Plaintiff Gil Sanchez purchased a used 2006 Mercedes-Benz S500V.  During Mr. Sanchez’s ownership of the vehicle, a dispute arose over the condition of the vehicle at the time of sale and whether the dealer made certain disclosures.  Mr. Sanchez filed a class action lawsuit against the dealer, Valencia Holding Company (“Valencia”), alleging Valencia violated several consumer-based protection statues, including California’s Consumer Legal Remedies Act (“CLRA”). 

Valencia moved to compel arbitration pursuant to an arbitration provision included in the sales contract Mr. Sanchez signed when he purchased the vehicle.  The arbitration provision provides, among other things, that if a dispute is arbitrated, Mr. Sanchez gives up his right to participate in a class action.  It further provides that the Federal Arbitration Act (“FAA”), as opposed to state law, governs the arbitration.  The arbitration provision also stated that if the class action waiver was found to be unenforceable, then the entire arbitration agreement shall be unenforceable.

The trial court denied Valencia’s motion, finding that the class action waiver was unenforceable, namely because the CLRA permits class actions and prohibits class action waivers, and thus, the entire arbitration provision was unenforceable. 

Interestingly, the Court of Appeal did not address whether the class waiver provision was enforceable.  Rather, the Court of Appeal addressed whether the arbitration provision as a whole was unconscionable.  Valencia appealed to the California Supreme Court.

The United States Supreme Court decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321 (“Concepcion”) formed the basis for Valencia’s appeal to the California Supreme Court.  In Concepcion, the United States Supreme Court held that the FAA preempts California’s unconscionability rule prohibiting class action waivers in consumer agreements.  In other words, the United States Supreme Court held that class action waivers are enforceable.

The California Supreme Court agreed with Valencia, holding that the Court of Appeal erred in finding that the arbitration agreement was unconscionable.  The Court also rejected the trial court’s holding that the class action waiver was unconscionable and found that the FAA preempts the CLRA’s anti-waiver provision.

Takeaway:  Businesses should not shy away from including class waivers in their sales contracts.