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Chapter 1

1.1

Avoiding Mandatory Arbitration

Appellate Brief That Mandatory Arbitration Provision Is Not Enforceable


IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT

PATTERSON, DAVIS, GONSALVES, GRAHAM, JACOBS, PIERCE, VELASCO, HODES, EMBLEY, EMBLEY, WESSELLS, and DE LA O, individually and on behalf of all persons similarly situated, Plaintiffs/Respondents [vs.] ITT CONSUMER FINANCIAL CORPORATION, AETNA FINANCE COMPANY, ITT LYNDON PROPERTY INSURANCE COMPANY, ITT LYNDON LIFE INSURANCE COMPANY, JOHN M. HIGGINS, ASAD ZAFARI, and DOES 1 through __, inclusive, Defendants/Appellants. Civil No. A057729 San Francisco Superior Court No. 936818 RESPONDENTS' BRIEF Appeal from the Order of the Superior Court of California, County of San Francisco, Honorable Lawrence D. Kay, Judge TABLE OF CONTENTS INTRODUCTION STATEMENT OF FACTS ARGUMENT I. THIS COURT MUST APPLY THE SUBSTANTIAL EVIDENCE STANDARD OF REVIEW II. THE FEDERAL ARBITRATION ACT DOES NOT CREATE ANY SUBSTANTIVE RIGHT TO ARBITRATION AND DOES NOT REQUIRE ARBITRATION WHEN THERE IS NO AGREEMENT TO ARBITRATE OR WHEN THE ARBITRATION PROVISION IS UNCONSCIONABLE A. There Is No Agreement To Arbitrate In This Case Because Respondents Did Not Knowingly Sign the Arbitration Provision, Did Not Agree To Submit Disputes to Arbitration, And Did Not Knowingly and Willingly Waive Their Constitutional Right to a Jury Trial Even Assuming an Agreement to Arbitrate in this Case, the Agreement Is Unenforceable Because It Was Obtained by Fraud and Deceit and Is Unconscionable

B.

III.

THE TRIAL COURT PROPERLY FOUND THAT THE STANDARDIZED ADHESIVE ARBITRATION PROVISIONS AT ISSUE IN THESE ACTIONS ARE UNCONSCIONABLE AND THEREFORE UNENFORCEABLE A. B. This Case Is Controlled by Civil Code 1670.5 Which Compels a Finding of Unconscionability The Evidence in this Case Establishes the Procedural Element of Unconscionability Because Appellants Had Vastly Superior Bargaining Power, Respondents Had No Opportunity to Negotiate the Terms of the Contract, and the Arbitration Provision Was Hidden in Standardized Adhesive Documents 1. 2. C. The Facts Establish the Element of Oppression The Facts Establish the Element of Surprise

The Evidence Establishes That the Arbitration Clause Appellants Seek to Enforce is Substantively Unconscionable Because It Is Unduly Oppressive for Consumer Borrowers 1. 2. 3. The Arbitration Provision Appears to, and in Practical Effect, Does Require Arbitration in a Distant Forum The Fees Required By the National Arbitration Forum Are Unduly Oppressive for Consumers The Arbitration Forum is Unreasonably Favorable to Appellants and Overly Harsh for Consumer Borrowers, Resulting in an Unjustifiable One-Sided Result The Arbitration Provision Is Unduly Oppressive Because It Precludes Consumer Borrowers from Participating in Class Actions and Insulates Appellants from Liability Under California Consumer Protection Statutes

4.

IV.

THE TRIAL COURT'S ORDER TEMPORARILY STAYING APPELLANTS' CONFIRMATION OF DEFAULT ARBITRATION AWARDS ENTERED AGAINST CALIFORNIA CONSUMERS BY THE NAF IN MINNESOTA WAS A REASONABLE EXERCISE OF THE COURT'S DISCRETION A. Respondents Have Standing as Members of the General Public to Challenge Appellants' Unfair Business Practices, Including the Enforcement of an Unconscionable Arbitration Provision The Trial Court's Order Is Temporary, Narrow, and Necessary to Preserve the Status Quo There Is No State of Federal Policy Favoring the Enforcement of Unconscionable Arbitration Provisions

B. C. CONCLUSION

TABLE OF AUTHORITIES CASES: A & M Produce v. FMC Corp. (1982) 135 Cal.App.3d 473 AT&T Tech. Inc. v. Communications Workers (1986) 475 U.S. 643 Barquis v. Merchants Collection Ass'n of Oakland (1972) 7 Cal.3d 94 Carboni v. Arrospide (1992) 2 Cal.App.4th 76, reh'g and rev. denied Consumers Union of U.S. v. Fisher Dev. (1991) 208 Cal.App.3d 1433 County of Inyo v. City of Los Angeles (1976) 61 Cal.App.3d 91 Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418 Dean Witter Reynolds v. Superior Court (1989) 211 Cal.App.3d 758, rev. denied Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 105 S.Ct. 1238 Ford v. Shearson Lehman/American Exp, Inc. (1986) 180 Cal.App.3d 1011, rev. denied Graham v. Scissor-Tail (1981) 28 Cal.3d 807 Hasson v. Ford Motor Co. (1977) 19 Cal.3d 530 Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65 Hope v. Superior Court (1981) 122 Cal.App.3d 147 In re: Marriage of Moore (1980) 113 Cal.App.3d 22 Izzy v. Mesquite Country Club (1986) 186 Cal.App.3d 1309 King v. Prudential-Bache Securities, Inc. (1991) 226 Cal.App.3d 749, rev. denied, cert. denied Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699 Medical Operations Management Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, rev. denied Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 105 S.Ct. 3346 Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) Nestle v. City of Santa Monica (1972) 6 Cal.3d 920 Painters Dist. Council No. 33 v. Moen (1982) 128 Cal.App.3d 1032 Perdue v. Crocker Nat. Bank (1985) 38 Cal.3d 913 Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520 Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 87 S.Ct. 1801 Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d 1016, reh'g and rev. denied Rowland v. Paine Webber Inc. (1992) 4 Cal.App.4th 279 Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970 State Ex. Rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147 Titan Group v. Sonoma Valley County Sanitation (1985) 164 Cal.App.3d 1122, rev. denied Trizec Properties v. Superior Court (1991) 229 Cal.App.3d 1616 U.S. Roofing v. Credit Alliance Corp. (1991) 228 Cal.App.3d 1431, rev. denied Volt Info. Sciences v. Bd of Trustees (1989) 489 U.S. 468, 109 S.Ct. 1248 Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1972) 24 Cal.App.3d 35, affirmed 414 U.S. 141 Webster v. Superior Court (1988) 46 Cal.3d 338 Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345 Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987 STATUTES: 9 U.S.C. 2 Business and Professions Code Section 17200 Section 17500 Civil Code Section 1670 Section 1750

Section 1788 Code of Civil Procedure Section 1281 Financial Code Section 24000 INTRODUCTION The issue presented by this appeal is whether a sophisticated financial company may insulate its illegal conduct from scrutiny under California consumer protection statutes by unilaterally imposing binding arbitration on its customers. Respondents in this action are average consumers, unsophisticated in financial matters, who had the misfortune to borrow money from one of the ITT financial companies designated as appellants in this action. As victims of appellants' on-going consumer lending and insurance packing scheme, respondents were subjected to a variety of unlawful, unfair, fraudulent, deceitful and unconscionable business practices. Now, seeking to enforce their legal rights through a class action brought pursuant to California consumer protection statutes, respondents have discovered yet another fraud committed by appellants -- one of the many standardized form documents respondents were required to sign contained an arbitration provision. It is undisputed that the arbitration provision was not disclosed by appellants and that respondents were entirely unaware of its existence until the issue arose in this litigation. Nevertheless, hiding behind this provision, and asserting a fictional "fundamental right" to arbitration, appellants seek to exclude respondents, and other similarly situated consumers, from this class action by compelling them to arbitrate their claims on an individual basis before the National Arbitration Forum in Minneapolis, Minnesota. It is quite clear that appellants' purpose in imposing the arbitration provision is to shield their ongoing pattern of unfair and unlawful business practices from discovery and class action litigation brought under California consumer protection statutes. Demonstrating the ultimate unfairness of the arbitration provision, respondents presented undisputed evidence to the trial court that the so-called arbitration "agreement" had been foisted on unaware consumers, with no disclosure and no negotiation. In addition, the evidence established that the arbitration forum designated by the provision was inaccessible,

incomprehensible and extremely expensive for consumers, in practical effect allowing appellants routinely to obtain default arbitration awards issued administratively in Minnesota against California consumers. Based on this evidence the trial court rightly found the arbitration provision to be unconscionable and therefore unenforceable. This finding did not evidence "an outdated judicial hostility" to arbitration, as claimed by appellants, but a rather a well-considered application of established law. Appellants' attempted reliance on federal and state policy favoring arbitration is unavailing. The Federal and California Arbitration Acts create no substantive right to arbitration, but rather favor the enforcement of actual arbitration agreements freely-negotiated between parties of equal bargaining strength. The policy provides absolutely no support for the blind enforcement of a standardized arbitration provision contained in an adhesive form contract signed by a consumer unaware of its existence. As the courts have repeatedly emphasized, arbitration is fundamentally a matter of contract -- a party cannot be coerced into arbitration to which he did not agree and a provision cannot be enforced if it is unconscionable. The record demonstrates that respondents never consented to arbitration and that the provision is procedurally and substantively unconscionable. Accordingly, the trial court's order denying appellants' petitions to compel arbitration must be upheld.

STATEMENT OF FACTS This is a class action in which plaintiffs and respondents allege that appellants engage in unlawful, unfair, and unconscionable business practices in the soliciting, making, and collecting of small high-interest consumer loans. Respondents assert that ITT Consumer Financial Corporation, ITT Financial Services, Aetna Finance Company, ITT Lyndon Life Insurance Company, and ITT Lyndon Property Insurance Company (hereinafter collectively referred to as "appellants") have engaged in a pattern of unlawful business practices and fraud and deceit in which they have deceived borrowers about the true nature of loans, deliberately concealed material terms, materially misrepresented the legal rights and obligations of insured borrowers,

and induced borrowers to sign documents based on false representations as to their content and meaning. (See Complaint, generally, JA 1-46.)1 Specifically, respondents allege as follows: appellants have induced consumers to borrow money by distributing mass advertising and individual solicitations offering borrowers "guaranteed loans." (JA 2-5, 29-33, 48, 52, 55-56.) Such solicitations are false, deceptive and fraudulent, in violation of the Consumer Legal Remedies Act, Civil Code 1750 et. seq. and Business and Professions Code 17500, et. seq., in that the solicitations do not disclose that the loans are not guaranteed, or that borrowers are required to pledge their personal property as security for the loan, and to purchase credit life, credit disability, and credit property insurance, at substantial additional cost, as a condition of obtaining the loan. (Id.) Once borrowers have responded to the solicitation, appellants unlawfully require borrowers to purchase various insurance policies, issued by appellants, to obtain the loan (a practice referred to as "insurance packing"). (JA 11-15.) Appellants falsely represent to borrowers that such insurance is required in order to obtain the loan, and, in some circumstances, have added insurance policies to borrowers' loan documents without the borrowers' knowledge or consent, and have deliberately concealed the existence of insurance charges from borrowers. (JA 4-5, 11, 194). Respondents also allege that in order to maximize the collective profits of their insurance packing scheme, appellants have deliberately and systematically "churned" borrowers' accounts, forcing borrowers to refinance their loans on a periodic basis, each time purchasing and financing additional unnecessary and unwanted insurance products. (JA 2-5, 10-15, 197-198, 201-202.) Certain plaintiffs, including plaintiff Gonsalves and respondent Velasco, allege that appellants fraudulently induced them to sign documents refinancing their loan by deliberately misrepresenting and concealing the true content of said documents. (JA 3, 12, 15, 22, 194.)

Since the hearing on this matter before the trial court, plaintiffs have amended the Complaint twice. The Second Amended Complaint now on file with the trial court includes the allegations of two additional named plaintiffs and an additional cause of action for negligent infliction of emotional distress. The third cause of action for violation of the Personal Property Brokers Law and Consumer Finance Lenders Law, Financial Code 24000 et. seq. was ordered stricken by the trial court.

Respondents allege further that, although borrowers are required to purchase insurance policies in order to obtain a loan, appellants fail to honor the terms of such policies in that appellants refuse to pay full disability benefits upon a borrower's total disability, (JA 28-30), pay themselves rather than the insured borrowers when insured collateral is lost, stolen or destroyed, and fail to issue refunds of unearned premiums when borrowers are forced to purchase additional policies. (JA 17, 29.) Finally, with respect to appellants' practices in the collection of

loans, respondents allege that appellants deliberately engage in a variety of oppressive, abusive and unlawful practices in violation of the Robbins-Rosenthal Fair Debt Collection Practices Act, Civil Code 1788 et. seq., including telephoning borrowers numerous times each day, speaking to and yelling at borrowers in a rude, abusive and demeaning manner, threatening to destroy borrowers' credit rating and to repossess their personal possessions, and unlawfully contacting the family, friends, co-workers, neighbors and employers of borrowers to reveal the borrowers' debt. (JA 21-26, 52-53.) Plaintiffs and respondents bring this action on behalf of a class of similarly situated consumer borrowers and state causes of action for violation of the Consumer Legal Remedies Act, Civil Code 1750 et. seq., Business and Professions Code 17200, et. seq., the RobbinsRosenthal Fair Debt Collection Practices Act, Civil Code 1788 et. seq., and for breach of contract, intentional and negligent infliction of emotional distress, fraud and deceit, breach of the implied covenant of good faith and fair dealing, and declaratory relief. (JA 1-46.) Shortly after the complaints were filed in these actions, certain of the plaintiffs, those now designated as respondents in this appeal, discovered for the first time that one of the many standardized forms they had been required to sign as a borrower contained an arbitration provision. Invoking this provision, which was contained in one of many standardized, preprinted, adhesive documents, and which was not disclosed to any respondent, appellants sought to exclude respondents, and presumably all other borrowers who may also have signed documents containing the arbitration provision, from this class action and to compel them to

submit their claims to arbitration on an individual basis before the National Arbitration Forum, located in Minneapolis, Minnesota. (JA 64-106.) Respondents opposed this transparent effort to sabotage the class action, and deny discovery into appellants' practices, on the grounds that the arbitration provision is unenforceable because respondents did not knowingly and willingly agree to submit their claims to arbitration, and because the provision is procedurally and substantively unconscionable. (JA 117-140, 160203.) In support of their opposition, respondents presented considerable evidence as to the oppressive circumstances under which the documents containing the arbitration provision were signed, the manner in which the provision was hidden within one of many adhesive form documents, and the unconscionable purpose and effect of the provision. The arbitration provision signed by the respondents in the Patterson action was one paragraph on a form entitled "Agreement for Dispute Resolution." (JA 97-104.) For the average consumer, this appears to be a customer information sheet and not a legal document. It contains four paragraphs, the first three of which describe, respectively, ITT's purported commitment to customer service, "Office Cooperation" policy and "Customer Service Hotline," and the fourth which contains the arbitration provision. (JA 97-104.) The provision was not discussed, explained, or even pointed out to any of the respondents. (JA 194, 198, 202.) The more recent version of the arbitration provision, that signed by respondent Lang, is merely one paragraph on the back side of a lengthy and detailed standardized form entitled "Disclosure Statement Note and Security Agreement." (JA 78A-78B.) There is no signature line on the back side of the page. Like the other respondents, Lang was not aware that he was signing an agreement that included an arbitration clause. (JA 140.)2 It is significant that the agreement signed by Lang in April of 1991, within which the arbitration clause is merely one small paragraph on the back side of a long and detailed document, is the more recent version of the arbitration clause used by appellants. Appellants claim, in footnote 4 of their opening brief, that the clause signed by Lang was an earlier version of the "Agreement for Dispute Resolution" signed by the respondents in the Patterson action. The evidence demonstrates that this is incorrect. Velasco, Jacobs and Pierce signed the more lengthy "Agreement for Dispute Resolution" in May of 1989, August of 1989, and June of 1990, respectively. (JA 97-104.) Lang signed his loan documents in April of 1991. (JA 78A-78B.) Because discovery is in its initial stages, respondents cannot verify whether the
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All of the respondents submitted declarations testifying to essentially the same experience. At the time they took out a loan from appellants, or were forced to refinance an existing loan, they were handed a stack of numerous documents and directed to sign them. (JA 140, 194, 198, 201.) The documents were described by a loan officer as the respondent's "loan documents" but explained no further. (JA 140, 194, 198, 201.) All of the documents were preprinted, standardized forms prepared by appellants. (JA 78A-78B, 94-104, 194, 198, 201.) Appellants determined all terms of the loan and filled in all information on the forms. There was no negotiation of terms. Id. The respondents were not informed at any time that the documents contained an arbitration provision and, until the issue arose in this litigation, were completely unaware they had signed any document containing such a provision. (JA 140, 194, 198, 202.) This evidence is uncontroverted. Respondents also presented substantial evidence that the arbitration provision is substantively unconscionable because it is overly favorable to appellants and unduly oppressive for consumer borrowers. Arbitration is conducted by the National Arbitration Forum ("NAF") in Minneapolis, Minnesota, a forum clearly designed for the arbitration of commercial disputes that may be resolved primarily by document review.3 Both versions of the arbitration provision, make specific reference to the "National Arbitration Forum, Minneapolis, Minnesota," suggesting to the average unsophisticated consumer that arbitration occurs in Minnesota, a belief that would discourage many from responding to a claim. (JA 78B, 97-104). Appellants file claims against California consumers with the NAF office in Minneapolis. (See NAF Code of Procedure, JA 364-383.) Notification of the claim is sent out from that office and consumers are invited to send in a written response. (JA 588-589.) Unless the consumer specifically requests a participatory hearing, no hearing is held and the arbitration is conducted entirely by document

arbitration clause signed by Lang is the version currently being used by appellants. Appellants refer to the NAF office in Minneapolis as the "headquarters" or "main office." As far as respondents have been able to determine, however, the office of the NAF in Minneapolis is the only office. There is no evidence in the record suggesting that any other office exists.
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review. (JA 364-383.) Although consumers are provided some notification as to the possibility of a participatory hearing, the notification and the Code of Procedure are ambiguous as to the location of the hearing and the rules require the consumer to submit a hearing fee of at least $750. (See NAF Code of Procedure, Rule 32, JA 376, 360; March 31 RT 17:14-18:22, JA 359, 579, 376.) The evidence also established that the fees for arbitration before the NAF are unduly oppressive for consumer borrowers. (JA 358-362.) Any party filing a claim before the NAF must pay a filing fee based on the amount in controversy. The minimum for any claim is $98.00. (Id.) (In contrast, the filing fee in a small claims court is $8.00). The fee for a claim of $5,000 is $250; the fee for a claim of $25,000 is $700. There are substantial additional fees if a participatory hearing is requested. The minimum fee for a participatory hearing is $750 per threehour session, which must be paid at the time the hearing is requested. (Id.) The Code of Procedure provides that the amount in controversy is the total of all claims as well as the value of any non-monetary relief sought. (JA 359-360.) Even assuming the NAF is equipped to arbitrate class claims and claims for declaratory and injunctive relief, therefore, the fees for arbitration of respondents' claims in this action would be in the tens of thousands of dollars. (Id.) Most importantly, the evidence established that, in practical effect, appellants are using the arbitration provision to obtain default arbitration awards against California consumers, issued administratively in a distant and inaccessible forum, which are then converted into enforceable California judgments. (JA 781-881.) And while the provision operates to the disadvantage of consumers, it simultaneously operates to shield appellants from liability under California consumer protection statutes and from the class action litigation necessary to enforce those statutes. Appellants' petitions to compel arbitration came before the trial court for hearing on March 31, 1992. At that time, the court expressed concern about the ultimate fairness of the arbitration provision given the level of sophistication of the average consumer borrower. (March 31 RT 6-33.) In particular, the court noted that the language of both the provision and the NAF

Code of Procedure suggests to consumers that arbitration occurs in Minnesota, that arbitration against California consumers does, in fact, occur in Minnesota, and that the fees and fee waiver provisions of the NAF make arbitration very expensive for consumers. (March 32 RT 6:228:10; 11:8-17:10; 12:25-27; 17:14-18:22; 22:24-24:7.) The court found that these factors, in effect, deny consumers any meaningful right to contest a claim filed against them by appellants. Based on this evidence, the court held that the arbitration provision was unconscionable and therefore unenforceable. (March 31 RT 22:16-24:26.) Appellants' petitions to compel arbitration were denied. Having found the arbitration provision unconscionable, and having determined that appellants had pending, through other counsel, petitions to confirm NAF arbitration awards rendered pursuant to that very provision, the court expressed its intention to stay confirmation of those awards pendente lite. (March 31 RT 26:9-27:27.) The purpose of the court's proposed stay was not to enjoin appellants' collection activity in general, but merely to ensure that, pending class certification or further development of this action, appellants were not continuing to confirm default arbitration awards against potential class members in the Law & Motion Department based on an arbitration provision found to be unconscionable by Judge Kay. (March 31 RT 27:5-27.) The trial court also noted the danger of inconsistent rulings and the possible effect of collateral estoppel and res judicata should other departments of the court continue to confirm arbitration awards pursuant to the provision. (Id., 29:25-30:5; 31:9-22.) In response to appellants' request, the trial court scheduled briefing and further argument solely as to the issue of the proposed temporary stay. (Id., 32:13-27.) Appellants filed an opposition to the court's proposed temporary stay, and also filed a separate motion for reconsideration. (JA 549-718.) The court held further hearing on April 29, 1992 and did, in fact, consider appellants additional evidence and argument. (April 29 RT 1544.) Appellants failed, however, to present any evidence addressing the court's primary concerns. Despite the court's finding that the arbitration provision leads consumers to believe they must submit to arbitration in Minnesota, appellants presented no evidence that any California consumer ever has, in fact, been able to obtain a participatory hearing in San Francisco. Indeed,

the Declaration of Susan Stillwell, Director of Arbitration for the NAF states explicitly that, "it is not possible for the National Arbitration Forum to advise a claimant or respondent of the location of the Participatory Hearing before a claim is filed or a response entered for a number of reasons." (JA 573; April 29 RT 20:3-13.) Nor was any evidence presented to dispel the court's stated concerns regarding the number of awards entered by default. In fact, the additional evidence demonstrated that, not only are appellants obtaining default arbitration awards against California consumers, but that they are doing so through an administrative process that requires no hearing whatsoever and no review by an arbitrator. (Declaration of Rory Clark, JA 909-911; Declaration of Susan Stillwell, JA 568-577; April 29 RT 20:14-21:7.) Evidence presented on the fee issue merely suggested that the NAF fees may be comparable to those of the American Arbitration Association (JA 596-636); no evidence was presented suggesting that these fees are affordable to consumers or that fee waivers are, in fact, granted to consumers by the NAF. The court reconsidered its earlier ruling, but again found the arbitration provision to be unconscionable and unenforceable. (JA 920.) The court also ordered pendente lite the temporary cessation of all confirmation of arbitration awards filed by appellants in San Francisco Superior Court. (April 29 RT 39:15-19.) In order to protect any legitimate claim appellants' might have, however, the trial carefully crafted the order to ensure that appellants would have a forum in which to secure and to enforce a judgment. (April 29 RT 34:25-35:13; 36:5-37:11; 39:15-40:12.) Specifically, the court ordered that appellants would be allowed to file claims against consumers in any court in San Francisco that would otherwise have jurisdiction, notwithstanding the existence of the arbitration provision. The court also ruled that no consumer would be allowed to assert the existence of the provision as a defense to a court action and that appellants' filing of claims in court would not constitute a waiver of their right to seek arbitration at a later date or against consumers not covered by the Order. (JA 924-925.) The court's order merely stayed the confirmation of any arbitration awards entered in Minnesota pursuant to an unconscionable arbitration provision, while protecting appellants' right to file legitimate claims against consumers in San Francisco courts.

The trial court's finding of unconscionability, and refusal to enforce the arbitration provision, was compelled by the evidence in the record and must be affirmed by this Court. The corresponding stay of confirmation of arbitration awards was well within the court's discretion, caused no irreparable harm to appellants, and represented a wise use of judicial resources. ARGUMENT I. This Court Must Apply The Substantial Evidence Standard Of Review The trial court found the arbitration provision to be unenforceable because it is unconscionable. This Court must uphold that determination if there is substantial evidence in the record to support the finding of unconscionability. As discussed in Section III, infra, the record supports and indeed surpasses the substantial evidence test. In addition, this Court may uphold the trial court's order based on legal theories or evidence other than that relied upon by the trial court. See Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1972) 24 Cal.App.3d 35, 43, affirmed 414 U.S. 141. If the decision of the trial court is correct, the order must be affirmed, regardless of whether the trial court reached its conclusion on the correct grounds. Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d 1016, 1026, reh'g and rev. denied. The applicable standard of review for determinations of unconscionability has been clearly stated by the courts: Although unconscionability is ultimately a question of law, numerous factual inquiries bear upon that question. To the extent there are conflicts in the evidence or in the factual inferences which may be drawn therefrom, we must assume a set of facts consistent with the court's finding of unconscionability if such an assumption is supported by substantial evidence. Carboni v. Arrospide (1992) 2 Cal.App.4th 76, 83, reh'g and rev. denied, quoting A & M Produce v. FMC Corp. (1982) 135 Cal.App.3d 473, 489. The law recognizes that a trial court's determination of unconscionability is made in light of evidence as to its setting, purpose and effect. California Code of Civil Procedure 1670.5(b); A & M Produce Co., supra, 135 Cal.App.3d, at 489. In this case, the trial court reviewed extrinsic evidence that included, inter alia, documents signed by respondents (JA 78A-78B; 97-104), declarations of respondents as to

the circumstances under which the documents were signed (JA 139-140; 192-202); the NAF Code of Procedure (JA 364-383) and Fee Schedule (JA 358-362); NAF Notices and Form Letters (JA 578-594); the Declaration of the NAF Director (JA 568-577); and petitions to confirm NAF arbitration awards pending in San Francisco Superior Court (JA 781-881). The trial court's determination, made in light of these and other factual inquiries, must be upheld so long as there is substantial evidence in the record in support. In applying the substantial evidence test, this Court must view the evidence in the light most favorable to respondents. Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 925-26. This court may not reweigh the evidence, but must accept respondents' evidence as true, resolve all conflicts in the evidence in respondents' favor and draw all reasonable favorable inferences. Hasson v. Ford Motor Co. (1977) 19 Cal.3d 530, 544. Applying these principles, the record demonstrates that this Court must uphold the trial court's finding of unconscionability.4 II. The Federal Arbitration Act Does Not Create Any Substantive Right To Arbitration And Does Not Require Arbitration When There Is No Agreement To Arbitrate Or When The Arbitration Provision Is Unconscionable The Federal Arbitration Act, enacted in 1924, provides that: A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." 9 U.S.C. 2 (emphasis added). The California Arbitration Act contains a similar provision, stating, "[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable, and irrevocable, save upon grounds as exist for revocation of any contract." Code of Civ.Proc. 1281 (emphasis added). These provisions establish two Appellants have blatantly misrepresented the record in this case, stating that no extrinsic evidence was introduced and suggesting that de novo review is appropriate. (Opening Brief, at 7-8, n. 20.) This is incorrect. The record is clear that substantial evidence was introduced and supports the trial court's order. Should this Court choose to exercise de novo review, however, the Court must review and consider not only the arbitration agreements but also all extrinsic evidence introduced below. See Medical Operations Management Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, 892, rev. denied. This evidence mandates an independent finding of unconscionability.
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principles that must be considered by this Court. First, arbitration is a matter of contract and may not be compelled unless an actual agreement was reached between the parties to submit disputes to arbitration. Second, even assuming an agreement to arbitrate exists, it is entitled to no greater deference than any other contract provision and is revocable upon any statutory or common law grounds that would invalidate any other contract provision. 9 U.S.C. 2; Code of Civ. Proc. 1281.5 In their opening brief, appellants repeatedly refer to arbitration as a "fundamental right," falsely suggesting to this Court that the Federal Arbitration Act, 9 U.S.C. 1-14, ("the Act") confers upon them a substantive right to compel arbitration against respondents and other consumer borrowers. Appellants' suggestion misrepresents both the purpose and effect of the Act. In cases interpreting the Act, the Supreme Court has repeatedly emphasized that it does not mandate arbitration, create any substantive right to arbitration, or even evidence a policy favoring arbitration. The purpose of the Act was merely to make privately-negotiated arbitration agreements "as enforceable as other contracts, but not more so." Volt Info. Sciences v. Bd of Trustees (1989) 489 U.S. 468, 470, 109 S.Ct. 1248, quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 404, n. 12, 87 S.Ct. 1801. The legislative history and purpose of the Act was addressed thoroughly by the Supreme Court in Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 105 S.Ct. 1238. In that case the Court noted that the House Report accompanying the Act made clear that the purpose "was to place an arbitration agreement 'upon the same footing as other contracts' where it belongs,' H.R.Rep. No. 96, 68th Cong., 1st Sess., 1 (1924), and to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate." Id., at 219. The need for the Act arose not from a Respondents do not concede that the arbitration provision is governed by the Federal Arbitration Act. The fact that the provision so states is irrelevant given that respondents never acquiesced to the provision. It is also highly questionable whether the consumer loan transactions alleged in this action, which occurred entirely in California, are transactions in interstate commerce, as is required under the Federal Arbitration Act. Ultimately, which Arbitration Act applies is irrelevant, however, because it is California law that determines the threshold issues of whether an agreement was reached and, if so, whether the agreement must be revoked because it is unconscionable. See Perry v. Thomas (1987) 482 U.S. 483, 492, n. 9, 107 S.Ct. 2520.
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desire to force disputes to arbitration, but from an anachronistic judicial hostility to arbitration agreements carried over from English common law.6 Id., at 220. As the Court explained: The legislative history of the Act establishes that the purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate. We therefore reject the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims. The Act, after all does not mandate the arbitration of all claims, but merely the enforcement-- upon a motion of one of the parties-- of privately negotiated arbitration agreements. Id., at 213 (emphasis added). The legislative history of the Act stated specifically that the Act "create[d] no new legislation, no new rights, except a remedy to enforce an agreement in commercial contracts and in admiralty contracts." Id., at 220, n.7, quoting 65 Cong.Rec. 1931 (1924) (emphasis added). "Passage of the Act was motivated, first and foremost, by a congressional desire to enforce agreements into which parties had entered." Id., at 220. That arbitration is fundamentally a matter of contract has repeatedly been emphasized by the Supreme Court. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 625-626, 105 S.Ct. 3346, for example, the Court stated, "The liberal federal policy favoring arbitration agreements,' Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), manifested by this provision and the Act as a whole, is at bottom a policy guaranteeing the enforcement of private contractual arrangements." (Emphasis added.) Similarly, in Volt Information Systems v. Bd. of Trustees, supra, 489 U.S., at 479, the Supreme Court noted that "[a]rbitration under the Act is a matter of consent, not

