the
interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or
dispute), between you and us or our employees, agents, successors or assigns, which
arises out of or relates to your credit application, purchase or condition of this vehicle,
this contract or any resulting transaction or relationship (including any such relationship
with third parties who do not sign this contract) shall, at your or our election, be resolved
by neutral, binding arbitration and not by a court action. If federal law provides that a
claim or dispute is not subject to binding arbitration, this Arbitration Clause shall not
apply to such claim or dispute. Any claim or dispute is to be arbitrated by a single
arbitrator on an individual basis and not as a class action. You expressly waive any right
you may have to arbitrate a class action. You may choose one of the following arbitration
organizations and its applicable rules: the National Arbitration Forum . . . .
(www.arbforum.com), the American Arbitration Association . . . (www.adr.org), or any
other organization that you may choose subject to our approval. You may get a copy of
the rules of these organizations by contacting the arbitration organization or visiting its
website.
"Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the
applicable rules. The arbitrator shall apply governing substantive law in making an
award. The arbitration hearing shall be conducted in the federal district in which you
reside. . . . We will advance your filing, administration, service or case management fee
and your arbitrator or hearing fee all up to a maximum of $2500, which may be
reimbursed by decision of the arbitrator at the arbitrator's discretion. Each party shall be
responsible for its own attorney, expert and other fees, unless awarded by the arbitrator
under applicable law. If the chosen arbitration organization's rules conflict with this
Arbitration Clause, then the provisions of this Arbitration Clause shall control. The
arbitrator's award shall be final and binding on all parties, except that in the event the
arbitrator's award for a party is $0 or against a party is in excess of $100,000, or
includes an award of injunctive relief against a party, that party may request a new
arbitration under the rules of the arbitration organization by a three-arbitrator panel.
The appealing party requesting new arbitration shall be responsible for the filing fee and
other arbitration costs subject to a final determination by the arbitrators of a fair
apportionment of costs. Any arbitration under this Arbitration Clause shall be governed
4
by the Federal Arbitration Act (9 U.S.C. § 1 et. seq.) and not by any state law concerning
arbitration.
"You and we retain any rights to self-help remedies, such as repossession. You and we
retain the right to seek remedies in small claims court for disputes or claims within that
court's jurisdiction, unless such action is transferred, removed or appealed to a different
court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing
suit. Any court having jurisdiction may enter judgment on the arbitrator's award. This
Arbitration Clause shall survive any termination, payoff or transfer of this contract. If any
part of this Arbitration Clause, other than waivers of class action rights, is deemed or
found to be unenforceable for any reason, the remainder shall remain enforceable. If a
waiver of class action rights is deemed or found to be unenforceable for any reason in a
case in which class action allegations have been made, the remainder of this Arbitration
Clause shall be unenforceable." (Italics added.)
The evidence showed the entire sales agreement was contained on a single sheet of
paper that is about 26 inches long with numerous provisions close together on the front
and back side. The arbitration provision is located on the bottom of the back side and is
outlined in black lines, as are several other provisions. The provision is printed in at least
8-point type. Okudan signed the bottom of the front side and initialed the contract on
several places on the front side, but there are no signatures or initials by Okudan on the
back of the contract.
Okudan also presented his declaration in which he described his execution of the
sales agreement. The declaration states in part:
"When I was asked to sign the purchase documents, the dealer
representative never actually gave me the sales contract to read. He
spent no more than five to ten minutes having me sign the purchase
contract and several other sales documents. The sales person did not
explain the contract to me prior to signing it, and did not discuss
anything on the back of the contract. I could not read the back of the
contract because he never turned it over. I was not asked to sign
anywhere on the back of the contract. I was not told there was
additional language on the back. The sales person did not turn the
contract over at all during the signing.
5
. . . The sales person held the contract flat on the desk with one hand
and with the other pointed to the various places on the front of the
contract for me to sign. The way he held his hands on the contract
kept me from reading much of the language on the front of the
contract. In addition, there were probably 7 or 8 other documents to
be signed. No one at the dealership ever discussed an arbitration
clause with me prior to the sale. I did not know there was any
arbitration clause until my attorney told me [Financial] is trying to
force arbitration. . . . [¶] The contract was presented to me on a take
it or leave it basis.
. . . I have never heard of the National Arbitration Forum or the
American Arbitration Association. I am unfamiliar with their rules
and was never given a copy of the rules. I cannot afford to pay
arbitration fees. If I had been told that I would have to forfeit my
right to go to court I would not have bought the vehicle. I no longer
have my copy of the contract because it was misplaced when I
moved in 2009."
Based on this evidence, Okudan argued the court should deny Financial's motion
to compel because the arbitration agreement was identical to the arbitration clause found
procedurally and substantively unconscionable by the Sanchez court (which had not yet
been granted review by the California Supreme Court). (See fn. 1, ante.) The Sanchez
court had found four portions of the arbitration clause to be unconscionable: (1)
providing the parties with the right to a second arbitration before a three-arbitrator panel
if the award exceeds $100,000; (2) providing the parties with the right to a second
arbitration before a three-arbitrator panel if the award includes injunctive relief; (3) the
6
requirement that the appealing party advance all arbitration costs; and (4) the exemption
for self-help remedies (e.g., repossession).2
In reply, Financial argued Sanchez was wrongly decided and the agreement was
neither procedurally nor substantively unconscionable, and in any event severance is the
proper remedy. Financial also argued it did not waive its arbitration right, noting that it
filed its motion immediately after Okudan filed the amended cross-complaint adding the
class allegations. Financial asserted that "the filing of a class action cross-complaint is in
itself a dramatic change in the nature and scope of the case justifying [Financial] to
change strategy and move to compel arbitration," and Okudan did not suffer any
prejudice from the delayed motion.
