Judge: Mark H. Epstein, Case: 23SMCV01630, Date: 2023-08-09 Tentative Ruling
Case Number: 23SMCV01630 Hearing Date: August 9, 2023 Dept: R
The motion to compel arbitration is GRANTED. The matter is STAYED pending the
arbitration’s outcome. The request for
judicial notice is GRANTED.
This is a Song-Beverly case. Plaintiff bought a Tesla and claims that Tesla has an obligation to repurchase the car due to its inability to fix certain problems. Defendant moves to compel arbitration. Defendant cites to two arbitration agreements: one in the contract in which plaintiff ordered the car and the other in the contract by which plaintiff actually bought it.
Arbitration provisions are favored in both California and under federal law. But that said, such agreements are subject to the normal contract defenses, including unconscionability. The burden is on the party moving to compel arbitration to demonstrate there is an enforceable agreement. If there is, the burden shifts to the opposing party to demonstrate some kind of defense thereto. (Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276.) That is a decision for the court, not a jury and not the arbitrator. (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955.) The Federal Arbitration Act (FAA) governs contracts involving interstate commerce and preempts California law that is contrary to the FAA. But that said, the court does not find any conflict pertinent here.
Defendant claims that there are two separate arbitration provisions that are operative. The court is not so sure. The court’s reading is that the second supersedes the first. Moreover, the second is actually signed. The court views the second agreement as the operative one. Although the court does not view the first agreement as operative (because it was superseded), it only takes one agreement to satisfy the requirement.
The second arbitration agreement is broadly worded, and covers the instant dispute. It states that “Any 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 and not by court action.” That is broad enough to cover Song-Beverly claims.
Plaintiff does not really dispute as much. Rather, plaintiff claims that the contract (and specifically the arbitration agreement) is unconscionable. Unconscionability is a generally applicable contract defense and may be applied to an arbitration agreement without violating the FAA. (OTO, LLC v. Kho (2019) 8 Cal.5th 111.) It is plaintiff’s burden to show that the contract is in fact unconscionable. (Szetela v. Discovery Bank (2002) 97 Cal.App.4th 1094.) That requires a showing, on a sliding scale basis, of both procedural and substantive unconscionability. The former goes to the manner in which the contract was created and the latter goes to the contract’s specific terms.
Plaintiff contends that the contract is procedurally unconscionable because it is a contract of adhesion. Adhesion contracts are unconscionable procedurally, although if that is all there is, the showing is a low one. A contract is one of adhesion if it is provided on a take-it-or-leave-it basis by one party with superior bargaining power over the other. That is the situation here. Plaintiff goes further, though, and states that defendant failed to provide the relevant arbitration rules. Here, the contract provided that the arbitration would be under the AAA’s auspices. While it is true that defendant did not attach the rules to the contract, it tells plaintiff how to get them. Further, the contract allows plaintiff to choose a different organization subject to Tesla’s approval.
Defendant also notes that there is an opt-out provision in the agreement. The court believes that a proper opt-out will render what looks like an adhesion contract to escape such a characterization. After all, the contract is hardly take-it-or-leave-it if the weaker party is given the choice to leave the arbitration provision at will but take the rest of the contract. The court suspects that the opt-out clause is there in part because Tesla knows that few people will actually read it and fewer still will take advantage of it, but even so, it is there and that is material. However, the clause is only in the first of the two contracts. Because it was not in the second, the opt-out provision would seem to have no relevance to this motion. Accordingly, the court finds that the contract is one of adhesion, and thus procedural unconscionability has been shown, albeit at a low level. That means that the showing on substantive unconscionability must be stronger.