The purpose of the Act was described in the House Report as follows:

The need for the law arises from an anachronism of our American law. Some centuries ago, because of the jealously of the English courts for their own jurisdiction, they refused to enforce specific agreements to arbitrate upon the ground that the courts were thereby ousted from their jurisdiction. This jealously survived for so long a period that the principle became firmly embedded in the English common law and was adopted with it by the American courts. The courts felt that the precedent was too strongly fixed to be overturned without legislative enactment, although they have frequently criticized the rule and recognized its illogical nature and the injustice which results from it. This bill declares simply that such agreements for arbitration shall be enforced, and provides a procedure in Federal courts for their enforcement. H.R.Rep. No. 96, 68th Cong., 1st Sess., 1-2 (1924). Dean Witter Reynolds v Byrd, supra, at 220, n.6.

coercion." In that case, the party seeking to compel arbitration argued, much as appellants do in this action, that it had a "federally guaranteed right to compel arbitration" under the Federal Arbitration Act. Id., at 474. The Supreme Court rejected this argument, observing that it "fundamentally misconceive[d] the nature of rights created by the FAA." Id. Citing Dean Witter Reynolds v. Byrd, supra, the Court noted that passage of the Act was motivated, first and foremost, by a desire to enforce actual agreements. Id., at 478. "Accordingly, we have recognized that the FAA does not require parties to arbitrate when they have not agreed to do so." Id. See also AT&T Tech. Inc. v. Communications Workers (1986) 475 U.S. 643, 648 ("arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.") A. There Is No Agreement To Arbitrate In This Case Because Respondents Did Not Knowingly Sign the Arbitration Provision, Did Not Agree To Submit Disputes to Arbitration, And Did Not Knowingly and Willingly Waive Their Constitutional Right to a Jury Trial Respondents cannot be required to submit their disputes with appellants to arbitration unless it is established that they agreed to do so. AT&T Tech. Inc., supra, 475 U.S., at 648; Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 356. "This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration." AT&T, at 648. "Accordingly, the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors, supra, 473 U.S., at 626. The question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator. AT&T, supra, at 649. State law applicable to contracts generally governs whether an agreement to arbitrate exists. 9 U.S.C. 2; Perry v. Thomas, supra, 482 U.S., at 492, n. 9. In this case, uncontroverted evidence in the record establishes that no agreement to arbitrate ever existed between appellants and respondents. It is undisputed that the arbitration provision was contained in one of many standardized, pre-printed adhesive documents signed by respondents, that the provision was not negotiated or even discussed with respondents, that

respondents were completely unaware of the provision, and that respondents did not knowingly and willingly agree to submit to arbitration. (JA 78A-78B, 139-140, 192-202.) It is also undisputed that respondents are unsophisticated middle and lower income consumer borrowers who did not expect or anticipate that an arbitration provision would be contained in their "loan documents." (JA 192-202.) Appellants argue that an agreement to arbitrate should be imputed to respondents merely because they signed documents containing the provision, regardless of whether they were aware of its existence. While in some cases courts have held that failure to read an arbitration provision does not invalidate the agreement, these cases have involved sophisticated parties dealing at arm's length. For example, appellants cite the recent case Rowland v. Paine Webber Inc. (1992) 4 Cal.App.4th 279, in support of their assertion that they had no duty to disclose the arbitration provision. In that case, however, the court emphasized that the party seeking to avoid arbitration was once employed as a securities broker with the very stock brokerage firm he later sued and was not in any weaker position than the firm. The court emphasized that, "he was familiar with all industry contract terms" and that "[c]ontracts made at arms length between experienced business people should be honored by the parties and enforced by the courts." Id., at 286 (emphasis added.) Similarly, in Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, the disputed arbitration provision was not part of an adhesion contract, but had in fact been negotiated between a health plan and an employees union, "possessing parity of bargaining strength." Id., at 711. See also King v. Prudential-Bache Securities, Inc. (1991) 226 Cal.App.3d 749, 756, rev. denied, cert. denied (plaintiff was "an experience broker"); Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. supra, 24 Cal.App.3d, at 41 (plaintiff was an employee of highly regulated securities exchange). As the court noted in Rowland, the state policy favoring arbitration "is particularly applicable to cases where the parties agreeing to arbitration are of presumptively equal bargaining power." Rowland, supra, 4 Cal.App.4th, at 284 (emphasis added). In contrast, respondents in this action are unsophisticated consumer borrowers.

Appellants are large, sophisticated financial corporations specializing in consumer lending and

insurance sales. Appellants had complete and total bargaining power in the loan transactions; respondents had none. All documents were standardized, adhesive contracts drafted entirely by appellants. In California, while there is a judicial policy favoring arbitration, "there is an equally strong concern for the rights of consumers against whom unexpected or oppressive provisions of standardized contracts are sought to be enforced." Painters Dist. Council No. 33 v. Moen (1982) 128 Cal.App.3d 1032, 1039; Wheeler v. St. Joseph Hospital, supra, 63 Cal.App.3d, at 355. When a consumer signs a standardized adhesive contract containing an arbitration provision without knowledge of the provision or the sophistication to anticipate such a provision, an agreement to arbitrate should not be implied by the court. As the court noted in Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970, 974, "[w]hile there is a strong judicial policy favoring arbitration, there is just as strong a judicial concern regarding the weaker bargaining power of consumers. The use of standardized or mass-produced agreements containing a profusion of provisions which allow the stronger party to dictate the terms to the weaker party is viewed with judicial concern." See also Wheeler, supra, 63 Cal.App.3d, at 362 (no agreement to arbitrate should be implied when hospital patient was unaware of the provision); Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 428-29 (an insurance company has a duty to inform its insureds of an arbitration provision); Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987, 994 (no agreement to arbitrate when provision was in small print, was not conspicuous, was not pointed out to plaintiff, and when plaintiff had no actual knowledge of the provision). Furthermore, this Court should decline to imply an agreement to arbitrate, when none in fact exists, given that arbitration necessarily deprives respondents of their constitutional right to trial by jury. Article 1, 16 of the California Constitution guarantees a right to trial by jury in civil actions. The Seventh Amendment of the United States Constitution provides the same guarantee for litigants in federal court. While this right to trial by jury may be waived, such a waiver must be a voluntary act, knowingly done, with sufficient awareness of the relevant circumstances and likely consequences. See e.g. In re: Marriage of Moore (1980) 113

Cal.App.3d 22, 27. Moreover, when the waiver is between parties to a contract, it "must be clearly apparent in the contract and its language must be unambiguous and unequivocal, leaving no room for doubt as to the intention of the parties." Trizec Properties v. Superior Court (1991) 229 Cal.App.3d 1616, 1619. In Titan Group v. Sonoma Valley County Sanitation (1985) 164 Cal.App.3d 1122, 1129, rev. denied, this Court refused to enforce an arbitration provision because it did not clearly and unmistakably waive the parties' right to trial by jury. In light of the importance of the jury trial in our system of jurisprudence, any waiver thereof should appear in clear and unmistakable form. This agreement does not present such a waiver. We cannot elevate judicial expediency over access to the courts and the right to jury trial in the absence of clear waiver. Id., at 1129. As the Court noted in Windsor Mills, supra, 25 Cal.App.3d, at 993, "the principle of knowing consent applies with particular force to provisions for arbitration." Neither of the arbitration provisions at issue in this appeal make any reference whatsoever to the consumer's waiver of the right to trial by jury. (JA 78A-78B; 97-104.) Indeed, the "Agreement for Dispute Resolution" signed by the respondents in the Patterson action, is primarily a customer service information sheet and does not even appear to be a legal document. (Id.) A waiver of respondents' right to trial by jury cannot be implied from these documents. Moreover, because unsophisticated consumers cannot be expected to know the legal significance of an arbitration provision, no agreement to arbitrate should be found unless there is clear and unmistakable evidence that the consumer knew of the provision and its consequences and knowingly waived the right to trial by jury. The requirement of an knowing and willing agreement to arbitrate is particularly important in light of the California Supreme Court's recent decision in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr. 2d 183. In that case, the Court held that an arbitrator's decision is not generally reviewable by a court for errors of law or fact even if such error appears on the face of the award and causes substantial injustice to the parties. In reaching this decision, the Court emphasized that, "an arbitrator's decision is final and conclusive because the parties have agreed that it be so." 10 Cal.Rptr. 2d, at 187 (emphasis in original). The Court also explained that "an arbitrator is not ordinarily constrained to decide according to the rule of law,"

but that the risk of mistake by an arbitrator is acceptable because, "by voluntarily submitting to arbitration, the parties have agreed to bear that risk in return for a quick, inexpensive and conclusive resolution to their dispute." Id., at 188 (emphasis added.) As the Court itself noted, the decision assumes that an actual, voluntary agreement to arbitrate exists. Id., at 187, n.3. In this case, appellants seek to force respondents and other consumers to submit to arbitration, a forum that offers no assurance of proper application of California law, and no possibility of judicial oversight even if the result is clearly in error and causes substantial injustice, based on the legal fiction of respondents' consent. It is absolutely undisputed that respondents did not know about the arbitration provision and did not consent to it. Given the substantial waiver of legal rights inherent in any arbitration agreement, no consumer should be forced into arbitration based on a legal fiction of their consent. As the court noted in Wheeler, supra, 63 Cal.App.3d, at 357, "the policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate." B. Even Assuming an Agreement to Arbitrate in this Case, the Agreement Is Unenforceable Because It Was Obtained by Fraud and Deceit and Is Unconscionable Even assuming an agreement to arbitrate was formed, both the Federal Arbitration Act and the California Arbitration Act provide that the agreement is revocable upon any statutory or common law ground that would invalidate any other contract provision, including fraud and unconscionability. 9 U.S.C. 2; Code Civ. Proc. 1281. The Supreme Court has emphasized that "courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide ground 'for the revocation of any contract.'" Mitsubishi Motors, supra, at 627, citing the Act. See also Shearson/American Exp., Inc. v. McMahon (1987) 482 U.S. 220, 226, 107 S.Ct. 2332, reh'g denied (a well-founded claim that an arbitration agreement resulted from fraud or excessive economic power would provide grounds for the revocation of the agreement.) In determining whether the agreement must be revoked, the court is to apply state law governing issues of

validity, revocability and enforceability for contracts generally. See Perry v. Thomas, supra, 482 U.S. at 492, n.9; Rice v. Dean Witter Reynolds, Inc. supra, 235 Cal.App.3d, at 1016. The trial court found the arbitration provisions at issue in this appeal to be unconscionable, a finding compelled by the law of unconscionability and fully supported by the record. (See discussion in Section III, infra.) This alone is sufficient to render the provision invalid and unenforceable under the terms of both the Federal and California Arbitration Acts. The evidence in the record also demonstrates, however, the trial court could additionally have found the provisions revocable upon the grounds of fraud and deceit. An arbitration agreement that is procured by fraud is unenforceable. Rice v. Dean Witter Reynolds, supra, 235 Cal.App.3d, at 1024. Similarly, fraud in the inception of a contract, such that the promisor is deceived as to nature of what he is signing and mutual assent is lacking, is sufficient to void an arbitration clause. Id., at 1024-25. Additionally, fraud that permeates an entire contract, including the arbitration provision, vitiates the arbitration agreement and requires judicial determination. Ford v. Shearson Lehman/American Exp, Inc. (1986) 180 Cal.App.3d 1011, 1019, rev. denied; Rice, supra, 235 Cal.App.3d, at 1026. It is the court, and not the arbitrator, that must determine whether fraud exists. Rice, supra, at 1025. Respondents' allegations, summarized in the Statement of Facts, establish fraud sufficient to void the arbitration agreement. Specifically, respondents allege that they were induced to enter into loan agreements based upon fraudulent misrepresentations as to their rights and obligations, that they were deceived about the nature of documents they were required to sign, and that appellants fraudulently failed to disclose that the documents contained an arbitration provision. (JA 1-46, 139-140, 192-202). These allegations are sufficient to establish triable issues of fraud and to defeat appellants' petitions to compel arbitration.

III. The Trial Court Properly Found That The Standardized Adhesive Arbitration Provisions At Issue In These Actions Are Unconscionable And Therefore Unenforceable

An arbitration provision that is unconscionable is unenforceable. Graham v. Scissor-Tail (1981) 28 Cal.3d 807, 820; Civil Code 1670.5; Hope v. Superior Court (1981) 122 Cal.App.3d 147, 154, cert. denied. In this case, the trial court found the arbitration provisions at issue to be unconscionable for several reasons, including among others, that the arbitration clause was not negotiated between the parties, appears to require that arbitration occur in Minneapolis, Minnesota, and, in practical effect, allows appellants to obtain default arbitration awards in a distant forum against California consumers that are then converted into enforceable judgments. (JA 920-922.) The trial court's finding of unconscionability was compelled by governing law and evidence in the record and must be upheld by this Court. A. This Case Is Controlled by Civil Code 1670.5 Which Compels a Finding of Unconscionability In 1979, the state legislature codified the doctrine of unconscionability in Civil Code 1670.5. That section provides as follows: (a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause so as to avoid any unconscionable result. (b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination. Cal. Civil Code 1670.5. The leading case interpreting the doctrine of unconscionability in California is A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, rev. denied which was recently reviewed and reaffirmed by this Court in Carboni v. Arrospide, supra, 2 Cal.App.4th, at 82. As the court in A & M Produce Co. explained, the doctrine has both a procedural element (absence of

meaningful choice) and a substantive element (terms unreasonably favorable to one party). Id., at 486.7 The procedural element focuses on two factors: "oppression" and "surprise." "Oppression" is present when there is a substantial inequality of bargaining power between the parties which denies the weaker party an opportunity to negotiate and results in "an absence of meaningful choice." Id. "Surprise" involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in standard printed forms drafted by the party with the superior bargaining power. Id. The sophistication of the aggrieved party, or lack thereof, is a relevant consideration under this factor. See Dean Witter Reynolds v. Superior Court (1989) 211 Cal.App.3d 758, rev. denied; Perdue v. Crocker National Bank, supra, 38 Cal.3d, at 927. The substantive element of unconscionability requires that the disputed terms be substantively unreasonable, such that the terms are overly harsh as to one party and unreasonably favorable to the other, resulting in an unjustifiable "one-sided" result. A & M Produce Co., supra, at 487. See

There are two alternative theoretical frameworks for finding a contract term unconscionable under California law. See Perdue v. Crocker Nat. Bank (1985) 38 Cal.3d 913, 925, n.9; Carboni v. Arrospide, supra, 2 Cal.App.4th, at 83, n.8. The examination of "procedural" and "substantive" elements of unconscionability, as set forth in A & M Produce Co. is probably the more common analysis. The California Supreme Court's analysis in Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, however, serves as an alternative framework. In that case, in which the Court found a mandatory arbitration clause to be unconscionable, the Court first determined whether the contract was adhesive. It then noted that, "[g]enerally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof." Id., at 820. The first is that a provision, "which does not fall within the reasonable expectations of the weaker or "adhering" party will not be enforced against him." Id. (emphasis added.) The second is that a provision, even if consistent with the parties' reasonable expectations, will not be enforced if it is unduly oppressive or unconscionable. Id. Although respondents primarily rely upon the A & M Produce analysis, it is equally clear that the arbitration clause would be found unenforceable under the Graham v. ScissorTail analysis. It is clear that the contracts were adhesive. They were "standardized contract[s], which, imposed and drafted by the party of superior bargaining strength, relegat[ed] to the subscribing party only the opportunity to adhere to the contract or reject it." Id., at 817. And it is clear that the mandatory arbitration clause hidden within those contracts was not within the reasonable expectations of respondents, who are unsophisticated consumer borrowers. On that basis alone, under Graham v. Scissor-Tail, the clause is unenforceable. Id., at 820. Furthermore, even if the clause had been within the expectations of respondents, it is "unduly oppressive" and "unconscionable" as is discussed infra in Sections III.C. and D.

also U.S. Roofing v. Credit Alliance Corp. (1991) 228 Cal.App.3d 1431, 1448, rev. denied ("The substantive element is concerned with whether the terms are overly harsh or one-sided.") Although the courts have suggested that both the procedural and substantive elements of unconscionability must be present in order for a contract or clause to be held unenforceable, the importance of one factor may outweigh the absence of the other. As this Court noted in Carboni, "there is a sliding scale relationship between the two concepts: the greater the degree of substantive unconscionability, the less the degree of procedural unconscionability that is required to annul the contract or clause." 2 Cal.App.4th, at 83; see also A & M Produce Co., supra, at 487 ("the greater the unfair surprise or inequality of bargaining power, the less unreasonable the risk reallocation which will be tolerated"). As is discussed in section I, supra, which sets forth the standard of review to be applied by this Court, a determination of unconscionability is ultimately a question of law. Carboni, supra, 2 Cal.App.4th, at 83; A & M Produce Co., supra, 135 Cal.App.3d, at 489. Nevertheless, there are numerous factual inquiries that are relevant to the Court's determination, including the conditions under which the contract was formed, the parties' relative bargaining power, the parties' reasonable expectations, the relative sophistication of the parties, and the purpose and effect of the disputed clause. See Carboni, at 83; A & M Produce Co., at 489; Perdue, supra, 38 Cal.3d, at 927; Civil Code 1670.5(b). "To the extent there are conflicts in the evidence or in the factual inferences which may be drawn therefrom, [this Court] must assume a set of facts consistent with the court's finding of unconscionability if such an assumption is supported by substantial evidence." A & M Produce Co., at 489. Even if the Court exercises de novo review, the evidence clearly establishes the existence of both procedural and substantive elements of unconscionability in the arbitration provision. Moreover, because a finding of unconscionability is ultimately an issue of law, id., at 489, if the Court does choose to make a de novo determination, the Court may affirm the finding of unconscionability for reasons in addition to or other than those relied upon by the trial court. See

Rice v. Dean Witter, supra, 235 Cal.App.3d, at 1026; Ware v. Merrill Lynch, supra, 24 Cal.App.3d, at 40. B. The Evidence in this Case Establishes the Procedural Element of Unconscionability Because Appellants Had Vastly Superior Bargaining Power, Respondents Had No Opportunity to Negotiate the Terms of the Contract, and the Arbitration Provision Was Hidden in Standardized Adhesive Documents The trial court found the arbitration provision to be procedurally unconscionable because "the arbitration clauses are printed on form contracts which are part of transactions in which borrowers in the main borrow small amounts of money and are unrepresented by counsel." (JA 920.) An examination of the evidence as to circumstances under which respondents signed documents containing the arbitration provision, (the commercial setting) supports this finding and demonstrates that both factors in the procedural element of unconscionability-- oppression and surprise -- are present.

1. The Facts Establish the Element of Oppression

Oppression is found when there is an inequality of bargaining power, no real negotiation of terms, and an absence of meaningful choice for the weaker party. A & M Produce Co., supra, 135 Cal.App.3d, at 487. The inequality in bargaining power between the parties is readily apparent. Appellants ITT Consumer Financial Corporation, ITT Financial Services, Aetna Finance Company, ITT Lyndon Life Insurance Company, and ITT Lyndon Property Insurance Company are wealthy and powerful nationwide conglomerates specializing in the lucrative business of high-interest consumer lending and insurance sales. (JA 6-8). Respondents allege in these actions that appellants use highly sophisticated practices to solicit consumer borrowers and to deceive them about their rights and obligations when taking out consumer loans. (See Complaint, generally, JA 1-46.) In stark contrast, respondents are relatively unsophisticated, middle and lower income consumer borrowers. (JA 139-140; 192-202.) They borrowed money from ITT, in small high-interest loans, in direct response to individualized offers of a "guaranteed

loan" sent to them by appellants. (JA 140, 193, 197.) None of the respondents was represented by counsel in the transactions. (JA 139-140, 192-202.) The evidence also establishes that there was no negotiation of the terms of the loan or of the arbitration clause. All documents, including those containing the arbitration clause, were prepared on pre-printed, standardized forms drafted by appellants. (JA 78-78B, 94-104, 194, 198, 201.) Appellants determined all terms of the loan, filled in all individualized information on standardized forms, and merely presented the documents to respondents for signing. (JA 194, 198, 201.) None of the respondents were informed that the documents contained an arbitration clause and there was no opportunity whatsoever for discussion or negotiation of the arbitration agreement. (JA 140, 194, 198, 202.) The vastly superior bargaining power of appellants, along with the complete lack of negotiation of terms, combined to create "an absence of meaningful choice" for respondents as to the arbitration provision. This clearly establishes the element of oppression for purposes of determining unconscionability. In their opening brief, appellants attempt to defeat respondents' claim of oppression by falsely asserting that "respondents presented no evidence of the unavailability of loans from other lending institutions that did not include arbitration provisions," and, therefore, there can be no claim of "absence of meaningful choice." (Opening Brief, at 26.) In support of this argument, appellants cite Dean Witter Reynolds v. Superior Court, supra, 211 Cal.App.3d, at 758, a case in which the court rejected a claim of unconscionability because the plaintiff had the option of doing business elsewhere to avoid objectionable terms. The argument fails here for two reasons. First, appellants baldly misstate the record. The evidence does establish that, at the time they obtained loans from ITT, each of the respondents was in an unstable financial condition and unable to obtain a loan from a more traditional and reputable lending source. Lang stated that he was a self-employed acupuncturist and believed that he could not qualify for a loan at a bank. (JA 140) Velasco stated that she was unemployed and would not have qualified for a loan from a bank. (JA 193.) Jacobs stated that he was a self-employed astrologer and that he believed he would not qualify for a loan from a bank. (JA 197.) Pierce was a student at the time he obtained

the loan and would not have qualified for a loan from a bank. (JA 201.) Moreover, the evidence establishes that respondents were targeted by ITT and borrowed money only after having been personally solicited to do so by appellants. (JA 140, 193, 197.) For respondents the choice was the ITT loan or no loan at all. They did not have the option of shopping around among lenders for terms that did not include mandatory arbitration.8 Second, the holding in Dean Witter Reynolds was limited to its facts and is inapplicable in this action.9 In that case, an attorney, who was a self-described "specialist in class action litigation involving financial institutions," filed suit against Dean Witter claiming that a $50 termination fee imposed when he closed his Individual Retirement Account ("IRA") account was unconscionable. On appeal from the trial court's order certifying the class, the court rejected the plaintiff's claim of unconscionability, finding that the availability of IRA accounts at other institutions that did not charge a termination fee foreclosed the plaintiff's allegation of "oppression." Id. at 768. In making this finding, however, the court stressed the importance of the plaintiff's sophistication and ability to understand the nature and significance of the objectionable term. As the court stated: We do not hold or suggest . . . that any showing of competition in the market place as to the desired goods and services defeats, as a matter of law, any claim of unconscionability. Rather, we hold that the 'oppression' factor of the procedural element of unconscionability may be defeated, if the complaining party has a meaningful choice or reasonably available alternative sources or supply from which to obtain the desired goods and services free of the terms claimed to be unconscionable. Id. at 772 (emphasis in original). The Court went on to hold that based on the record, "the termination fee was not shown to be unconscionable as to the sophisticated investor-attorney" who sought appointment as the class representative. Id. The Dean Witter case differs from this case significantly. The plaintiff in Dean Witter was a sophisticated investor familiar with financial institutions and investment plans. In contrast, This is particularly true for respondents Jacobs and Pierce, who signed documents containing the arbitration provision when they were forced by ITT to refinance their loans. This Court recently questioned the holding in Dean Witter. See Carboni v. Arrospide, supra, 2 Cal.App.4th, at 86.
9 8

the plaintiffs in these actions are unsophisticated middle and lower income borrowers with little or no experience in consumer lending practices. Moreover, the objectionable term in the Dean Witter case, a $50 termination fee, is a penalty easily understood by most consumers, sophisticated or not. In contrast, the significance and effect of a binding arbitration clause is much less apparent to the average consumer who, without explanation, would not understand the legal rights forfeited by an arbitration agreement. And finally, the plaintiff in Dean Witter, being a "sophisticated attorney-investor" of some means, clearly had the option of considering other banks before he opened his IRA account. As discussed above, the consumers in these actions were not so fortunate. They did not have "a meaningful choice or reasonably available alternative sources or supply from which to obtain the desired goods and services free of the terms claimed to be unconscionable." Dean Witter, supra, at 772.10 This absence of meaningful choice, along with the clear disparity in bargaining power, and the complete absence of negotiation of the arbitration term, establish the element of oppression.

2. The Facts Establish the Element of Surprise

The other aspect of procedural unconscionability is the element of surprise, which involves the extent to which the unfavorable terms are hidden in standardized printed forms drafted by the party with the superior bargaining power. A & M Produce Co., supra, 135 Cal.App.3d, at 486. Also relevant to this determination is the sophistication, or lack thereof, of the consumer, (see Perdue v. Crocker Nat. Bank, supra, 38 Cal.3d, at 927, and cases cited therein), and the extent to which the disputed term was within the reasonable expectations of the parties. See discussion at note 7, supra; Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d, at 820. The record in this action conclusively establishes this element. Of course, a finding that a party could have avoided the objectionable term by taking advantage of alternative sources presumes that the party was aware of the unfavorable term and understood the term sufficiently to recognize it as unfavorable. As has been discussed, the respondents in these actions were not aware that the documents they signed contained binding arbitration clauses.
10

None of the respondents were aware, at the time they signed documents prepared by appellants, that they were signing an arbitration agreement. In each case, the respondent was given and directed to sign a stack of papers, identified by an ITT loan officer as the respondent's "loan documents." (JA 194, 198, 201.) The documents were not explained to respondents. (JA 194, 198, 201.) The arbitration provision contained in the documents was not discussed, explained, or even pointed out to any of the respondents. (JA 140, 194, 198, 202.)11 The fact that the arbitration clause was hidden in a form contract, which was one of many, and was not disclosed to respondents, clearly establishes the element of surprise. It is undisputed that respondents were unaware of the arbitration provision. Nevertheless, appellants have argued that respondents cannot claim surprise because no evidence was presented indicating that respondents were "confused, deceived or injured" by the arbitration agreements. (Opening brief, 17, 26.) Again, appellants have misrepresented the record. The evidence establishes that respondents were deceived about the very fact that they were signing an arbitration agreement. While appellants may argue that the clause is "obvious" when the document is presented in the record by itself and the relevant language is quoted in full, it was not nearly so apparent for respondents when the clause was merely one paragraph on one of many documents. Respondents' lack of sophistication and inability to review and to understand all of the documents they signed is a factor that must be taken into account. See Perdue, supra, 38 Cal.3d, at 927. Moreover, unlike provisions regarding monthly payments and interest, the provision was not a term that the average consumer would expect to be part of a loan agreement. See Graham v. Scissor-Tail, supra, 28 Cal.3d, at 820. Furthermore, it is the very gravamen of respondents' complaint in this action that appellants engaged in a variety of sophisticated practices to deliberately and systematically deceive respondents and other consumer borrowers

The same experience was reported by Jules. Jules is not a respondent in this action, but is a potential class member and a respondent in a Petition to Confirm an Arbitration Award filed by ITT in San Francisco Superior Court. In his declaration, Mr. Jules states that he was given many documents to sign by an ITT loan representative and that none of the documents were explained to him. He was not aware, and he was not informed by the loan officer, that one of the documents contained an arbitration clause. (JA 914-915.)