After considering the parties' submissions and conducting a hearing, the court
denied Financial's motion to compel arbitration based on its conclusion that the provision
was substantively and procedurally unconscionable under Sanchez. With respect to
substantive unconscionability, the court followed the Sanchez court's holding that the
four challenged portions of the arbitration provision were unfairly one-sided and
oppressive. The trial court also denied Financial's severance request, stating that
"consistent with the holding in Sanchez, . . . the arbitration provision is permeated with
unconscionability, which cannot be cured by severing the offensive provisions from the
2 Although the arbitration clause included a class action waiver, Okudan did not
argue the waiver was unconscionable. (See AT&T Mobility LLC v. Concepcion (2011)
__ U.S. __ [131 S.Ct. 1740] (Concepcion).)
7
Contract." The court also overruled Okudan's evidentiary objections and did not reach
Okudan's waiver arguments.
Financial filed a notice of appeal on March 19, 2012. Two days later, the
California Supreme Court granted a petition for review of the Sanchez decision. (See fn.
1, ante.) While Financial's appeal was pending, this court filed the Goodridge decision
(see fn. 1, ante), in which we held that an identical arbitration provision in a vehicle
purchase contract was procedurally and substantively unconscionable, adopting much of
Sanchez's analysis. After Okudan filed his respondent's brief on appeal, the California
Supreme Court granted a petition for review in the Goodridge case and held the case
pending the outcome of Sanchez. (See fn. 1, ante.)
Several federal courts (in unpublished decisions) have found identical arbitration
provisions in vehicle sale contracts to be unconscionable. (See Trompeter v. Ally
Financial, Inc. (N.D.Cal., June 1, 2012, No. C 12-00392 CW) 2012 WL 1980894; Lau v.
Mercedes-Benz USA, LLC (N.D.Cal., Jan. 31, 2012, No. CV 11-1940 MEJ) 2012 WL
370557 (Lau); see also Mance v. Mercedes-Benz USA (N.D.Cal., Sept. 28, 2012, No. CV
11-03717 LB), 2012 WL 4497369 [substantively but not procedurally unconscionable]),
and at least one California Court of Appeal (in a published decision) has rejected an
unconscionability challenge (Flores v. West Covina Auto Group, LLC (2013) 212
Cal.App.4th 895).
8
DISCUSSION
I. Applicable Legal Principles
The parties' agreement is expressly governed by the Federal Arbitration Act
(FAA), which reflects a strong federal policy favoring the enforcement of arbitration
agreements. Under the FAA, arbitration agreements "shall be valid, irrevocable, and
enforceable save upon such grounds as exist at law or in equity for the revocation of any
contract." (9 U.S.C. § 2.) State laws inconsistent with the federal act's provisions and
objectives are preempted. (Perry v. Thomas (1987) 482 U.S. 483, 489.)
In 2011, the United States Supreme Court reiterated the strong public policy
favoring the enforceability of arbitration agreements under the FAA and reaffirmed that a
state law contract defense is unenforceable if it applies only to arbitration or if it derives
its meaning from the fact that an agreement to arbitrate is at issue. (See Concepcion,
supra, 131 S.Ct. at pp. 1745-1746.) The court further made clear that the principal
purpose of the FAA is to " 'ensur[e] that private arbitration agreements are enforced
according to their terms.' " (Id. at p. 1748.) However, the Supreme Court also
recognized that state laws regarding arbitration are enforceable to the extent they are not
in conflict with the FAA. (Ibid.; see Doctor's Associates, Inc. v. Casorotto (1996) 517
U.S. 681, 687; Truly Nolen of America v. Superior Court (2012) 208 Cal.App.4th 487,
498.)
One basis for revoking a contract under California law is a showing that the
contract is unconscionable. This unconscionability defense is codified in Civil Code
section 1670.5, subdivision (a), which states: "If the court as a matter of law finds the
9
contract or any clause of the contract to have been unconscionable at the time it was
made the court may refuse to enforce the contract, or it may enforce the remainder of the
contract without the unconscionable clause . . . ."
Following Concepcion, the California Supreme Court reaffirmed that this statutory
unconscionability defense " 'may be applied to invalidate arbitration agreements without
contravening' the FAA." (Pinnacle Museum Tower Assn. v. Pinnacle Market
Development (US), LLC (2012) 55 Cal.4th 223, 246 (Pinnacle).) The Pinnacle court also
reiterated well-settled principles governing the analysis of unconscionability claims under
California law: "Unconscionability consists of both procedural and substantive elements.
The procedural element addresses the circumstances of contract negotiation and
formation, focusing on oppression or surprise due to unequal bargaining power.
[Citations.] Substantive unconscionability pertains to the fairness of an agreement's
actual terms and to assessments of whether they are overly harsh or one-sided.
