New Cars and Used Arbitrations

December 7, 2016

Sadly, the alternative-dispute-resolution of arbitration has become a laundromat where consumers are forced to allow powerful business interests to wash their dirty clothes in private. As I see it, the hallmarks of a truly fair arbitration system are that it is voluntary and offers a reasonable alternative to the court system's due process protections. The modern-day reality, however, is that too many industries force consumers into using a mandatory arbitration process that utilizes policies designed to delay the onset of adjudication, protract the hearing of the dispute, and favor repeat corporate users of a given forum.

The response of those apologists and defenders of the present arbitration system is that it is not mandatory but simply an economically necessary option that corporations use in order to contain ever-increasing legal fees and costs attendant to lawsuits.  Not mandatory? Okay, go try an open a brokerage account without agreeing to the purportedly optional arbitration provision. Go try to buy a major appliance or vehicle and strike out the arbitration provision on the sale contract. Good luck with that!  As is becoming increasingly clear, mandatory arbitration is not just a problem on Wall Street but has become far more pervasive. Consider a recent arbitration involving the dispute over a new car purchase and a used-car trade-in.

Case In Point

Today's legal tale starts with the purchase of a new vehicle by customer Gene Condon from the Daland Nissan, Inc. dealership. As with many such transactions, this one didn't go particularly well because Condon sued Daland and the dealership's insurer (Federated Mutual Insurance Company) and the entity that acquired his contract of sale (Wells Fargo Dealer Services). According to his Superior Court Complaint, on January 27, 2011, Condon bought a new 2011 Nissan TR 4X2 Crew vehicle for $25,845.46 and traded in a used 2007 Nisan Titan 4X2 vehicle. As noted in the Complaint:

17. As part of the CONTRACT, SELLER represented that a Smog Abatement Fee of $20.00 was due, and SELLER charged $20.00 for said fee at Line 2.D.

18. Plaintiff is informed and believes, and thereon alleges, that SELLER misrepresented the Smog Abatement Fee and overcharged Plaintiff for said fee.

19. SELLER never refunded Plaintiff for the overcharge of the Smog Abatement Fee

Additionally, Condon alleged that Daland failed to pay off the lien on the trade-in vehicle within 21-days of the execution of the contract, as was required. So, this is essentially a case in which a buyer of a new car is complaining about the seller's 1) failure to pay off the lien on a trade-in and 2) a Smog Abatement Fee overcharge. For more details, and there are more, READ: Gene Condon, Plaintiff, v. Daland Nissan Inc., Nissan Motor Acceptance Corporation, Federated Mutual Insurance Company, and Does 1 through 20, Defendants (Complaint, Superior Court of the State of California, Count of San Mateo, CIV 517002 / September 28, 2012).

Choice of Forum

Condon's contract of sale contained an arbitration provision offering a choice of the National Arbitration Forum ("NAF"), the American Arbitration Association ("AAA"), or any other mutually agreeable arbitration forum.  As provided in the Contract, if :

the arbitrator's award for a party is $0 or against a party is in excess of $100,000, or includes an award of injunctive relief against a part . . .

[the party against which the above specified award or relief was made] may request a new arbitration under the rules of the arbitration organization by a three arbitrator panel. The appealing party requesting new arbitration shall be responsible for the filing fee and other arbitration costs  . . .

So, let's see if we can decipher those arbitration provisions.

An unhappy used or new car buyer is obligated to arbitrate and is further required to do so before the NAF, AAA, or whatever alternative forum is mutually agreed-to. If one of the parties is awarded $0, that party may request a new arbitration before a three-arbitrator panel provided that party pays the filing fees and attendant arbitration costs. Similarly, if one of the parties gets hit with an award of more than $100,000 or injunctive relief, that party is entitled to pursue the same new arbitration route with three-arbitrators.

SIDE BAR: As a veteran lawyer, the thing that stands out to me about the above new-arbitration provision is the lack of finality: It's not an appeal; it's a new trial. The question is why is the first decision not simply amenable to appeal, as is typically the case in court and in many arbitration forums? The answer likely contains a number of anti-consumer considerations -- or at least that's how I see it and I'm sticking to my guns on that point.

