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Consumer contracts that require private arbitration instead of the courts cannot burden the plaintiff with expensive costs, a California appellate court ruled Tuesday. In a unanimous decision authored by 1st District Court of Appeal Justice Mark Simons, the court found that any initial arbitration filing fees must comport with a consumer’s ability to pay the fees. The ruling appeared to call into question the standard rules of the American Arbitration Association, which were at issue in the case. “It is substantively unconscionable to require a consumer to give up the right to utilize the judicial system, while imposing arbitral forum fees that are prohibitively high,” wrote Simons in Gutierrez v. Autowest. The decision extends some of the protections governing employment arbitration contracts to the consumer arena, where such pre-dispute contracts have become a mainstay of businesses such as telephone companies and credit card issuers. Citing Armendariz v. Foundation Health Psychcare Services, the appeal court noted that a contract is substantively unconscionable if it is unduly harsh or one-sided or falls outside the non-drafting party’s “reasonable expectations.” “While arbitration may be within the reasonable expectations of consumers, a process that builds prohibitively expensive fees into the arbitration is not,” wrote Simons. San Francisco attorney Nancy Barron, who represented the plaintiff, said the decision will make it easier for consumers of modest means to find the appropriate forum for their grievances. “If he can’t get in the door to arbitration, he cannot vindicate those rights,” said Barron. Laura Christa, who represented defendant Autowest, said she could not comment, as the company has a policy of not commenting on pending litigation. The case involved Ryan Gutierrez’s claim that he suffered a “bait-and-switch” when he tried to lease a Dodge Durango from an Autowest car dealership. He alleged that while an advertisement promised the Durango for a $249 per month “zero down” lease, he was told at the dealership that the lease was actually $489 per month, unless he made a $5,900 down payment. Gutierrez sued, seeking a class action on behalf of other customers. Autowest moved to compel arbitration, as the lease agreement included an arbitration clause. The agreement provided that any disputes would be resolved “under the authority and rules of the American Arbitration Association.” The plaintiffs showed that under the rules in effect at the time of the motion to compel arbitration, they would have been required to pay about $8,000 to initiate the arbitration because of the amount of damages at stake. While Autowest argued that the plaintiff could recover the fee at the conclusion of the arbitration, the court found that this provided little comfort to consumers who cannot afford to pay the fee in the first place. And it noted that the contract provided scant provisions to waive or reduce the fee even if the plaintiff could demonstrate that it constituted an extreme hardship. While the court’s decision adopts some of the logic concerning unreasonable fees laid out in Armendariz, it does not adopt the bright line established in that case. Under Armendariz, an employee cannot be forced to incur any arbitration costs beyond what would be incurred in the public court system. In Gutierrez, the court ties unconscionability only to the consumer’s ability to pay. San Francisco plaintiffs attorney Cliff Palefsky said that while the decision was well intentioned, this lack of a bright line could lead to some unfortunate consequences, including subjecting plaintiffs to financial discovery. “In the real world, without specific guidelines, the decision of how much money is too much money to pay is not a workable standard,” said Palefsky. The court remanded the decision to San Francisco Superior Court to determine whether the unreasonable fees were adopted in bad faith — and consequently whether to simply sever the fee provision or invalidate the arbitration contract entirely. Justices Barbara Jones and Linda Gemello concurred.

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