Judge: Daniel S. Murphy, Case: 22STCV33579, Date: 2023-03-03 Tentative Ruling

Case Number: 22STCV33579    Hearing Date: March 3, 2023    Dept: 32

BACKGROUND

            On October 14, 2022, Plaintiff Richard Aguilar filed this action against Defendants Shift Operations LLC, American Contractors Indemnity Company, and US Bancorp arising from Plaintiff’s purchase of a used vehicle. The complaint asserts causes of action for (1) violation of the Consumer Legal Remedies Act, (2) fraud, (3) negligent misrepresentation, (4) violation of the Unfair Competition Law, and (5) violation of the Vehicle Code.

            On January 27, 2023, Defendants Shift Operations LLC and US Bancorp filed the instant motion to compel arbitration based on an arbitration provision in the Retail Installment Sale Contract (RISC) that Plaintiff signed upon purchasing the vehicle. Plaintiff does not dispute consenting to arbitration, but the parties are at odds over the arbitration provider.

LEGAL STANDARD

The Federal Arbitration Act (FAA) states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . 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.) The term “involving commerce” is interpreted to mean simply “affecting commerce” to give the FAA the broadest reach possible, and does not require a transaction that is actually “within the flow of interstate commerce.” (See Allied-Bruce Terminix Co. v. Dobson (1995) 513 U.S. 265, 273-74; Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 56.) Moreover, parties may agree to apply the FAA notwithstanding any effect on interstate commerce. (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 355.)

California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.) The California Arbitration Act (CAA) states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that 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….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

DISCUSSION

I. Existence of Valid Agreement

            The RISC contains the following provision: “Any claim or dispute, whether in contract, tort, statute or otherwise . . . 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 . . . shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action.” (Chu Decl., Ex. A.) Plaintiff’s claims arise from his purchase of the vehicle and its alleged defects. Therefore, the claims are covered by the arbitration provision.

Plaintiff signed the RISC in multiple places, including in a box labeled “Agreement to Arbitrate” which confirms that Plaintiff agreed to abide by “the Arbitration Provision on page 7 of this contract . . . .” (Ibid.) Plaintiff does not dispute that he signed the arbitration agreement and is not opposed to arbitration. Therefore, Defendants have presented sufficient evidence of a valid arbitration agreement.  

II. Arbitration Provider

            The primary dispute on this motion arises from the parties’ disagreement over the arbitration provider. Defendants insist on AAA as the more cost-effective and efficient provider, while Plaintiff prefers JAMS for the broader discovery procedures. The arbitration provision reads: “You may choose the American Arbitration Association, 1633 Broadway, 10th Floor, New York, New York 10019 (www.adr.org), or any other organization to conduct the arbitration subject to our approval.” (Chu Decl., Ex. A.) Pursuant to this clause, Defendants rejected Plaintiff’s choice of JAMS and move to proceed with AAA. Plaintiff argues that the provision gives him a choice of arbitration provider, and he has chosen JAMS.

            a. Plaintiff’s Right to Select a Provider

            Plaintiff begins by arguing that he “holds the exclusive right to select the arbitration forum.” (Opp. 4:2-9.) However, the arbitration clause plainly states that any provider other than AAA is “subject to [Defendants’] approval.” (Chu Decl., Ex. A.) Therefore, Plaintiff does not have the exclusive right to select the provider. Rather, Plaintiff’s choice is subject to Defendants’ approval. In this case, Defendants do not approve of Plaintiff’s choice of JAMS.

            b. Good Faith and Fair Dealing

            “The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-50.) “The implied covenant cannot contradict the express terms of a contract . . . [and] cannot be used to limit or restrict an express grant of discretion to one of the contracting parties.”  (Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC (2010) 185 Cal.App.4th 1050, 1061.) Nevertheless, “a discretionary power must be exercised in good faith.” (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 804.)