Unless there is an issue of arbitrator fraud or misconduct, a whole new trial is a very generous second bite of the litigation apple, which reduces the first trial to little more than a wonderful opportunity to force your opponent to put on his or her case and then allow you to use the "new" arbitration to learn from your prior mistakes. That dynamic would seem to favor a larger, better-financed party such as a dealership, insurer, or financial services organization to the disadvantage of a lowly consumer.


It seems that customer Condon wasn't enamored with the requirements of Daland's mandatory arbitration because he refused to arbitrate. Condon asserted that the arbitration provision was unconscionable because of the new-arbitration scenario, which he said unfairly favored the dealership. After the Defendants petitioned a court to compel arbitration, that trial court ordered the arbitration.  Round one went to the Defendants and we move on to arbitration.

Solo ADR Arbitrator Renders an Award

On remand to arbitration, the parties selected ADR Services, Inc.  Seems that this was a great choice by Condon because the solo ADR arbitrator hearing the case issued an award for all amounts paid by Condon minus "the proper purchase price" of $13,516.

Thereafter, Condon made an unopposed Motion for Costs and Fees, which resulted in the ADR Arbitrator awarding $180,175.34, which purportedly consisted of $23,000 in costs, $107,000 in incurred fees plus a "1.5 multiplier of $50,000."

$100,000-plus Trigger

After getting hit for some $180,000 in costs and fees, the Daland dealership was not a happy camper and requested the new arbitration as provided in the contract of sale when an award exceeds $100,000. Condon's response to the dealership's new-arbitration request was to reiterate his unconscionability objection.

In response to the dueling positions, ADR directed the parties back to the courts for guidance on how the forum should proceed. The forum did not suggest it was unable to offer another three-arbitrator panel but merely opted to await a court's directions.

Superior Court

In response to ADR's position, Condon filed a Petition to Confirm the ADR Arbitration Award. Defendants filed a Petition to Vacate and also sought an order enforcing the arbitration provision requiring a new, three-arbitrator arbitration. And then we get hit with a wrinkle when Defendants argue that:

[S]ince ADR . . . has declined to do its job by honoring Defendant's [sic] lawful request for a new arbitration panel, Defendant [sic] request that the order compelling the new arbitration before a three arbitrator panel include a specific referral to the American Arbitration Association.

Not only did Defendants argue that the new arbitration with a three-arbitrator panel was not unconscionable and must be enforced but they further sought a court order that since ADR had failed to honor the "lawful request for a new arbitration panel," that the former forum be stripped of any remand and that the AAA be substituted on remand. Although AAA is cited as one of two specified forums in the Daland sales contract, Condon had not agreed to arbitration before AAA and, in fact, the parties opted for ADR. Now what?

At the motion hearing, Defendants inexplicably qualified their position by asserting that the substitution of AAA for ADR was not premised upon ADR's rules and procedures (or the forum's failure to apply same) but on Condon's refusal to accept the three-arbitrator ADR panel. Further, Defendants argued that absent Condon's agreement to retrial at ADR, they preferred to proceed before AAA but would be "perfectly happy if Your Honor wants to order the appeal to go back to ADR."

SIDE BAR: Seriously? First Defendants complain about not getting a new trial before ADR, which never denied them a new trial but merely referred them to court for clarification in the face of Condon's objection. Then, Defendants requested that the court order a new hearing at AAA, a forum that Condon had never agreed to arbitrate before and before which no hearings took place. Finally, the Defendants say that they don't care if the new arbitration occurs at AAA but will be perfectly happy with going back to ADR. Why go through all of that if you're going to wind up sort of where you started?

Superior Court confirmed the arbitration award in Condon's favor and denied Defendants' request for a second arbitration. In offering the rationale for its decision, the Superior Court offered two reasons:

One, the "agreement does not provide" for when "the arbitration organization selected by the parties does not have a process by which a new arbitration may be had before a three arbitrator panel." Second, "the agreement certainly does not provide for a party to return to Court and request a new arbitration before an entirely new arbitral forum."

And thus, the Defendants appealed.

Court of Appeal

In addressing the competing positions on appeal, the Court of Appeal deems that Condon essentially abandoned his unconscionability argument and the Opinion and Order references:

Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 915-917, in which the court held a similar "new arbitration" clause in a similar auto sales contract enforceable against the purchaser.