11

about the terms of their loans and about their rights and obligations under the law. See Complaint, JA 1-46; Statement of Facts, supra. Appellants' deception with regard to the existence and effect of the arbitration clause is merely one of many deceptions respondents allege in this action. C. The Evidence Establishes That the Arbitration Clause Appellants Seek to Enforce is Substantively Unconscionable Because It Is Unduly Oppressive for Consumer Borrowers

A contract provision is "substantively unconscionable" if it is unduly oppressive as to one party or overly harsh or one-sided in a manner that was not justified by the circumstances in which the contract was made. A & M Produce Co., supra, 135 Cal.App.3d, at 487; Graham v. Scissor-Tail, supra, 28 Cal.3d, at 820. In making this determination, a court may consider evidence as to the purpose and effect of the provision. Civil Code 1670.5. In this action, the trial court found the arbitration clause to be substantively unconscionable for the following reasons: (1) a fair reading of the clause appears to require that arbitration take place in Minneapolis; (2) borrowers are not given a copy of the NAF rules at the time they sign documents binding them to NAF arbitration; (3) even if borrowers were given a copy of the NAF rules, they contain no readily intelligible notice that the arbitration hearing may be had in the locale where the loan agreement was signed; (4) the NAF requires participants to pay considerable fees in order to bring or to defend a claim; (5) the NAF rules do not provide a comprehensible explanation as to how the fees may be waived; (6) the NAF rules allow fee waivers only for the truly indigent, a category which would not include the average borrower; (7) the notice sent by the NAF in Minneapolis to borrowers informing them that a claim has been filed invites the borrower to submit any defenses he or she may have to the NAF in Minneapolis, an act that appellants conceded would confer jurisdiction on the NAF in Minneapolis; and most importantly, (8) the practical effect of the arbitration provision is that ITT Consumer Financial Corporation has been filing claims against California consumers with the NAF in Minneapolis, obtaining default arbitration awards, and then converting those awards into California judgments.

(JA 920-922.) These findings, as well as the trial court's conclusion that they render the arbitration provision unconscionable, are fully supported by the record. 1. The Arbitration Provision Appears to, and in Practical Effect, Does Require Arbitration in a Distant Forum

The arbitration agreement signed by respondents in the Patterson action states that disputes "shall be resolved by binding arbitration by the National Arbitration Forum, Minneapolis, Minnesota and judgment upon any award by the arbitrator may be entered in any court having jurisdiction." (JA 97-104.)12 A fair reading of this provision is that arbitration occurs in Minneapolis, Minnesota. Indeed, at the initial hearing on this matter, it was clear that the provision had lead both respondents' counsel and the trial court to reach such a conclusion. (March 31, 1992 Tr. 12:25-27; 17:14-18:22; 22:24-24:7.) Although appellants argued that the NAF rules do allow for a participatory hearing in locations other than Minneapolis, it takes considerable effort to reach this conclusion. The NAF clearly is designed for commercial disputes that can be resolved by document review. The Initial Claim is filed with the NAF office in Minneapolis, Minnesota. (JA 588-589.) Unless a party specifically requests a participatory hearing, no hearing is held. (See NAF Code of Procedure, Rule 26, JA 374.) The Initial Claim served on the borrower does not inform the borrower of the possibility of a participatory hearing. It states specifically that the respondent may file a written response within 30 days. (JA 588-589.) The Notice of Arbitration, which is supposed to be served along with the Initial Claim, informs the borrower that he or she may demand a participatory hearing, but makes no mention of where the hearing would be held and requires that the borrower submit the required hearing fee (the minimum fee is $750.00). (JA 579 (Notice); 359 (fee schedule). The Initial Claim form, the Respondent's Response form and the

The later version of the provision, signed by respondent Lang, is slightly different. It states that disputes "shall be resolved by binding arbitration in accordance with the arbitration rules of the National Arbitration Forum, Minneapolis, Minnesota, . . ." (JA 78B.)

12

Notice of Arbitration all direct the borrower to submit a written response to, and direct all inquiries to, the NAF in Minneapolis, Minnesota. (JA 579, 589, 592.) After careful review of the lengthy NAF Code of Procedure a borrower might determine that a participatory hearing may be held in his or her home district. Rule 32 states that a participatory hearing shall be held in the federal judicial district where the arbitration agreement was signed, "unless the arbitration agreement designates or the parties agree to a different location." (JA 376.) As the trial court noted, however, even this language is ambiguous because it may suggest to consumers that, based on the language of the arbitration clause, they have already agreed to arbitration in Minnesota. (March 31, 1992 Tr. 23:18-22.) In Barquis v. Merchants Collection Ass'n of Oakland (1972) 7 Cal.3d 94, the California Supreme Court held that the filing of collection actions in a distant and inconvenient forum, with the intent and effect of obtaining an increased number of default judgments, constituted an abuse of process and an unlawful business practice. Id., at 108. In that action, the plaintiffs alleged that an Oakland collection agency deliberately filed collection actions in an improper venue in order to discourage any defensive action by the consumer. Id., at 97. While the Court acknowledged that the individual defendants had a remedy in that they could seek a change of venue under the appropriate statute, it also noted that "the mere filing of an action in an inconvenient forum will inevitably deter many debtors from voicing any objection to the suit." Id., at 105. The same is true in this case in which the arbitration claim is filed in Minnesota. At the time this matter was before the trial court, there were at least six petitions to confirm arbitration awards filed by appellants against California consumers pending in the trial court. (JA 780881.)13 All of these petitions were filed to confirm arbitration awards entered by default by an administrator of the NAF in Minneapolis, Minnesota. (JA 796, 819; 834; 843; 873; 909-911;

These petitions were as follows: ITT v. Purnell, S.F. Superior Court No. 935404; ITT v. Nash, S.F. Superior Court No. 934936; ITT v. Duran, S.F. Superior Court. No. 935441; ITT v. Oliver, S.F. Superior Court No. 934240; ITT v. Borja, S.F. Superior Court No. 934199; and ITT v. Jules, S.F. Superior Court No. 938117.

13

916-917.) (It should also be noted that the court records of these petitions indicate a consistent pattern of improper service.) Because the NAF arbitration process is inaccessible and incomprehensible for consumers, the evidence suggests that appellants routinely obtain default awards against consumers. In purpose and effect, therefore, the arbitration provision is overly favorable to appellants and overly-harsh to borrowers. A & M Produce Co., supra, 135 Cal.App.3d, at 487 Appellants have suggested that their filing of arbitration claims in a distant forum is irrelevant because respondents in this action have not been compelled to submit to arbitration in Minnesota. The issue, however, is not whether the trial court in this action could have compelled arbitration in a local forum, but whether the arbitration provision itself, in its setting, purpose and effect, is unconscionable as a matter of law. Civil Code 1670.5. Based upon evidence showing that the arbitration provision appears to require arbitration in a distant forum, that the arbitration claims are, in fact, filed in a distant forum, and that appellants routinely obtain default arbitration awards against California consumers, the trial court properly found the arbitration provision unconscionable. Furthermore, because this action has been filed on behalf of a class, the issue is not just where arbitration would occur for the individual respondents, but whether every consumer borrower who signed a document containing the arbitration provision must be excluded from the class and forced to arbitrate his or her claims against appellants on an individual basis before the NAF. Such a result would be "unduly oppressive" for those consumers. Graham v. Scissor-Tail, supra, 28 Cal.3d, at 820. 2. The Fees Required By the National Arbitration Forum Are Unduly Oppressive for Consumers.

The substantial cost of arbitration can effectively deny a consumer a forum for resolution of his or her complaints. See Spence v. Omnibus Industries, supra, 44 Cal.App.3d, at 973. The fee schedule for the NAF demonstrates that respondents would be required to pay substantial fees in order to arbitrate their claims against appellants before the NAF. (JA 358-362.) For a claim

of only $25,000, which is well within the range of the claims asserted by each of the respondents in this action, the filing fee would be $700. Id. Because respondents request non-monetary relief, (even assuming the arbitrator had the power to grant such relief), the filing fee might be adjusted upward by the arbitrator. Id. The fee for a participatory hearing, which must be paid at the time the hearing is requested, would be $1,250.00 for the initial three-hour session, plus $1,000 for each additional three-hour session. Id. Because respondents allege claims against more than one party, an additional fee of $250 per session is added for each additional party. (JA 361.) There are additional fees for any discovery hearings. (JA 360.) Thus, assuming claims of only $25,000, a two-day hearing, and two additional parties, each respondent would be required to pay fees in excess of $3,950. There can be no doubt that this is unduly oppressive for the average consumer borrower. This is particularly true given that, if the consumer were not required to submit to arbitration, the fee for filing an action in California superior court would be less than $200, and the consumer would be able to participate in a class action that would require no individual expenditure. As the court noted in Spence, supra, 44 Cal.App.3d, at 973: The contrast between [arbitration] fees and court filing fees is rather startling. . . . In the instant case, with a claim of $37,000, the filing fee in the Superior Court of Riverside County is $50.50, but it will cost plaintiffs $720 to submit the matter to arbitration-- a not inconsiderable disparity. The reason for this disparity is obvious. Courts are established and supported by the State in order to afford forums to which all, rich and poor alike, may present controversies at minimum cost to the parties. If the parties are equal in bargaining power, arbitration is good. If the parties are not equal, arbitration may deny a forum to the weaker.14 The fact that the filing and hearing fees of the NAF may be waived upon an affidavit of poverty does little to cure the defect. First, as the trial court found, the rules setting forth the requirements for the fee waiver are practically incomprehensible. (JA 921-922.) While appellants strive to explain these rules in detail in their opening brief, (Opening Brief, at 27-30), In Spence, the plaintiff consumers did not dispute the trial court's order compelling arbitration, but did appeal that portion of the court's order requiring them to pay the arbitration filing fee. The appellate court found that the plaintiffs had the right to waive arbitration by filing the action in superior court, and that if the defendants wanted to compel arbitration, they would be the "initiating party" and would be responsible for paying the filing fees. 44 Cal.App.3d, at 975. "Of course, had plaintiffs originally instituted arbitration, they would have had to pay the filing fee. They did not and if defendants really want arbitration they can pay for it. The judicial zeal for arbitration cannot be blindly used so as to cause a palpable injustice." Id.
14

the record demonstrates that, at the initial hearing on this matter, there was considerable confusion among all parties, including counsel for appellants, as to the meaning of the NAF rule regarding fee waivers. (March 31, 1992 Tr. 15:22 - 17:10; 24:15 - 26:8; 46:14-48:8.) If it took several attorneys and one judge, with well over fifty years of legal experience among them, over an hour to discern the meaning of the rules, it is reasonable to assume that the average consumer borrower might also have some difficulty. Furthermore, the fee waiver is available only to those individuals who are truly indigent as defined by the federal poverty guidelines. (See Declaration of Susan Stillwell, JA 576.) Even though most consumer borrowers could not afford the substantial fees required by the NAF, they would not fall below the federal poverty guidelines. Thus, most consumer borrowers would be ineligible for the fee waiver regardless.15 As the court noted in Spence, "there are many citizens who are not paupers who do not have sufficient funds to pursue arbitration when the filing fee is as large as was the filing fee in this case [$720]. For these citizens, the arbitration remedy is illusory." Spence, supra, 44 Cal.App.3d, at 976. 3. The Arbitration Forum is Unreasonably Favorable to Appellants and Overly Harsh for Consumer Borrowers, Resulting in an Unjustifiable One-Sided Result Appellants claim that the purpose and effect of the arbitration provision is to provide a "neutral and efficient" forum within which disputes can be resolved expeditiously. (Opening Brief, at 21.) There is absolutely no evidence in the record to support this assertion. In fact, the evidence strongly suggests that the actual purpose of the provision is to allow appellants to obtain default arbitration awards in Minnesota against California consumers, with a minimum of proof and a minimum of expenditure, and that the actual effect of the provision is to insulate appellants from judicial enforcement of consumer protection statutes in California. As noted above, the

Appellants' comparisons to the requirements for in forma pauperis filing in California courts are unavailing. It is not the requirement of the affidavit of poverty that is the problem; it is the poverty. The requirement of actual indigency is reasonable when the filing fee sought to be avoided is less than $200. Given that the filing fees for the NAF are substantially greater, ($1,000 to $5,000) the requirement of actual indigency (based on federal poverty guidelines) is clearly unreasonable.

15

trial court had before it evidence of several petitions to confirm arbitration awards filed by appellants in the San Francisco Superior Court. All of those awards had been entered by default by an administrator of the NAF. According to the declaration of Rory Clark, counsel for appellants in the confirmation of arbitration awards, if a borrower fails to respond to a an arbitration claim filed in Minnesota within thirty days, the arbitration award is entered "in an administrative fashion by the executive administrator of the NAF." (JA 910.) Appellants are not even required to appear before the arbitrator to answer questions or to prove their claim. Id. Indeed, the evidence indicates that "arbitration" is not occurring at all. The entire process is an administrative "rubber stamp" of claims filed by appellants against California consumers being performed by an administrator in an office in Minnesota. The evidence also demonstrates that the arbitration provision is one-sided, apparently for the specific purpose of shielding appellants from class action litigation under California consumer protection statutes. In the more recent version of the arbitration provision, such as that signed by respondent Lang, only claims exceeding $3,000 are subject to arbitration. (JA 78A78B.) Most consumer loans made by appellants, including all of the loans made to respondents, were for amounts ranging between $2,000 and $2,800, including amounts financed for insurance premiums. By limiting the arbitration clause to disputes in excess of $3,000, appellants have carved out for themselves the option of filing collection actions in small claims or municipal courts. While small claims court is a more accessible forum for consumers than the NAF in Minneapolis, the actual effect of the arbitration provision is to allow appellants access to small claims court for collections activity, while simultaneously precluding judicial review of any counterclaims or other affirmative claims by consumers against appellants. This is exactly what happened in this action. Appellants sued respondent Lang in the small claims division of San Francisco Superior Court seeking damages of $2,500. (JA 761762.) When respondent Lang filed his own complaint against appellants in Superior Court and transferred the small claims action, appellants immediately invoked the arbitration provision. (JA 64-68.) Like respondent Lang, any consumer who alleges fraud or unfair business practices

against appellants is likely to allege damages in excess of $3,000. Similarly, because the arbitration provision requires that class claims be aggregated, any class action seeking declaratory and/or injunctive relief under California consumer protection statutes would involve claims in well excess of $3,000. In effect, therefore, appellants are able to avoid the arbitration clause in collections activity, but invoke it as a shield whenever any consumer attempts to assert affirmative claims under California consumer protection statutes. The arbitration provision thus provides appellants an unfair advantage and disadvantages consumer borrowers, resulting in an "overly harsh or one-sided" result. U.S. Roofing v. Credit Alliance Corp., supra, 228 Cal.App.3d, at 1448; Dean Witter Reynolds, supra, 211 Cal.App.3d, at 768. 4. The Arbitration Provision Is Unduly Oppressive Because It Precludes Consumer Borrowers from Participating in Class Actions and Insulates Appellants from Liability Under California Consumer Protection Statutes The NAF is designed to resolve contract disputes between individual commercial entities on a case-by-case basis, preferably by document review. There is no provision in the NAF Code of Procedure for the arbitration of class actions. Nor is there any specific provision for the granting of prospective declaratory and injunctive relief. (JA 365-383.) Although the Code allows for the exchange of documents, it is not clear that consumers would be entitled to the extensive discovery necessary to establish the requisite pattern of unlawful practices for a claim under Business and Professions Code 17200, et seq. See State Ex. Rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1170. Even if the NAF were equipped to arbitrate a class action, the filing and hearing fees would be astronomical. (JA 358-361.) By forcing consumers to submit to arbitration before the NAF, therefore, appellants are attempting to reduce every consumer claim to an individual dispute, thus blocking any class action litigation and shielding their pattern of unlawful conduct from liability under California's consumer protection statutes.16 While courts in California have acknowledged the possibility of a class-wide arbitration "in appropriate cases" (see Izzy v. Mesquite Country Club (1986) 186 Cal.App.3d 1309), there is no evidence or indication in the record that the NAF is either willing or equipped to perform an arbitration on such a grand scale or that appellants would submit to the injunctive jurisdiction of the NAF in a class-wide arbitration.
16

Compelling arbitration in this case would exclude respondents from the class, prevent them from sharing in any class-wide relief, and effectively preclude them from asserting their claims under Business and Professions Code 17200, et seq. Such a result would be unduly oppressive for respondents and other consumers, demonstrating the unconscionability of the arbitration provision. When it can be established that the clear effect of an arbitration procedure is to deny a party a fair opportunity to present his case, the court should refuse to compel arbitration. Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d, at 826.17 IV. The Trial Court's Order Temporarily Staying Appellants' Confirmation Of Default Arbitration Awards Entered Against California Consumers By The NAF In Minnesota Was A Reasonable Exercise Of The Court's Discretion Having determined that the arbitration provision sought to be enforced by appellants is unconscionable, and having determined that petitions to confirm awards entered pursuant to that provision are currently pending in the trial court, the court exercised its discretion to temporarily stay the confirmation of those awards pendente lite. To ensure that appellants' legitimate claims would not be prejudiced by the stay, the trial court carefully crafted an order allowing appellants access to any court otherwise having jurisdiction. (JA 922-925.) This order represented sound judicial management of a burgeoning class action, a wise use of judicial resources, and was well within the trial court's power and discretion. Nevertheless, appellants challenge the order on three grounds: that respondents lack standing to seek such an order; that the order is overbroad and unnecessary; and that it is contrary to state and federal policy favoring arbitration. Each of these challenges may be summarily dismissed in light of applicable California law.

In Perry v. Thomas, supra, 482 U.S. 483, the Supreme Court held that a state may not refuse to enforce an actual agreement to arbitrate negotiated under the Federal Arbitration Act by requiring a judicial forum for certain statutory causes of action. Id., at 491. Whether an arbitration provision is unconscionable, however, in a given case for particular parties, is a separate issue. The arbitration provision appellants seek to enforce by this appeal is unduly oppressive for respondents and other consumers who seek to challenge appellants' unlawful business practices. This renders the provision unconscionable under California law and unenforceable under both the Federal and California Arbitration Acts.

17

A. Respondents Have Standing as Members of the General Public to Challenge Appellants' Unfair Business Practices, Including the Enforcement of an Unconscionable Arbitration Provision Appellants mistakenly claim that respondents have no standing to challenge the confirmation of arbitration awards against other consumers. It is well-established that any person may challenge unfair and unlawful business practices under Business and Professions Code 17200 et. seq. on behalf of the general public even if the named plaintiff has not been personally damaged by the challenged conduct. See Consumers Union of U.S. v. Fisher Dev. (1991) 208 Cal.App.3d 1433, 1438, citing Perdue v. Crocker National Bank, supra, 38 Cal.3d, at 929; Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 70-73. A named plaintiff may seek to prevent an on-going practice for the protection of the general public even if the action is not filed on behalf of a class or if no class has yet been certified. Hernandez, 105 Cal.App.3d, at 72. Respondents in this action challenge appellants' unfair, unlawful, unconscionable, and fraudulent business practices, including the use of an unconscionable arbitration provision, on behalf of themselves, a class of others similarly situated, and the general public. Accordingly, respondents had standing to assert the unconscionability of the arbitration provision generally and on behalf of other consumers in the general public. Having found the provision unconscionable, the trial court wisely exercised its discretion to prevent appellants' continued reliance on it in San Francisco Superior Court. B. The Trial Court's Order Is Temporary, Narrow, and Necessary to Preserve the Status Quo Appellants characterize the trial court's order as a "broad" and "sweeping" injunctive order. (Opening Brief, at 36.) This an obvious overstatement. The order was a temporary stay, pendente lite, of all pending and future petitions to confirm arbitration awards filed by appellants in the trial court. The granting of a stay is within the trial court's equitable discretion. See Webster v. Superior Court (1988) 46 Cal.3d 338, 345. The order did not enjoin all collection activity by appellants. Indeed, it specifically allowed legitimate collection activity in all San Francisco courts. Nor did the order enjoin the confirmation of arbitration awards in other counties. The order was specifically and narrowly tailored to prevent appellants' continued

reliance in San Francisco Superior Court on a provision found to be unconscionable by that very court. The court found the arbitration provision to be unconscionable, not just as to respondents, but in general, in the manner in which it is foisted onto consumers and in the manner in which the process prevents consumers from asserting defenses. Having made this determination, it would have been manifestly illogical and improper for the trial court to continue to rely on that provision in confirming arbitration awards into judgments. Appellants argue that the order is unnecessary because each consumer may appear individually in response to the petition and request that the court vacate the arbitration award. There are two fundamental problems with this suggested "remedy." First and foremost, as discussed supra, the California Supreme Court has recently held that any arbitration decision is final and binding, even if clearly wrong, save upon grounds specifically set forth in the statute. Moncharsh v. Heily & Blase, supra, 3 Cal.App.4th 1. This is a heavy presumption for any consumer to overcome. Second, even though the evidence would establish the absence of an agreement and the unconscionability of the provision for each consumer, much as respondents have established in this action, this remedy places the onus on the consumer to appear at the confirmation stage and to create the necessary record. Most consumers would have neither the wherewithal nor the resources to do so. This is the very purpose of actions filed under Business and Professions Code 17200 and the Consumer Legal Remedies Act -- to create remedies for consumers who otherwise would be required to defend themselves individually. Furthermore, this action is filed on behalf of a class of consumer borrowers. Although no class has yet been certified, it would have been highly imprudent for the trial court simply to ignore the nature of the litigation. And as the court noted, the order was necessary to ensure that appellants did not rush to obtain judgments against consumers thereby jeopardizing their status as future class members. A court has the discretion to issue an order preserving the status quo and protecting the interests of potential class members. See County of Inyo v. City of Los Angeles (1976) 61 Cal.App.3d 91, 100. Moreover, it is clear that the underlying purpose of appellants' attempt to compel arbitration is to exclude respondents and all other consumers who may have

signed an arbitration provision from participating in this class action. The court's order finding the provision unconscionable in setting, purpose and effect for all consumers, not just respondents, was necessary to establish the potential class membership of others who may also have been subjected to the provision. C. There Is No State of Federal Policy Favoring the Enforcement of Unconscionable Arbitration Provisions As is discussed in Sections II and III, infra, the arbitration provision used by appellants in adhesive consumer lending contracts is unenforceable because it is unconscionable and because consumers do not knowingly and willing agree to submit to arbitration. Neither the Federal nor the California Arbitration Acts evidence any policy whatsoever favoring the enforcement of such a provision. The "policy favoring arbitration" appellants hide behind is "at bottom a policy guaranteeing the enforcement of private contractual agreements." Mitsubishi Motors Corp, supra, 473 U.S. 614, 625-26. The unconscionable arbitration provision forced on consumers without their knowledge or consent by appellants is entitled to no such protection. Indeed wellestablished law mandated the trial court's finding of unconscionability and subsequent refusal to enforce the provision. CONCLUSION The record in this case establishes that respondents did not agree to submit their claims against appellants to arbitration and that the arbitration provision appellants seek to enforce against consumer borrowers is unconscionable. For these and all the foregoing reasons, this Court must uphold the trial court's order denying appellants' petitions to compel arbitration. DATED: September 15, 1992 Respectfully submitted, Attorneys for Plaintiffs/Respondents

1.2

Complaint Challenging Mandatory Arbitration Clause Found in Credit Card "Stuffer"


SUPERIOR COURT OF THE STATE OF CALIFORNIA IN AND FOR THE CITY AND COUNTY OF SAN FRANCISCO

MARY BADIE, WILLIAM BADIE, GLADYS DOE AND TIMOTHY SMITH, individually, and CONSUMER ACTION, a non-profit membership organization, and CALIFORNIA TRIAL LAWYERS ASSOCIATION, a voluntary membership organization, all as private attorneys general, Plaintiffs, [vs.] BANK OF AMERICA, a California corporation, Defendant. Case No. COMPLAINT FOR VIOLATIONS OF THE CONSUMER LEGAL REMEDIES ACT, THE UNFAIR BUSINESS PRACTICES ACT, AND FOR DECLARATORY AND INJUNCTIVE RELIEF Type of Case: (Other): Unfair Business Practices 1. Plaintiffs, by their attorneys, bring this challenge to defendant's unilateral attempt to deprive its consumer customers of access to the courts and of their constitutional rights to trial by judge and jury. They seek declaratory and injunctive relief against defendant's imposition of the requirement that disputes be resolved by arbitration or reference as an unlawful, unfair and deceptive business practice on behalf of all affected members of the general public. Plaintiffs complain and allege as follows: THE PARTIES A. Plaintiffs. 2. Plaintiffs Mary Badie and William Badie, husband and wife, are over 18 years of age and are residents of the City of Smallville, County of Los Angeles. Since 1990, Mary Badie has been the primary holder of a Gold Visa account with Bank of America, on which plaintiff William Badie is and has been an authorized user. Plaintiffs Mary Badie and William Badie also have a joint checking account with defendant Bank of America, which was originally opened at

Security Pacific National Bank (SPNB) and then transferred to defendant when it acquired SPNB. Plaintiffs Mary Badie and William Badie recently received a "Change of Terms Notice" included as a "stuffer" with other documents in a monthly statement by which Bank of America purported to change the terms of these accounts by requiring arbitration or reference of any controversy involving them. 3. Plaintiff Gladys Doe is over 18 years of age and is a resident of the City of Long Beach, County of Los Angeles. Since approximately 1957, plaintiff Doe has maintained an active Visa account with Bank of America. Plaintiff Doe recently received a "Change of Terms Notice" included as a "stuffer" with other documents in a monthly statement by which Bank of America purported to change the terms of this account by requiring arbitration or reference of any controversy involving it. 4. Plaintiff Timothy Smith is over 18 years of age and a resident of the City of Van Nuys, County of Los Angeles. For a number of years, plaintiff Smith has maintained an active Visa account with Bank of America. Plaintiff Smith recently received a "Change of Terms Notice" included as a "stuffer" with other documents in a monthly statement by which Bank of America purported to change the terms of this account by requiring arbitration or reference of any controversy involving it. 5. Plaintiff Consumer Action ("CA") is a non-profit membership organization committed to consumer education and advocacy. CA was established 21 years ago, and has approximately 1,600 members. CA is headquartered in San Francisco and has members throughout California. As a service to consumers in California and elsewhere, CA publishes and distributes approximately 1,000,000 pieces of literature a year, in 8 different languages, on banking and utility issues, including an annual survey on bank credit cards. In addition, CA is actively involved in policy and legislative advocacy on credit and banking issues on behalf of consumers at both the state and national levels. 6. Plaintiff California Trial Lawyers Association ("CTLA") is a voluntary membership organization of approximately 5,500 trial attorneys throughout California. The organization was

founded in 1962 and its members predominantly represent victims of consumer fraud and injured tort victims. CTLA has taken a leading role in the protection of the right to trial by jury, and in advancing and protecting the rights of injured victims in both the courts and the legislature.

B. Defendant.

7. Defendant Bank of America is, and at all times material hereto was, a national banking association and a California corporation with its principal place of business in San Francisco, California. It is, through its officers, agents, and employees, engaged in the banking business, including the bank credit card business, and the checking account business, and is doing such business in California with offices located in San Francisco, California and many other California locations. 8. Plaintiffs are not superiors of or superintending officers authorized to exert "visitorial powers" over defendant Bank of America. 9. Plaintiffs are not authorized to enforce observance by defendant Bank of America of federal laws and regulations. Plaintiffs to not seek to control defendant Bank of America but merely to obtain a declaration of rights and responsibilities and injunctive relief relying on state law.