[Citations.] A contract term is not substantively unconscionable when it merely gives
one side a greater benefit; rather, the term must be 'so one-sided as to "shock the
conscience." ' [Citation.] [¶] The party resisting arbitration bears the burden of proving
unconscionability. [Citations.] Both procedural unconscionability and substantive
unconscionability must be shown, but 'they need not be present in the same degree' and
are evaluated on ' "a sliding scale." ' [Citation.] '[T]he more substantively oppressive the
contract term, the less evidence of procedural unconscionability is required to come to the
10
conclusion that the term is unenforceable, and vice versa.' [Citation.]" (Id. at pp. 246-
247.)3
Unconscionability is ultimately a question of law, which we review de novo when
no meaningful factual disputes exist as to the evidence. (Parada v. Superior Court
(2009) 176 Cal.App.4th 1554, 1567.) We review the court's resolution of disputed facts
for substantial evidence. (Ibid.) When the trial court makes no express findings, we infer
that it made every implied factual finding necessary to support its order and review those
implied findings for substantial evidence. (Ibid.)
II. Procedural Unconscionability
Procedural unconscionability requires oppression or surprise. " 'Oppression arises
from an inequality of bargaining power that results in no real negotiation and an absence
of meaningful choice.' [Citation.] Surprise is defined as ' "the extent to which the
supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted
by the party seeking to enforce the disputed terms." ' [Citation.]" (Gatton v. T-Mobile
USA, Inc. (2007) 152 Cal.App.4th 571, 581, fn. omitted.)
3 To the extent Financial argues these standards are no longer applicable after
Concepcion, supra, 131 S.Ct. 1740, we reject this contention. Although the Pinnacle
court did not specifically discuss the Concepcion decision on this issue, the Pinnacle
court's application of California's existing unconscionability standards to an arbitration
agreement establishes the continuing validity of these rules. In any event, Concepcion's
impact on this state's unconscionability rules is before the California Supreme Court in
the Sanchez case. (See fn. 1, ante.) Until our high court provides different standards, we
adhere to settled rules for enforcing arbitration agreements. (See Lau, supra, 2012 WL
370557, p. *7 ["Concepcion does not affect the traditional analysis used to determine
whether an arbitration clause is unconscionable"].)
11
Viewing the factual record in the light most favorable to Okudan, both aspects of
procedural unconscionability are present in this case. The purchase agreement is
contained on a lengthy two-sided preprinted form that is about two feet long, and the
arbitration provisions are on the back side on the bottom of the form. Okudan signed
only the front of the document. He also placed his initials next to several clauses, but
each of those clauses was on the front of the document. Okudan submitted a declaration
stating he had no opportunity to read the contract or negotiate the terms, and the contract
was presented to him on a "take it or leave it basis." He also said he was unaware of the
arbitration clause, and the salesperson did not call his attention to, or explain, the
provision. Okudan said the salesperson "held the contract flat on the desk with one hand
and with the other pointed to the various places on the front of the contract for me to sign.
The way he held his hands on the contract kept me from reading much of the language on
the front of the contract."
These facts, together with our review of the entire contract, supports that there was
a lack of negotiation or meaningful choice before Okudan signed the contract. (See
Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 89 (Gutierrez); Szetela v.
Discover Bank (2002) 97 Cal.App.4th 1094, 1100; Lau, supra, 2012 WL 370557, p. *8.)
Financial argues that Okudan could not have been "surprised" by the arbitration
requirement because a clause on the front side of the contract "alerted" him to the
arbitration provision on its reverse side. Specifically, towards the bottom of the front side
of the form and on the far right of the printed page, the following provision appears in
capital letters (although in substantially smaller type than what appears here):
12
"YOU AGREE TO THE TERMS OF THIS CONTRACT. YOU
CONFIRM THAT BEFORE YOU SIGNED THIS CONTRACT,
WE GAVE IT TO YOU, AND YOU WERE FREE TO TAKE IT
AND REVIEW IT. YOU ACKNOWLEDGE YOU HAVE READ
BOTH SIDES OF THIS CONTRACT, INCLUDING THE
ARBITRATION CLAUSE ON THE REVERSE SIDE. BEFORE
SIGNING BELOW, YOU CONFIRM THAT YOU RECEIVED A
COMPLETELY FILLED-IN COPY WHEN YOU SIGNED IT."
The trial court did not err in finding this clause would not have notified a
reasonable consumer of the existence of the arbitration clause. There is no provision for
Okudan's signature or initials under or adjacent to that language. Rather, his signature
appears on the opposite side of the page under a larger, boxed-in provision regarding the
lack of a cooling-off period that appears to the left of the quoted language in the two-
thirds width of the page adjacent to the left margin. Further, based on the manner in
which the salesperson held his hand on the contract while Okudan was placing the
required signature/initials, the trial court had a reasonable basis to conclude that Okudan
did not have a fair opportunity to read this clause in a careful manner that would have
provided sufficient information to refer Okudan to the arbitration provision on the back
side.
We recognize that automobile dealers are statutorily mandated to include copious
amounts of information in a sales contract and the contract here met the legal
requirements regarding content and print size. (See Civ. Code, §§ 2982, 2981.9.)