Gene Condon, Plaintiff/Respondent, v. Daland Nissan, Inc., et al., Defendants/Appellants (Opinion and Order, Court of Appeal for the State of California, A145613 / November 29, 2016).  See the note at the end of this article about Sanchez v. Valencia.

Moving on in its analysis, the Court of Appeal characterizes Condon's appellate position as based upon his contention that ADR lacked special rules for handling arbitration appeals. In parsing through Condon's position, the Court of Appeals offers this rationale:

What Condon overlooks, however, is that the arbitration provision does not authorize an appeal as that term is used in our judicial system, involving different procedures than those used in the trial courts, and before different courts of defined, and often limited, review. Rather, the arbitration provision authorizes, at a party's request, a "new arbitration under the rules of the arbitration organization by a three-arbitrator panel." (Italics added.) In other words, in certain circumstances, the arbitration agreement permits a "do-over" -- governed by the same rules that applied to the first arbitration. The single reference to an "appealing party"-- who asks for a "new arbitration" -- does not change the fact that what that party will receive is an arbitration repeat. The correspondence with ADR demonstrates, moreover, that it was ready and able to provide a new arbitration before a three-member panel and declined to do so only because it perceived it lacked the authority to impose the new arbitration on Condon absent a court order. In short, the fact ADR has no specialized "appellate" rules, is irrelevant to the arbitration dispute in this case.

Condon also focuses on the permissive language of the provision-that an aggrieved party "may request a new arbitration under the rules of the arbitration organization by a three-arbitrator panel." (Italics added.) He reads this to mean that while a party suffering a $100,000-plus award may request a second arbitration, even if that party does so, such a request can, in either the arbitral forum's or court's discretion, be refused or denied. This is not a reasonable reading of this provision. On the contrary, the provision imbues the aggrieved party with a choice, to accept the award or ask for a new arbitration. If the party chooses an arbitration re-do, it is, by the plain language of the arbitration agreement, entitled to that recourse.

Finally, Condon maintains defendants never asked the superior court to order a new arbitration before ADR and the arbitration provision can in no way be read to allow defendants to jump from one arbitral forum to another (i.e., from ADR to AAA). We agree the arbitration provision requires any new arbitration to be "under the rules of the arbitration organization" that the consumer chose for the first arbitration. The context of the term "arbitration organization" throughout the provision demonstrates this.

We do not agree, however, that defendants insisted on a new arbitration before AAA, rather than ADR. To begin with, defendants asked ADR to conduct a new arbitration. ADR declined to do so only because Condon refused to agree. In the trial court, defendants initially asked that arbitration be ordered before AAA, but that was because Condon appeared to be objecting to arbitration before ADR. Defendants subsequently made it clear they were "perfectly happy" to return to ADR

In consideration of the above rationale, the Court of Appeal reversed the Superior Court and the appellate court ordered the parties to proceed with a new arbitration before a three-arbitrator ADR panel.

Bill Singer's Comment

Umm . . . what?  

If the first arbitration goes against you, you get to appeal -- except it's not called an "appeal," it's called a request for a new arbitration before three-arbitrators.

As to that new arbitration, there don't appear to be any specific rules at the initial arbitration forum for the conduct of this second hearing before a three-arbitrators panel. Which begs the question as to just what we should be calling that "new" arbitration. Looks like an an "appeal" except rhat it is a retrial before more arbitrators. So. . . just what the hell are we calling that first arbitration? Is that a dress rehearsal arbitration?  Is that a trial run arbitration? And if the aggrieved party is not appealing from the award rendered in that first arbitration, then just what is the purpose of the new arbitration?

Then there is another issue. As I read it, the arbitration provision says that the aggrieved party may "request" a new arbitration. Anyone see anything that provides as to how that request is to be handled by the arbitration forum or, more to the point, what the bases are for denying the request?

I could go on but what's the point?  