C. Private Attorney General Allegations.

10. This action is brought by plaintiffs acting as private attorneys general pursuant to the Unfair Business Practices Act. A private attorney general action pursuant to Business and Professions Code 17203 and 17204 is appropriate and necessary because Bank of America has engaged in the acts described herein as a general business practice. Plaintiffs request in this claim that this court decide that the arbitration and reference requirements unilaterally imposed on its customers by Bank of America are each unlawful, unfair, deceptive and unenforceable, and

enjoin Bank of America from unilaterally imposing these requirements on its customers' accounts. VENUE 11. Venue is appropriate in the County of San Francisco pursuant to California Civil Code 1780(c) and Code of Civil Procedure 395(a) because defendant is doing business, and defendant has its principal place of business, in San Francisco. FIRST CAUSE OF ACTION FOR INJUNCTIVE RELIEF (Violation of Consumer Legal Remedies Act, California Civil Code 1750, et seq., Brought by the Individual Plaintiffs) 12. Plaintiffs reallege and incorporate herein as though set forth in full, the allegations of paragraphs 1 through 11 above, inclusive. 13. Defendant possesses bargaining strength and power far superior to that of its customers. Without discussion or negotiation, it offers to its credit card customers and checking account customers standardized form contracts, drafted by the Bank, which are contracts of adhesion because they are offered on a take-it-or-leave-it basis and the customer has the opportunity only to adhere to the contract or reject it. Many of its credit card agreements and deposit account agreements with customers were entered into years ago. 14. Within the last few weeks, defendant has purported to change the terms of those standardized contracts unilaterally through another standardized form which specifies that controversies will be decided either by arbitration or reference. Defendant has notified customers of this change by inserting a "stuffer" with their monthly credit card and checking account statements along with other materials including newsletters and solicitations. The "Change of Terms Notice" for credit card accounts is attached hereto as Exhibit A, and a similar notice for deposit accounts is attached as Exhibit B; both are incorporated herein by reference [neither is reprinted infra]. The arbitration and reference provision is also adhesionary and is sent to customers on a take-it-or-leave-it basis, giving them the option only of adhering to the provision or closing their accounts. That provision would deprive consumer customers of free and equal

access to the courts, of their constitutional rights to trial by judge or jury, and to the protection of due process of law and would severely curtail or eliminate their ability to obtain discovery from the defendant Bank. Additionally, it would impose on them exorbitant fees, including filing fees, administrative fees, processing fees, fees for hearings, for postponing hearings, and for hearing rooms, and charges for compensation for arbitrators, thereby making dispute resolution many times more expensive than litigation. Moreover, the substitution of arbitration and reference for the courts would remove these matters from the public domain and deprive consumers of the benefits of precedential value for decisions in their favor, requiring similar disputes to be resolved anew each time. Finally, it would relegate them to a process which is biased in favor of the Bank. 15. The arbitration provision does not fall within the reasonable expectations of the consumer party and is unduly oppressive or unconscionable. It is, therefore, unenforceable. 16. Plaintiffs bring this action seeking injunctive relief pursuant to California Civil Code 1770 and 1780. The Consumer Legal Remedies Act, Civil Code 1750, et seq. is designed to protect consumers against unfair and deceptive business practices. It applies to defendant's conduct because it covers transactions which are intended to result or which result in the sale or lease of goods or services to consumers. The transactions between the defendant Bank and its cardholders and customers involve the sale of financial services to consumers primarily for personal, family or household purposes. The Act specifically proscribes in 1770(n) representing that a transaction confers or involves rights, remedies, or obligations which it does not have or involve or which are prohibited by law, and prohibits in 1770(s) inserting an unconscionable provision in the contract. 17. Defendant's imposition of the arbitration and reference requirement is a violation of those statutory provisions. The defendant Bank has falsely claimed in written representation to the public generally that the change in terms will benefit customers and will provide a less costly means of resolving disputes. The defendant's spokesperson further represented in its press release that after decision of the referee, the trial judge would be "required to make it his

judgment." Defendant bank, therefore, has represented that its arbitration and reference clause involves rights and obligations which it does not have and obligations which are prohibited by law in violation of 1770(h). The clause also violates 1770(s) because the provision is unconscionable. 18. Pursuant to California Civil Code 1770 and 1780, plaintiffs are entitled to enjoin implementation of that provision and to recover their reasonable attorneys fees and costs.

SECOND CAUSE OF ACTION FOR INJUNCTIVE RELIEF (Violation of the Unfair Trade Practices Act, California Business and Professions Code 17200, et seq., By All Plaintiffs) 19. Plaintiffs reallege and incorporate herein by this reference each and every allegation set forth in paragraphs 1 through 18 above, inclusive. 20. Plaintiffs file this Second Cause of Action acting as private attorneys general to challenge defendant's requirement that its customers resolve disputes through arbitration or reference by the American Arbitration Association. The Unfair Trade Practices Act defines unfair competition to include any "unfair," "unlawful," or "deceptive" business practice. Business and Professions Code 17200. The Act authorizes injunctive relief and restitution for violations. Id., at 17203. Defendant has imposed the requirement that disputes be resolved through arbitration or reference as a business practice. Plaintiffs request that this Court enjoin this practice as unlawful, unfair and deceptive. 21. The imposition of the arbitration or reference requirement is an unlawful business practice because it: a. Violates the Consumer Legal Remedies Act (California Civil Code 1750, et seq.) in that the Bank represents that the transactions involve rights and obligations which they do not and obligations which are prohibited by law.

b.

Violates the Consumer Legal Remedies Act (California Civil Code 1750, et seq.) in that it inserts unconscionable provisions in the contracts between the Bank and its customers;

c.

Attempts to modify an existing written contract without complying with the provisions of Civil Code 1550, 1565, 1580, 1581, 1605. No valid or enforceable contract is created by the Bank's notices of change of terms. These documents do not appear to be a contract. The consumer parties do not sign the document or otherwise give any reasonable manifestation of their assent to be bound by its terms, the notice does not specify all the terms to be changed or the implications of those changes, there is no meeting of the minds, and there is no sufficient consideration because there is no benefit conferred or agreed to be conferred upon the consumer or any detriment suffered or agreed to be suffered by the defendant Bank;

d.

Deprives consumers whose disputes are relegated to arbitration of their constitutional rights to trial by jury, guaranteed by the California Constitution Article 1, 16, and to trial by duly appointed judges guaranteed by Article 6, 21-22, and further deprives them of their statutory rights to conduct discovery pursuant to Code of Civil Procedure 2016, et seq., and of their constitutional right to due process and to equal protection of the laws under Article 1, 7(a) without their knowledge, consent, or any voluntary act by which such rights were waived; and

e.

Deprives consumers whose disputes are referred of the safeguards contained in Article 6, 21 and 22 of the California Constitution, and of their rights to due process and equal protection under Article 1, 7(a), by an unauthorized delegation of a judicial function to a referee, whose powers are constitutionally limited to subordinate judicial issues, and of the rights guaranteed under Code of Civil Procedure 638 and 639, which specify that without the parties' consent to

reference, the report and findings of the referee must be advisory only and require approval of a court in order to be binding. In violation of these statutes and constitutional mandates, defendant's practice is to insist that after a referee's decision is submitted to the trial judge, the judge is absolutely "required to make it his judgment."

22. Defendant's practice is also unfair because it is substantially injurious to consumers for each of the reasons set forth in the preceding paragraph and, in addition, because it: a. Is not called to the attention of the Bank's consumer customers, yet when a dispute arises and the credit card customer learns of the existence of the notice of change of terms, the customer may be deterred from challenging it in the belief that he or she is bound to it because the card continued to be used, and therefore the new provision applies to all past transactions. b. Substitutes for courts and juries the American Arbitration Association and a process for dispute resolution which is biased in favor of business interests and will be biased in favor of the defendant bank as one of its best customers; c. Removes resolution of disputes from the public domain, and deprives consumers of the benefit of precedent in cases decided in their favor; and d. Requires consumers to pay inordinate and exorbitant fees, far in excess of those which would be charged by courts, for filing of claims, administrative fees, processing fees, hearing fees, fees for postponing hearings, and fees for hearing rooms. Additionally, consumers would be required to pay compensation for the arbitrators who would resolve these disputes through arbitration and reference, rather than submit their disputes for resolution by the courts and judges funded by their taxes. 23. Defendant's practice is also deceptive in that:

a.

The change in terms is not embodied in a contractual document which the consumer must review and sign;

b. c.

The change in terms is not fully and sufficiently disclosed to consumers; The change in terms is not brought to the consumer's attention in any meaningful way;

d.

The change in terms for credit card customers appears to apply to past disputes if the customer continues to use the card;

e.

The defendant Bank has falsely claimed in its press release directed to the general public that the change in terms will benefit consumers and will be less costly than litigation for resolving disputes;

f.

The defendant Bank has not disclosed in the notices to consumers its decree that judges be required to accept decisions issued by referees without independently exercising their judicial authority and discretion to refuse to accept or to reject improper, unsupported, unsound, or unlawful decisions.

24. Pursuant to Business and Professions Code 17200, et seq., plaintiffs are entitled to enjoin these practices, both preliminarily and permanently, and seek to do so on behalf of themselves and on behalf of members of the general public who are, have been, or may be subjected to defendant's unlawful, unfair and deceptive practice. Plaintiffs are also entitled to recover their reasonable attorneys' fees, pursuant to Code of Civil Procedure 1021.5.

THIRD CAUSE OF ACTION (Declaratory Relief Brought by the Individual Plaintiffs) 25. Plaintiffs reallege and incorporate herein as though set forth in full the allegations of paragraphs 1 through 24 above, inclusive. 26. An actual controversy has arisen and now exists relating to the rights and duties of the parties herein in that plaintiffs contend that the defendant's notices of change of terms are unenforceable, void and of no force or effect in all respects, whereas defendant contends that its

notices are valid, create binding contracts, and are enforceable in all respects. Plaintiffs maintain that each such notice is unlawful and unenforceable in that it is unconscionable, deceptive and misleading in violation of the Consumer Legal Remedies Act, violates the Unfair Trade Practices statute, Business and Professions Code 17200, et seq., does not create a binding contract, infringes on protections guaranteed by the California Constitution and applicable statutes, and is oppressive and unfair. Defendant disputes these contentions and asserts that each notice of change of terms is valid, contractually binding, and enforceable. 27. Plaintiffs desire a declaration as to the validity and enforceability of the notice of change of terms and whether defendant Bank of America's unilateral attempt to impose it is unlawful, unfair or deceptive. A judicial declaration is necessary and appropriate at this time so that plaintiffs may ascertain their rights and duties, and those of other affected persons in regard to the resolution of disputes with defendant Bank of America. Wherefore, plaintiffs pray: 1. That this Court issue a declaration of the respective rights and obligations of the parties; 2. That this Court declare that the defendant's practice of imposing arbitration and reference on its customers' accounts violates the Consumers Legal Remedies Act because it is unconscionable, and violates the Unfair Trade Practices Act because it is unlawful, unfair, and deceptive; 3. That this Court preliminarily and permanently enjoin defendant from unilaterally imposing the arbitration and reference requirement for resolving disputes with customers; 4. That plaintiffs be awarded reasonable attorneys' fees and costs of suit; and 5. That plaintiffs be awarded such other and further relief as the Court may deem appropriate, just and proper. DATED: August 4, 1992 Respectfully submitted, Attorneys for Plaintiffs

1.3

Trial Brief Challenging Mandatory Arbitration Clause Found in Credit Card "Stuffer"
SUPERIOR COURT OF THE STATE OF CALIFORNIA IN AND FOR THE CITY AND COUNTY OF SAN FRANCISCO

MARY BADIE, WILLIAM BADIE, GLADYS DOE AND TIMOTHY SMITH, individually, and CONSUMER ACTION, a non-profit membership organization, and CALIFORNIA TRIAL LAWYERS ASSOCIATION, a voluntary membership organization, all as private attorneys general, Plaintiffs, [vs.] BANK OF AMERICA, a California corporation, Defendant. Case No. PLAINTIFFS' TRIAL BRIEF TRIAL DATE: February 9, 1994

TABLE OF CONTENTS

I. INTRODUCTION II. FACTS AND PROCEDURAL BACKGROUND III. THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE THE BANK'S PURPORTED CHANGE OF TERMS DOES NOT CREATE AN ENFORCEABLE CONTRACT A. No Contract Was Created Because There Was No Offer Communicated, No Agreement to the Purported Change, No Manifestation of Assent, and No Consideration

B.

No Contract Was Created Because the Notice Was Inadequate to Inform Consumers of the Terms of the Purported Modification

C.

No Contract Was Created Regarding Reference Because the Prerequisites Are Not Satisfied

IV. V.

THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE WAIVER REQUIRES KNOWING CONSENT THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE THE ADR CLAUSE IS UNCONSCIONABLE A. B. The Setting, Purpose and Effect of the ADR Clause Render It Unconscionable The ADR Clause Is Unconscionable Because the Bank Concealed the Terms of the Purported Modification and Because the Effect of the Change Is to Deprive Consumers of Constitutional Rights Without Their Consent

VI.

THE COURT SHOULD ENJOIN THE IMPLEMENTATION OF THE ADR PROVISION BECAUSE, IN IMPOSING THE CLAUSE ON THE CONSUMER ACCOUNT AGREEMENTS, BANK OF AMERICA HAS VIOLATED THE UNFAIR PRACTICES ACT AND THE CONSUMERS LEGAL REMEDIES ACT A. B. Bank of America's Conduct Violates The Unfair Practices Act Bank of America's Conduct Violates the Consumers Legal Remedies Act

VII. CONCLUSION

TABLE OF AUTHORITIES CASES: A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 186 Cal.Rptr. 114 Aetna Life Ins v. Superior Court (1986) 182 Cal.App.3d 431, 227 Cal.Rptr. 460 American Home Assur. Co. v. Benowitz, (1991) 234 Cal.App.3d 192, 285 Cal.Rptr. 626 Arthur Phillip Export Corp. v. Leathertone, Inc. (1949) 275 App.Div. 102, 87 N.Y.S. 2d 665 Baar v. Tigerman (1983) 140 Cal.App.3d 979, 189 Cal.Rptr. 834 Badgley v. Van Upp (1993) __ Cal.App.4th __, 24 Cal.Rptr.2d 406 Baker v. Baker (1858) 10 Cal.527

Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 101 Cal.Rptr. 745 Bird v. Superior Court (1980) 112 Cal.App.3d 595, 169 Cal.Rptr. 530 Brooks v. Allard (1966) 244 Cal.App.2d 283, 53 Cal.Rptr. 82 California State Automobile Association Inter-Insurance Bureau v. Barrett Garages (1967) 257 Cal.App.2d 71, 64 Cal.Rptr. 699 Carboni v. Arrospide (1992) 2 Cal.App.4th 76, 2 Cal.Rptr. 2d 845, rev. denied Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 223 Cal.Rptr. 838 Commercial Factors v. Kurtzman Bros. (1955) 131 Cal.App.2d 133, 280 P.2d 146 Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 197 Cal.Rptr. 783 Consumers Union of United States, Inc. v. Fisher Development, Inc. (1989) 208 Cal.App.3d 1433, 257 Cal.Rptr. 151 Dean Witter Reynolds v. Superior Court (1989) 211 Cal.App.3d 758, 259 Cal.Rptr. 789 Dunner v. Hoover (1941) 43 Cal.App.2d 753, 111 P.2d 737 Ellsworth v. Ellsworth (1954) 42 Cal.2d 719, 269 P.2d 3 Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 197 Cal.Rptr. 581 Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 6 Cal.Rptr. 2d 487 Fletcher v. Security Pacific Nat. Bank (1979) 23 Cal.3d 442, 153 Cal.Rptr. 28 Fooshe v. Sunshine (1950) 96 Cal.App.2d 336, 215 P.2d 66 Freeman v. State Farm Mut. Auto Ins. Co. (1975) 14 Cal.3d 473, 121 Cal.Rptr. 477 Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 171 Cal.Rptr. 604 Guild Wineries & Distilleries v. Land Dynamics (1980) 103 Cal.App.3d 966, 163 Cal.Rptr. 348 Hebert v. Harn (1982) 133 Cal.App.3d 465, 184 Cal.Rptr. 83 Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 164 Cal.Rptr. 279 Holt v. Kelly (1978) 20 Cal.3d 560, 143 Cal.Rptr. 625 In Re Edgar M. (1975) 14 Cal.3d 727, 122 Cal.Rptr. 574

In Re Hart's Estate (1938) 11 Cal.2d 89, 77 P.2d 1082 In Re John H. (1978) 21 Cal.3d 18, 145 Cal.Rptr. 357 In Re Marriage of Moore (1980) 113 Cal.App.3d 22, 169 Cal.Rptr. 619 In Re Perrone C. (1979) 26 Cal.3d 49, 160 Cal.Rptr. 704 In the Matter of Gregory M. (1977) 68 Cal.App.3d 1085, 137 Cal.Rptr. 756 International Jet Ski Boating v. Superior Court (1991) 232 Cal.App.3d 112, 283 Cal.Rptr. 33 Izzy v. Mesquite Country Club (1986) 186 Cal.App.3d 1309, 231 Cal.Rptr. 315 KC Working Chem. Co. v. Eureka-Security F & M Ins. Co. (1947) 82 Cal.App.2d 120, 185 P.2d 832 Los Angeles Investment Co. v. Home Savings Bank (1919) 180 Cal.601, 182 P.293 Marathon National Bank v. Superior Court (1993) __ Cal.App. __, 24 Cal.Rptr. 2d 40 McRae v. Superior Court (1963) 221 Cal.App.2d 166, 34 Cal.Rptr. 346 Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr. 2d 183 Mosk v. Nat'l Res. Co. (1962) 201 Cal.App.2d 765, 20 Cal.Rptr. 516 Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, 18 Cal.Rptr. 2d 563, rev. denied, pet. for cert. pending, No. 93-952 Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 216 Cal.Rptr. 345 Ramirez v. Superior Court (1980) 103 Cal.App.3d 746, 163 Cal.Rptr. 223 San Diego Fruit & Produce Co. v. Elster (1954) 127 Cal.App.2d 80, 273 P.2d 70 Sandoval v. Salazar (1922) 57 Cal.App. 756 Sarracino v. Superior Court (1974) 13 Cal.3d 1, 118 Cal.Rptr. 2115 Sorg v. Fred Weisz & Associates (1970) 14 Cal.App.3d 78, 91 Cal.Rptr. 918 Southern Cal. Acoustics Co. v. C.V. Holder, Inc. (1969) 71 Cal.2d 719, 79 Cal.Rptr. 319 Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970, 119 Cal.Rptr. 171 Titan Group v. Sonoma Valley County Sanitation (1985) 164 Cal.App.3d 1122, 211 Cal.Rptr.62 Trizec Properties Inc. v. Superior Court (1991) 229 Cal.App.3d 1616, 280 Cal.Rptr. 885

U.S. Roofing v. Credit Alliance Corp. (1991) 228 Cal.App.3d 1431, 279 Cal.Rptr. 533, rev. denied United Steelworkers v. Warrior & Gulf Navigation Co. 363 U.S. 574 (1960) Victoria v. Superior Court (1986) 40 Cal.3d 734, 222 Cal.Rptr. 16 White Point Company v. Herrington (1969) 268 Cal.App.2d 458, 73 Cal.Rptr. 885 Williams v. Benton (1864) 24 Cal.424 Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987, 101 Cal.Rptr. 347

STATUTES: 15 U.S.C. Section 1601 Business and Professions Code Section 17200 Section 17204 Civil Code Section 1550 Section 1565 Section 1580 Section 1581 Section 1605 Section 1750 Section 1770(n) Section 1770(s) Code of Civil Procedure Section 624 Section 638 Section 639 Section 644

Section 645 Section 1280 Section 1282.2 Section 1295 Section 1298 Section 2016 OTHER AUTHORITIES: California Constitution, Article 1, Section 7A Article 1, Section 16 Article 6, Sections 21 and 22 California Rules of Court, Rule 244 1 Corbin 95 1 Williston 3d 37 1 Witkin, Summary of California Law, Contracts (9th ed. 1987) Section 128 Section 145 6 Witkin, California Procedure, Proceedings Without Trial (3d ed. 1992) 45-46 11 Witkin, Summary of California Law, Equity 178 (9th ed. 1990) Black's Law Dictionary (West, 5th ed. 1979) at 849 Rest.2d, Contracts 19 Rest.2d, Contracts 33 Section 123

I. INTRODUCTION

This case is brought under California's consumer protection statutes to challenge an unprecedented attempt by the Bank of America to deprive consumers of equal access to justice. Plaintiffs seek injunctive relief and a judicial determination that the Bank's unilateral imposition of a binding alternative dispute resolution ("ADR") clause onto already-existing consumer credit card and deposit account agreements,18 without discussion, negotiation, knowledge, or consent of the account-holders, does not give rise to an enforceable contract or to a waiver of the constitutional rights to trial by jury or duly-appointed judges. Even if there were a contract, it would be unconscionable and unenforceable. The Bank's purpose is to alter the rules governing dispute resolution to favor the Bank, without consumers' knowledge or understanding consent. By purporting to mandate arbitration and reference, the Bank is attempting to deprive its customers of access to the courts, particularly in class actions, in order to insulate itself against large jury verdicts.

II. FACTS AND PROCEDURAL BACKGROUND

When Bank of America made the decision to impose an ADR clause on the agreements existing between itself and its consumer customers, the Bank did not revise its standard form agreements to include an arbitration and reference provision. Nor did the Bank specify in any document what the ADR requirement encompasses, or bring the new requirement to the attention of its customers in any meaningful way. Instead, beginning in July, 1992, the Bank inserted a notice with the customers' monthly statements, along with various pieces of promotional material and Bank newsletters. The Bank knew or should have known that the vast majority of such

18

These are personal checking and savings accounts.

stuffers wind up in wastebaskets, unread. The notice, described as a "change of terms,"19 purported to add an ADR provision to the existing contracts between Bank of America and its consumer account-holders, without disclosing or describing its terms. The notice provides that henceforth, at the request of either the Bank or the customer, any controversy involving one account, or two or more accounts with at least one common owner, will be decided by arbitration under the rules of the American Arbitration Association ("AAA"); any "other" dispute20 will be decided by reference. The notice is conspicuously silent about most of the important terms of this purported change in the contract. For example, the notice says nothing about the fact that the parties will be required to pay considerable fees to have their disputes resolved in this manner, or that the right to discovery in arbitration is severely curtailed. The notice nowhere indicates that the Bank construes the ADR clause to require that an arbitrator's decision be binding on the parties, and in the case of reference, that the trial judge be required to adopt the referee's decision; the notice states only that arbitration or reference "will take the place of a trial before a judge and jury." The notice sent to cardholders specifies that if they continue to use their accounts after receiving the notice, the new provision will apply to all past and future transactions; the notice sent to deposit account-holders does not contain even that information. Exhs. A and B to Complaint. The notice is vague, confusing, and misleading with regard to the rules and standards that will govern the reference procedure; the notice says that "Code of Civil Procedure 638 and related sections" will control, but states that referees will be selected pursuant to some unspecified AAA procedure.

The notice that the Bank sent to its consumer credit card account-holders was entitled "Change of Terms Notice for BankAmericard Visa, MasterCard, Visa Gold, Gold Mastercard, and Apollo Accounts." The notice sent by the Bank to its consumer deposit account-holders was entitled "Announcing Changes to Bank of America's Deposit Account Programs" and stated that "this announcement. . . discusses a change to the terms of your account with us." The notices are attached as Exhs. A and B to the Complaint. Although the notice is deliberately vague in this regard, any dispute "other" than the type the Bank proposes to resolve by arbitration is likely to be a consumer class action or a claim by a plaintiff acting as a private attorney general under California's consumer protection laws.
20

19

On June 2, 1992, the Bank issued a press release to announce its intent to institute the ADR provision. The press release specified additional terms not contained in the stuffer, stating that "for complaints made as class actions," the Bank "instituted a procedure known as 'judicial reference,'" described as a "long-standing but seldom-used alternative dispute resolution procedure," in which a referee hears the case, and "submits his decision to the trial judge, who is required to make it his judgment." Even as modified by these additional terms, however, the ADR provision is still unclear about the extent to which the right to appeal exists, or the standards that will govern. Plaintiffs challenged the Bank's attempt to deny consumers access to the courts as a violation of California's consumer protection laws and an unfair business practice. The complaint alleges violations of the Consumers Legal Remedies Act ("CLRA"), Civil Code 1750, et seq., and the Unfair Practices Act, Business and Professions Code 17200, et seq. Plaintiffs are four individual customers; Consumer Action, a California non-profit corporation which advocates for and educates consumers on banking issues; and the California Trial Lawyers Association. The complaint alleges that Bank of America violated the CLRA by falsely representing to consumers that the ADR provision would benefit the Bank's consumer account-holders because it would provide a less costly way of resolving disputes between consumers and the Bank; and by falsely representing that California law permits the decision of a referee in compelled reference to be binding on the trial court. The complaint further alleges that the Bank violated the CLRA because its purported modification of the consumer account agreements is unconscionable: the "change in terms" was unilaterally imposed by the Bank, the party of superior economic strength; is beyond the reasonable expectations of the consumers; was not brought to the attention of the account-holders in a meaningful way; is oppressive; and results in coerced infringement of the constitutional right to trial by jury. Finally, the complaint alleges that the Bank's conduct violates the Unfair Practices Act because it is unlawful, unfair, and deceptive.

On June 3, 1993, the Honorable Lucy Kelly McCabe denied the parties' cross-motions for summary judgment. On plaintiffs' alternative motion for summary adjudication of issues, the Court found that defendant's first, second, fifth, sixth, seventh, eighth, tenth, eleventh and fourteenth affirmative defenses were without merit, and granted summary adjudication on them. The Court denied plaintiffs' alternative motion with respect to defendant's third, fourth, ninth, twelfth, and thirteenth affirmative defenses. Among the factual issues to be resolved at trial are the following: 1. 2. 3. Whether valid agreements for arbitration and reference exist; Whether the "change of terms" notice provided adequate notice to the Bank's consumer account-holders; Whether the Bank misrepresented that transactions between the Bank and its consumer account-holders would confer or involve rights, remedies, or obligations which they do not have or involve or which are prohibited by law; Whether the setting, purpose and effect of the purported modification of the contract render the ADR clause unconscionable.

4.

Order Denying Summary Judgment and Granting Summary Adjudication, filed June 30, 1993, at 2-3 and 5-6. III. THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE THE BANK'S PURPORTED CHANGE OF TERMS DOES NOT CREATE AN ENFORCEABLE CONTRACT California has a strong public policy in favor of enforcing freely negotiated agreements to arbitrate. Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal.Rptr. 581, 587; Code of Civil Procedure 1280 et seq. "Arbitration is essentially a creature of contract, a contract in which the parties themselves charter a private tribunal for the resolution of their disputes." Baar v. Tigerman (1983) 140 Cal.App.3d 979, 98586, 189 Cal.Rptr. 834, 838 (citation omitted). The essence of arbitration is that it is voluntary and consensual. Ramirez v. Superior Court (1980) 103 Cal.App.3d 746, 751, 163 Cal.Rptr. 223, 226 ("[t]o compel arbitration there must be a voluntary agreement to arbitrate which is openly and fairly entered into"). The severe consequences of arbitration are tolerated precisely because the parties have chosen to arbitrate

and have agreed that even decisions that are wrong as a matter of fact or law or which result in a manifest injustice cannot be overturned on appeal. See Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 8-28, 10 Cal.Rptr. 2d 183, 186-200; Code of Civil Procedure 1280, et seq. The rationale for allowing the possibility of an unfair or incorrect resolution of a dispute is that parties who have made the bargain to arbitrate should be held to it. "[A]n arbitration decision is final and conclusive because the parties have agreed that it be so." Moncharsh, supra, 3 Cal.4th at 10, 10 Cal.Rptr. 2d at 187 (emphasis in original). But this rationale is wholly inapplicable absent a knowing consent to arbitrate, and even the strong policy favoring arbitration cannot displace the necessity for an agreement to arbitrate. Victoria v. Superior Court (1986) 40 Cal.3d 734, 738-39, 222 Cal.Rptr. 1, 2. A. No Contract Was Created Because There Was No Offer Communicated, No Agreement to the Purported Change, No Manifestation of Assent, and No Consideration. "An offer must be sufficiently definite, or must call for such definite terms in the acceptance, that the performance promised is reasonably certain." 1 Witkin, Summary of California Law, Contracts (9th ed. 1987) 145, citing Rest.2d, Contracts 33; 1 Corbin 95; 1 Williston 3d 37. And, "[e]ven though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain." Rest.2d, Contracts 33. Because the Bank's offer is indefinite in that one or more essential terms of the proposed bargain are omitted or uncertain, acceptance is not possible and no contract can result. Numerous courts have refused to decree specific performance of contracts where the terms are uncertain.21 A dispute resolution clause is no different from other contract provisions; it must See, e.g. White Point Company v. Herrington (1969) 268 Cal.App.2d 458, 465-66, 73 Cal.Rptr. 885, 889 (no specific performance of contract to purchase real property where the written agreement was incomplete and indefinite with regard to significant material terms); Brooks v. Allard (1966) 244 Cal.App.2d 283, 284-85 53 Cal.Rptr. 82, 83 (no specific performance of land option agreement that lacked sufficient description of land). In KC Working Chem. Co. v. Eureka-Security F & M Ins. Co. (1947) 82 Cal.App.2d 120, 185 P.2d 832, 840-41, the court found no contract for insurance where there was a lack of agreement as to such essential terms as which company would carry the insurance, how many policies there would be, and what the duration of the insurance and the amount of the premium would be.
21

identify the parties' obligations with sufficient specificity to be enforced. The details of an ADR procedure must be known or easily available to the contracting parties. See Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 641-43, 223 Cal.Rptr. 838, 843-44. In this case, the Bank did not send account-holders a new contractual agreement and disclosure statement but simply inserted a vague and inadequate notice of change of terms in a monthly billing statement to customers. The envelope transmitting the Bank's billing statement regularly contains materials such as solicitations to purchase luggage, insurance, and other goods or services; offers of discounts on rental cars or travel arrangements; and Bank newsletters. It is questionable whether customers read the change of terms notice, or, if they did, whether they realized it was an agreement. Witkin states the rule in 1 Summary, supra, 123 as follows: "If the writing does not reasonably appear to be a contract, and its contractual terms are not called to the attention of the person who receives it, he is not bound." For example, California State Automobile Association Inter-Insurance Bureau v. Barrett Garages (1967) 257 Cal.App.2d 71, 64 Cal.Rptr. 699, held that a claim check for an automobile which was parked by an attendant, who did not discuss its provisions with the motorist, created no binding contract. The court noted that the situation is similar to one in which someone deposits money with a bank and receives a passbook showing receipt of the money. Such a person "is not bound by a form of agreement printed in the passbook respecting nonliability of the bank as to forged and altered checks and endorsements when he did not sign such agreements and its terms were not called to his attention." Id. at 76, 64 Cal.Rptr. at 703, citing Los Angeles Investment Co. v. Home Savings Bank (1919) 180 Cal.601, 612-13, 182 P.293 (such a provision is "a trap for the unwary"). The court held that the delivery of a claim check did not create a contract as to its provisions as a matter of law. It noted, however, that a question of fact was presented in each case as to whether there was the necessary consent by the bailor to be bound by those contractual provisions, as required by Civil Code 1550. 257 Cal.App.2d at 79, 64 Cal.Rptr. at 704.

In Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987, 101 Cal.Rptr. 347, a purported contract to arbitrate was denied enforcement where it was contained in an acknowledgement of order from, which, on the reverse, contained inconspicuous fine print requiring arbitration, and where the buyer had not been advised of the provision and had no actual knowledge of it before receiving the seller's demand for arbitration. The court reasoned that whether these forms were offers or counter-offers was irrelevant, because, in either instance, the plaintiff's consent to, or acceptance of, the arbitration provision was necessary to create an agreement to arbitrate. Id. at 992, 101 Cal.Rptr. at 35. The court declared that an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he was unaware, contained in a document whose contractual nature is not obvious. Id. at 993, 101 Cal.Rptr. at 351, and cases cited therein. The court went on to state that the principle of knowing consent applies with particular force to provisions for arbitration, citing Commercial Factors v. Kurtzman Bros. (1955) 131 Cal.App.2d 133, 280 P.2d 146, which denied enforcement of an arbitration clause in a contract between residents of two states on the grounds that buyers in one state should not be forced into arbitration in another state without a definite contract knowingly entered into containing such a provision. The court also quoted Arthur Phillip Export Corp. v. Leathertone, Inc. (1949) 275 App.Div. 102, 87 N.Y.S. 2d 665, 667: "If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto." Applying these principles, the court refused to enforce the provision for arbitration, concluding that regardless of the outward manifestations of apparent assent by plaintiff in accepting the form without objection, and initially accepting the goods, there was no agreement by plaintiff to arbitrate. Windsor Mills, supra, 25 Cal.App.3d at 993-96, 101 Cal.Rptr. at 351-53. In this case, the "change of terms" notice contains no provision for the signature of the customer, the terms are not specified, and the notice is not brought to account holders' attention

in any meaningful way. The general rule under our system of justice is that a person cannot be forced to arbitrate what he or she has not specifically agreed to submit to arbitration. United Steelworkers v. Warrior & Gulf Navigation Co. 363 U.S. 574, 582 (1960); Freeman v. State Farm Mut. Auto Ins. Co. (1975) 14 Cal.3d 473, 481, 121 Cal.Rptr. 477, 482. Absent the consent of the account-holders, the Bank's unilateral and incomplete notice does not create an agreement by consumers that disputes should be resolved by binding ADR. The manifestation of mutual assent is usually accomplished through an offer communicated to the offeree and an acceptance communicated to the offeror. 1 Witkin, Summary, supra, 128. Although acceptance may be manifested by conduct, there are no cases holding that conduct a party would have engaged in anyway can be construed as acceptance of an offer which he may not know exists. The Restatement 2d of Contracts, at 19, indicates that assent may be manifested by conduct if the party intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents. In this case, a reasonable account-holder cannot be held to have knowledge of the terms of the Bank's ADR clause because the notice was inserted in a monthly billing and contained no provision for the account-holders to sign or accept it. Continuing to make charges on a credit card or writing checks simply indicates a consumer's assent to paying for the items purchased. That cannot reasonably be construed to indicate assent to arbitration or to judicial reference. Case law indicates that silence in the face of an offer is not an acceptance, unless there is a relationship between the parties or a previous course of dealing pursuant to which silence would be understood as acceptance.22 Because the attempt to mandate ADR is unprecedented,

See e.g. Sorg v. Fred Weisz & Associates (1970) 14 Cal.App.3d 78, 91 Cal.Rptr. 918 (silence after receiving letter demanding removal of waste dumped on plaintiff's property or payment for trespass held not to create a contract because there was no basis upon which plaintiff could have concluded that defendant intended to accept the obligation to pay daily damages); Southern Cal. Acoustics Co. v. C.V. Holder, Inc. (1969) 71 Cal.2d 719, 79 Cal.Rptr. 319 (finding no contract where subcontractors submitted bid to general contractor, who listed subcontractor in the prime bid; because listing of subcontractors which a general contractor intends to retain is required by statute it cannot be reasonably be construed as an expression of acceptance).

22

there exists no previous course of dealing whatever on this important subject. Moreover, such a silent acceptance would be inadequate to waive a constitutional right. Finally, this purported new contract term is not supported by consideration. There is no benefit conferred upon the cardholder, nor any detriment suffered by the Bank. Instead, cardholders would suffer deprivation of substantial rights to unimpeded discovery, trial by a judge or jury, and a court system funded by the taxpayers so the Bank can reap the benefit of lower damage awards. B. No Contract Was Created Because the Notice Was Inadequate to Inform Consumers of the Terms of the Purported Modification. Even customers who read the stuffer would not understand the substance of the change in contract terms or the consequences for consumers. The notice does not fully describe the terms of this new contract provision. Nothing informs the Bank's customers that arbitration and reference will be costly, or that discovery will be limited. Only those who obtain and read the rules of the American Arbitration Association will learn these important facts. The notice is also silent about the fact that no appeal is permitted from an arbitrator's decision. Consumers cannot possibly be expected to understand from the phrase "takes the place of a trial before a judge and jury" that case law specifies that arbitral decisions will be final and binding even if they are based on a misrepresentation of fact, apply the law incorrectly, or are unfair. Nor does the Bank explain that, as it interprets the ADR requirement, a referee's decision is required to become the trial court's judgment. Only if the Bank's consumer customers happened to receive a copy of the June press release, or read a newspaper article which quoted that sentence would they learn that the Bank construes its ADR clause to deny any judicial oversight of referees' decisions. This unilateral and incomplete notice was inadequate to create a contract to arbitrate. The notice is further deficient with respect to the provision for judicial reference. The only information provided to consumers is that California Code of Civil Procedure 638 and "related sections" apply, followed by the remark, "A referee who is an active attorney or retired judge will be appointed by the court after selection by the American Arbitration Association

using its procedures for selecting arbitrators." The notice is vague and incomplete in that, for example, it does not explain what reference is, or specify which "sections" of the Code of Civil Procedure are "related" to 638. Neither does it identify what the AAA procedures for selecting arbitrators are, nor clarify whether AAA procedures or court procedures will be utilized. No consumer could possibly understand the terms of the modified contract from the Bank's notice. Nor could consumers understand the consequences of implementation of the clause. C. No Contract Was Created Regarding Reference Because the Prerequisites Are Not Satisfied. Prior to 1872, when 638 and 639 of the Code of Civil Procedure were enacted, a court could order only equitable causes to reference without the consent of the parties. A court had no power, without the consent of the parties, to order a reference with directions to the referee to report a judgment, even when the issues were equitable. Williams v. Benton (1864) 24 Cal.424; Baker v. Baker (1858) 10 Cal.527 (no binding reference even with consent). The enactment of 638 allowed the parties in a suit at law to consent to submit the entire case to reference, with findings binding on the court, or reference of a determination of fact, with findings advisory, but weight given to the referee's factual determination. Specifically, 638 provides that the court may order reference upon written agreement of the parties, or agreement made before the court and entered in the minutes or the docket. If this consensual reference is to try all the issues in the case and report a finding and judgment, it is termed a "general" reference, and the decision is binding on the court. Code of Civil Procedure 644; San Diego Fruit & Produce Co. v. Elster (1954) 127 Cal.App.2d 80, 273 P.2d 70. If the reference is to ascertain a fact necessary to enable the court to rule in an action or proceeding, it is called a "special" reference, and the finding is not binding on the court.23 Ellsworth v. Ellsworth (1954) 42 Cal.2d 719, 269 P.2d 3; Holt v. Kelly (1978) 20 Cal.3d 560, 563, 143 Cal.Rptr. 625, 626. The referee's finding of fact is, however, the equivalent of a special verdict. Code of Civil Procedure 645. (A special verdict is that by which the jury finds the facts only, leaving the judgment to the court. Code of Civil Procedure 624.)
23

Section 639 provides that in the absence of the consent of both parties, the court may, on its own motion or the request of one of the parties, order a reference in any of five instances: (a) When the trial of an issue of fact requires the examination of a long account on either side; in which case the referees may be directed to hear and decide the whole issue, or report upon any specific question of fact involved therein; When the taking of an account is necessary for the information of the court before judgment, or for carrying a judgment or order into effect. When a question of fact, other than upon the pleadings, arises upon motion or otherwise, in any stage of the action. When it is necessary for the information of the court in a special proceeding. When the court in any pending action determines in its discretion that it is necessary for the court to appoint a referee to hear and determine any and all discovery motions and disputes relevant to the discovery in the action and to report findings and make a recommendation thereon.

(b) (c) (d) (e)

Section 639 thus established that a special reference could be ordered even without the consent of the parties, see 639 (c) and (d), above, and maintained the previous provision allowing courts to refer proceedings in equity -- "the examination of a long account"24 or "the taking of an account," 639(a) and (b). Reference under 639, however, must be strictly limited to the matters listed therein; when no long account is involved in the transaction, the court has no authority to direct a referee to hear and decide the whole case, absent consent of both parties. Dunner v. Hoover (1941) 43 Cal.App.2d 753, 111 P.2d 737, 740. The Bank's attempt to impose this provision for non-consensual reference and to declare it binding on the trial judge is thus patently unconstitutional and illegal. The California Constitution vests the judicial power in judges who are duly appointed or elected and limits the functions of commissioners and referees to "subordinate judicial duties;" a court may order a cause to be tried by a temporary judge only "[o]n stipulation of the parties litigant." Cal. Const., art. VI, 21 and 22. Consistent with this constitutional mandate, the case law uniformly holds that consent of the parties is required before cases may be decided by persons other than judges. According to Black's Law Dictionary, a "long account" is "an account involving numerous separate items or charges, on one side or both, or the statement of various complex transactions, such as a court of equity will refer to a master, referee, or commissioner." Black's Law Dictionary (West, 5th ed. 1979) at 849.
24

Without the parties' consent, the findings of commissioners or referees are advisory only, and numerous cases so hold. See, e.g., Ellsworth v. Ellsworth, supra, 42 Cal.2d at 719, 269 P.2d at 3; In Re Perrone C. (1979) 26 Cal.3d 49, 51-55, 160 Cal.Rptr. 704, 705-07; accord Sarracino v. Superior Court (1974) 13 Cal.3d 1, 118 Cal.Rptr. 21. In In Re Edgar M. (1975) 14 Cal.3d 727, 735, 122 Cal.Rptr. 574, 580, the Supreme Court reaffirmed Ellsworth, ruling that without any procedures for judicial review, the adjudication of a juvenile court matter by a referee acting without the parties' consent would violate the constitutional limitation upon his functions to "subordinate judicial duties." In order to meet constitutional muster, a decision of a referee in the absence of a stipulation must be advisory only, subject to judicial review. In In Re Perrone C., supra. In In Re John H. (1978) 21 Cal.3d 18, 145 Cal.Rptr. 357, the court further established that the constitutional limitation on referees to subordinate judicial duties may be satisfied by obtaining the counter-signature of a juvenile court judge on an order declaring a minor to be a ward of the court, so long as the opportunity to seek a full rehearing remains available on request. The Bank's attempt to make a referee's findings "the judgment of the court" without the signature of a judge or the opportunity for a rehearing is thus an unconstitutional delegation of judicial power. These constitutional requirements are reflected in the statutory scheme governing reference. The language of Code of Civil Procedure 63825 requires that there be a written stipulation, which plainly does not exist here.26 The case law consistently requires written affirmation of both parties before reference is permitted. For example, Badgley v. Van Upp (1993) __ Cal.App. 4th __, 24 Cal.Rptr. 2d 406, explains that a written agreement of the parties filed with the clerk or entered in the minutes is necessary to confer on a referee the statutory powers described in Code of Civil Procedure 638. See also In Re Hart's Estate (1938) 11 Cal.2d 89, 77 P.2d 1082; Fooshe v. Sunshine (1950) 96 Cal.App.2d 336, 215 P.2d 66.

"A reference may be ordered upon the agreement of the parties filed with the clerk, or judge, or entered in the minutes or in the docket, or upon the motion of a party to a written contract or lease, which provides that any controversy arising therefrom shall be heard by a reference if the court finds a reference agreement exists between the parties." Code of Civil Procedure 638. See also Rule 244 of the California Rules of Court (stipulation of parties that case may be tried by temporary judge "shall be in writing").
26

25

The statutory framework requires that a general reference of all issues in the case requires the parties' consent. Without consent, the reference of specific issues must be advisory only and become effective only after approval by the court. Holt, supra, 20 Cal.App.3d at 560, 143 Cal.Rptr. at 625. In Bird v. Superior Court (1980) 112 Cal.App.3d 595, 169 Cal.Rptr. 530, a reference was held to exceed statutory authority where the petitioner had not consented to reference, the issues referred were not those encompassed in Code of Civil Procedure 639, and the referee's determination was not advisory only. Accord, International Jet Ski Boating v. Superior Court (1991) 232 Cal.App.3d 112, 283 Cal.Rptr. 33. Indeed, 638 has been held to be constitutional based on the recognition that the referee's report may be accepted or rejected by the court. Sandoval v. Salazar (1922) 57 Cal.App. 756. Finally, the constitutional guarantees of due process and equal protection contained in Article 1, 7A also require that the findings of a referee or other non-judicial officer be advisory only. In Re Perrone C., supra. The appellate courts have explained these requirements in greater detail. In In the Matter of Gregory M. (1977) 68 Cal.App.3d 1085, 137 Cal.Rptr. 756, the court held that due process and equal protection require a judge to review a referee's determinations. Again, in Hebert v. Harn (1982) 133 Cal.App.3d 465, 469, 184 Cal.Rptr. 83, 86, the court ruled that the statutory scheme governing judicial arbitration (non-consensual court-ordered arbitration), in order to be constitutional, required a de novo trial, by court or jury, as to law and facts. If judicial arbitration requires these constitutional safeguards, then non-consensual arbitration and reference must encompass no less.

IV. THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE WAIVER REQUIRES KNOWING CONSENT "[T]rial by jury is an inviolate right and shall be secured to all." Cal. Const., Art. I, 16. Waiver is the "voluntary relinquishment of a known right." 11 Witkin, Summary, supra, Equity 178. Waiver of a constitutional right requires a voluntary act, knowingly done, with sufficient awareness of the relevant circumstances and likely consequences. It also requires actual or constructive knowledge of the existence of the right to which the person is entitled. Guild Wineries & Distilleries v. Land Dynamics (1980) 103 Cal.App.3d 966, 977, 163 Cal.Rptr. 348,

354. "In light of the importance of the jury trial in our system of jurisprudence, any waiver thereof should appear in clear and unmistakable form . . . We cannot elevate judicial expediency over access to the courts and the right to jury trial in the absence of a clear waiver." Titan Group v. Sonoma Valley County Sanitation (1985) 164 Cal.App.3d 1122, 1129, 211 Cal.Rptr. 62, 66. The burden is on the party claiming a waiver to prove it by evidence that does not leave the matter doubtful or uncertain and that party must satisfy the burden by clear and convincing evidence. In re Marriage of Moore (1980) 113 Cal.App.3d 22, 169 Cal.Rptr. 619. In Titan Group, supra, the court refused to enforce an arbitration clause in an agreement signed by both the parties because it did not clearly and unmistakably waive the right to trial by jury. The court explained: We are also mindful of the constitutional right to trial by jury. The right to trial by jury is a basic and fundamental part of our system of jurisprudence. As such, it should be zealously guarded by the courts. In case of doubt, therefore, the issue should be resolved in favor of preserving a litigant's right to trial by jury. 164 Cal.App.3d at 1127-28, 211 Cal.Rptr. at 65 (citations omitted). Similarly, in Trizec Properties Inc. v. Superior Court (1991) 229 Cal.App.3d 1616, 1619, 280 Cal.Rptr. 885, 887, the court recognized that a contractual waiver of the right to trial by jury requires a provision which is "clearly apparent in the contract," in language which is "unambiguous and unequivocal, leaving no doubt as to the intention of the parties." The agreement must also be supported by consideration. A contract provision that purports to waive constitutional rights must appear in specific and unambiguous language. In accordance with this principle, the California statute governing agreements to arbitrate disputes regarding professional negligence of health providers requires not only the signature of the consumer on the form of agreement, but the inclusion of the following statement in "at least 10-point bold red type": NOTICE: BY SIGNING THIS CONTRACT YOU ARE AGREEING TO HAVE ANY ISSUE OF MEDICAL MALPRACTICE DECIDED BY NEUTRAL ARBITRATION AND YOU ARE GIVING UP YOUR RIGHT TO A JURY OR COURT TRIAL. In addition, the contract must contain the following language: Both parties to this contract, by entering into it, are giving up their constitutional right to have any such dispute decided in a court of law before a jury, and instead are accepting the use of arbitration.

Code of Civil Procedure 1295. To the same effect are the provisions of the Code of Civil Procedure 1298, the statute covering agreements to arbitrate disputes arising from real estate contracts. By contrast, Bank of America's "change of terms" notice is silent about waiver of discovery or constitutional rights. The provision has never been made a part of the contract with cardholders, its terms and consequences are unspecified, and no consideration exists. This announcement by the Bank is wholly inadequate to constitute a contractual waiver of the consumer account-holders' constitutional right to trial by jury. V. THE COURT SHOULD ENJOIN THE BANK FROM MANDATING THE ADR REQUIREMENT BECAUSE THE ADR CLAUSE IS UNCONSCIONABLE A. The Setting, Purpose and Effect of the ADR Clause Render It Unconscionable Even if the Court finds that a contract was created, it is unconscionable and therefore unenforceable. The account-holder agreements are drafted by the Bank, the party of superior economic strength. The terms of the agreements are non-negotiable. The small print of the credit card agreement densely fills both sides of an 8" x 14" piece of paper. The cardholder receives a copy of the agreement only at the time the account is opened. The personal checking account agreement consists of a signature card retained by the Bank, and a "Facts" booklet, which in July, 1992 was a 69-page publication containing the terms of the Bank's various personal checking account plans. At the time the Bank mailed out the notice of "change of terms" containing the ADR provision, neither of the agreements contained any "term" relating to methods of dispute resolution. In general, the terms of the agreements correspond to the terms required to be disclosed by the federal Truth in Lending Act, 15 U.S.C. 1601, et seq., and related sections of the Code of Federal Regulations. Civil Code 1670.5, which codified the common law doctrine of unconscionability, provides that if a court finds as a matter of law that a contract or any clause of a contract was unconscionable at the time it was made, the court may refuse to enforce the contract or the unconscionable clause. As the California Supreme Court explained, "[A] principle of equity applicable to all contracts generally . . . is that a contract or provision . . . will be denied

enforcement if, considered in its context, it is unduly oppressive, or `unconscionable'." Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 820, 171 Cal.Rptr. 604, 612. Since "a claim of unconscionability often cannot be determined merely by examining the face of the contract," a court evaluating such a claim may be required to make factual inquiries into the setting, purpose, and effect of the contract. Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 926, 216 Cal.Rptr. 345, 354. The facts surrounding the Bank's attempt to impose the ADR clause on its account-holder agreements show that the clause is unconscionable and that enforcement should be denied. The Bank's purpose in imposing the ADR provision was to insulate itself from high jury awards, particularly in consumer class actions. The effect of the imposition of the ADR provision will be to deprive consumers, without their consent, of the ability to obtain discovery to prove their claims and of their constitutional rights to trial by judge or jury and to due process of law. B. The ADR Clause Is Unconscionable Because the Bank Concealed the Terms of the Purported Modification and Because the Effect of the Change Is to Deprive Consumers of Constitutional Rights Without Their Consent As the Perdue court noted, there are two alternative frameworks for determining whether a contractual provision is unconscionable. Id. at 925 n. 9, 216 Cal.Rptr. at 353 n. 9 ("[b]oth pathways should lead to the same result"). Under Graham, supra, the test is whether the contract is one of adhesion, and if so, whether the challenged provision was within the reasonable expectations of the weaker party, or whether the provision is unduly oppressive or unconscionable. Id. at 819-20, 171 Cal Rptr. at 612. If the contract was one of adhesion and either of the other two factors exist, the provision will be denied as unenforceable. Id. The alternative framework set forth in A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 186 Cal.Rptr. 114, rev. denied, divides the analysis of unconscionability into two elements -- procedural and substantive. Procedural unconscionability includes "oppression" (an "inequality of bargaining power" that results in "no real negotiation and an absence of meaningful choice") and "surprise" (the extent to which "the supposedly agreed-upon terms of the bargain are hidden in a prolix form drafted by the party seeking to enforce the disputed terms"). The sophistication of the aggrieved party, or lack thereof, is another relevant

consideration under this factor. See Dean Witter Reynolds v. Superior Court (1989) 211 Cal.App.3d 758, 768, 259 Cal.Rptr. 789, 795, rev. denied; Perdue, supra, 38 Cal.3d at 927, 216 Cal.Rptr. at 355. Substantive unconscionability involves a consideration of whether the provision is one-sided or unreasonable, lacks justification, or reallocates the risks of the bargain in an unexpected manner. A & M, supra, 135 Cal.App.3d at 485-88, 186 Cal.Rptr. at 121-22. Although courts have suggested that both the procedural and substantive elements of unconscionability must be present in order for a contract or clause to be held unenforceable, the importance of one factor may outweigh the absence of the other. "[T]here is a sliding scale relationship between the two concepts: the greater the degree of substantive unconscionability, the less the degree of procedural unconscionability that is required to annul the contract or clause." Carboni v. Arrospide (1992) 2 Cal.App.4th 76, 83, 2 Cal.Rptr. 2d 845, 849, rev. denied. The ADR clause is unconscionable under either of these analytical frameworks, and should therefore be denied enforcement in accordance with the mandate of Civil Code 1670.5. First, the Bank's unprecedented ADR provision does not fall within the reasonable expectations of the Bank's consumer account-holders. One important consideration in determining reasonable expectations is the adequacy of the notice. Graham, supra, 28 Cal.3d at 820 n.18, 171 Cal.Rptr. at 612 n. 18. As discussed above in section III.B., Bank of America not only failed to provide the account-holders with sufficient notice of the terms of the purported change, but also deceptively concealed from its consumer customers important information about the consequences of the change. Moreover, neither the Bank nor any other California bank had ever included such a provision in consumer account agreements. Consumers might reasonably expect the Bank to make changes in terms relating to, for example, the cost of credit (in the case of credit card accounts) or to the service charges or maintenance fees (for deposit accounts). Until the Bank promulgated its ADR clause, however, consumers had no reason to expect that by simply using their credit cards or writing checks on their accounts they would be agreeing to waive their rights to access to the courts or to trial by judge and jury. The ADR clause was clearly beyond the reasonable expectations of the consumer account-holders, particularly given the inadequacy of the notice.

Second, the ADR clause is both procedurally and substantively unconscionable. It is procedurally unconscionable because the Bank's failure to describe many important features and consequences of arbitration and reference means that these will come as an unpleasant surprise to consumers only after a dispute has arisen. This surprise negates any element of meaningful choice, see Carboni, supra, 2 Cal.App.4th at 85, 2 Cal.Rptr. 2d at 850, because consumers who do not know what they are being deprived of will have no reason to consider moving their accounts to banks which currently do not require arbitration and reference of disputes, even if they are financially able to do so,27 in order to avoid that result.28

In the most recent reported decision on unconscionability of arbitration clauses, Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, 18 Cal.Rptr. 2d 563, rev. denied, pet. for cert. pending, No. 93-952, the Court of Appeal found that the arbitration clause at issue was both beyond the reasonable expectations of the borrower (in Graham terms) and substantively and procedurally unconscionable (in A & M terms), despite the fact that the plaintiff consumers had signed loan agreements containing an arbitration provision. In the present case, by contrast, the Bank did not obtain in any form the acknowledgment or consent of the accountholders. If failure to read an arbitration provision in a document one has signed may "establish actual surprise the unfairness of which is reinforced by [defendant's] failure to call the arbitration

Not every consumer is able to pay off existing balances or obtain credit elsewhere without doing so, particularly in today's economy. As the D.C. Circuit explained in Williams v. Walker-Thomas Furniture Company (D.C. Cir. 1965) 350 F.2d 445 (cited by the court in A & M Produce, supra), Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration. . . [W]hen a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld. Id., at 449.50.
28

27

clause to the attention of [the consumers]," id., 18 Cal.Rptr. at 567, how much more profound will be the surprise of consumers who have not signed or even seen such an agreement. The ADR provision is substantively unconscionable for at least three reasons. First, the Bank's unilateral imposition of ADR deprives consumers without their consent of rights that are constitutionally guaranteed. The terms are thus overly harsh to consumers and unreasonably favorable to the Bank, resulting in an unjustified "one-sided" result. A & M, supra, 135 Cal.App.3d at 487, 186 Cal.Rptr. at 122; see also U.S. Roofing v. Credit Alliance Corp. (1991) 228 Cal.App.3d 1431, 1448, 279 Cal.Rptr. 533, 543, rev. denied ("substantive element is concerned with whether the terms are overly harsh or one-sided"). Second, the clause is substantively unconscionable because the Bank fails to disclose that this ADR requirement will greatly increase expense to consumers. Arbitration is inordinately expensive. As set forth in the Commercial Arbitration Rules of the AAA,29 the filing fees are $300 for a claim up to $25,000 (more than four times the $74 filing fee for Municipal Court) and $500 for a claim in the range of $25,000 to $50,000 (almost three times the $182 fee for Superior Court). The maximum fee is $4,000 for a claim in excess of $5,000,000. If no amount can be stated, the filing fee is $1,000, subject to adjustment; and, if injunctive relief is sought, the fee may be any sum deemed "appropriate" by AAA. In cases involving more than two parties, an additional 10% of the administrative fee is due for each additional represented party. The parties must also pay fees for processing the case, which are $150 per party for the first 180 days and $150 per party for every 90 days thereafter that the case is pending; fees for hearings, at the rate of $100 a day for each party; fees for postponing hearings; fees for arbitrator compensation; and fees for renting hearing rooms. Requiring payment of these substantial fees in order to challenge Bank practices is particularly egregious because account-holders, as taxpayers, have already paid for the court system, to which the Bank would deny them access. They are generally unable to afford to pay a second time in order to challenge the Bank's acts or practices. Finally, the ADR clause is substantively unconscionable in that the Bank has failed to disclose its intent to avoid discovery in arbitration proceedings. Under the AAA rules, discovery Plaintiffs request that the Court take judicial notice of the rules of the American Arbitration Association. Izzy v. Mesquite Country Club (1986) 186 Cal.App.3d 1309, 1318 n.3, 231 Cal.Rptr. 315, 319 n.3.
29

is discretionary, and may be ordered only if it is "[c]onsistent with the expedited nature of arbitration." AAA Commercial Arbitration Rules, Rule 10. The Rules also provide that the parties "shall produce such evidence as the arbitration may deem necessary to an understanding and determination of the dispute." Id. Rule 31. Even under California's contractual arbitration statute, Code of Civil Procedure 1280, et seq., assuming it applies, the right to discovery that is regularly available in court is deemed to be incorporated into agreements to arbitrate only if the controversies arise out of personal injury or wrongful death claims. In all other types of disputes, discovery is available only if the parties so provide in the agreement. Code of Civil Procedure 1282.2; see American Home Assur. Co. v. Benowitz, (1991) 234 Cal.App.3d 192, 201, 285 Cal.Rptr. 626, 631, n. 3, citing McRae v. Superior Court (1963) 221 Cal.App.2d 166, 172, 34 Cal.Rptr. 346, 350. ("[a]rbitration hearing is a `special proceeding' to which the discovery statute [Code of Civil Procedure 2016 et seq.] has no application absent an express provision to the contrary"). Since the Bank has not provided for discovery in its arbitration clause, it would be required to make available only those documents it intends to offer in support of its own claim. Under either AAA Rules or the Code of Civil Procedure, consumers challenging the legality of bank charges would be deprived of the evidence they need to prove their claims. Even if discovery is available in the judicial reference procedure, the result is still unconscionable, because consumers will have to pay far more because of the reference. Consumers will be deprived of access to the courts, which are established and supported by the state to afford forums for the rich and poor alike to present controversies at minimal cost to the litigants. Instead, a class of bank customers seeking to challenge unlawful conduct would be forced to bear the burden and expense of paying referees to handle matters involving law and motion issues, discovery disputes, and trial. Particularly in class actions and unlawful business practices cases, costs of reference could be many times more than litigation in the courts.

