Case Number: BC528581    Hearing Date: August 22, 2014    Dept: 32

CASE NAME: Rachel L. Reed, et al. v. Miller – DM, Inc., et al.
CASE NO.: BC528581
HEARING DATE: 08/22/14
DEPARTMENT: 32
CALENDAR NO.: 14
SUBJECT: Petition to Compel Arbitration and Request for Stay of Proceedings
MOVING PARTY: Defendant Miller – DM, Inc., dba Mercedes Benz of Beverly Hills
RESP. PARTY: Plaintiffs Rachel L. Reed and Linda F. Reed

COURT’S TENTATIVE RULING

Petition to Compel Arbitration and Request for Stay of Proceedings GRANTED. However, the parties should be prepared to discuss the question of whether JAMS should be the forum for the arbitration.

BACKGROUND

This case arises from the purchase of a certified pre-owned Mercedes Menz vehicle from defendant Miller-DM dba Mercedes Benz of Beverly Hills (“MBBH”) on April 26, 2013 for $38,600. The Plaintiffs are a daughter (Rachel Reed) and her mother (Linda Reed), who co- signed for the purchase. Plaintiff Rachel Reed drove from Santa Cruz to Beverly Hills to complete the purchase after receiving the proposed purchase agreement in the mail and having her mother co-sign. The subject contract has an arbitration provision which is governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. The agreement provides that the customers, Plaintiffs herein, may choose “the American Arbitration Association… or any other organization to conduct the arbitration subject to our approval.”

Shortly after purchase, a dispute developed over the condition of the vehicle and the representations that had allegedly been made by the selling dealer. This action followed. Defendant MBBH has filed a petition to compel arbitration. Plaintiffs have opposed the petition and alternatively asked the court to grant the motion subject to the arbitration being conducted at the Judicial Arbitration and Mediation Service, i.e., JAMS.

For the reasons set forth below, the court is inclined to grant the petition and direct that the matter between these contracting parties proceed to arbitration. Since the agreement gives the Plaintiffs the ability to select the forum, (“You may choose….”) subject to MBBH’s consent, the issue of the forum will be discussed further at the hearing. In order to avoid making the provision allowing for the customer to select a forum subject to approval illusory, it would appear that any disapproval by MBBH would have to be reasonably based. (See 300 DeHaro Street Investors v. Department of Housing and Community Development (2008) 161 Cal.App.4th 1240, 1253 [“It has long been the rule in California that ‘where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.’”].) JAMS is a recognized and nationally known dispute resolution provider and MBBH has not offered a substantive reason why it would not be suitable for the arbitration.

ANALYSIS

The CCP provides as follows: “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate a controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (CCP § 1281.2.) The right to compel arbitration exists unless the court finds that the right has been waived by a party’s conduct, other grounds exist for revocation of the agreement, or where a pending court action arising out of the same transaction creates the possibility of conflicting rulings on a common issue of law or fact. (CCP § 1281.2(a)-(c).)

Existence of Arbitration Agreement

There is no dispute over the existence of the arbitration agreement. The evidence reflects that Plaintiffs signed a retail installment sale contract (the “Sale Contract”) for the purchase of the subject vehicle, and that this contract contains an arbitration clause. It appears from the face of the Sale Contract that Plaintiffs executed the agreement on April 26, 2013. (Mot. Exh. A.) Plaintiff Rachel Reed states in her declaration that Defendant mailed the Sale Contract to Plaintiffs, apparently in Santa Cruz, California, so that her mother, Linda Reed, could sign the contract as a co-signor. (Reed Decl. ¶¶ 5-6.) Plaintiff Rachel Reed thereafter drove alone from Santa Cruz to Beverly Hills to complete the transaction, and she apparently signed the Sale Contract while at Defendant’s finance department. (Id. ¶¶ 7-14.)

The Sale Contract includes a provision on the front page, signed by Plaintiffs, which states the following: “Agreement to Arbitrate: By signing below, you agree that, pursuant to the Arbitration Provision on the reverse side of this contract, you or we may elect to resolve any dispute by neutral, binding arbitration and not by a court action. See the Arbitration Provision for additional information concerning the agreement to arbitrate.” (Mot. Exh. A.)