However, there is no statutory requirement that the arbitration provision be placed on the
bottom of the back of the form without any provision for a consumer signature or initials
to ensure the buyer has read and/or understood the provision. Because the arbitration
13
provision was contained on the back of the contract containing dense contractual
language and there was no evidence that Okudan knew of the provision or would have
been reasonably alerted to this clause before signing and consenting to the agreement, the
court's finding of surprise was supported.4
Based on the totality of the circumstances, there was a moderate degree of
procedural unconscionability in this case. However, this is not the end of the analysis
because a contract is unconscionable only if it is both procedurally and substantively
unconscionable.
III. Substantive Unconscionability
Financial contends the court erred in finding four portions of the arbitration
provision were substantively unconscionable: three concern the finality of the arbitrator's
decision and one concerns the parties' rights to seek relief outside the arbitration process
thorough self-help remedies or small claims court.
We conclude Financial's contention has merit with respect to the self-help and
small claims court remedies. As explained, there is nothing unfair or unreasonable in
allowing the parties to retain their rights to these remedies outside the arbitration process.
But we conclude the remaining challenged provisions pertaining to the finality of
the arbitration decision are moderately unconscionable because they primarily benefit the
economically-stronger party and substantially burden the weaker party. Viewing together
4 In analyzing procedural unconscionability, we do not find material the fact that the
contract did not attach the specific arbitral rules that would govern arbitration. The
omission of these rules does not contribute to our unconscionability finding.
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the moderate levels of procedural and substantive unconscionability, we determine these
provisions cannot be enforced. However, because the objectionable provisions are
contained solely in two sentences of the lengthy arbitration agreement and pertain to a
single part of the arbitration clause (concerning the finality of the arbitration award), they
can potentially be severed from the remaining portions of the agreement. We thus
remand for the trial court to exercise its discretion on the severance issue without
including the erroneous determination regarding the self help/small claims provisions.
A. Summary of Substantive Unconscionability Standard
"Substantive unconscionability pertains to the fairness of an agreement's actual
terms and to assessments of whether they are overly harsh or one-sided. [Citations.] A
contract term is not substantively unconscionable when it merely gives one side a greater
benefit; rather, the term must be 'so one-sided as to "shock the conscience." ' [Citation.]"
(Pinnacle, supra, 55 Cal.4th at p. 246.) Moreover, even though a provision is unduly
one-sided, it may not be unconscionable when the party who is imposing the provision
offers a legitimate business justification based on " 'business realities.' " (Armendariz v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 117-118.) However,
" 'unless the "business realities" that create the special need for such an advantage are
explained in the contract itself,' " they " 'must be factually established.' " (Id. at p. 117.)
In determining substantive unconscionability, we are required to consider the
circumstances at the time the agreement was executed, and not the particular dispute
between the parties. (Civ. Code, § 1670.5; American Software, Inc. v. Ali (1996) 46
Cal.App.4th 1386, 1391.)
15
In our prior Goodridge decision, we expressly declined to apply the "shock the
conscience" standard in examining whether the arbitration provision was unconscionable.
(See fn. 1, ante.) However, the California Supreme Court has since made clear that this
standard governs the substantive unconscionability analysis. (Pinnacle, supra, 55 Cal.4th
at p. 246.) Following Pinnacle, we apply the "shock the conscience" standard and
recognize that it imposes a significant burden on a party seeking to prevail on a
substantive unconscionability claim. Thus, our analysis in this case differs somewhat
from our analysis in the Goodridge case.
B. Self-Help and Small Claims Remedies
The final paragraph of the arbitration provision begins: "You and we retain any
rights to self-help remedies, such as repossession. You and we retain the right to seek
remedies in small claims court for disputes or claims within that court's jurisdiction,
unless such action is transferred, removed or appealed to a different court. Neither you
nor we waive the right to arbitrate by using self-help remedies or filing suit."
Okudan contends this provision, in practical effect, benefits only Financial
because car dealers/creditors are the only parties that use self-help remedies (i.e.,
repossession). We agree repossession is a common recourse for sellers against a
defaulting buyer, and buyers do not have an equivalent self-help remedy. However, the
exclusion of this remedy from the scope of arbitration is not oppressive or unfair because
self-help remedies are, by definition, outside the judicial system. In other words, the fact
that the buyer has no corresponding self-help remedy is not a consequence of the
arbitration agreement. Under the applicable statutes and the parties' contract, a seller has
16
the right to repossess a vehicle when the buyer defaults and required payments are not
being made. (See Civ. Code, § 2983.3, subd. (b).) The creditor may exercise its rights to
this self-help remedy without bringing this claim to court. There is nothing harsh or one-
sided about exempting repossession from arbitration when it is exempt from the judicial
process. To the extent the seller/creditor seeks to obtain a deficiency after the
repossession and sale, this is not a self-help remedy, and the seller/creditor would be
required to resolve that claim in the arbitration process.
In this respect, Okudan's reliance on Flores v. Transamerica HomeFirst, Inc.