By way of an interesting aside, consider this from Sanchez v. Valencia Holding:

In the context of mandatory employment arbitration of unwaivable statutory rights, we have held that arbitration agreements "cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court." (Armendariz, supra, 24 Cal.4th at pp. 110-111.) In the area of consumer arbitration, the Legislature has addressed costs in a different way. In 2002, shortly after Armendariz was decided, the Legislature enacted Code of Civil Procedure section 1284.3 to address fees and costs in consumer arbitration. Subdivision (a) of section 1284.3 provides that "[n]o neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider organization, attorney, or witnesses." Most pertinently, section 1284.3, subdivision (b)(1) provides that "[a]ll fees and costs charged to or assessed upon a consumer party by a private arbitration company in a consumer arbitration, exclusive of arbitrator fees, shall be waived for an indigent consumer. For the purposes of this section, `indigent consumer' means a person having a gross monthly income that is less than 300 percent of the federal poverty guidelines. Nothing in this section shall affect the ability of a private arbitration company to shift fees that would otherwise be charged or assessed upon a consumer party to a nonconsumer party." Subdivision (b)(2) requires the arbitration provider to give notice of the fee waiver provision, and subdivision (b)(3) provides that "[a]ny consumer requesting a waiver of fees or costs may establish his or her eligibility by making a declaration under oath on a form provided to the consumer by the private arbitration company for signature stating his or her monthly income and the number of persons living in his or her household. No private arbitration company may require a consumer to provide any further statement or evidence of indigence." (Code Civ. Proc., § 1284.3, subd. (b)(2) & (3).) 

The legislative history shows that the statute's specific provisions were part of a general concern about the affordability of arbitration: "One of the primary arguments advanced in support of mandatory consumer arbitration is that it is less costly than civil litigation. However, this argument is cast into significant doubt by the available evidence. In fact, arbitration costs are so high that many people drop their complaints because they can't afford to pursue them, a recent study by Public Citizen found." (Assem. Conc. Sen. Amends. to Assem. Bill No. 2915 (Reg. Sess. 2001-2002) as amended Aug. 26, 2002, p. 2.) The analysis observed that "unlike civil court, private arbitration is subject to no fee limitations. As a result, access to the system may be greatly affected by the wealth of the consumer. The author states that this bill addresses these inequities by prohibiting large private judging companies from conducting mandatory consumer arbitrations where a consumer who loses the case must pay the winning company's fees and costs. This bill also implements a fee waiver policy for indigent consumers akin to the long-standing practice in public courts. This bill does not affect commercial arbitrations between businesses." (Ibid.)

(9) As noted in Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77 [7 Cal.Rptr.3d 267] (Gutierrez), on which the Court of Appeal below relied, the Legislature in enacting Code of Civil Procedure section 1284.3 "did not adopt the Armendariz categorical approach and direct that all administrative fees be paid by nonconsumer parties without regard to the size of the costs or the wealth of the consumer.... [T]he Legislature did adopt an ability-to-pay approach, which, though limited in this statute to indigents, provides direction for a rule applicable to all consumers faced with arbitral forum fees that are prohibitively high. In Armendariz the court signaled its deference to the Legislature in selecting a categorical rule. (Armendariz, supra, 24 Cal.4th at pp. 112-113.) In this consumer case, that same deference leads us to adopt a case-by-case determination of affordability: plaintiffs suing under the [consumer protection] statutes may resist enforcement of an arbitration agreement that imposes unaffordable fees." (Gutierrez, at pp. 97-98.) 

We agree with Gutierrez's approach. As Gutierrez said in distinguishing Armendariz's categorical rule in the employment context, "jobseekers are more likely to face `particularly acute' economic pressure to sign an employment contract with a predispute arbitration provision, `for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.' (Armendariz, supra, 24 Cal.4th at p. 115.) A family in search of a job confronts a very different set of burdens than one seeking a new vehicle. Consumers, who face significantly less economic pressure[,] would seem to require measurably less protection." (Gutierrez, supra, 114 Cal.App.4th at p. 97.) In enacting Code of Civil Procedure section 1284.3, the Legislature concluded that an ability-to-pay approach is appropriate in the context of consumer arbitration agreements. Although the statute specifically addresses the affordability of consumer arbitration for people who are indigent, high arbitration fees can be unaffordable for nonindigent as well as indigent consumers, and nothing in the statute's text or legislative history precludes courts from using unconscionability doctrine on a case-by-case basis to protect nonindigent consumers against fees that unreasonably limit access to arbitration. (See Sonic II, supra, 57 Cal.4th at p. 1145 [endorsing Gutierrez's view that unaffordable arbitration costs that "`effectively blocks every forum for the redress of disputes'" may render an arbitration agreement unconscionable].)