Sanchez v. Valencia Holding Company: Court of Appeal Strikes Down Class Action Ban

In another decision suggesting that reports of the death of class actions are greatly exaggerated, California’s Court of Appeal has affirmed a trial court order striking down an arbitration clause that included a class action waiver in Sanchez v. Valencia Holding Co., ___ Cal. App. 4th ___ (2011) (available here).

 Although the Court of Appeal upheld the trial court’s decision, it did so on different grounds, underscoring the continued vitality of California’s unconscionability doctrine.  In Sanchez, a consumer class action, the defendant car dealer moved to compel arbitration pursuant to an arbitration clause embedded in the sales agreement between the plaintiff and the defendant.  Slip op. at 1.  The arbitration clause included a class action waiver and a “poison pill” provision, whereby the entire arbitration clause would be held unenforceable if the class action waiver were found unenforceable.  Id. at 7.  The trial court determined that the class action waiver was unenforceable on the ground that a consumer is statutorily entitled to maintain a CLRA suit as a class action, pursuant to California Civil Code section 1781.  Id.  On that basis, the trial court invalidated the entire arbitration clause, consistent with the sales contract’s severance provision.  Id.  The Court of Appeal reached the same ultimate conclusion as the trial court—that the arbitration clause is unenforceable—but based its decision on the unconscionability doctrine, rather than on the sales contract’s severance provision.

The Court of Appeal noted that while the U.S. Supreme Court’s opinion in AT&T v. Concepcion decried the Discover Bank rule and its attendant unconscionability analysis with regard to class action waivers, the U.S. Supreme Court left untouched California’s general unconscionability doctrine, which may still be employed to invalidate arbitration clauses in their totality.  See id. at 11-12.  The court found Concepcion to be inapplicable to situations where an entire arbitration provision is at issue, rather than merely “a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purposes of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1–16).”  Id. at 12.