(2001) 93 Cal.App.4th 846 is misplaced. In Flores, the plaintiffs obtained a reverse
mortgage on their home from the defendant lender. (Id. at p. 849.) The loan documents
contained a broad arbitration clause requiring arbitration of all disputes between the
parties, except the agreement preserved the lender's right to "foreclose against the
Property (whether judicially or non-judicially . . . ), to exercise self-help remedies such as
set-off, or to obtain injunctive relief for the appointment of a receiver." (Id. at p. 850,
italics added.) The court found this broad exclusion unconscionable because the lender
was not required to bring any of its claims to arbitration and the "clear implication is that
[the lender] has attempted to maximize its advantage by avoiding arbitration of its own
claims." (Id. at p. 855.)
Flores does not support Okudan's argument that the self-help exclusion renders the
arbitration clause unconscionable. The Flores agreement exempted from arbitration not
only claims outside the judicial process (nonjudicial foreclosure) but also claims that
must be brought in court (judicial foreclosure). Thus, the broad exclusion affirmatively
17
provided the lender with the unilateral opportunity to bring certain of its claims in court,
even during the pendency of the arbitration process. The exemption for true self-help
remedies (i.e., repossession) does not have a similar effect because the remedy is by
definition already outside the judicial process.
Moreover, the recent Pinnacle decision creates some doubt as to the continuing
validity of the Flores court's reasoning. (Pinnacle, supra, 55 Cal.4th at pp. 246-250.) In
Pinnacle, the court rejected the argument that an arbitration provision is necessarily
unconscionable merely because it requires the homeowners association and property
owners to arbitrate all construction disputes with the developer without requiring the
developer to arbitrate any of its nonconstruction-related claims against these parties. (Id.
at pp. 248-249.) In so concluding, the court reiterated that "arbitration clauses may be
limited to a specific subject or subjects and that such clauses are not required to 'mandate
the arbitration of all claims between [the parties] in order to avoid invalidation on
grounds of unconscionability.' " (Id. at p. 248.)
Okudan also failed to meet his burden to show the exemption of small claims
disputes is so harsh or one-sided that it "shocks the conscience." (See Pinnacle, supra,
55 Cal.4th at p. 246.) The provision is neutral and applies to any party's claim that falls
within the small claims court's jurisdiction. On its face and in practical application, the
provision is mutual. (See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th
825, 845, fn. 21.) Vehicle purchasers frequently have small claims disputes with
sellers—for example, for the cost to repair a defective condition of the vehicle—and it
would not be unfair that this dispute would be exempt from arbitration. Consumers
18
benefit from this exception by having a faster and much less expensive dispute resolution
forum to resolve claims under a certain monetary amount without needing to retain an
attorney. The fact that injunctive or other forms of equitable relief are not available in
small claims court does not make the small claims exclusion particularly unfair or one-
sided with respect to the claims that do fall within the court's jurisdiction. As Pinnacle
held, substantive unconscionability does not arise merely because an arbitration clause
limits the type of claims subject to arbitration, even if those limitations mean that one
party's claims are more likely to fall within the scope of the arbitration clause. (Pinnacle,
supra, 55 Cal.4th at pp. 248-249.)
We conclude the trial court erred in finding the self-help and small claims court
exclusions to be unconscionable.
C. Finality Provisions
The court also found unconscionable the arbitration clauses' finality provision,
which reads as follows:
"The arbitrator's award shall be final and binding on all parties,
except that in the event the arbitrator's award for a party is $0 or
against a party is in excess of $100,000, or includes an award of
injunctive relief against a party, that party may request a new
arbitration under the rules of the arbitration organization by a three-
arbitrator panel. The appealing party requesting new arbitration shall
be responsible for the filing fee and other arbitration costs subject to
a final determination by the arbitrators of a fair apportionment of
costs."
The court determined three portions of this provision were oppressive and one-
sided: (1) the exception to finality if the arbitration award is "$0" or exceeds $100,000;
(2) the exception to finality if the arbitration award "includes an award of injunctive
19
relief"; and (3) the requirement that the appealing party advance all costs for the second
arbitration proceeding.
Reviewing these challenged provisions together, we find they are moderately
unconscionable because they create a situation in which the arbitration appellate rules
benefit the economically stronger party (Financial) to the detriment of the weaker party
(Okudan) and, in doing so, defeat an essential purpose of the FAA, which is to encourage
efficient and speedy dispute resolution. (Concepcion, supra, 131 S.Ct. at p. 1749; see
Pinnacle, supra, 55 Cal.4th at p. 235, fn. 4.) Where, as here, an arbitration agreement
provides for broad exceptions to finality and these exceptions generally favor only one
party, the private and public policy advantages of the arbitration process no longer exist.
Viewing the totality of the circumstances, we cannot say that Okudan fairly agreed to an
arbitration process that provides for a second arbitration under the circumstances set forth
in the arbitration provision.
The first exception to the finality rule is the provision that either party is entitled to
compel a second arbitration before a three-person arbitration panel if the award is in
excess of $100,000 or is zero. Okudan argues that although the provision on its face
applies to both parties, its practical effect is to favor Financial because Financial is the
party most likely to suffer an award against it in excess of $100,000, and the provision
unfairly precludes him from appealing a monetary award that is too low but is more than
zero.
Financial counters that in this case where the cost of the vehicle was
approximately $72,000 and a substantial portion of the vehicle was financed by the seller,
20
it is just as likely that Financial could recover $100,000 and thus that Okudan could
benefit from the $100,000-plus award finality exception. Financial also points out that
the $0 award exception would have the same effect on both parties because the parties are
equally likely to be awarded no monetary damages on a claim.