Turning to substantive unconscionability, plaintiff raises a few points. The first is the use of AAA. Choosing AAA is not substantively unconscionable, at least absent some specific showing as to why AAA is inherently unfair. Unlike the case to which plaintiff adverts, this is not a situation where the selection of the arbitrator will not result in a neutral arbitrator. The AAA rules allow for the arbitrator’s selection and they appear to be neutral. There is no substantive unconscionability regarding the arbitrator’s appointment. And it is not clear that AAA is the only agency that may be used. The contract provides that plaintiff may choose a different agency subject to Tesla’s approval. Plaintiff has chosen JAMS. The court reads the approval requirement as allowing Tesla to reject the alternative agency, but not arbitrarily. In other words, Tesla’s rejection (if it chooses to reject) must be on a reasoned basis. The court will not second-guess the reasoning so long as it is in good faith and makes sense, but it cannot be arbitrary. The court is not clear whether Tesla is rejecting JAMS, and if so, why. (There may be many reasons why a party would prefer one agency over another. For example, the fee structure may be different, one agency’s rules regarding discovery may be better, one agency may have more neutrals or more locations, or one agency may have a better reputation for speedy adjudication. Accordingly, choosing one agency over another is not inherently improper, let alone unconscionable.)
The second issue is the provision that Tesla will pay costs up to $5000 only (after which, the court presumes, costs are split subject to whatever the arbitrator awards). The $5000 is for the “filing, administration, service or case management fee and your arbitration or hearing fee all up to a maximum of $5,000, unless the law or rules of the chosen arbitration organization require us to pay more.” The theory is that if the unique arbitration costs exceed $5,000, plaintiff will be responsible for the difference, which is unconscionable. But the issue is not quite so clear. As stated at the outset, arbitrations are favored under state and federal law. (The court suspects that were the issue put to today’s Congress and today’s Legislature, the result may be different in light of actual experience, or at least there would be no consensus. But the fact remains that the law is clear on this point and this court will not disturb that law.) The fact that there are costs associated with arbitration does not make arbitration unconscionable. What could make it unconscionable is where those costs burden a fundamental statutory policy articulated by Congress or the Legislature. The clearest example is the employment context. Although arbitrations remain favored in that context, requiring an employee to bear the burden of paying a type of expense that would not be required in court in order to vindicate a wage and hour right or a right under FEHA is not proper. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899.) Citing to the seminal Armendariz case, our Supreme Court noted that an arbitration agreement cannot force an employee to bear costs not required in the regular judicial system. But in the consumer context, the law is different. Code of Civil Procedure section 1284.3 provides that a consumer cannot be compelled to pay costs incurred by an opposing party even if the consumer does not prevail, and further that such costs (exclusive of the arbitrator’s fee) must be waived if the consumer is indigent. As the Sanchez Court held, the Legislature chose to deal with these costs differently than in the employment context. Accordingly, certain costs cannot be shifted, and certain costs must be foregone entirely by the arbitration entity if the consumer is indigent. However, the burden is on the consumer to show indigency or something similar. By the latter phrase, the court notes that in Sanchez, the Supreme Court noted that even if the consumer is not indigent, if the arbitration fees are unreasonably high such that the arbitral forum is foreclosed to the consumer, the contract may still be unconscionable. But again, the burden is on the consumer to so demonstrate. The court also notes that the arbitration clause contains a savings provision, stating that if the law requires Tesla to pay additional fees or costs, it will do so.
Accordingly, the fact that Tesla’s agreement to pay the consumer’s costs up to $5,000 is not itself a showing of unconscionability. Rather, it is up to plaintiff to show that the additional likely costs make arbitration non-viable. No such showing has been made here. Accordingly, there is no evidence to support substantive unconscionability.
Therefore, the motion to compel arbitration is GRANTED. The parties will meet and confer to determine whether Tesla objects to using JAMS and, if so, its reasons therefor. If there is no good faith objection, then JAMS will be the arbitral entity (and, presumably, JAMS’s rules will apply). If there is an objection, then either plaintiff will acquiesce and AAA will be used or the parties can bring the issue back to the court. Other than resolving the arbitral forum, the matter is STAYED pending the outcome of the arbitration. The court will set a status conference for approximately 9 months from now to ensure that things are moving along apace.