If the California Supreme Court lets a ruling on arbitration stand against an auto dealership in Santa Clarita, dealerships and lenders in the state could be more vulnerable to litigation, including class-action lawsuits, the American Financial Services Association says.
"The case is of very serious concern to the vehicle finance industry," the association said in a newsletter last week.
The case also calls into question how far a dealership must go to document whether a customer knowingly signed off on a legal disclosure, according to court documents.
The association, headquartered in Washington, and California groups representing auto lenders are supporting the appeal.
The case began when customer Gil Sanchez bought a certified pre-owned S class from Mercedes-Benz of Valencia in Santa Clarita in 2008. Sanchez later claimed in a proposed class-action lawsuit against the dealership that when he started having problems with the car, he discovered that the car had prior damage that had not been disclosed. He also claimed that he unknowingly paid extra for an extended-service contract and other added costs, according to court records.
Among other defenses, the dealership claimed that Sanchez could not properly file a proposed class-action suit because his finance contract -- a standard, preprinted form used by many California dealerships -- mandated binding arbitration and specifically prohibited a class action.
Because of legal arguments over where and how the case should be heard, the dealership has not yet filed a detailed, formal answer to Sanchez's other accusations, but the dealership is expected to deny any wrongdoing, according to Bob Olson, a Los Angeles attorney for the dealership.
Sanchez said that he did not read both sides of the contract, which was 26 inches long and densely worded; the language explaining arbitration was on the back, according to court documents.
A lower court supported that part of Sanchez's complaint, even though the front side of the contract says, "You acknowledge that you have read both sides of this contract, including the arbitration clause on the reverse side, before signing below." The court refused the dealership's request to throw out the lawsuit and compel arbitration in the case.
The dealership appealed, but the state appeals court refused to overturn that decision. The appeals court also found that aspects of the arbitration clause were so biased against the consumer as to be "unconscionable."
The dealership filed its appeal to the California Supreme Court earlier this year.
Bill Himpler, the financial services association's executive vice president, said last week that arbitration is designed to be fair to both sides.
Said Himpler: "Ultimately, it produces a timely and equitable result and in the final analysis keeps down the cost of credit for everybody."