The Arbitration Provision on the reverse side of the contract is not separately signed by Plaintiffs and did not include a space for Plaintiffs to sign or initial. The Arbitration Provision states “any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Provision, and the arbitrability of the claim or dispute), between you and us …, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship … shall, at your or our election, be resolved by neutral, binding arbitration.” (Mot. Exh. A.)

Based on the foregoing, Defendant has met its moving burden of showing that Plaintiffs signed an arbitration agreement. Defendant submits evidence that it demanded that the parties submit this action to arbitration and that Plaintiffs have not responded to that demand. (See Molino Decl. ¶ 14 and Exh. F, I.) The arbitration agreement broadly applies to all claims arising out of the sales transactions and, in any event, it delegates the issue of arbitrability to the arbitrator. Thus, Defendant shifted the burden to Plaintiffs to show a defense to arbitration.

Federal Arbitration Act (FAA) and Unconscionability Analysis

There is also no dispute that the FAA applies to the agreement. The Arbitration Provision states that the arbitration shall be governed by the FAA. Plaintiffs do not dispute in opposition that the FAA governs the Arbitration Provision.

Federal law allows a court to invalidate an arbitration agreement insofar as it is an unconscionable contract. Section 2 of the FAA permits an arbitration agreement to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) Unconscionability is a general principle of law under which any contract, not just an arbitration agreement, may be invalidated. (Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 [fraud, duress, and unconscionability “may be applied to invalidate arbitration agreements without contravening § 2.”].)

Unconsionability

In opposition, Plaintiffs contend that the arbitration agreement is unconscionable. Thus, the court addresses that issue below.

Both procedural and substantive unconscionability are required to invalidate an arbitration clause. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113.) Procedural unconscionability focuses largely on oppression and the manner in which the agreement was negotiated; substantive unconscionability focuses on the terms of the agreement and the presence of overly harsh or one-sided results. (Ibid.) The two aspects need not be present to the same degree, as the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. (Ibid.)

In Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, the California Supreme Court provided the following discussion of unconscionability analysis:

[T]he core concern of unconscionability doctrine is the “ ‘ “absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” ’ ” Unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as “ ‘ “overly harsh” ’ ”, “unduly oppressive”, “ ‘so one-sided as to “shock the conscience” ’ ”, or “unfairly one-sided.” [Internal citations omitted.] [¶¶]

[After Concepcion], courts may examine the terms of adhesive arbitration agreements to determine whether they are unreasonably one-sided. What courts may not do, in applying unconscionability doctrine, is to mandate procedural rules that are inconsistent with fundamental attributes of arbitration, even if such rules are “desirable for unrelated reasons.”

(Sonic II at 1143-1145.)

Procedural Unconscionability

Plaintiffs contend that the Arbitration Provision is procedurally unconscionable because Plaintiffs were presented with the Sale Contract on a “take it or leave it” basis; there was no opportunity to negotiate; and Plaintiffs were never informed that the Sale Contract contained an arbitration clause. Plaintiffs further argue that the arbitration clause was hidden on the reverse side of the contract and written in small-sized font. Plaintiffs contend that they were not required to initial the arbitration clause on the reverse side of the Sale Contract. For the reasons noted below, none of these arguments are persuasive under the circumstances of this case.

First, as discussed above, Plaintiff Rachel Reed states in her declaration that Defendant mailed the Sale Contract to Plaintiffs, apparently in Santa Cruz, California, so that Rachel’s mother, Linda Reed, could sign the contract as a co-signor. (Reed Decl. ¶¶ 5-6.) This evidence suggests that Plaintiffs had substantial time to review the Sale Contract if they were so inclined. Plaintiffs present no evidence that they asked if Defendant would negotiate the Arbitration Provision. Since this was a purchase for an expensive automobile for $ 38,600, Plaintiffs presumably had some bargaining power as well as other alternatives. As Defendant notes, there are other car dealers who presumably would be able to sell Plaintiffs an equivalent car, as well as private parties. Moreover, even assuming arguendo that this was an adhesion contract, “the mere fact an adhesion contract is involved does not per se render the arbitration clauses unenforceable.” (Rutter Guide, Cal. Prac. Guide Alt. Disp. Res. Ch. 5-D ¶ 5:146.)