We agree that because of the cost of the vehicle, it is possible that Okudan could
suffer an adverse award of more than $100,000. Although a nonprevailing consumer is
not required to bear the prevailing party's attorney fees in an arbitration (Code Civ. Proc.,
§ 1284.3, subd. (a)), a seller/creditor who prevails on a collection claim against a
consumer may be awarded the amount of the claim plus interest. A defaulting consumer
who purchased a $72,000 vehicle with a minimal downpayment may ultimately owe
more than $100,000 if the award includes interest. Moreover, there is nothing one-sided
about a rule permitting either party to appeal when the arbitration award does not include
any money damages.
However, even if under some circumstances Okudan could exercise his appellate
rights to a second arbitration, we agree with Okudan that—when viewing the contract at
the time it was signed—it was much more likely that these rights would be exercised by
the dealer/creditor. A consumer who proves a claim that a $72,000 vehicle does not work
as promised or that the defendant engaged in some form of fraud or unfair business
practice would likely receive an award of more than $100,000, particularly when
considering the consumer may be entitled to compensatory damages, statutory penalties
and attorney fees. (See, e.g., Civ. Code, § 1780.) Although an arbitrator is precluded
from awarding prevailing party attorney fees against a consumer, this same rule does not
21
apply where a prevailing consumer seeks to recover attorney fees against the
seller/creditor. (See Code Civ. Proc., § 1284.3.)
Moreover, a conclusion that both parties may possibly exercise appellate rights is
not the end of our analysis. In Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, the
California Supreme Court held a similar provision in an employment arbitration
agreement was unenforceable because it was unconscionably one-sided. (Id. at pp. 1071-
1074.) In Little, the arbitration clause in the employment contract provided that if the
arbitration award was more than $50,000, either party could appeal the award to a second
arbitrator who would "proceed according to the law and procedures applicable to
appellate review by the California Court of Appeal . . . ." (Id. at p. 1071.) Little held that
even if there was a possibility that the employee would benefit from the appeal provision
because the employer could be a plaintiff in a trade secrets case, the provision was
unconscionable because the employer (the drafting party) failed to adequately explain the
business justification for the $50,000 threshold. (Id. at p. 1073.) In particular, the court
found fault with the $50,000 trigger because it would not be a relevant factor in the
employee's decision to appeal, which the court said would be typically based on the
"potential value of the arbitration claim" compared with "the costs of the appeal," rather
than on an arbitrary monetary threshold. (Ibid.; see also Saika v. Gold (1996) 49
Cal.App.4th 1074, 1080 [finding unconscionable a $25,000 award minimum to trigger a
de novo arbitration].)
In this case, Financial argues that the $100,000 minimum reflects a legitimate
business decision because it will eliminate "outlier" awards. However, where, as here, a
22
consumer purchases a vehicle for $72,000, a $100,000 award against either party would
not necessarily be considered an outlier award. It appears more likely that the drafters of
the arbitration provision included the $100,000-plus finality exception to ensure that the
seller/creditor would have a second chance at arbitration if an award is sufficiently large
to support the expense of a second arbitration. Although this may be a reasonable
business justification, this purpose would generally benefit only the appealing
seller/creditor and not the appealing consumer. As reflected in Little's holding, the
$100,000 trigger is not necessarily a rational basis for a consumer's decision to appeal an
arbitration award. A consumer's decision is instead based primarily on the value of the
claim and the likely costs of the appeal.
In any event, we need not decide if the $100,000-plus exception is unconscionable
by itself because the second finality exception (the injunction exception) raises even
stronger concerns regarding the one-sided nature of the arbitration clause's finality rules.
This exception provides a party with a right to compel a second arbitration before a three-
person arbitration panel if the first award "includes . . . injunctive relief." (Italics added.)
This exception does not provide equivalent appellate rights to the party who does not
prevail on a request for injunctive relief.
The exception advantages only the seller/creditor. Consumers frequently seek
injunctive relief because it is a remedy to protect the public from further unlawful actions
by a defendant. (See People v. Pacific Land Research Co. (1977) 20 Cal.3d 10, 16-20;
Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 103-108.) When buyers bring
statutory consumer claims against sellers/creditors, many of the applicable statutes
23
specifically provide for injunctive relief, regardless of the amount of damages/restitution
awarded. Under such circumstances, a seller/creditor who obtains a judgment between
$0 and $100,000 will have the right to appeal the entire award if the award "includes"
injunctive relief.
However, there is no reasonable possibility that a consumer can take advantage of
this exception because it is unlikely that a seller/creditor will seek or obtain injunctive
relief against a buyer. If a creditor seeks immediate or equitable relief after a default, the
dealer/creditor has the option to exercise its repossession rights or seek a writ of
prohibition in superior court while the arbitration proceeding is pending. (See Code Civ.
Proc., §§ 512.010, 1281.8, subd. (b).) Consumers have no equivalent rights, and must
bring their claims for provisional or permanent equitable relief in the arbitration
proceedings.
