We have been advising our dealer and finance company clients for years that they should consider using arbitration agreements in connection with their sales and lease transactions.  We advocate arbitration agreements because, when properly drafted to expressly exclude class relief, they can serve as a very effective first line of defense against class action lawyers. 

Lately, plaintiffs’ lawyers have convinced a few courts that requiring a consumer to waive class relief is “unconscionable” and is reason enough for courts to refuse to enforce the arbitration agreements.  The following case illustrates the value of an arbitration clause in blunting a class action and shows what happens when the plaintiffs’ lawyer’s “unconscionable” argument is made to a thinking judge.

Artemio Ornelas sued SonicDenver T, Inc. and Toyota Motor Credit Corporation, alleging that in February of 2004 he sought to buy a new Camry and negotiated an agreed price and terms. He claimed that due to his lack of ability to speak English or understand the all-English documents he was asked to sign, he was induced by the defendants' misrepresentations and concealment into signing lease documents for the vehicle, rather than purchase documents, resulting in a price higher than he had agreed to pay and terms less favorable than he had negotiated.

The plaintiff claimed that he did not understand that he was leasing the car.  He claimed he only found out he had leased it when he asked if he could "payoff the loan early" and was told he could not do that because he had leased the vehicle for a fixed period of time. He further contended that he informed TMCC that he’d been deceived into a lease rather than a purchase, but that TMCC took no action in response, other than to prepare documents for the outright purchase of the car that had been leased. Apparently, he did pay the "payoff price" to purchase the car, claiming that it was "considerably in excess of the purchase price he had originally negotiated."

Ornelas alleged eight claims for relief that he sought to bring as a class action on behalf of "all” racial or ethnic minority individuals whose principal or first language is other than English, and who, since 15 February 2002, have leased a new or used motor vehicle from Sonic Denver." Two of the counts alleged federal civil rights claims, while the remainder were Colorado state law statutory and tort claims.

The plaintiff’s class allegations claimed that Sonic had a pattern of inducing Latinos and other nonwhite consumers, particularly those who have limited ability to understand written or spoken English, into leasing cars instead of buying them, even when Sonic knew that the consumers wanted to buy the cars. Ornelas claimed that Toyota knew about this discriminatory pattern, profited from it and did nothing to stop it. He asked for actual damages, trebled actual damages under the CCPA claim for defendants' bad faith conduct, punitive damages as allowed by law, attorneys' fees and costs, and pre-judgment interest.

The defendants moved to stay the proceedings on the ground that all of Ornelas' claims were subject to arbitration based on an arbitration provision in the lease agreement that provided, in pertinent part:

“You agree that any claims arising from or relating to this Lease or related agreements or relationships, including the validity, enforceability, or scope of this Arbitration Provision, at your election or our election, are subject to arbitration. This includes any claim that arises from or relates to the Lease, whether in contract, tort, pursuant to statute, regulation, ordinance or in equity or otherwise, and includes, but is not limited to, claims asserted by you against us, Toyota Motor Credit Corporation, and/or any of our or its affiliates...“

The arbitration provision also set forth the procedures under which the arbitration was to be conducted, referencing the Federal Arbitration Act, and included a sentence providing that if the lessee cannot afford to pay and cannot obtain a waiver of the arbitrator's fees, or if the lessee believes the fees "will be prohibitively expensive or excessive," the lessor will "entertain in good faith any reasonable written request" to pay or reimburse the lessee for all or part of such fees. In addition, the arbitration provision contained a class action waiver or language restricting arbitration of claims on an "individual basis" and precluding arbitration "as a class action," and provided that if the class waiver were unenforceable, the entire arbitration agreement would be unenforceable.

Ornelas claimed that the arbitration provision was not enforceable for several reasons. First, he claimed that no contract was formed between the parties "given their complete and utter failure to arrive at a meeting of the minds over the contract's essential terms" because he did not understand what he was signing.  Second, the arbitration provision was unenforceable because of a lack of mutual assent to the essential terms of the lease agreement, that the class waiver provision was "contrary to law," and should be declared by the court to be unlawful, and therefore, pursuant to the language of the arbitration provision, the entire arbitration arrangement should be declared null and void. Finally, Ornelas argued that whether the arbitration agreement was enforceable was solely an issue for the court, and not the arbitrator, to decide.

The court rejected his arguments and granted in part and denied in part the defendants' motion to stay the case and compel arbitration. In rejecting the plaintiff’s claims regarding the class waiver, the court pointed out that the decisions relied on by Ornelas were primarily state court decisions that did not follow several federal circuit court opinions that have found that such provisions are not unconscionable under the Federal Arbitration Act.

The court granted the motion to compel arbitration to the extent it sought to compel arbitration by Ornelas of his individual claims on an individual basis. The court denied the motion to stay proceedings pending arbitration, instead ordering the clerk to administratively close the case, subject to reopening for “good cause shown” after the completion of the arbitration proceeding, if one is commenced.

So, at the risk of repeating ourselves, if you aren’t using an arbitration agreement, you should consider doing so.  You may hear some lawyers claim that courts will not enforce the class waiver provision that we recommend, and while it is true that some may not, this case makes it clear that many courts will.

Ornelas v. Sonic-Denver T Inc., 2007 WL 274738 (D. Colo.), January 29, 2007

Vol 4, Issue 4