Plaintiffs argue that Defendant never informed them of the existence of the Arbitration Provision. The actual Arbitration Provision is presented in small-sized font and on the reverse side of the Sale Contract. However, the Arbitration Provision is clearly demarcated with bold and capitalized letters and also warns the reading “PLEASE REVIEW – IMPORTANT – AFFECTS YOUR LEGAL RIGHTS.” Further, Plaintiffs signed a provision on the front of the Sale Contract that explicitly stated that the Arbitration Provision was located on the reverse side of the contract and that Plaintiffs agreed to its terms. The general rule is that “one who signs an agreement cannot avoid its terms on the ground that he failed to read it.” (Bolanos v. Khalatian (1991) 231 Cal.App.3d 1586, 1590.)

Plaintiffs also contend that there is procedural unconscionability because Defendant did not include a copy of the AAA rules with the arbitration agreement, even though the AAA rules are incorporated in the agreement. Courts have held that the failure to include the AAA rules adds “a bit” to procedural unconscionability. (See e.g. Zullo v. Sup. Ct. (2011) 197 Cal.App.4th 477, 486.) The agreement does, however, state that the rules may be obtained on the AAA’s website. In addition, the cases involving this issue generally give reasons why the failure to attach the applicable rules prejudiced the plaintiff by failing to provide notice of an onerous term of the agreement. (See Zullo at 486; cf. Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 722 [failure to include AAA rules prejudicial because AAA rules conflicted with discovery provision in the arbitration agreement].) In opposition, Plaintiffs do not persuasively show that the failure to attach the AAA rules prejudiced Plaintiffs in any way. (Oppo. 8-9.) Also, since Plaintiffs were sent the Sale Contract by mail, they presumably could have obtained a copy of the AAA Rules on the internet before driving to Southern California to complete the purchase.

Based on the foregoing, at best for Plaintiffs, the evidence shows only at most a slight degree of procedural unconscionability.

Substantive Unconscionability

To establish substantive unconscionability, Plaintiffs contend that the Arbitration Provision lacks mutuality because the parties retained the right to seek remedies in small claims court and the parties would not waive the right to arbitration by using self-help remedies such as repossession or by filing a claim to recover the vehicle or seek a deficiency balance. Plaintiffs also contend that the Arbitration Provision imposes unreasonable arbitration and attorney fees on Plaintiffs. These issues will be discussed in turn.

Lack of Mutuality

In assessing substantive unconscionability, the “paramount consideration” is mutuality of the obligation to arbitrate. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1287.)

In pertinent part, the Arbitration Provision states the following: “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, such as repossession, or by filing an action to recover the vehicle, to recover a deficiency balance, or for individual injunctive relief.”

The exception to arbitration of small claims matters is clearly bilateral. The language of the Arbitration Provision states that “you and we” may sue in small claims court. Plaintiffs have set forth no authorities or argument that would suggest such an exception is unconscionable, or that Defendant would be more likely than Plaintiffs to sue in small claims court. Moreover, an exception for small claims matters appears consistent with the goal of arbitration to keep the costs related to any dispute to a minimum.

The parties also agreed that they would not “waive the right to arbitrate by using self-help remedies, such as repossession, or by filing an action to recover the vehicle, to recover a deficiency balance, or for individual injunctive relief.” In reply, Defendant cites case authority stating that a similar provision was not unconscionable. (See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825, 845, fn. 21.) In Arguelles-Romero, the arbitration provision stated the following: “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.” The Court of Appeal held that this provision was not unconscionable because “it is apparent that, contrary to plaintiffs’ assertion, if AmeriCredit [the defendant] were to sue a debtor to obtain a deficiency, as long as that deficiency exceeded the jurisdictional limit of small claims court, the debtor could compel arbitration. Thus, the arbitration clause is clearly bilateral, and not unconscionable.” (Ibid.)