Financial argues that "[i]n non-class arbitration, a car buyer will rarely seek or
obtain injunctive relief . . . since the car buyer cannot show a risk that he or she will be
affected by the dealer's same practice in the future." However, in asserting this argument
Financial ignores the various statutory consumer statutes, including California's UCL and
CLRA that specifically provide for injunctive relief to prevent similar harm to others,
even in cases brought individually. (See, e.g., Bus. & Prof. Code, § 17200 et seq.; Civ.
Code, §§ 1750, 1780, subd. (a), 1784.)
We also find unpersuasive Financial's argument that "there is an obvious and
powerful business justification" for the injunctive relief exception because "[a]wards of
that type are unusual and could potentially be devastating to a dealer's continued
24
operation as a business" and the "awards are just the sort of 'outlier' results that the parties
could legitimately think required a second look."
This argument is not supported by any citation to the record or legal authority, nor
is it logically persuasive. Because consumers alleging wrongful conduct frequently seek
equitable remedies, an arbitration award that includes injunctive relief cannot be fairly
characterized as an "outlier." Moreover, an injunction would not necessarily impose
substantial financial burdens on a seller/creditor. For example, in this case, Okudan
brought a Business and Professions Code section 17200 claim seeking to enjoin Financial
from continuing to send NOI's that violate the applicable statutes. If the evidence shows
that the NOI's used by Financial do not comply with applicable law, an injunction would
be appropriate, but would not necessarily "be devastating to a dealer's continued
operation as a business." Significantly, there is no equivalent exception permitting an
appeal for awards against a consumer if the award would be financially "devastating,"
including awards that are less than $100,000 but more than the consumer can afford to
pay.
Additionally, as one federal district court recently recognized, allowing an appeal
of an arbitration award merely because it includes preliminary or permanent injunctive
relief would create substantial delay, undermining the urgency of that type of remedy and
defeating the goals of arbitration to provide a relatively prompt and efficient method for
obtaining necessary relief. (See Trompeter, supra, 2012 WL 1980894, p. *6.)
Financial argues that even if the injunctive relief exception to the finality rule is
not mutual, it is merely a "slight departure" from the bilateral nature of the contract. We
25
disagree. Allowing the seller/creditor to challenge any arbitration award merely because
it contains some form of injunctive relief, while denying the consumer the right to appeal
when an injunction is denied or when the amount of the award is less than $100,000, is
not a "slight" departure from mutuality. It systematically tilts the playing field in favor of
the seller/creditor. (See Trompeter, supra, 2012 WL 1980894, p. *6.)
The unfairness inherent in the arbitration agreement's finality rules is further
evidenced by the requirement that the appealing party advance the full costs of the second
arbitration, including the costs of the three-arbitrator panel. Under this provision, if
Okudan were to appeal an arbitration award, he would be responsible for advancing the
costs and fees of that appeal for both parties, including the fees for the private arbitrators.
Given the common hourly rates of private arbitrators (in the hundreds of dollars), it is
reasonable to conclude that Okudan would face the prospect of advancing a minimum of
$10,000 to appeal an arbitration award. This payment would be required after he was
unsuccessful in obtaining any monetary award or was found liable for more than
$100,000. Further, the arbitration provision does not inform Okudan of the exact amount
required to file an appeal and therefore may have the effect of discouraging him from
appealing. Additionally, there is nothing in this arbitration agreement providing for a
waiver of these upfront fees if Okudan could not afford to pay these fees.
Under analogous circumstances, a California Court of Appeal held a consumer
arbitration agreement unconscionable where the agreement imposed a "substantial
[upfront] administrative fee" and "there [was] no effective procedure for a consumer to
obtain a fee waiver or reduction." (Gutierrez, supra, 114 Cal.App.4th at p. 91.) The
26
Gutierrez court explained: "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." (Ibid.)
Although Gutierrez arose in the context of an initial fee (rather than a fee to appeal), the
logic of its holding extends to the cost provision challenged here. If the fee for an appeal
is so high that it is unlikely that the consumer could bear it, the exceptions to the finality
provision are not mutually beneficial to both parties and become solely one-sided. (See
Lau, supra, 2012 WL 370557, p. *10 ["[s]uch a provision places an unduly harsh burden
on consumers and further discourages them from enforcing their rights"].)
Financial argues that in this case, unlike in Gutierrez, Okudan did not present any
evidence that he could not afford the upfront second-arbitration fees. Generally, in
evaluating the fairness of an arbitration agreement under a substantive unconscionability
analysis, the ability to pay must be evaluated at the time the agreement is signed. (Civ.
Code, § 1670.5; Parada v. Superior Court, supra, 176 Cal.App.4th at p. 1583; Gutierrez,
supra, 114 Cal.App.4th at p. 91.) In his declaration, Okudan said he "cannot afford to
pay arbitration fees." However, Okudan presented no evidence regarding his ability to
pay fees when he signed the sales contract, nor did he present any evidence of the
projected cost amount if he were to request a second arbitration. We agree the lack of
this evidence is a factor in determining whether a cost provision in an arbitration
agreement is unconscionable. However, even without this evidence, the lack of an
effective procedure for a consumer to obtain a waiver of a cost requirement before the
consumer must pay in advance the entire costs of an arbitration proceeding, which
27
include the costs of a three-arbitrator panel, is an important factor in the
unconscionability analysis. (See Gutierrez, supra, 114 Cal.App.4th at pp. 91-92.)
