Facts
- Frank Sabia and eight other homeowners sued on behalf of a proposed class in California state court over loan-modification/foreclosure-consulting services marketed under The Home Defender Center (Home Defender) and related parties, including Orange County Metro Realty, Inc.
- Plaintiffs alleged Home Defender was a mortgage-foreclosure consultant that induced customers to sign loan-modification agreements presented on a take-it-or-leave-it basis.
- Plaintiffs asserted claims including fraud and breach of contract, alleging class members paid money for promised services that were not performed and that defendants retained those payments.
- The written agreements included an arbitration provision that required the customer (the “Client”) to arbitrate disputes against Home Defender if the client filed suit outside small claims court, while not imposing a comparable duty on Home Defender to arbitrate its own claims against the client.
- Plaintiffs also alleged circumstances supporting procedural unfairness, including that the agreements were written in English but orally explained to Spanish-speaking customers in Spanish.
- Defendants petitioned to compel arbitration based on the contract’s arbitration clause.
- The trial court granted the petition and compelled arbitration.
- Plaintiffs appealed from the order compelling arbitration, arguing the arbitration provision was unconscionable and unenforceable.
Issues
- Whether the arbitration provision—requiring only the consumers to arbitrate claims against defendants—was unconscionable under California law.
- Whether, after AT&T Mobility LLC v. Concepcion, the Federal Arbitration Act preempted application of California’s unconscionability doctrine to invalidate the arbitration provision.
- If the provision was unconscionable, whether the proper result was to deny enforcement of the arbitration clause (rather than enforce it as written).
Decision
- The Court of Appeal reversed the trial court’s order compelling arbitration.
- The court held the arbitration provision was unconscionable, principally because it was one-sided: it applied only to plaintiffs and effectively gave defendants the unilateral option to require arbitration of claims brought against them.
- The court concluded California’s unconscionability doctrine remained an available contract defense to arbitration clauses after Concepcion when applied as a generally applicable rule of contract law, not as a rule targeting arbitration.
- The court stated it was bound by controlling California Supreme Court authority on unconscionability (including decisions discussing the need for a meaningful level of mutuality in arbitration obligations) and could not disregard that authority based on speculation about how the United States Supreme Court might treat similar facts.
Legal Principles
- Unconscionability is a generally applicable contract defense in California that can render an arbitration provision unenforceable when there is both procedural unconscionability (oppression or surprise) and substantive unconscionability (overly harsh or one-sided terms), evaluated on a sliding scale.
- In the consumer and employment settings, California cases recognize that an arbitration agreement that compels arbitration of the weaker party’s likely claims while allowing the drafting party to litigate its own likely claims may be substantively unconscionable due to lack of mutuality.
- A contract presented as a take-it-or-leave-it agreement can support procedural unconscionability, especially where the consumer’s ability to understand or negotiate terms is limited, including by language-related circumstances affecting meaningful assent.
- The Federal Arbitration Act preempts state rules that disfavor arbitration as arbitration, but it does not eliminate ordinary contract defenses such as unconscionability when those defenses are applied evenhandedly.
- California intermediate appellate courts must follow binding California Supreme Court precedent on state contract law defenses when evaluating arbitration provisions.
Conclusion
Sabia v. Orange County Metro Realty, Inc. held that a one-way arbitration clause in a consumer loan-modification/foreclosure-consulting agreement was unconscionable because it required only the customers to arbitrate while leaving the service provider free to litigate, and the Court of Appeal reversed the order compelling arbitration, applying California unconscionability doctrine consistent with the FAA after Concepcion.