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California Upholds Controversial Arbitration Clause

Saturday, August, 15, 2015


California, long known for its flouting of federal arbitration law, appears to be changing its tune. In a recent decision the California Supreme Court decided to abide by the US Supreme Court’s interpretation of federal arbitration law. This reversal decision came after a trial court and an appellate court ruled the arbitration clause contained in a consumer contract was unconscionable.

 

The clause that was the center of the case was created by Mercedes-Benz. The buyer in the case alleged the company made false representations concerning the car’s condition and that it violated state laws about various charges and fees. The buyer was interested in starting a class action with other buyers who were affected. Instead, the seller requested arbitration, which was denied by the trial court and the Court of Appeals, but the state Supreme Court granted.

 

There were several issues in question, including:

 

  • A take it or leave it basis for the vehicle purchase
  • An arbitration clause on the back of the contract when the buyer only needed to sign the front page
  • Possibility of an appeal of a three-person arbitration panel only if the award was $0 or greater than $100,000. The appealing party would also be responsible for fees and costs of the appeal.
  • Mercedes-Benz retained the ability to repossess the vehicle
  • A preclusion for the buyer from arbitrating on a class or consolidated basis

 

The State Supreme Court’s decision put California into the mainstream on the unconscionability of arbitration agreements and provided useful guidance for the state courts about how to find in cases concerning arbitration clauses.