VI. THE COURT SHOULD ENJOIN THE IMPLEMENTATION OF THE ADR PROVISION BECAUSE, IN IMPOSING THE CLAUSE ON THE CONSUMER ACCOUNT AGREEMENTS, BANK OF AMERICA HAS VIOLATED THE UNFAIR PRACTICES ACT AND THE CONSUMERS LEGAL REMEDIES ACT A. Bank of America's Conduct Violates The Unfair Practices Act

The Unfair Practices Act, Business and Professions Code 17200, et seq. prohibits unlawful, unfair or fraudulent business acts or practices -- "anything that can properly be called a business practice and at the same time is forbidden by law." Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 112-13, 101 Cal.Rptr. 745, 758. An action based on 17200 often "`borrows' violations of other laws and treats those violations, when committed pursuant to business activity, as unlawful practices independently actionable under section 17200 et seq." Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 383, 6 Cal.Rptr. 2d 487, 491. The Bank's purported modification of the consumer account agreements is unlawful and unfair, and therefore violates the Unfair Practices Act. The Unfair Practices Act provides that actions for injunctions against unlawful, unfair, or fraudulent business practices may be prosecuted "by any person acting for the interests of itself, its members, or the general public." Business and Professions Code 17204. One test of whether a 17200 action is appropriate is whether the challenged practice is likely to deceive the public, although the statute's prohibitions are meant to protect consumers from all unfair or fraudulent business practices, which "may run the gamut of human ingenuity and chicanery." Mosk v. Nat'l Res. Co. (1962) 201 Cal.App.2d 765, 772, 20 Cal.Rptr. 516, 521. Barquis, supra, 7 Cal.3d at 111, 101 Cal.Rptr. at 757. To this end, it is not necessary that a party seeking injunctive relief under 17200, et seq. make a showing that he or she has been affected by the challenged practice.30 See, e.g., Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 210-211, 197 Cal.Rptr. 783, 790-91 (nonaggrieved organizational plaintiff had standing under 17200 to bring suit to enforce the Sherman Food, Drug, and Cosmetic Law); Consumers Union of United States, Inc. v. Fisher Development, Inc. (1989) 208 Cal.App.3d 1433, 1438, 257 Cal.Rptr. 151, 153-154 (nonaggrieved consumers group had standing under 17200 to bring suit to enjoin discrimination in violation of the Unruh Act); Hernandez v.
30

Moreover, "[t]he court [in a 17200 suit] is empowered to grant equitable relief, including restitution in favor of absent persons, without certifying a class action." Dean Witter, supra, 211 Cal.App.3d at 773, 259 Cal.Rptr. at 799. Indeed, individual representative actions under 17200 et seq. are ideally suited for consumers challenging unlawful business practices, and may in certain cases, be preferable to class actions. See e.g. Fletcher v. Security Pacific Nat. Bank (1979) 23 Cal.3d 442, 453-54, 153 Cal.Rptr. 28. Bank of America's purported modification of the consumer account agreements violates the Unfair Practices Act in at least four ways: the "change of terms" was designed to provide no meaningful notice to consumers; it is an attempt to modify an existing written contract without complying with fundamental principles of contract law; it deprives the Bank's consumer accountholders of rights guaranteed by the California Constitution and statutory law; and it violates the Consumer Legal Remedies Act. First, as discussed in Section III.B. above, the Bank's deceptive method of notifying customers and its failure to include the complete terms of the change show that the Bank intended to provide no meaningful notice to consumers. Second, the imposition of the ADR clause is unlawful because it is an attempt to modify an existing written contract without complying with the principles of contract law set forth in the California Civil Code, specifically in Civil Code 1550, 1565, 1580, 1581, and 1605.31 As discussed in Section III.A. above, the ADR clause has none of the indicia of a valid and binding contract. It does not appear to be a contract; no offer was communicated; there was no

Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 71-73, 164 Cal.Rptr. 279, 283-84 (nonaggrieved individual had standing under 17200 to bring suit to enjoin violation of the Rees-Levering Automobile Sales Finance Act). Civil Code 1550 provides that the essential elements of a contract are 1) parties capable of contracting, 2) the consent of the parties, 3) a lawful object, and 4) sufficient consideration. Civil Code 1565 provides that the consent of the parties to a contract must be 1) free, 2) mutual, and 3) communicated by each to the other. Civil Code 1580 provides, in part, that "[c]onsent is not mutual, unless the parties all agree upon the same thing in the same sense." Civil Code 1581 provides that consent to a contract must be communicated. Civil Code 1605 defines "consideration" as "[a]ny benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor."
31

manifestation of assent to the change of terms; the purported change of terms was not supported by consideration; and the terms of the new contract provision are not fully described. Third, the Bank's attempt to impose the ADR provision is unlawful because it improperly denies consumer account-holders their constitutional rights to trial by judge or jury and to due process, their right to seek redress in a court requiring the payment of only minimal fees and costs, and their right to unfettered use of discovery. Deprivation of constitutional rights can never be justified by claiming a need for speed and efficiency. See Titan Group, supra, 164 Cal.App.3d at 1129. Finally, the attempted modification of the contract is unlawful because it violates the Consumers Legal Remedies Act, Civil Code 1750, et seq., specifically Civil Code 1770(n) and 1770(s). B. Bank of America's Conduct Violates the Consumers Legal Remedies Act. The CLRA prohibits representing that "a transaction confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law." Civil Code 1770(n). The "change of terms" notice that Bank of America sent to its consumer deposit account-holders states that the imposition of the ADR provision "is expected to help resolve disputes quickly, economically, and fairly" and that it will be "beneficial" to both the Bank and the consumer account-holders. In the press release issued in connection with the "change of terms," the Bank represented publicly that it had modified all of its deposit and credit card account contracts to include an ADR provision, and that this change would benefit the account holders because it would provide a less costly way of resolving disputes. Bank of America also represented that in the case of compelled reference, the referee's decision would be binding on the court. In making these representations, the Bank violated 1770(n). The representations that account-holders who have disputes with the Bank will have a remedy (ADR) that is quick, economical, fair, beneficial to consumers and less costly than litigation are false, and the representation that the decision of a referee in compelled reference will be binding on the trial judge asserts a remedy prohibited by law.

Contrary to Bank of America's assertion, compelled arbitration is not a less costly way of resolving consumer disputes, but rather, is inordinately expensive. The administrative and other costs of conducting an arbitration are much higher than the costs of filing a lawsuit and having the matter heard before a jury or judge. As explained in Section V.B. above, the rules of the American Arbitration Association provide that parties to an arbitration proceeding pay filing fees based on the amount of the claim -- the larger the claim, the greater the amount that must be paid to the AAA. The parties must also pay many other fees and must pay for the arbitrator's time. Thus, arbitration may be a significantly more expensive proposition than bringing an action in court. The substantial cost of AAA arbitration can effectively deny a consumer a forum for resolution of his or her complaints. In Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970, 119 Cal.Rptr. 171, a case in which homeowners who had sued a building contractor challenged the court's order that they pay the filing fee for arbitration, the court observed that "arbitration is not necessarily an inexpensive method of resolving controversies," and found the contrast between the amount of court filing fees and the amount of the filing fees required by rules of the AAA to be "rather startling." "To put it mildly, arbitration in [such] cases with homeowners paying the filing fee would have a chilling effect upon the ambition of any homeowner to pursue a claim against a builder." Id. at 973-74, 119 Cal.Rptr. at 172-73. Similarly, compelling consumers to pay the exorbitant AAA fees as a condition for obtaining resolution of their disputes with the Bank will have a chilling effect on the ability and the motivation of any consumer with such a claim. As the court noted in Spence, "there are many citizens who are not paupers who do not have sufficient funds to pursue arbitration when the filing fee is as large as was the filing fee in this case [$720]. For these citizens, the arbitration remedy is illusory." Id. at 976, 119 Cal.Rptr. at 174. As for judicial reference, the only possible purpose for the Bank's imposing this provision is to remove consumer class actions from the purview of a jury. Reference will not be cheaper, faster, or more efficient, as the Bank claims. Rather, the parties will have to pay higher filing fees, and fees for processing, for hearings for postponing hearings, and for renting hearing rooms; and will have to pay the referee for every hour he or she spends reading motion papers,

conducting hearings, drafting orders, preparing for the trial, presiding at the trial, and preparing the written decision. Rather than resolving disputes quickly and efficiently, reference will likely take longer because the referee will not have access to court facilities or to the assistance of the court staff. Bank of America's claim that ADR will provide its consumer account-holders with a quick, fair, and less costly way of resolving disputes is thus patently false, and violates 1770(n) because it represents that arbitration and reference confer or involve rights or remedies that they do not have. Bank of America also violated Civil Code 1770(n) by representing publicly that the trial judge would be required to make the referee's decision the decision of the case. California law plainly mandates that a referee's report is binding on the trial court only if the reference was properly made, which requires written agreement of the parties. Absent such an agreement, it is an abdication of judicial responsibility to, for example, enter a decision on a motion for summary judgment based on a referee's report. The court has no power to make a general reference without consent because not only is such a general reference not authorized except by explicit agreement of the parties, but also, the California Constitution prevents delegation of judicial power except for performance of "subordinate judicial duties." Cal. Const., Art VI, 22. Deciding a major legal issue in a case, which will probably determine liability, is not a subordinate judicial duty. Aetna Life Ins v. Superior Court (1986) 182 Cal.App.3d 431, 435-36, 227 Cal.Rptr. 460, 463 (citations omitted); see also Marathon National Bank v. Superior Court (1993) __ Cal.App. __, 24 Cal.Rptr. 2d 40, 43 (trial court must independently consider referee's findings before acting on the recommendation); 6 Witkin, California Procedure, Proceedings Without Trial (3d ed. 1992) 45-46. Because no such written agreement exists between the Bank and the consumer accountholders, any findings by a referee would of necessity be advisory only. Id. Bank of America's representation that the "change of terms" incorporates nonconsensual binding reference into the consumer account-agreements therefore violates 1770(n) because this "remedy" is prohibited by law.

Finally, Bank of America violated Civil Code 1770(s) by "[i]nserting an unconscionable provision in [a] contract." As discussed in Section V above, the imposition of the ADR clause was unconscionable because the Bank concealed the terms of the purported modification of the contract and because the effect of the change is to increase expense to consumers and to deprive them of constitutional and statutory rights without their consent. VII. CONCLUSION

The Bank's purported change of terms does not create an enforceable contract. The notice was inadequate to inform consumers of the terms of the ADR provision, and the account-holders did not agree to submit disputes to arbitration or reference or to waive their constitutional right to trial by judge or jury. Moreover, the ADR clause is unfair and unconscionable. The Court, therefore, should enjoin Bank of America from unilaterally imposing it, and should issue a declaration that the ADR clause is unenforceable. DATED: January 18, 1994 Respectfully submitted, Attorneys for Plaintiffs

1.4

Post-Trial Brief Challenging Mandatory Arbitration Clause Found in Credit Card "Stuffer"
SUPERIOR COURT OF THE STATE OF CALIFORNIA IN AND FOR THE CITY AND COUNTY OF SAN FRANCISCO

MARY BADIE, WILLIAM BADIE, GLADYS DOE AND TIMOTHY SMITH, individually, and CONSUMER ACTION, a non-profit membership organization, and CALIFORNIA TRIAL LAWYERS ASSOCIATION, a voluntary membership organization, all as private attorneys general, Plaintiffs, [vs.] BANK OF AMERICA, a California corporation, Defendant. Case No. PLAINTIFFS' POST TRIAL BRIEF HONORABLE THOMAS J. MELLON, JR. TABLE OF CONTENTS I. INTRODUCTION II. THE BANK'S ATTEMPTED MODIFICATION OF ITS DEPOSIT ACCOUNT AND CREDIT CARD AGREEMENTS WAS INEFFECTIVE TO CREATE AN AGREEMENT FOR ARBITRATION OR REFERENCE A. B. Perdue is Not Controlling on These Facts Application of Well-Established Rules Of Contract Interpretation Demonstrates That The Attempted Modifications Are Ineffective III. APPLICATION OF BASIC CONTRACT PRINCIPLES DEMONSTRATES THAT NO CONTRACT FOR ARBITRATION AND REFERENCE WAS CREATED BY THE BANK'S STUFFER NOTICES A. The Offer Was Uncertain And Indefinite Because Important Material Terms Were Omitted B. The Offer Was Not Effectively Communicated C. There Was no Manifestation of Assent D. The Purported Agreement Was Unsupported By Consideration

IV.

EVEN IF A CONTRACT WAS CREATED, IT IS OUTSIDE THE REASONABLE EXPECTATIONS OF CONSUMERS AND THEREFORE UNENFORCEABLE A. B. C. Both Reference and Arbitration Were a Surprise Notice of These Unanticipated Requirements Was Not Plain or Clear The Notices Are Insufficiently Conspicuous to Be Enforceable

V.

THE CLAUSES ARE ALSO UNCONSCIONABLE AND UNENFORCEABLE BECAUSE THEY ARE HIDDEN AND COME AS A SURPRISE

VI.

EVEN IF THIS COURT WERE TO APPLY FEDERAL LAW, THESE CLAUSES MUST STILL BE FOUND UNCONSCIONABLE

VII.

THE BANK COULD HAVE ALTERED ITS CHOICE OF LAW PROVISIONS BUT ELECTED NOT TO DO SO A. California Law Determines the Legality of Contract Formation Under Both California and Federal Law B. Assuming a Valid Agreement Exists for Arbitration/Reference, the Bank's Choice of Law Provision Still Requires that the Court Apply the Relevant Provisions of the California Arbitration Act

VIII.

BANK OF AMERICA'S CUSTOMERS DO NOT HAVE MEANINGFUL CHOICE OF ALTERNATIVE SOURCES OF SUPPLY

IX.

PLAINTIFFS MAY SEEK INJUNCTIVE AND DECLARATORY RELIEF UNDER BUSINESS AND PROFESSIONS CODE 17200, ET SEQ A. Plaintiffs Have Standing to Bring Suit Under Business and Professions Code 17200 on Behalf of the General Public for Violations of the Consumer Legal Remedies Act B. There is no Requirement That an Action to Enjoin an Unfair Business Practice be Prosecuted as a Class Action; A 17200 Representative Action May In Fact Be Preferable to a Class Action C. The Bank Has Waived Any Right It May Have Had to Insist on Consideration of Class Treatment For This Action

X. CONCLUSION

TABLE OF AUTHORITIES CASES: A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473 Appalachian Insurance Co. v. McDonnell Douglas Corp. (1989) 214 Cal.App.3d 1 Avagliano v. Sumitomo Shoji America, Inc. (S.D.N.Y. 1985) 614 F.Supp. 1397 Barquis v. Merchants Collection Ass'n. (1972) 7 Cal.3d 94 Beynon v. Garden Grove Medical Group (1980) 100 Cal.App.3d 698 Bolanos v. Khalatian (1991) 231 Cal.App.3d 1586 Bronco Wine Co. v. Frank A. Logoluso Farms (1989) 214 Cal.App.3d 699, rev. denied (1990) Busch v. Globe Industries (1962) 200 Cal.App.2d 315 California Grocers Ass'n Inc. v. Bank of America, NT&SA (1994) 22 Cal.App.4th 205 California Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474 California State Automobile Association Inter-Insurance Bureau v. Barrett Garages (1967) 257 Cal.App.2d 71 Carboni v. Arrospide (1991) 2 Cal.App.4th 76, rev. denied (1992) Celli v. Sports Car Club of America, Inc. (1972) 29 Cal.App.3d 511 Central Bank v. Kaiperm Santa Clara Fed. Credit Union (1987) 191 Cal.App.3d 186, rev. denied Citizen Utilities Co. v. Wheeler (1957) 156 Cal.App.2d 423 Civil Service Employees Insurance Co. v. Superior Court (1978) 22 Cal.3d 362 Colwell Co. v. Superior Court (1975) 50 Cal.App. 3d 32 Committee on Children's TV, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197 Conservatorship of Estate of Link (1984) 158 Cal.App.3d 138 Consumers Union of United States, Inc. v. Fisher Development, Inc. (1989) 208 Cal.App.3d 1433, rev. denied Cory v. Golden State Bank (1979) 95 Cal.App.3d 360 Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758 rev. denied Dorman v. International Harvester Company (1975) 46 Cal.App.3d 11 Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377 Ferrell v. Southern Nevada Off-Road Enthusiasts, Ltd. (1983) 147 Cal.App.3d 309

Fields v. Blue Shield of California (1985) 163 Cal.App.3d 570 Fletcher v. Security Pacific National Bank (1979) 23 Cal.3d 442 Frankini v. Bank of America NT&SA (1939) 31 Cal.App.2d 666 Frazier v. City of Richmond (1986) 184 Cal.App.3d 1491 Freeman v. State Farm Mutual Automobile Ins. Co. (1975) 14 Cal.3d 473 Geldermann & Co., Inc. v. Lane Processing, Inc. (8th Cir. 1975) 527 F.2d 571 Gilmer v. Interstate/Johnson Lane Corp. (1991) 111 S.Ct. 1647 Graham v. Scissor Tail, Inc. (1981) 28 Cal.3d 807 Gray v. Zurich Insurance Company (1966) 65 Cal.2d 263 Green v. Obledo (1981) 29 Cal.3d 126 Henningsen v. Bloomfield Motors, Inc. (1960) 32 N.J. 358, 161 A.2d 69 Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65 Home Savings & Loan Ass'n v. Superior Court (1974) 42 Cal.App.3d 1006 (Home Savings I) Home Savings & Loan Ass'n v. Superior Court (1976) 54 Cal.App.3d 208 (Home Savings II) Hume v. United States (1889) 132 U.S. 406 Industralease Automated & Scientific Eg. Corp., Etc. (1977) 58 A.D.2d 482, 396 N.Y.S.2d 427 K.C. Working Chemical Co. v. Eureka-Security Fire & Marine Ins. Co. (1947) 82 Cal.App.2d 120 Kincade v. General Tire & Rubber Co. (5th Cir. 1981) 635 F.2d 501 Krobitzsch v. Middleton (1946) 72 Cal.App.2d 804 Kurashige v. Indian Dunes, Inc. (1988) 200 Cal.App.3d 606 LaSala v. American Savings & Loan Ass'n (1971) 5 Cal.3d 864 Los Angeles Investment Co. v. Home Savings Bank (1919) 180 Cal.601 Los Angeles v. Superior Court (1959) 51 Cal.2d 423 Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699 Magna Development Co. v. Reed (1964) 228 Cal.App.2d 230 McDonald v. Superior Court (1994) 22 Cal.App.4th 364 Michaelis v. Schori (1993) 20 Cal.App.4th 133

Mid-Peninsula Citizens For Fair Housing v. Westwood Investors (1990) 221 Cal.App.3d 1377 Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) 473 U.S. 614 Mormile v. Sinclair (1994) 21 Cal.App.4th 1508 Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690 Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459 Parr v. Superior Court (1983) 139 Cal.App.3d 440 Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, rev. denied, cert. denied, 114 S.Ct. 1217 (1994) People v. McKale (1979) 25 Cal.3d 626 People v. Pacific Land Res. Co. (1977) 20 Cal.3d 10 People v. Thomas Shelton Powers, M.D., Inc. (1992) 2 Cal.App.4th 330, 341, reh. denied Perdue v. Crocker Nat. Bank (1983) 141 Cal.App.3d 200, opinion vacated by 38 Cal.3d 913 Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, appeal dismissed (1986) 475 U.S. 1001 Perry v. Thomas (1987) 482 U.S. 483 Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797 Pines v. Tomson (1984) 160 Cal.App.3d 370 Player v. Geo. M. Brewster & Son, Inc. (1971) 18 Cal.App.3d 526 Prima Paint Corp. v. Flood & Conklin Mfg. Co.(1967) 388 U.S. 395 Rodriguez De Quijas v. Shearson/American Exp., Inc. (1989) 490 U.S. 477 Rose v. City of Hayward (1981) 126 Cal.App.3d 926 Rowland v. PaineWebber, Inc. (1992) 4 Cal.App.4th 279 Scott's Valley Fruit Exchange v. Growers Refrigeration Co., Inc. (1947) 81 Cal.App.2d 437 Solorzano v. Superior Court (1993) 18 Cal.App.4th 603 Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970 Steven v. Fidelity and Casualty Co. of New York (1962) 58 Cal.2d 862 Thompson v. Occidental Life Insurance Co. of Cal. (1973) 9 Cal.3d 904 Tonetti v. Shirley (1985) 173 Cal.App.3d 1144 Victoria v. Superior Court (1985) 40 Cal.3d 734

Volt Info. Sciences, Inc. v. Board of Trustees (1989) 489 U.S. 468 Warren v. City of Tampa (M.D.Fla. 1988) 693 F.Supp. 1051, aff'd 893 F.2d 347 (11th Cir. 1989) Webb v. R. Rowland & Co., Inc. (8th Cir. 1986) 800 F.2d 803 Weeks v. Crow (1980) 113 Cal.App.3d 350 West v. Henderson (1991) 227 Cal.App.3d 1578, reh. denied Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345 Williams v. Walker-Thomas Furniture Company (D.C. Cir. 1965) 350 F.2d 445 Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987

STATUTES:

Business and Professions Code Section 17200 Section 17203 Section 17204 Civil Code Section 1281.2 Section 1550 Section 1565 Section 1638 Section 1641 Section 1644 Section 1670.5 Section 1677 Section 1803.2 Section 1812.85 Section 2982(g) Section 2983.2 Code of Civil Procedure

Section 367 Section 382 Section 639 Section 645.1 Section 1280 Section 1295 Section 1298 Commercial Code Section 1201 Federal Arbitration Act 9 U.S.C. 1 9 U.S.C. 2 Uniform Commercial Code Section 2-302 OTHER AUTHORITIES: 1 Arthur Corbin, Corbin on Contracts, 128 (1992 Supp.) 1 Witkin, Summary of California Law, Contracts (9th ed. 1987) 119 123 145 146 Class Action Manual, Rules 411-416 McCall, James R., "Repossession and Adhesion Contracts" (1974) 26 Hastings L.J. 383 Restatement Second of Conflicts 187 Restatement Second of Contracts 187 208 Weil & Brown, Civil Procedure Before Trial (1993) 2:40-2:76

I. INTRODUCTION

This case involves a totally unprecedented attempt by Bank of America to unilaterally impose binding arbitration and reference on its consumer customers. Arbitration is a creature of contract; no prior case has ever upheld an agreement to arbitrate without a signed contract. Nor has any prior decision ever required judicial reference of an entire matter without the consent of the parties, manifested by their signed, written agreement filed with the Court or entered in the minutes. The only precedent for modifying contract terms by a notice inserted in a billing statement is in the context of a change in the price to be charged for a service of which customers are aware. Neither precedent, nor custom and practice, exists which would support the formation of a contract for arbitration or reference on the factual record before this Court. The change of terms notice did not contain all of the terms that the Bank construes to be part of the agreement, was drafted in language incomprehensible to most consumers, and was hidden amidst clutter. The Bank sent that notice by a statement stuffer, knowing it was likely to be read by only 4% of its customers.32 Despite the availability of many additional ways to communicate this information to customers at negligible cost, the Bank chose to utilize none of them. Because this notice was not communicated to customers in any meaningful way, and its terms were incomplete and unclear, there could be no meeting of the minds, no assent to its terms, and no valid contract modification. Even if this Court were to find that a contract was created, it is unenforceable. There is no dispute that if there is a contract, it is one of adhesion. Because the concept of judicial reference is little known, even to lawyers, and is beyond the understanding or awareness of the Bank's consumer customers, because its use in this context is wholly unprecedented, and because it was not brought plainly and clearly to consumers' attention, the reference clause for resolving class and private law enforcement actions falls outside the reasonable expectations of the Bank's See Defendant's Exhibit (hereinafter "DX") 1134, the October, 1992 readership survey, which indicates at page iii that 44% of the customers recalled receiving a newsletter in their statements, up from 22% in 1989. The survey further specifies at page iv that of the 67% of customers who read the newsletter in 1992 (compared to only 40% who read it in 1989), only 6% said they had read the section dealing with account information. That strongly indicates that the Bank could not have expected more than 4% of its total customers to read the inserts stuffed into their statements.
32

customers and cannot be enforced. Similarly, because arbitration of individual disputes between a Bank and its consumer customers was unprecedented, beyond the expectations of the Bank's customers, and was not brought to their attention in a document they were likely to read or review by language which was clear, plain or conspicuous, that clause also falls outside their reasonable expectations and may not be enforced. II. THE BANK'S ATTEMPTED MODIFICATION OF ITS DEPOSIT ACCOUNT AND CREDIT CARD AGREEMENTS WAS INEFFECTIVE TO CREATE AN AGREEMENT FOR ARBITRATION OR REFERENCE A. Perdue is Not Controlling on These Facts

The starting point for analysis of the Bank's attempted contract modification is Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, appeal dismissed (1986) 475 U.S. 1001. In Perdue, the court held that the Bank's "signature card" for checking accounts was a contract. Id. at 924. The signature card at issue in Perdue utilized broad language allowing future modifications as follows: [t]he undersigned depositors "agree with Crocker National Bank and with each other that ... this account and all deposits therein shall be ... subject to all applicable laws, to the Bank's present and future rules, regulations, practices and charges, and to its right of setoff for the obligations of any of us." Id. at 921. The Court concluded that the card authorized "the bank to impose [NSF] charges, subject to the bank's duty of good faith and fair dealing in setting or varying such charges." Id. at 924. In Perdue, the extent of the service charge for NSF checks was neither hidden nor unexpected, but was known to plaintiff and other consumers33 and the contractual language plainly set out an agreement to be subject to future rules, practices and charges. Neither factor exists here. The narrow scope of terms subject to change in Bank of America's deposit account and credit card agreements contrasts sharply with the signature card construed in Perdue. Plaintiffs' Exhibit (hereinafter "PX") 22, the Master Agreement for Deposit Accounts, states that "the written information ... tells you the current terms. We may change these terms at any time." The

33

913.

Perdue v. Crocker Nat. Bank (1983) 141 Cal.App.3d 200, opinion vacated by 38 Cal.3d

Facts booklet for deposit accounts (PX 23), states that "You agree to the terms and conditions described in this publication. We may change these terms and conditions any time." (Emphasis added.) The Credit Card Account Agreements, PX 55-63, state in relevant part as follows: You accept the terms and conditions of this Agreement when you apply for or use your Account ... we may change any term, condition, service, or feature of your Account at any time. These agreements are contracts of adhesion which must be construed against the Bank. Graham v. Scissor Tail, Inc. (1981) 28 Cal.3d 807, 819, n. 16; Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 695. Whether the addition of new and unexpected terms is permitted by the language of this Bank's contracts is wholly distinguishable from whether the change of a known price for an existing service complied with the very different contractual language construed in Perdue.

B. Application of Well-Established Rules Of Contract Interpretation Demonstrates That The Attempted Modifications Are Ineffective. The Bank contends that it followed the express terms of its account agreements and industry custom and practice and modified those agreements by a billing insert. But, the rules governing contract interpretation compel the conclusion that the attempted modifications are ineffective. Civil Code 1638 provides that the language of a contract, if clear and explicit, governs the interpretation of the instrument. Section 1641 says that the whole of a contract is to be taken together, so as to give effect to every part. Section 1644 provides that the words of a contract are to be interpreted and understood in their ordinary and popular sense. Read together, these statutes require the references in PX 22-25 and 55-63 to possible "changes" in "these terms" or "the terms" to be limited to changes in (not additions to) the "terms" that are set forth in the account agreements. That is how these phrases would ordinarily be understood. To the extent the contract is ambiguous, this Court may consider extrinsic evidence to ascertain the intent of the parties. The unequivocal testimony of Sylvia Coats at trial was that the meaning to the Bank of the word "terms" is the "price terms" required under the standard 515 disclosures. She elaborated that the word "terms" on acceptance certificates in PX 52 meant the

fees stated in those documents, referring specifically to two examples in Bates No. 2990, the annual membership fee and the annual percentage rate. Tr. 2/28 p.m., 2:13-16. She further testified that the terms that the direct mail solicitations in PX 52 contain are the "standard 515 disclosure . . . membership fee, annual percentage rate, the 25-day grace period, the balance calculation method." (Id. at 4:4-9, Bates Nos. 2992-3). (Bates No. 3024 and Tr. 2/28 p.m., 6:257:6.) The applications in PX 51 also consistently define "terms" as those some required disclosures (see e.g., Bates Nos. 1196, 1198, 1204, 1208 and 1212). Again, when asked specifically about what the word "term" meant in the contractual provision allowing changes in terms (PX 55), Coats said "the 515," meaning the price terms disclosed to customers in the account application. (Tr. 2/28 p.m., 3:28-4:28.) The extrinsic evidence at trial thus confirms that the meaning of "term" as reflected in written Bank documents and as understood by the Bank was the standard 515 price disclosures. The change in terms provision must be construed to allow modification only of those price terms.34 Finally, the Bank's account agreements, which were drafted entirely by the Bank, did not give the Bank the right to "add" new terms, but only to "change" existing terms. (PX 55-63). Only two agreements in effect between 1986 and 1989 reserved to the Bank that right (DX 6 and PX 74). Construing the "change of terms" language, as it must, against the Bank, this Court should conclude it does not encompass the right to add new non-price terms. Moreover, no custom and practice supports the Bank's conduct. As revised to reflect Professor Scott's concessions during cross-examination, DX 1127 shows only three banks had a right to add new contract terms, so no custom and practice exists in the industry which allows the Bank to "modify" by adding new and different provisions. See Exhibit A attached. And DX 1127A modified to delete banks' requiring prior notice of changes shows no real industry custom and practice exists of modifying Contracts without prior notice. See Exhibit B hereto. Bank of

If the language of the underlying contract is ambiguous, the court should choose the meaning that will enable it to enforce the contract. See Los Angeles v. Superior Court (1959) 51 Cal.2d 423, 437. In ascertaining that meaning, the Court should be guided by the established principle that "where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing." California Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474, 484, quoted with approval in Perdue, supra, 38 Cal.3d at 923.

