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Snoozing and Losing: The Case for Arbitration Agreements

I am frequently asked whether dealers’ use of mandatory arbitration agreements as a defense against class action lawsuits and as a way to escape potentially crippling court-awarded damages is a tactic that actually works. My standard reply, since I’m a lawyer, is: “It depends.”

What does it depend on, you say?

First, you need a well-drafted arbitration agreement that bends over backward to favor the consumer. The terms of the arbitration agreement that deal with the consumer’s obligation to pay the costs and expenses of arbitration, the place where the arbitration will take place, so-called “carveouts” of issues that the dealer or finance company is not required to arbitrate, the prohibition against class relief, and the election of the Federal Arbitration Act are all provisions that are frequently attacked by plaintiffs’ lawyers who are trying to convince courts not to enforce arbitration agreements. These provisions need to be addressed in ways that will improve the likelihood that a court will enforce the arbitration agreement.

Second, the arbitration agreement needs to be conspicuous. I don’t have a dog in the fight when it comes to whether the arbitration agreement needs to appear in a document by itself, except in those few states that have so-called “single document” rules. If the arbitration provision appears in a buyers order, retail installment sales contract or lease, I always recommend that it appear in bold type, all caps, boxed, or some combination of all three, and that the acknowledgement that appears above the customer’s signature contain a reference to the fact that there’s an arbitration agreement in the document.

Third, the dealer needs to avoid dumb mistakes. In a few instances, we’ve seen cases where the dealer has failed to sign the arbitration agreement. In other instances, dealers have documented a transaction with separate documents that have contained “dueling” arbitration agreements with different provisions. A dealer-hostile court will seize on such mistakes as a reason to refuse to enforce the arbitration agreement.

Lastly, when a dispute arises, don’t wait too long to elect arbitration under the agreement. A recent case illustrates what can happen when you snooze.

Ernesto Radillo sued Superior Nissan of Mission Hills and Nissan Motor Acceptance Corporation (NMAC), alleging that Radillo, who does not speak English well, was assisted by a Spanish-speaking employee in buying a new vehicle from the dealership. Radillo alleged conversion, fraud and concealment, violation of the Consumer Legal Remedies Act, rescission and restitution.

The defendants answered the complaint in April of 2006, and raised 23 affirmative defenses, none of which mentioned arbitration. NMAC answered and cross-complained against Radillo, but did not seek arbitration of the claims raised in the complaint or the cross-complaint. Thus, neither defendant asserted as an affirmative defense that the matter should be submitted to arbitration.

The defendants later executed a case management conference statement which demanded a jury trial, and also requested mediation. The parties participated in mediation on Dec. 14, 2006. During the time the action was pending in superior court, the parties, including defendants, used discovery methods applicable to civil litigation.

On Dec. 20, 2006, Radillo moved for leave to file a first amended complaint. The amended complaint raised issues of whether Radillo's name had been forged on documents used to finance the purchase of the Nissan. On Jan. 25, 2007 (months after first answering the complaint), the defendants for the first time demanded arbitration of the claims. The trial court found that defendants had waived the right to compel arbitration. The defendants appealed.

The appellate court affirmed the trial court's judgment with regard to whether the defendants had waived their right to compel arbitration under California waiver law. The defendants also claimed that the waiver analysis should be governed by the Federal Arbitration Act. Applying a 3-step analysis, the appellate court determined that the defendants had a known right to compel arbitration, that they acted inconsistently with that right and that Radillo was prejudiced by the inconsistent acts. Consequently, the appellate court rejected the FAA argument, as well.

So, as I said, it depends. Get yourself a good arbitration agreement, don’t try to hide it from the customer, watch out for rookie mistakes and make the decision to invoke the arbitration agreement as quickly as you can. If you do all of these things, it’s likely that a court will enforce your agreement.

Vol 5, Issue 5


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