Although Plaintiffs have not yet responded to Arguelles-Romero, they could argue that the language in the instant case might be read to permit Defendant to file suit for a deficiency balance regardless of whether the amount is within small claims jurisdiction. However, importantly, the Arbitration Provision only states that the parties “retain the right” to sue in small claims court, not that they “retain the right” to sue for a deficiency balance regardless of amount. Although they do not waive the right to arbitrate by suing in court for a deficiency balance, this sentence is most reasonably interpreted in context, as in Arguelles-Romero, so that Plaintiffs could compel the deficiency action to arbitration so long as it exceeded the jurisdictional limit of small claims court. This interpretation gives full meaning to the language of the two critical sentences quoted in Plaintiff’s opposition at page 10. The parties agreed to “retain the right” to sue in small claims court, but only agreed that they would not “waive the right to arbitration” by suing for recovery of the vehicle or for a deficiency balance. Finally, there is no factual basis to conclude that Defendants would be likely to bring claims for a deficiency balance exceeding the jurisdictional limit of small claims court. Thus, considering the strong policy in favor of arbitration and the small degree of procedural unconscionability, the court cannot find that this provision is substantively unconscionable in the context of this case.

Insofar as there is an exception for injunctive relief, such exception is also bilateral. Plaintiffs also fail to show that Defendant would be more likely to sue for injunctive relief. Thus, the injunctive relief exception is also not unconscionable. (See Htay Htay Chin v. Advanced Fresh Concepts Franchise Corp. (2011) 194 Cal.App.4th 704, 712 [injunctive remedy exception in the arbitration provision was not unconscionable].)

Arbitrator and Attorney Fees

The Arbitration Provision states the following in pertinent part: “We will
pay your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $5000, unless the law or the rules of the chosen arbitration organization require us to pay more. The amount we pay may be reimbursed in whole or in part by decision of the arbitrator if the arbitrator finds that any of your claims is frivolous under applicable law. 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 Provision, then the provisions
of this Arbitration Provision shall control.”

Plaintiffs submit evidence that the JAMS arbitration rules limit the consumer plaintiff’s arbitration costs to $250, and state that the consumer cannot be required to pay the fees and costs of the opposing party if the consumer does not prevail. The AAA rules similarly limit the arbitration fee to the consumer to $200 “unless the parties’ agreement provides that the consumer pay less.” (Oppo. 12.)

Plaintiffs contend that the Arbitration Provision conflicts with the JAMS and AAA rules because it provides that Defendant will only pay up to $5,000 for Plaintiffs’ arbitration fees and costs, and that Plaintiffs could have to pay those amounts back if Plaintiffs do not prevail. Plaintiffs state that, because the Arbitration Provision expressly controls over the arbitration organization rules, Defendant could refuse to pay more than $5,000.

These arguments are unpersuasive. First, Plaintiffs submit insufficient evidence to establish that their share of the arbitrator fees would be likely to exceed $5,000. Thus, it seems speculative on this record to conclude that this provision would come into play. More importantly, however, the Arbitration Provision expressly states that Defendant would pay more than $5,000 if “the law or the rules of the chosen arbitration organization require us to pay more.” The JAMS and AAA rules limit Plaintiffs’ arbitration fees to $250 and $200, respectively, and therefore do not permit Plaintiffs to pay more than that amount. Thus, pursuant to the terms of the Arbitration Provision, Defendant would be required to pay any arbitration fees exceeding $5,000 assuming the parties arbitrated before a JAMS or AAA arbitrator. Plaintiffs identify no conflict between the Arbitration Provision and JAMS or AAA rules on this issue.