34

America's own practice was to require affirmative assent by customers to important changes in terms (see e.g. PX 17, 66).

III. APPLICATION OF BASIC CONTRACT PRINCIPLES DEMONSTRATES THAT NO CONTRACT FOR ARBITRATION AND REFERENCE WAS CREATED BY THE BANK'S STUFFER NOTICES A contract is created only if both parties assent to be bound, and their agreement is definite enough to be enforced. The evidence shows that the Bank met none of the requisites for the formation of a valid contract when it attempted to modify the account agreements to include a provision for ADR. First, the Bank's offer was indefinite and uncertain in that it omitted essential terms of the proposed bargain; thus, acceptance was not possible because the Bank's customers could not have knowingly consented. Second, there was no manifestation of mutual assent. Third, the purported modification was unsupported by any consideration. A. The Offer Was Uncertain And Indefinite Because Important Material Terms Were Omitted "An offer must be sufficiently definite, or must call for such definite terms in the acceptance, that the performance promised is reasonably certain." 1 Witkin, Summary of California Law, Contracts (9th ed. 1987), 145 at 169. Numerous cases illustrate the rule requiring certainty. E.g., K.C. Working Chemical Co. v. Eureka-Security Fire & Marine Ins. Co. (1947) 82 Cal.App.2d 120; see Witkin, supra, 146 at 169-70. Although uncertainty in minor details will not render a contract unenforceable, if the indefinite terms are so essential to the bargain that the agreement cannot be enforced according to its terms, the contract cannot stand. Los Angeles v. Superior Court, supra, 51 Cal.2d at 433. Uncertain or ambiguous terms render an agreement illusory unless they can be objectively determined in some manner. California Lettuce Growers., supra, 45 Cal.2d at 481-85 (contracts that did not specify price, terms of delivery, or obligation of Union Sugar to accept delivery were nevertheless enforceable because these were determinable from prior dealings of the parties and industry practice); compare Magna Development Co. v. Reed (1964) 228 Cal.App.2d 230 (an action for specific performance of realty purchase contract, where terms of subordination agreement regarding construction loan were left open, court found no evidence that sellers knew or understood practices or customs in

building industry); Citizen Utilities Co. v. Wheeler (1957) 156 Cal.App.2d 423 (in action for specific performance of agreements to sell stock, where matter of price was left for future agreement, court found no prior course of dealing between parties and no evidence of practice in industry by which price could be fixed). In this case, neither prior dealings of the Bank and its customers nor industry practice supplies the necessary certainty missing from the offer. All the Bank sent to customers was PX 1 and 3. (Christian, Coats and Martino testimony). With respect to arbitration, these notices do not state that under the Commercial Arbitration Rules of the AAA35 discovery is sharply limited, that arbitration is final and binding, that arbitrators are not bound by any rules of evidence or that the upfront costs to bank customers are significantly greater.36 Plaintiffs and other customers testified that they did not have an understanding of "arbitration" (P. Badie, M. Kraszewski, K. Haghighi). None of the individual plaintiffs had ever seen the AAA commercial arbitration rules and the Bank did not make them available. (Christian testimony). Nor does the notice state which party would be required to pay the filing and other fees. With respect to reference, the notice did not specify what reference was, which code sections were related,37 what rules or procedures would govern, or how referees would be selected. It did not inform consumers they would be required to pay the referee's hourly fees, or that the Bank construed the term to mean there would be no judicial oversight at the trial court level. See PX 4. Neither the Bank's witnesses nor the individual plaintiffs had any understanding of what "reference" meant. Even an experienced trial and appellate lawyer, David Heilbron, who had twice served as a referee, had no definitive understanding of the meaning of "reference" or related sections, as used in PX 1 and 3. Christian testified that he and the Bank selected the AAA because cases would be managed and moved. (See also DX 1164 quoting

See PX 65, and other AAA documents, PX 103-115 (AAA Rules, training materials and explanatory brochures).
36 37

35

Cooper conceded this at trial.

No consumer, even one who consulted counsel, could possibly discern from the stuffer the Bank's interpretation that 639 and its requirement for judicial review were not applicable, as Christian testified. This interpretation of the contract was not communicated to consumers, making the contract uncertain, and also renders it constitutionally infirm for the reasons stated in Plaintiffs' Trial Brief, at 15-18.

Christian as liking the AAA's "steady hand on administration," at 540.) However, Cooper of the AAA had a totally different understanding; he said that the AAA would merely appoint the referee and "close its file." Because PX 1 and 3 meant different things to different people, and different things to the same people at different times, the certainty required by the law of contracts was plainly not satisfied.

B. The Offer Was Not Effectively Communicated. Had the Bank intended to conceal from its customers the new dispute resolution term, it could hardly have made the provisions less likely to be seen and understood. Its own readership survey made it clear that less than 4 percent of its customers would read "stand alone" inserts like PX 1 and 3 (DX 1134; Tr. 3/7, 7:5-8:15). Despite that internal knowledge, the Bank failed to utilize other available and customary means of communication with its customers to inform them of this term. It failed to mention the new term in the personal letters sent to more than 5.2 million checking account customers in June, 1992 (PX 17-21). The modified terms were not contained in a document that purported to be a contract. Despite the availability of 10 separate lines on the front of each credit card, checking and savings account statement, and space for important terms on the reverse of each, the Bank failed to insert any mention of arbitration or reference on any statements sent to its twelve million customers (PX 34-35 and 71). The Bank also failed to refer to the arbitration/reference term in any way in its monthly newsletters (PX 3641), although those newsletters were likelier to be read than the stuffer (DX 1134). The Bank never amended its credit card agreements to contain the arbitration/reference policy (PX 62, 63 and 65; Coats testimony). Moreover, it sent new credit card customers like Sherman Kasoff an agreement bearing a date of June, 1992 and sent PX 1, dated March, 1992 in the October, 1992 statement (Kasoff Testimony; PX 76 and 78). For those few customers who received and read PX 1 and 3 but who required further information, the Bank promulgated internally inconsistent and conflicting information to be distributed to its customers. PX 42. For example, the suggested answer for customers who called Bank branches was that reference was very similar to arbitration; customers who picked up the handout sheet were informed that reference was like regular court proceedings. Because even

the Bank, the drafting party, cannot determine what the language of PX 1 and 3 means, this Court must find it to be uncertain and inadequately communicated to create a valid contract.

C. There Is No Manifestation of Assent In addition to the certainty of terms, Civil Code 1550 and 1565 provide that every contract requires mutual assent. "Mutual assent is gathered from the reasonable meaning of the words and acts of the parties, and not from their unexpressed intentions or understanding." 1 Witkin, supra, 119 at 144. Cases construing these sections hold that where the writing does not reasonably appear to be a contract, and its contractual terms are not called to the attention of the person who receives it, that person is not bound. See Witkin, supra, 123 at 148; California State Automobile Association Inter-Insurance Bureau v. Barrett Garages (1967) 257 Cal.App.2d 71 (automobile claim check created no binding contract); Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987 (purported contract to arbitrate was denied enforcement because it was inconspicuous and buyer had no knowledge of it, so could not have consented); Cory v. Golden State Bank (1979) 95 Cal.App.3d 360 (bank that did not inform customers of service charge provision during sale of money orders had no right to collect service charges on uncashed money orders because customers could not be deemed to have consented to the provision). Here, the Bank required no signature or other assent. (Christian, Coats, Martino and Scott testimony). The Bank was aware that many customers never even received PX 1 and 3 (Martino testimony). Nevertheless, the Bank deemed them all bound if their accounts remained open.38 The language used in PX 1 and 3 did not inform customers that to avoid the attempted modification they must close their accounts. Without such express disclosure, simply leaving an account open cannot manifest assent to a new term.

PX 1 recites that if customers continue to use their accounts, the new provision "will apply to all past and future transactions" while PX 3 specifies only that it is "effective immediately." Christian testified in deposition (33:15-39:24) that customers would not be bound until they had manifested assent to the new term by writing a check or using the credit card; at trial he stated that if customers did not close their account, no continued use would be required and PX 1 and 3 would apply to all past transactions and controversies concerning them.

38

D. The Purported Agreement Was Unsupported By Consideration

Every executory contract requires consideration. Civil Code 1550. Any supplemental agreement adding to or varying the terms of the original contract, so as to impose new burdens on one of the parties, must also be supported by consideration. Krobitzsch v. Middleton (1946) 72 Cal.App.2d 804, 808. A written agreement may expressly provide for modification, and a modification accomplished in accordance with the terms of the agreement does not require additional consideration. Busch v. Globe Industries (1962) 200 Cal.App.2d 315, 320. But, the Bank account agreements provide only a limited right to change existing price terms. In attempting to add a new, non-price provision for dispute resolution to agreements that had previously contained no such term, the Bank did not act in conformance with those agreements. Thus, the purported new contract must be supported by consideration, which plainly does not exist. Basic contract principles compel the conclusion that the Bank's "Change of Terms" was uncertain, not communicated or consented to by its consumer customers, and unsupported by consideration, and was, therefore, ineffective, to create a contractual agreement. IV. EVEN IF A CONTRACT WAS CREATED, IT IS OUTSIDE THE REASONABLE EXPECTATIONS OF CONSUMERS AND THEREFORE UNENFORCEABLE A. Both Reference and Arbitration Were a Surprise Because these contracts are plainly adhesive, they are subject to the judicially imposed limitation that provisions not falling within the reasonable expectations of the "adhering" party will not be enforced against him. Graham v. Scissor Tail, Inc., supra, 28 Cal.3d at 920. The arbitration clause at issue in Graham was contained in a standardized form agreement in use by all members of the America Federation of Musicians (AFM) which Graham had signed. By his own testimony, he previously had been a party to thousands of AFM contracts containing similar provisions. On that record, the Court could not conclude that the contractual provision requiring arbitration before the AFM was in any way contrary to the reasonable expectations of the plaintiff. Id. Nevertheless, the Court invalidated the clause on the grounds that it was unconscionable and unenforceable because it designated a presumptively biased arbitrator and therefore did not satisfy "minimum levels of integrity." Id. at 825.

The minimum levels of integrity test is inapplicable to this case because the clause at issue was outside the reasonable expectations of the adhering parties. Here, unlike in Graham, there was no standardized contract in use throughout the industry,39 no plaintiff had ever been a party to a similar contract in banking or elsewhere, and no consumer signed the purported agreement. Moreover, the evidence was undisputed that it was a "big innovation" by Christian to initiate arbitration in banking initially in the mid-1980's and in banking consumer relationships subsequently in June, 199240 and that judicial reference is "seldom used" (see PX 4) and little understood by consumers or lawyers. The plaintiffs had no idea what "reference" meant, and the lawyer witnesses testified they and most lawyers did not understand reference (McCall, Scott and Heilbron testimony). All plaintiffs testified they did not have any expectations that the Bank would attempt to include such a requirement in their contracts, and Ken McEldowney, an experienced consumer activist in banking issues for more than a decade, testified he had never heard of judicial reference before his meeting with Winslow Christian and believed "that the average consumer would have no idea what judicial reference meant." (Tr. 3/2, 32:27-34:1.) That the reference requirement falls outside consumers' reasonable expectations is further confirmed by the Bank's expert, Kenneth Scott, who agreed that consumers would not be aware of or understand that procedure.41 Thus, reference was unknown and unexpected by the Bank's consumer customers; it constitutes a classic illustration of surprise. Although some of the plaintiffs were aware generally of arbitration as a means of resolving disputes, all of them testified that they were surprised that the Bank had attempted to insert an arbitration provision into their agreements. McEldowney also testified that he never expected that an arbitration or reference requirement would exist in banking. (Tr. 3/2, 34:2-8.)

Compare the agreements of Wells Fargo Bank (PX 121A, 134) and First Interstate Bank (PX 124) with PX 1 and 3. The Bank stated in PX 42 that it was unaware of any other financial institution which uses arbitration and reference for deposit and credit card accounts (Bates No. 3934). His study of all California banks and major banks nationwide with ADR clauses found virtually none with a reference provision in their contracts when Bank of America adopted its clause in June, 1992. See DX 1127 and 1127A. He also testified that as of June, 1993, Bank of America was the only credit card issuer out of the top ten in the country with any ADR provisions. See DX 1163.
41 40

39

Thus, neither reference nor arbitration was within reasonable pre-existing expectations of the Bank's consumer customers. B. Notice of These Unanticipated Requirements Was Not Plain or Clear. As the Court pointed out in Graham, supra, 28 Cal.3d at 821 n.18, the adequacy of notice is a very important factor in determining whether provisions contrary to the reasonable expectations of the adhering party will be denied enforcement. Numerous cases hold that notice must be plain, clear, and/or conspicuous and that there must be an understanding consent for such provisions to be enforceable. As the Supreme Court explained: The effect of an adequate notice, of course, is to alter pre-existing expectations. Notice, in other words, is simply one of the factors -- albeit an extremely significant one -- to be weighed in assessing the reasonable expectations of the adhering party. Id. Accord, Parr v. Superior Court (1983) 139 Cal.App.3d 440, 445. In the earlier decisions cited and relied on in Graham, the Court adopted the rule requiring "plain and clear notification" and "an understanding consent." Graham, supra, 28 Cal.3d at 821 n.18. In Steven v. Fidelity and Casualty Co. of New York (1962) 58 Cal.2d 862, the Court refused to allow an insurer who sold life insurance policies on a mass basis to airline passengers to deny coverage for substituted or unscheduled flights because the insurer did not "plainly and clearly" bring those exclusions to the attention of the purchaser. Id. at 866, 868-9. Applying the principle that ambiguities in standardized contracts are to be construed against the drafter, the Court held that the language of the policy was insufficiently clear to overcome the insured's reasonable expectations of coverage for his entire trip. The Court explained that traditional principles of contract law applied with special force in light of the important circumstances that there was no opportunity for the insured to obtain an explanation or discussion of the contract's terms, that there was little opportunity to read the policy, and, even if one had done so, the clauses excluding coverage were "inconspicuous" and "unclear." Id. at 877. In language equally applicable to this Bank's practices, the court concluded: While the insurer has every right to sell insurance policies by methods of mechanization, and present-day economic conditions may well justify such distribution, the insurer cannot then rely on esoteric provisions to limit coverage. If it deals with the public on a mass basis, the notice of non-coverage of the

policy, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear. Id. at 878. Again, in Gray v. Zurich Insurance Company (1966) 65 Cal.2d 263, the Court applied the "conspicuous, plain and clear" notice rule and refused to allow an insurer to deny a duty to defend by relying on an unclear exclusionary clause. The Court traced the application of the adhesion contract doctrine, which requires courts to interpret such contracts by ascertaining the meaning which the weaker party would reasonably expect. Id. at 270. Finding that a layman would reasonably expect coverage and that the clause limiting the duty to defend was not conspicuously set forth in the policy and that its effect was not "plain and clear," the Court refused to enforce it. Id. at 273-74. In Thompson v. Occidental Life Insurance Co. of Cal. (1973) 9 Cal.3d 904, the Court again applied the "conspicuous, plain and clear" rule to an insurance contract of adhesion. The court began by finding that the understanding of an ordinary person is the standard to be used in construing the contract, and that an ordinary person reading the application could reasonably believe that he would be covered on paying the premium. The Court applied the rule covering any divergence from the reasonable expectations of the adhering party, in this instance, any condition precedent to coverage as follows: [A]ny such condition must be stated in conspicuous, unambiguous and unequivocal language which an ordinary layman can understand. As the insurer is responsible for drafting the application, it is appropriate that he be required to chose plain and unequivocal terms. Id. at 912 (citations omitted). This rule of plain and clear notification of terms and an understanding consent thereto has also been applied to deny enforcement of arbitration clauses in cases decided after Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699.42 In Wheeler v. St. Joseph Hospital (1976) Madden provides no support for the Bank because it stands only for the proposition that a union member is bound by a freely negotiated arbitration clause in a contract between parties of equal bargaining strength, her union and the hospital. Id. at 712. Similarly, the cases cited by the Bank in support of the proposition that failure to read an arbitration provision is not a proper basis for finding it unenforceable, and that arbitration agreements are enforced with regularity against non-signatory parties, are inapposite because the arbitration provision at issue in each of those cases was part of a signed agreement. Michaelis v. Schori (1993) 20 Cal.App.4th 133; Rowland v. PaineWebber, Inc. (1992) 4 Cal.App.4th 279; Bolanos v. Khalatian (1991) 231 Cal.App.3d 1586; and Mormile v. Sinclair (1994) 21 Cal.App.4th 1508.
42

63 Cal.App.3d 345, the court held that there was no agreement to arbitrate where a hospital patient had not read the admission form containing the arbitration clause and no one at the hospital called his attention to it. The court first acknowledged the basic premise that arbitration is consensual in nature, and that disputes may be resolved by this alternative to the judicial process "only by reason of an exercise of choice by all parties." Id. at 355. The Court went on to weigh and apply two competing public policy considerations in determining whether an agreement to arbitrate existed. The court recognized that "[i]t has long been the public policy of this state to favor arbitration over litigation as a means of settling disputes because it is expeditious, avoids the delays of litigation, and relieves court congestion." Id., citing Madden at 706-07 (footnote omitted). Nevertheless, the court held that the policy favoring arbitration "cannot displace the necessity for a voluntary agreement to arbitrate." The court relied on a recent Supreme Court decision that recognized the strong policy favoring arbitration, but cautioned that "there is no policy compelling persons to accept arbitration of controversies they have not agreed to arbitrate." Id. at 356, quoting Freeman v. State Farm Mutual Automobile Ins. Co. (1975) 14 Cal.3d 473, 481. Accord Victoria v. Superior Court (1985) 40 Cal.3d 734, 739. The court further noted that to be enforceable, an agreement to arbitrate must have been "openly and fairly entered into." 63 Cal.App.3d at 356, citing Player v. Geo. M. Brewster & Son, Inc. (1971) 18 Cal.App.3d 526, 534. The court explained that enforceability of an adhesion contract depends upon whether the terms of which the adherent was unaware are beyond the reasonable expectations of an ordinary person or are oppressive or unconscionable. "In dealing with standardized contracts courts have to determine what the weaker contracting party could legitimately expect by way of services according to the enterpriser's 'calling,' and to what extent the stronger party disappointed reasonable expectations based on the typical life situation." 63 Cal.App.3d at 357, citing Gray, supra, 65 Cal.2d at 270.

Moreover, Bolanos, Michaelis, and Mormile all involved agency issues: whether the person who signed an agreement for arbitration of medical malpractice claims in the format specified by Code of Civil Procedure 1295, et seq. had the authority to bind other parties (family members) to arbitration of claims arising from the signatory's claim.

The court in Wheeler applied adhesion contract principles to an arbitration clause, and recognized that an arbitration clause limits the liability of the stronger party43 and that it must be called to the weaker party's attention in some meaningful way. Where the contract is one of adhesion, conspicuousness and clarity of language alone may not be enough to satisfy the requirement of awareness ... [I]t may also be necessary to call his attention to the language of the provision (citation omitted) and if the language of such a provision "is too complicated or subtle for an ordinary layman to understand he should also be given a reasonable explanation of its implications." Id. citing McCall, "Repossession and Adhesion Contracts" (1974) 26 Hastings L.J. 383, 417-8 (articulating the majority view that an adhering party must be aware both of the existence and legal import of an adhesive provision for it to be enforceable). The Wheeler court held that: [B]y agreeing to arbitration, the patient does forfeit a valuable right. The law ought not to decree a forfeiture of such a valuable right where the patient has not been made aware of the existence of an arbitration provision or its implications. Absent notification and at least some explanation, the patient cannot be said to have exercised a "real choice" in selecting arbitration over litigation. We conclude that in order to be binding, an arbitration clause incorporated in a hospital's "CONDITIONS OF ADMISSION" form should be called to the patient's attention and he should be given a reasonable explanation of its meaning and effect, including an explanation of any options available to the patient. 63 Cal.App.3d at 361. No explanation at all was provided by the Bank to its customers. As Professor McCall said, mentioning only the word "reference" and a citation to the Code of Civil Procedure section "is like the dark ages of consumers contracts . . . that would mean nothing to a consumer." Tr. 3/8, 75:7-12. The analysis and requirements of awareness of meaning and effect urged by McCall and followed in Wheeler must apply in this case. Subsequent arbitration cases have "uniformly restricted the Madden rule to its limited factual setting." Fields v. Blue Shield of California (1985) 163 Cal.App.3d 570, 581, found the duty to read insufficient to bind a party to unusual language, contained in a booklet modifying the initial policy, which is not conspicuously, plainly and clearly set forth, brought to the party's attention and explained. Similarly, in Beynon v.

The Wheeler court squarely recognized that the purpose of an arbitration clause is to avoid a jury trial, minimize losses for medical malpractice, and reduce the amount of recovery to the patient. Id. at 361. Similarly, it was the Bank's purpose and intent to limit its exposure to unpredictably high damage awards and to reduce its expenses which motivated the Bank to adopt arbitration and reference. See Christian testimony and Px. 4.

43

Garden Grove Medical Group (1980) 100 Cal.App.3d 698, 705, the court found the specific arbitration clause unenforceable because the provisions were not clear or conspicuous, were not called to the plaintiff's attention when she enrolled, and limited the liabilities of the stronger party. Wheeler, by contrast, has been cited approvingly and followed in Weeks v. Crow (1980) 113 Cal.App.3d 350, 353, and Victoria, supra, 40 Cal.3d at 739. This is not a special rule applicable to arbitration cases, but a general principle governing all adhesion contracts. Courts have repeatedly refused to enforce limitations on liability in nonarbitration adhesion contracts in the absence of plain, clear and explicit notice. See, e.g., Ferrell v. Southern Nevada Off-Road Enthusiasts, Ltd. (1983) 147 Cal.App.3d 309, 317; Celli v. Sports Car Club of America, Inc. (1972) 29 Cal.App.3d 511, 518; Scott's Valley Fruit Exchange v. Growers Refrigeration Co., Inc. (1947) 81 Cal.App.2d 437, 445-49. Additionally, this rule has been applied to deny enforcement of unanticipated contractual provisions in the bank-customer context. In Los Angeles Investment Co. v. Home Savings Bank (1919) 180 Cal.601, the plaintiff sued to recover $16,000 paid by the bank for forged checks. The "Agreement with Depositor" printed in the passbook contained a provision precluding the depositor from questioning the genuineness of endorsements on checks after ten days. Holding that the "average man" would not trouble to read such a provision and that it materially changed the "usual obligation" of the bank, the court refused to enforce it without evidence of the depositor's consent. The court noted that the statement was not signed by the depositor, and that there was no showing that it had been brought to his attention. It is just the character of the thing that the average man would not trouble to read, or reading would fail to appreciate the significance of the inclusion in it of "indorsements", and the fact that it very materially changed the usual obligation of a bank to its depositors. There is no reason, so far as we know, why a depositor may not make such an agreement if he deliberately chooses to do so, unreasonable as it is. But it is evident that the statement comes in the category of "traps for the unwary," and before such statement can be given effect as a contract binding upon the depositor and changing in a substantial particular the relation which presumably he thought he was entering into, it must appear affirmatively that he consented and agreed to it either by being required to sign it or by having his attention particularly called to it. 180 Cal. at 613. In Frankini v. Bank of America NT&SA (1939) 31 Cal.App.2d 666, a depositor brought an action to recover the amount of several forged checks charged to his account. At the bank's

request, Frankini had signed an agreement entitled "Authorization to Mail Statement and Vouchers" stating that he requested the bank to mail his statement, and that he would notify the bank of any error within ten days. The bank argued that the "Authorization" constituted a contract, and Frankini's failure to notify the bank within ten days of receiving the statement precluded recovery for the amount of the forged checks. The court disagreed, finding that the agreement was so unreasonable as to render the contract void: [T]he writing purports to obligate the depositor in requiring him to give notice of errors, but no corresponding or reciprocal promise is made on behalf of the bank; in fact the bank does not agree or promise to perform any act whatever. Id. at 676 (emphasis in original). The court found the language was so misleading as to constitute unfair advantage. The bank had placed the words "Authorization to Mail Statement and Vouchers" in large type at the top of the agreement -- "words which referred to a comparatively inconsequential matter" -rather than emphasizing the clause containing the limitation -- "the ignoring of which might mean financial ruin to the depositor." Id. The court characterized the agreement as "a trap for the unwary," citing Los Angeles Investment, supra. Under this reasoning, the Bank of America's clauses must also be found unenforceable. C. The Notices Are Insufficiently Conspicuous to Be Enforceable Both statutes and case law set forth the typeface size and format of contractual provisions that are conspicuous. Conservatorship of Estate of Link (1984) 158 Cal.App.3d 138, 141, summarized the Civil Code sections regulating the size of type in various kinds of contracts and the requirements for boldface type or contrasting red print in the body and headings of provisions because that is deemed necessary to draw consumers' attention to them.44 Important language

Among those are 1677, requiring eight-point bold red or ten-point bold print to draw attention to a liquidated damages provision in a real property purchase contract, Civil Code 1803.2, specifying the words "Security Agreement" in at least 12-point bold type at the top of a retail installment agreement where a security interest is retained in goods, and a notice in 14point boldface type, set apart from the rest of the contract by a border, and appearing directly below the title and another similar warning just before the signature line, if an interest in real property is taken, 1812.85, requiring ten-point bold print to draw attention to a three day cancellation right in a health studio services contract, and 2982(g)(1)(2) and (3) requiring ten-point bold print for notices concerning their rights to buyers of motor vehicles and 2983.2, requiring notice in ten-point bold type that a buyer may be subject to suit after repossession of a vehicle if there is a deficiency after sale. Id. at 142 n.1. Similar requirements govern arbitration provisions. See Code of Civil Procedure 1295 and 1298.

44

"should be placed in a position which compels notice and must be distinguished from other sections of the document." Id. at 142. Other decisions have held that a notice will not be found conspicuous where it appears within columns of print, in the same type face, placed in the middle of a document, because that is not likely to attract attention, Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 750, and that a disclaimer of implied warranties will not satisfy the requirement that it be conspicuous45 even where it was placed near the purchaser's signature and was in slightly larger type: In order to have a valid disclaimer provision, it must be in clear and distinct language and prominently set forth in large, bold print in such position as to compel notice. Dorman v. International Harvester Company (1975) 46 Cal.App.3d 11, 18. The Dorman court held that the type size in the body of the disclaimer was not large enough to be conspicuous and the heading "Additional Provisions" instead of something like "Disclaimer of Warranties" was inadequate to call attention to the clause. The criticisms of the Bank's arbitration and reference clause made by Ken McEldowney were remarkably similar to the deficiencies identical in Dorman. He testified that the notices were not clear about their subject matter or the consequences of the arbitration/reference requirement (Tr. 3/2, 20:2-4; 32:18-26), that the title should have been descriptive, such as "Arbitration Program" or something similar (id., 32:7-11), that graphics or color should have been used to make the notice attract attention in the envelope (id., 32:12-14, and Tr. 3/7, 22:22-26), and that the typeface, format and lack of color all were objectionable (id., 22:28 - 23:3).46 This Court should conclude, as did the Court in Dorman, that the lack of a descriptive title, and the failure to differentiate important language by a larger typeface, bold face, or a contrasting color, makes this notice insufficiently conspicuous.