Financial relies on Green Tree Financial Corp.-Ala. v. Randolph (2000) 531 U.S.
79 (Green Tree), to argue that these arbitration costs are not relevant to show
unconscionability. In Green Tree, the plaintiff asserted a federal statutory consumer
claim against a lender and contended the arbitration agreement between the parties
(which was silent on the cost of arbitration) was unenforceable because the arbitration
would be too expensive. (Id. at pp. 82-84.) Rejecting this claim, the United States
Supreme Court held an arbitration agreement silent on arbitration costs is not per se
unenforceable without a showing that the plaintiff will actually be required to bear the
costs of the proceeding. (Id. at pp. 89-92.) The court reasoned that although "[i]t may
well be that the existence of large arbitration costs could preclude a litigant . . . from
effectively vindicating her federal statutory rights," the litigant bears the burden of
showing the likelihood of incurring such costs. (Id. at pp. 90-91.) Under this rule, the
court found "the record does not show that [the litigant] will bear such costs if she goes to
arbitration" and thus the " 'risk' that [the litigant] will be saddled with prohibitive costs is
too speculative to justify the invalidation of an arbitration agreement." (Ibid.; see also
Parada v. Superior Court, supra, 176 Cal.App.4th at pp. 1575-1576.)
Green Tree does not support Financial's argument that a requirement that a
consumer bear the advance costs of a second arbitration has no relevance to California's
unconscionability analysis or that we cannot consider the issue without a full factual
record of the consumer's ability to pay. Here, unlike in Green Tree, the arbitration
28
agreement provides that if Okudan wishes to appeal an award, he will be required to pay
in advance all costs, which (as explained above) are certain to be substantial. This is a
relevant factor in the unconscionability analysis.
In sum, we have determined that when considered together, three provisions
relating to the finality of the arbitration award combine to deny Okudan the mutual
benefits of the arbitration agreement and are substantively unconscionable: (1) the
exception to finality for awards that are more than $100,000; (2) the exception to finality
for an award that "includes" injunctive relief; and (3) the requirement that the appealing
party advance both parties' costs for the second arbitration with a three-arbitrator panel.
The parties' arbitration agreement provides a streamlined and efficient procedure when it
serves the needs of the seller/creditor, but when such needs are not served—for example
when the award is more than $100,000 or includes injunctive relief—the buyer is then
subjected to delay and complexity. Moreover, without any waiver for a consumer who
cannot afford to pay for an appeal, the requirement that the appealing party advance the
full cost of the arbitration (including the fees for the three arbitrators) makes it likely that
the seller/creditor will be the only party to take advantage of the appeal procedures.
Considered together, these three challenged provisions are moderately substantively
unconscionable. Under the sliding-scale test, these provisions cannot be enforced
because we have found that the contract was also moderately procedurally
unconscionable.
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IV. Severance
Civil Code section 1670.5, subdivision (a) provides: "If the court as a matter of
law finds the contract or any clause of the contract to have been unconscionable at the
time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause so as to avoid any unconscionable result." A
trial court has broad discretion to determine whether severance is appropriate in a
particular case. (Murphy v. Check 'N Go of California, Inc. (2007) 156 Cal.App.4th 138,
144.)
The trial court refused to sever the unconscionable provisions because it found the
arbitration agreement was "permeated with unconscionability" and this problem could not
"be cured by severing the offensive provisions . . . ." This conclusion was based on the
court's finding that there were multiple unconscionable provisions. In this opinion, we
have concluded that the court erred in finding the self-help/small-claims exceptions are
unconscionable, and that the unconscionable portions of the arbitration agreement relate
solely to the rules regarding the finality of an arbitration award. On remand, the court
should reconsider its severance ruling based on a correct analysis of which provisions are
unconscionable.
V. Okudan's Additional Arguments
Okudan contends an alternate basis for affirming the court's order is to determine
that Financial waived its right to seek arbitration by waiting until Okudan amended his
complaint to add class allegations. Because the waiver issue is a matter for the trial
30
court's discretion in the first instance, it would not be appropriate for this court to reach
Okudan's contentions before the trial court has had the opportunity to address the issue.
If, on remand, the court finds that the unconscionable portions of the agreement can be
severed and thus the agreement is enforceable, the court should address the waiver
argument.
We also reject Okudan's argument that the court erred in finding that Financial
adequately proved the arbitration agreement by its submission of its collections manager's
declaration. Substantial evidence supports the trial court's factual finding that the parties
entered into the arbitration agreement and that the contract was the industry standard
form contract. For purposes of the motion to compel, there was no dispute over the
contents of the agreement.
31
DISPOSITION
The court is ordered to vacate its order denying Financial's motion to compel
arbitration and to consider whether to sever the provisions found unconscionable in this
opinion. If the court finds the unconscionable provisions can be severed, the court should
consider and rule on Okudan's argument that Financial waived its right to compel
arbitration. If the court finds the provisions can be severed and that there was no waiver,
it should grant Financial's motion to compel the arbitration.
The parties to bear their own costs on appeal.
HALLER, Acting P. J.
WE CONCUR:
AARON, J.
IRION, J.
32