Plaintiffs also contend that the provision allowing the arbitrator to award fees and costs to Defendant if Plaintiffs lose and the action is deemed “frivolous” violates CCP § 1284.3. Under this statute, “no neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party if the consumer does not prevail in the arbitration ….” (CCP § 1284.3(a) [emphasis added].) However, as argued in reply at page 8, the sentence relating to possible reimbursement for “frivolous” claims directly follows the sentence starting “we will pay your filing, administration, service or case management fee and your arbitrator or hearing fee….” (emphasis added). The two sentences are most reasonably interpreted to relate to one another and should be read in context. (See Civ. Code § 1641.) The reimbursed amount reasonably refers to the arbitrator fees paid on the consumer’s behalf, not the fees of the seller. Thus, the provision does not violate CCP § 1284.3.

Selection of AAA Arbitrator

Plaintiffs object to Defendant’s selection of AAA as the arbitrator, apparently on the basis that the AAA would have an institutional bias toward Defendant. (Oppo. 14.) Plaintiffs alternatively ask the court to order any arbitration to be held before JAMS. As to alleged bias of AAA, Plaintiffs present insufficient evidence to support any reasonable inference of bias.

The more significant issue however, is whether JAMS should be the forum based on the agreement. While the court cannot rewrite the terms of an agreement, the agreement that is the subject of the petition expressly allows Plaintiffs to “choose” either AAA or another organization subject only to Defendant’s “approval.” In order to effectuate the intent of the parties giving Plaintiffs a choice, the court should interpret any approval or disapproval of Plaintiffs’ choice to be subject to a reasonableness standard. Otherwise, the provision giving Plaintiffs a “choice” would be illusory. California law clearly eschews such a result. (See, e.g., Civil Code §§ 1643, 3541; see also 300 DeHaro Street Investors v. Department of Housing and Community Development (2008) 161 Cal.App.4th 1240, 1253.) To do otherwise could raise other issues in the unconscionabllity analysis. Defendant has not offered any reason why JAMS would not be suitable.

Severance

A court has discretion to sever an unconscionable term to save an otherwise enforceable arbitration agreement. (Civ. Code § 1670.5.) Here, severance is not an issue because the court finds no unconscionable terms in the Arbitration Provision.

Risk of Conflicting Rulings

In the alternative to the arguments discussed above, Plaintiffs contend that arbitration should be denied because of the risk of conflicting rulings as to the Defendants that did not sign the arbitration agreement.

“If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c) herein, the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.” (CCP § 1281.2.)

“When the FAA applies, it preempts any contrary state law and is binding on state as well as federal courts. [Citations.] The FAA requires courts to enforce arbitration provisions. (9 U.S.C., § 2.) It does not authorize courts to stay arbitration pending resolution of litigation, or to refuse to enforce a valid arbitration provision to avoid duplicative proceedings or conflicting rulings.” (Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1263.)

Here, Plaintiffs do not dispute that the Arbitration Provision is governed by the FAA. Accordingly, the court cannot refuse to enforce the Arbitration Provision pursuant to CCP § 1281.2. Moreover, the decision to deny arbitration under CCP § 1281.2 is discretionary, and, given the strong policy of enforcing arbitration agreements, Plaintiffs have not made a sufficient showing of probable inconsistent rulings under § 1281.2(c) to support denial of the petition. (See Oppo. 13-14.)

The petition is GRANTED, subject to a further order on the arbitral forum.
_____________________________________________
1
There is some inconsistent language in Defendant’s moving papers and proposed order suggesting that it has also brought the petition on behalf of Defendant Hartford Fire Insurance Co., which was not a party to the Sale Contract or Arbitration Provision. Defendant asserts no argument suggesting that Hartford Fire Insurance Co. can compel Plaintiffs to arbitrate. In any event, the court interprets the petition as only requesting arbitration between Plaintiffs and Defendant Miller – DM, Inc., dba Mercedes Benz of Beverly Hills, and only grants the petition as to that Defendant.
_________________________________________
2
Plaintiffs submit no argument or evidence suggesting the parties would arbitrate before a different arbitration organization.

_______________________________________________
3
While Plaintiffs also have not cited any authority to compel Defendant to agree to use JAMS. (See Oppo. 15.), both CCP § 1281.6 and 9 U.S.C. § 5 would appear to give authority to the court to select the arbitrator if there were a disagreement. This issue will be further discussed at the hearing.