Senator Ruiz has introduced new legislation designed to interfere with the terms of standard consumer contracts. S1152 would create a rebuttable presumption that various contractual terms are “substantively unconscionable” when included in standard form consumer contracts. Increasing the risk and litigation expense on arbitration is probably the primary objective of the legislation. But the legislation would also interfere with forum selection clauses, and its effect on the enforceability of statutes of limitations is not at all clear.
Terms presumed to be unconscionable include:
- Waivers of right “to participate in any collective or class action”
- A forum selection clause that requires the dispute to be resolved outside the “county or district”
- Waivers of punitive damages
- Waivers of rights to assert a claim or “seek a remedy provided by State or federal law”
- A requirement that the individual “bring an action prior to the expiration of the applicable statute of limitations”
- A requirement that the consumer pay “fees or costs” that are “substantially in excess” of costs associated with bringing claims in court.
The legislation would make the inclusion of any term found to be unconscionable a violation of the Consumer Fraud Act. Penalties include civil penalties, treble damages, and attorney fee shifting. The legislation also delegates to the courts the question of whether to sever the “unconscionable” term or to invalidate the contract altogether and proscribes even considering the presence of a severability clause when making that determination. The legislation further prohibits a court from considering the availability of “opt-out” provisions when determining the conscionability of a particular term.
The result would be significant uncertainty over the enforceability of consumer contracts.
How would this legislation affect arbitration agreements?
Creating enforceable class action waivers is among the significant advantages of consumer arbitration agreements. The agreements ensure that consumers will have the opportunity for informal, individualized dispute resolution, while ensuring that claims will not be hijacked by attorneys bringing classwide claims that typically yield pennies on the dollar.
This legislation would attempt to prohibit such arbitration agreements, by making waivers of “collective or class actions” presumptively “substantively unconscionable.” This isn’t even a new trick. In 2005, the California Supreme Court held that waivers on classwide claims were unconscionable when included in standard form consumer contracts covering low dollar consumer disputes. The result was the landmark U.S. Supreme Court decision of AT&T Mobility v. Concepcion, which held that classwide claims are incompatible with arbitration and therefore preempted by the Federal Arbitration Act.
Although the FAA preemption is clear, as with legislation enacted last year to ban arbitration agreements in employment contracts, the legislation imposes significant risk on businesses seeking to exercise their federally-protected contract rights.
Please contact Alida Kass if you would like to discuss this legislation further.