            The arbitration clause in this case grants Defendants the discretion to approve or reject Plaintiff’s choice of provider. Defendants must exercise this discretion in good faith. Plaintiff argues that Defendants committed bad faith by “unreasonably rejecting Plaintiff’s choice, JAMS, and refusing to submit to any arbitrator other than AAA.” (Opp. 4:21-22.) However, Defendants reasonably rejected JAMS based on concerns over cost and efficiency. The very purpose of arbitration is to serve as a cheaper, expedited alternative to litigation. Therefore, Defendants acted in good faith by selecting the provider that they believe to be the most cost-effective and efficient.

            c. Discovery Under AAA

            Plaintiff’s issue with AAA is that AAA rules do not adequately provide for discovery. (Opp. 5:1-7.) Under AAA rules, “[i]f any party asks or if the arbitrator decides on his or her own . . . the arbitrator may direct . . . specific documents and other information to be shared between the consumer and business . . . .” (AAA Rule 22(a).) The arbitrator also has discretion to order additional discovery if they determine that “further information exchange is needed to provide for a fundamentally fair process.” (Rule 22(c).) Therefore, an AAA arbitrator has discretion to allow as much discovery as needed, including up to the level that JAMS provides. Plaintiff cites no authority finding AAA discovery procedures to be inadequate. There is no indication that AAA regularly denies necessary discovery.

d. Selection of the Arbitrator Under AAA

            Plaintiff takes further issue with AAA because AAA appoints an arbitrator from its confidential National Roster, whereas JAMS uses a rank-and-strike system. (Opp. 5:15-19.) However, AAA only resorts to the National Roster when “the parties have not appointed an arbitrator and have not agreed to a process for appointing the arbitrator.” (AAA Rule 16(a).) In this case, Defendants agree to use the rank-and-strike system. (Sidran Reply Decl. ¶ 4.) Therefore, the parties can stipulate to the rank-and-strike process, and AAA will follow it.

III. Unconscionability

Unconscionability has both a procedural and a substantive element. (Aron v. U-Haul Co. of California (2006) 143 Cal.App.4th 796, 808.) Both elements must be present for a court to invalidate a contract or clause. (Ibid.) However, the two elements need not be present in the same degree; courts use a sliding scale approach in assessing the two elements. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 242.)

Procedural unconscionability “focuses on two factors: ‘oppression’ and ‘surprise.’ ‘Oppression’ arises from an inequality of bargaining power which results in no real negotiation and ‘an absence of meaningful choice.’ ‘Surprise’ involves 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.” (Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 484, internal citations and quotations omitted.) Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create overly harsh or one-sided results as to shock the conscience. (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1515.)    

            Plaintiff argues that the agreement is adhesive. (Opp. 6:20-25.) However, an adhesion contract, by itself, presents only a minimal degree of procedural unconscionability. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.) Additionally, the contract here was not one for employment, but for the purchase of a used vehicle. The economic pressure to sign the agreement is significantly less in this instance. Plaintiff also argues that “Defendants’ position that Plaintiff may only arbitrate his claims with AAA is substantively

unconscionable because it robs Plaintiff of a ‘valuable contractual right’ and leaves him with an ‘absence of meaningful choice.’” (Opp. 7:20-22.) However, Plaintiff cites to caselaw finding unconscionability where agreements granted one party the unilateral right to select the arbitrator. (See Opp. 5:7-19.) That is not the case here. The parties in this case will either mutually use the rank-and-strike system, or AAA will select from its National Roster without input from either party. Either way, Defendant will not unilaterally select the arbitrator.

            The “valuable contractual right” that Plaintiff extracts from these cases refers to “the right of contractual parties to provide for the resolution of contractual disputes by arbitral machinery of their own design and composition.” (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 824.) This actually supports granting Defendants’ motion because the parties here have agreed to arbitrate through AAA unless Defendants approve another provider. (Chu Decl., Ex. A.) Forcing the arbitration to proceed through JAMS despite Defendants’ disapproval would violate the parties’ contractual right to outline their own terms of arbitration.

            Lastly, there is no indication of a “significant risk of financial interdependence between Defendants and the arbitrators, and an opportunity for Defendants to gain an advantage.” (See Opp. 7:23-25.)

IV. Code of Civil Procedure section 1281.6

            Plaintiff’s request for the Court to appoint an arbitrator is unnecessary because Section 1281.6 applies only when the parties cannot agree on a selection method or the method cannot be used for some reason. Here, it appears that both parties prefer the rank-and-strike process. If the parties agree on a method of selection, the Court does not need to intervene.

CONCLUSION

            Defendants’ motion to compel arbitration is GRANTED. Arbitration shall proceed through AAA. The Court hereby stays the case in its entirety.