The Commercial Code defines a conspicuous term or clause as one which is so written that a reasonable person against whom it is to operate ought to have noticed it. Section 1201(10) further specifies that a printed heading in all capitals is conspicuous and that language in the body of a form is conspicuous if it is in larger or other contrasting type or color. The attached Exhibits C and D show how much more noticeable the limiting language in PX 1 and 3 would be if it were properly titled and set in a larger size type and in bold face.
46

45

Moreover, the content falls short of the "plain and clear" standard. Arbitration was not described as final or binding and consumers were not told they were "giving up any rights" to a judge or jury trial, discovery and appeal (see Code of Civil Procedure 1298 and PX 133). Reference was not described at all and its meaning was unclear even to lawyers. Because both reference and arbitration were outside the reasonable expectations of the consumer parties and because the Bank did not follow the rule requiring conspicuous, plain and clear notification, the clauses are unenforceable. V. THE CLAUSES ARE ALSO UNCONSCIONABLE AND UNENFORCEABLE BECAUSE THEY ARE HIDDEN AND COME AS A SURPRISE Under the alternate analytic framework of A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, these terms must also be found unenforceable. As noted in Perdue, the A & M Produce analysis conforms more closely to the Uniform Commercial Code and treats unconscionability as the only basis for refusing to enforce a contractual provision, while Graham v. Scissor Tail, supra, more closely follows California precedent and treats frustration of reasonable expectations and unconscionability as alternative bases for refusing enforcement of contractual provisions. Perdue, supra, 38 Cal.3d at 925 n.9. It is generally accepted that both methods of analysis lead to the same result. Id. A & M Produce analyzes unconscionability as consisting of two elements, procedural and substantive. The procedural element can consist either of oppression, which arises from unequal bargaining power, or surprise, which is found where hidden and unexpected contractual provisions are asserted. Both are present in this case, but surprise is indisputable because many aspects of the reference requirement such as specific sections which the Bank deems "related," the rules or procedures which govern reference selection, the need to pay referee's fees, the lack of judicial oversight at the trial court level (PX 4, Christian testimony), and the fact that AAA just appoints a referee and closes the file (Cooper testimony) were never disclosed to customers at all. Similarly, as to arbitration, there was no disclosure in the stuffer that discovery would be limited, or that the arbitrator's decision would be final and binding, even if it is incorrect as a matter of fact or law and results in a manifest injustice. In the usual surprise case, terms are specified in the contractual documents, but hidden in a sea of fine print, and for that reason are

not conspicuous. Here, the facts are even stronger because certain terms which the Bank asserts are part of the contract were not in the notice at all and are contained in the press release (PX 4) or in the testimony of witnesses at trial, none of which were communicated to the Bank's customers. In Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, rev. denied, cert. denied, 114 S.Ct. 1217 (1994) the Court of Appeal held that consumers were surprised by an arbitration clause in a contract because they had not read the arbitration provision nor had any ITT employee pointed it out to them at the time they signed the loan agreement.47 The court explained that while failure to read the provisions does not excuse compliance with it, "it does establish actual surprise the unfairness of which is reinforced by ITT's failure to call the arbitration clause to the attention of its borrowers." 14 Cal.App.4th at 1666. Because there is an inverse relationship between procedural and substantive unconscionability,48 where the procedural elements of surprise and oppression are so clearly apparent, little or no substantive unconscionability must exist for a clause to be found unenforceable. The increased cost of both reference and arbitration up front to the consumer (Cooper testimony) satisfies that element in this case, as it did in Patterson, supra, and in Spence v. Omnibus Industries (1975) 44 Cal.App.3d 970. In a surprise case such as this, the existence of a theoretical meaningful choice to do business elsewhere and avoid the objectionable clause never arises. Meaningful choice is never mentioned in A & M Produce,49 but was found to negate the procedural element of The Court also found the clause unenforceable under Graham, supra, because arbitration in a distant forum was outside the reasonable expectations of the borrowers. Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758, 768, rev. denied states that both procedural and substantive unconscionability must be present, and explains that "a relatively larger degree of one will compensate for a relatively smaller degree of the other." Accord, A & M Produce, supra, at 287. The A & M holding did not turn on the issue of "meaningful choice." The court in that case found procedural unconscionability in the unequal bargaining power and lack of negotiation between a tomato farmer (A&M) and a huge corporate conglomerate manufacturer of agricultural machinery (FMC), which had sold the farmer a defective machine pursuant to a contract containing a warranty disclaimer and a consequential damages exclusion. The court also found "surprise" in that the disclaimers appeared in the middle of the back of a long, complex, pre-printed form contract. Nowhere in the decision is there any suggestion that the farmer had to prove he could not have purchased the machine elsewhere without a similar disclaimer before the court would find the disclaimers unconscionable.
49 48 47

unconscionability in Dean Witter, supra, 211 Cal.App.3d at 768. The claimed procedural element of unconscionability in Dean Witter was oppression, not surprise, and it is only that element that the decision says may be defeated by reasonably available alternative sources of supply of the desired goods or services free of the offensive term.50 If the term at issue is not brought to the consumer's attention because it is communicated by a method that makes it unlikely to be read, using language the average consumer will not understand, and omitting important terms and consequences, the consumers will have no impetus to shop. Not knowing of the objectionable term or of its undesirable effects, they will not be motivated to find out if the same goods or services are available without that term. The meaningful choice concept is also inapplicable for a separate reason. Dean Witter was the first decision to actually hold that alternative sources of supply negated oppression. It did so at the inception of the business relationship between the parties. Prior to contracting for Individual Retirement Account services, the plaintiff had received a booklet in which the challenged fees were plainly disclosed, so he had knowledge of it and the ability to shop around. All other meaningful choice cases have arisen at the inception of a business relationship, where the choice is part of the initial process of bargaining for products or services. See, e.g., Henningsen v. Bloomfield Motors, Inc. (1960) 32 N.J. 358, 161 A.2d 69; Steven v. Fidelity & Casualty Co., supra; A & M Produce, supra; Patterson v. ITT, supra; and cases cited below.51 Other cases which find unconscionability based on lack of meaningful choice also involve oppression based on unequal bargaining power and take-it-or-leave-it terms. For example, in Carboni v. Arrospide (1991) 2 Cal.App.4th 76, rev. denied (1992), there was no surprise because the objectionable price term was bargained for and plainly set out in a disclosure statement signed by the plaintiff. Accord Patterson v. ITT, supra, in which the holding that the arbitration clause was procedurally unconscionable was based on the alternative grounds of surprise and of oppression because the contract terms were non-negotiable, the parties were of unequal bargaining power, and plaintiffs were individuals of modest means who did not believe they would have qualified for bank loans and responded to ITT's advertising promising guaranteed loans. West v. Henderson (1991) 227 Cal.App.3d 1578, reh. denied (commercial lessee who challenged lease provision specifying 6-month limitation period for filing actions against lessor had meaningful choice because she could have done business with another lessor); Appalachian Insurance Co. v. McDonnell Douglas Corp. (1989) 214 Cal.App.3d 1 (exculpatory clause limiting liability between telecommunications company and manufacturer of communications satellite launching rocket was not unconscionable because the telecommunications company had meaningful choice regarding purchase of system for launching satellite); Kurashige v. Indian Dunes, Inc. (1988) 200 Cal.App.3d 606 (injured motorcyclist who had signed nonnegotiated general release agreement with motorcycle park and who then challenged release agreement as unconscionable had meaningful choice because he could have ridden his
51 50

No meaningful choice case has involved a long-term business relationship or an existing contract that was suddenly subjected to an unbargained-for, unilateral modification by the party with superior economic strength. Moreover, the negotiating parties in these cases were experienced business people or entities, with the exception of the motorcycle rider in Kurashige (neither business person nor consumer) and the borrower in Carboni (where the court ruled there was no meaningful choice). Thus, this analytical pathway again leads to the same result. The clauses, even if they were within the reasonable expectations of bank customers, are unconscionable and must be denied enforcement.

VI. EVEN IF THIS COURT WERE TO APPLY FEDERAL LAW, THESE CLAUSES MUST STILL BE FOUND UNCONSCIONABLE The doctrine of unconscionability is not unique to California law, is not uniquely applicable to arbitration agreements, and does not conflict in any way with federal common law. Thus, even if the Bank is correct that the FAA applies and that unique state law principles may not be applied to arbitration agreements governed by the FAA, the result in this case would not change. There is no conflict between state and federal law. The doctrine of unconscionability, as set forth in A & M Produce, supra, is derived directly from the Uniform Commercial Code and federal common law. Indeed, in describing the doctrine, the A & M Produce court cited and relied heavily upon the well-known case Williams v. Walker-Thomas Furniture Company (D.C. Cir. 1965) 350 F.2d 445, in which that court described the doctrine of unconscionability, as a matter of federal common law, in terms almost identical to those used by California state courts. Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably unfavorable to the other party. Williams, 350 F.2d at 449.

motorcycle elsewhere); Central Bank v. Kaiperm Santa Clara Fed. Credit Union (1987) 191 Cal.App.3d 186, rev. denied (credit union, having negligently allowed blank money order forms to be stolen while acting as bank's agent for money order sales, and subsequently challenging indemnification agreement as unconscionable, had meaningful choice because it could have either insured the money order forms or born the risk of loss).

The A & M Produce case also notes that California's doctrine of unconscionability was derived from 2-302 of the Uniform Commercial Code, which has long been applied by both federal and state courts to deny enforcement of unconscionable contract provisions. See, e.g., Williams, supra; Industralease Automated & Scientific Eg. Corp., Etc. (1977) 58 A.D. 2d 482, 396 N.Y.S.2d 427; Geldermann & Co., Inc. v. Lane Processing, Inc. (8th Cir. 1975) 527 F.2d 571, 575. In Geldermann, the court explained that the doctrine of unconscionability as currently codified in U.C.C. 2-302 originated in English common law, and was first approved by the Supreme Court in 1889 in Hume v. United States (1889) 132 U.S. 406, 411. In describing the doctrine, the court in Geldermann emphasized the same considerations that formed the basis of the analysis in A & M Produce -- whether there was a gross inequity of bargaining power between the parties, whether the aggrieved party was aware of and comprehended the provision in question, and whether the provision at issue was a commercially reasonable allocation of risks. 527 F.2d at 575-76; see also 1 Arthur Corbin, Corbin on Contracts, 128 (1992 Supp.); Restatement Second of Contracts, 208 (1979).52 Thus, the doctrine of unconscionability is one of the most long-standing and generally applicable principles of both federal and state contract law that "exist[s] at law or equity for the revocation of any contract." 9 U.S.C. 2. Accordingly, regardless of whether this Court applies state or federal common law, the result would be the same. The United States Supreme Court has never held that agreements containing arbitration provisions are exempt from general contractual principles of adhesion, oppression and unconscionability. Rather, the Court has cautioned that allegations of oppression and unconscionability remain relevant, (see Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) 473 U.S. 614, 627; Gilmer v. Interstate/Johnson Lane Corp. (1991) 111 S.Ct. 1647, 1656, and that determinations on these issues must be made in individual cases based on the evidence. See, e.g., Perry v. Thomas (1987) 482 U.S. 483, 492 n.9 (claim of unconscionability to

In addition, it is clear that the analysis for determining unconscionability is not uniquely applicable to arbitration provisions, but rather is applicable to contracts generally. The same analysis has been applied to a variety of contractual provisions, including a provision requiring an unconscionable interest rate (Carboni v. Arrospide, supra); a provision establishing an NSF bank charge (Perdue, supra) and a provision imposing a termination fee for an IRA account (Dean Witter, supra).

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be considered on remand); Gilmer, supra; Rodriguez De Quijas v. Shearson/American Exp., Inc. (1989) 490 U.S. 477, 484.53 The purpose, setting, and effect of the clause render it unconscionable. The Bank's purpose was to insulate itself from large damage awards (Px 4) and deter the filing and prosecution of class action and unlawful business practice lawsuits. Christian plainly testified that he had class cases in mind at the time the Bank created the policy. Arne Wagner further testified that there were seven class or unlawful business practices cases pending in California against the Bank involving claims of millions of dollars in the aggregate and substantial attorneys' fees for both sides. Because both Wagner and Scott emphasized the exceedingly small number of individual disputes, moving those disputes into arbitration could not have been the motivating force behind the policy. Professor McCall testified that the uncertainties of any possible reference fee allocation between the parties and the increased costs and expenses would be a disincentive to plaintiffs' counsel54 to undertake such cases on a contingency basis. Thus, the effect of the policy would be to seriously impair enforcement of consumer protection statutes. Tr. 3/9 at 18:2-28. VII. THE BANK COULD HAVE ALTERED ITS CHOICE OF LAW PROVISIONS BUT ELECTED NOT TO DO SO A. California Law Determines the Legality of Contract Formation Under Both California and Federal Law In 1989, the Supreme Court in Volt Info. Sciences, Inc. v. Board of Trustees (1989) 489 U.S. 468, emphasized that the Federal Arbitration Act, 9 U.S.C. 1, et seq., was designed to The cases in which federal courts have enforced arbitration agreements alleged to be adhesion contracts are distinguishable in two important aspects -- the relative sophistication of the adhering party, and the lack of any evidence supporting the claim of adhesion and unconscionability. See e.g. Gilmer, supra (the record showed that Gilmer was "an experienced businessman" and did not contain any evidence of coercion in the signing of the arbitration clause); Rodriguez De Quijas, supra (the record showed that plaintiffs were large-scale securities investors and contained no evidence that the contract was one of adhesion); Webb v. R. Rowland & Co., Inc. (8th Cir. 1986) 800 F.2d 803, 807 (contract of adhesion is invalid only if it is also unconscionable). Code of Civil Procedure 1023 is silent as to the waiver or allocation of the referee's fees. It states only that the "amount" of compensation or the "rate" of compensation is to be set by the court or by the parties' agreement. Fee waivers under Code of Civil Procedure 645.1 apply only to special references under Code of Civil Procedure 639. See McDonald v. Superior Court (1994) 22 Cal.App.4th 364; Solorzano v. Superior Court (1993) 18 Cal.App.4th 603 (court did not have authority to appoint a privately compensated discovery referee in a case brought by indigent persons or those of modest means).
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place agreements to arbitrate "upon the same footing as other contracts." Id. at 478. "[The FAA] does not require parties to arbitrate when they have not agreed to do so . . . It simply requires courts to enforce private negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Id. The Court had previously ruled that the Act was designed "to make arbitration agreements as enforceable as other contracts, but not more so." Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 404 n. 12. The Court concluded that "arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit." Volt, supra, 489 U.S. at 479. Thus, after the decision in Volt, the Bank knew that it had both the right and ability to revise its choice of law provisions to specifically refer to the Federal Arbitration Act. The Bank could have provided as the parties did in Tonetti v. Shirley (1985) 173 Cal.App.3d 1144 that the clause was governed by the FAA. The Bank had ample opportunity to amend the choice of law clause consistent with the holding in Volt -- that contracts including arbitration provisions will be enforced according to their terms. The Bank made no change to the choice of law provisions contained in the underlying agreements when it promulgated and transmitted PX 1 and 3 to its customers. The choice of law provisions contained in the account agreements state that they are subject to "California law and applicable federal law." The California Supreme Court recently visited the application of choice of law rules in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459. It held that California follows the Restatement Second of Conflicts 187, which provides that the law of the parties' choice of forum will apply if it has a "substantial relationship" to the parties or their transaction. If it does not, the court will ascertain whether there is any other reasonable basis for the parties' choice of law. If either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of the forum state which in this case is California. 3 Cal.4th at 465-66. There can be no question but that California has a "substantial relationship to the parties." Restatement, 187, Subd. (2)(a). The defendant is incorporated, has its principal place of business, and all of its branches, in California. The four named plaintiffs and the two organizational plaintiffs are residents of California and the underlying agreements were entered

into in California. In addition, the plaintiffs testified that when they opened their credit card accounts they intended to make purchases of goods and services primarily with California retailers. See Nedlloyd Lines B.V., supra, 3 Cal.4th at 467. Second, there is no inconsistency between California and federal law regarding arbitration. Indeed, California decisions interpreting the California Arbitration Act, California Code of Civil Procedure 1280, et seq., are fully consistent with federal decisions interpreting the FAA. Both recognize that arbitration is a creature of contract and that arbitration agreements are as enforceable as other contracts; no more, no less.55 See Wheeler, supra, and cases cited supra at 16-17, and Volt, supra. The Bank has pointed to no evidence to suggest that "applicable federal law" refers to the Federal Arbitration Act. It acknowledged in its post-trial preemption brief, and trial witnesses testified, that the applicable federal law means the disclosure requirements of the Federal Truth in Lending Act. (Coats Testimony). Even if the FAA applied, no conflict would be presented on the claims raised in this case. The FAA itself, provides, and has been specifically interpreted by the Supreme Court to require, that "[s]tate law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." Perry v. Thomas, supra, 482 U.S. at 492 n. 9. So long as the principles of state law are arbitration neutral, they are to be applied in determining the "validity" of the underlying agreement. It is clear that the California law of contracts is arbitration neutral and applies to determine whether any contract, including one providing for arbitration and reference, was legally formed. There is no inconsistency, then, between California and federal law with respect to the determinative issues in this case. The Bank's failure to amend the choice of law provision after the Supreme Court's decision in Volt reinforces its intent that California law applies to determine the validity of its clauses. Heilbron acknowledged that arbitration, general reference and mediation are premised on the consent of the parties. The recognition that alternatives to litigation must be based on the parties' knowing consent also underlies the endorsement of alternatives like mediation and arbitration in Justice in the Balance 2020: "Unless they choose to do so, disputants do not waive any right to adjudicate their disputes," at 43. See also p. 44 (parties voluntarily seek arbitration and reference) and p. 53 "appropriate dispute resolution. . . stands for the principles of parties' control over the resolution of their own disputes."
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B. Assuming a Valid Agreement Exists for Arbitration/Reference, the Bank's Choice of Law Provision Still Requires that the Court Apply the Relevant Provisions of the California Arbitration Act Even if this Court concludes that a valid contract for arbitration and reference exists between the Bank and its customers, based upon the holding in Volt, the Bank's choice of California law requires the Court to apply the relevant provisions of Civil Code 1281.2(b). That statutory section requires the Court, as Volt makes clear, to find that privately-negotiated agreements to arbitrate are "as enforceable as other contracts, but not more so." 489 U.S. at 478. By electing to retain the provision referencing California law, after Volt, the Bank must be held to have intended that 1281.2(b) applies. It cannot be persuasively argued that "other applicable federal law" means the Bank chooses federal law where the supremacy clause applies. This is not a matter for choice; the supremacy clause either applies, based upon the law of preemption and conflict, or it does not. No reference to federal law is necessary to invoke the supremacy clause, and the majority in Volt rejected Justice Brennan's dissent that the choice of law provision contained in that case necessarily included federal law. 489 U.S. at 490-91 (Brennan, J., dissenting). Moreover, under standard principles applicable to the construction of adhesion contracts, all ambiguities must be resolved against the Bank. Graham, supra, 28 Cal.3d at 819 n.16. The choice of California law three years after Volt prevents the Bank from arguing now that it chose to have the FAA apply to contract formation and revocation issues. Instead, Code of Civil Procedure 1281.2(b) authorizes trial courts in California, not arbitrators, to determine whether grounds exist for the revocation of the agreement. The Bank has failed to cite a single case applicable to arbitration after Volt which changes this conclusion in any way. VIII. BANK OF AMERICA'S CUSTOMERS DO NOT HAVE MEANINGFUL CHOICE OF ALTERNATIVE SOURCES OF SUPPLY There is no evidence that Bank of America's customers have any meaningful choice of alternatives. Its expert, Professor Scott, did not express any opinion about whether the choice which he said existed was "meaningful." Rather, he expressed only the narrow conclusion that other products exist that are a close substitute in all respects except they have no ADR clause. He did not consider whether the notice was sufficient to motivate consumers to shop around, or

whether the alternatives were known to consumers, disadvantageous, or more costly. He was unaware of the demographic profile of the Bank's customers, so did not take that into account. And he had no factual basis for his glib conclusion that it was easy to switch accounts. He said only that because there is a competition in the marketplace, in that there are a large number of banks in California, with branch offices in most communities, and because there is a national market for credit cards with many issuers and ease of entry, alternatives are "out there," so customers have choice. Because the factual premises for his opinion testimony were contradicted by that of Martino and McEldowney, as well as by the literature, including articles on which he purported to rely, his opinion is entitled to little, if any, weight. Both Martino and McEldowney recognized the importance to consumers of a checking account at a branch near their home or workplace (Tr. 3/7, 56:3-7) and of a broad network of ATM machines where cash can be obtained without a user fee (Tr. 3/2, 42:16-25). The Bank's solicitation materials emphasize the importance of those features to customers and repeatedly represent that Bank of America offers more because it is the leader, that it has the largest number of branches and ATM locations in California, and that its credit cards offer the best features. See PX 51. The demographic profile of Bank customers is extremely important in deciding whether or not any choice which might exist is meaningful or whether alternatives are reasonably available. DX 1134 contains a demographic profile of checking account customers at pp. 31-33. It shows that for 91% of those surveyed, Bank of America was their primary financial institution, that 82% have been a customer for ten years or more, that they have multiple banking relationships with Bank of America,56 and that the median age was 57.6 years. McEldowney testified that this showed "a very loyal customer base" (Tr. 3/7, 107:20-108:19) and that it would require a complex and complicated decision involving three or four different accounts to switch to another institution. Such long-term, stable customers are not motivated, like a new

The survey showed that Bank of America had significant penetration: 54% had Visa or Mastercard accounts, 51% had savings accounts, 30% had interest checking, 28% had a safety deposit box, 14% had a certificate of deposit, 14% had a retirement IRA or Keough plan, and smaller percentages had other relationships as well.

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prospective customer, to shop around for banks or credit cards with the best terms. Inertia and loyalty would minimize the likelihood they would seek out or utilize alternatives.57 The literature recognizes that consumers face both search costs and switching costs. See e.g. DX 1115 at p. 664, and PX 146 at 68-69 and 147 at 4. These costs include the difficulty of obtaining information, the concern that services will be inferior at the new institution, the cost in time, effort and emotional energy in closing out existing accounts and applying for new ones, the facts that there will be increased costs for new checks and increased or additional annual fees because existing accounts do not refund fees upon closure, the reduced credit rating or credit limits when a new card is obtained, and the time lag between applying for an account and receiving checks or a credit card. McEldowney agreed with these commentators that it would be disadvantageous and costly for customers to have to find a new bank with convenient branches and obtain new checks (Tr. 3/2, 42:7-15).

Additionally, the need to close one credit card account before opening another could require several months of reduced spending to pay off an outstanding balance which is a substantial switching cost (PX 147, p. 13). Even if an account balance can be transferred to a new credit card through the mechanism of a cash advance, it is inconvenient and there is a fee as high as 2% of the balance transferred (Tr. 3/2, 43:5-23).58 Another extremely important factor, which Scott ignored, is that customers must be given adequate notice of an objectionable contract term or they will have no motive or impetus to shop around to determine if alternatives exist. Professor McCall expressed the opinion that the notices were inadequate because they did not inform the consumer of the restrictions, harm or cost of the new term. He explained that: [i]f the notice is insufficient, the consumer effectively has no opportunity to shop around, no chance to look for any alternative sources to provide the same service in this instance. See e.g. trial testimony of Timothy Smith and Gladys Doe who had been loyal Bank of America customers for thirty years. McEldowney summarized the costs of switching as including moving to a bank with fewer branches at a location less convenient, with fewer ATMs, which would require customers to incur charges of at least $1 each time to access a network ATM and would impair their ability to cash checks in as many branch locations. Tr. 3/3, 30:29-32:5.)
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If, and only if, there is notice to the consumer of the "cost" of his new term does the consumer have any choice in the matter at all. If you are not informed of a detriment, then you have no choice and no ability to avoid it. Tr. 3/8, 67:5-15. McCall found the notices particularly deficient as to the reference provision which he thought was "inadequate to give notice to all but a handful of lawyers," id. at 74:2-15, and would "mystify consumers if they read it." Id. at 76:9-13. Professor Scott concurred. The total inadequacy of the notices to inform consumers negates any meaningful choice. Finally, even if choices currently exist for banking relationships without arbitration clauses, that is likely to be only temporary. McEldowney expressed the concern that smaller banks will follow the lead of Bank of America and Wells Fargo and there will be sharply reduced choices for consumers in the future (Tr. 3/7, 67:2-16). There is sound reason for that concern. The witnesses from other banks at trial and in their public statements indicated that the industry is watching this case, and that other banks are considering adopting ADR.59 The likelihood that other banks will follow suit is confirmed by the literature. The Butler article, DX 1164, recognizes that "many financial institutions have joined the trend begun by Bank of America in 1986" and says that the significant cost and other savings factors are driving "lenders in record numbers to consider arbitration or other ADR techniques" (at 527 and 528). The RAND study, PX 148, concludes: In sum, all the evidence ... suggests that the banking industry is satisfied with private ADR mechanisms, that these mechanisms are serving the industry well, and that the industry will continue to expand their use. Id. at xiii. Such a transient, temporary availability of choice until other banks adopt ADR can hardly be considered meaningful.

Christopher Chenoweth, General Counsel to the California Bankers Association, testified that the banking industry is "carefully watching this case" (Px 100). William Bogaard testified that FICAL is considering "following Bank of America's lead" (Px 118) has written to its consumer customers personally highlighting a potential change to arbitration (Px 123) and has already modified its written account agreements to include such a provision and a glossary of terms (Px 124). John McGuckin testified that Bank of California is re-examining arbitration for its consumer accounts in view of Bank of America's policy and that consumers do not compare financial institutions based on arbitration or reference provisions (Px 119). Finally, Steven Saxe testified that in November, 1992 he was advising 50 community banks on whether to try some form of ADR and how to use it (Px 125).

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IX. PLAINTIFFS MAY SEEK INJUNCTIVE AND DECLARATORY RELIEF UNDER BUSINESS AND PROFESSIONS CODE 17200, ET SEQ.

The prohibition against "unlawful, unfair or fraudulent business practice[s]" in Business and Professions Code 17200 includes "anything that can properly be called a business practice and at the same time is forbidden by law." Barquis v. Merchants Collection Ass'n. (1972) 7 Cal.3d 94, 113. An action based on 17200 "`borrows' violations of other laws and treats those violations, when committed pursuant to business activity, as unlawful practices independently actionable under 17200, et seq. and subject to the distinct remedies provided thereunder." Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 383. Those remedies include injunctive relief and restitution. Business and Professions Code 17203. In enacting the Unfair Practices Act, the Legislature "intended by this sweeping language to permit tribunals to enjoin ongoing wrongful business conduct in whatever context such activity might occur." Barquis, supra, 7 Cal.3d at 111, quoted in People v. McKale (1979) 25 Cal.3d 626, 632. California Grocers Ass'n Inc. v. Bank of America, NT&SA (1994) 22 Cal.App.4th 205, on which the Bank relies, is distinguishable on its facts. Plaintiff, a business entity, challenged as unconscionable the $3 fee imposed on business accounts for deposited items returned by the Bank under Civil Code 1670.5. The court held that no cause of action could be stated because that section simply codified the defense of unconscionability. Id. at 217. It further held that the fee was not unconscionable because it fell within the range of fees charged by other financial institutions and within the range of accepted notions of fair profitability. The court held further that the issuance of an injunction requiring the bank to lower the fee to $1.73 for ten years was "an inappropriate exercise of judicial authority" because "[j]udicial review of one service fee charged by one bank is an entirely inappropriate method of overseeing bank services fees." Id. at 218. The court characterized the determination of whether bank service fees are too high as "a question of economic policy" for the Legislature. This case, by contrast, does not implicate a question of economic policy. Specifically, plaintiffs do not challenge the Bank's setting or charging of service fees, and the purpose of the requested injunctive relief is not to "regulat[e] retail bank pricing via injunction on an ongoing

basis," which the Court of Appeal found objectionable. Id. (citation omitted). Rather, plaintiffs request the Court to enjoin the Bank from implementing an unlawful and unfair change to the terms of the agreements between the Bank and its consumer account-holders, a change that does not implicate fees or costs associated with the consumer accounts. The holding in California Grocers, therefore, cannot prevent the granting of injunctive relief in this action. In its trial brief, the Bank contends that plaintiffs' prayer for injunctive relief under 17200 is improper because (1) this case was neither pleaded nor prosecuted as a class action, (2) plaintiffs do not share the interests of the Bank's customers, and (3) the Bank's customers are not party to this action. The Bank's argument, in essence, is that it cannot be enjoined under 17203 from violating the Consumer Legal Remedies Act because none of the plaintiffs is aggrieved by the Bank's actions and because due process prohibits the court from granting the requested relief outside the confines of a class action. This argument misconstrues the distinctions between 17200 representative actions and class actions. Carried to its logical conclusion, it would eliminate 17200 actions, a result plainly at odds with the intent of the California Legislature, and established precedent. Contrary to the position asserted by the Bank, the Unfair Practices Act authorizes plaintiffs to sue on behalf of the general public for a violation of the Consumer Legal Remedies Act. This suit may be prosecuted via a 17200 action; no class action is required, and indeed, would be less advantageous in this case. Finally, the Bank, by failing to request the court to consider the suitability of this case for class action treatment, and by instead twice moving for summary judgment has waived any right it may have had to insist on class certification. A. Plaintiffs Have Standing to Bring Suit Under Business and Professions Code 17200 on Behalf of the General Public for Violations of the Consumer Legal Remedies Act The general rule in California is that "[e]very action must be prosecuted in the name of the real party in interest." Code of Civil Procedure 367. Among the exceptions to the "real party in interest" requirement, see generally Weil & Brown, Civil Procedure Before Trial (1993) 2:40-2:76, is the provision in the Unfair Practices Act allowing actions to be prosecuted by the People or by "any person acting for the interests of itself, its members, or the general public." Business and Professions Code 17204. The broad language of 17204, in conjunction with the

other provisions of the Unfair Practices Act, evidences a conscious design to protect consumers. Barquis, supra, 7 Cal.3d at 110, ("[t]he section demonstrates a clear [legislative] design to protect consumers . . . by . . . permitting, inter alia, any member of the public to sue on his own behalf or on behalf of the public generally"). The Bank's suggestion that plaintiffs lack standing to bring a 17200 claim on behalf of non-parties is plainly wrong. "Courts have consistently given a broad interpretation to the standing provisions in [17204]." Mid-Peninsula Citizens For Fair Housing v. Westwood Investors (1990) 221 Cal.App.3d 1377, 1389; see also Committee on Children's TV, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 215, quoting Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 72, 164 Cal.Rptr 279, 284 ("Nothing in the legislative history of this section nor in the manner in which it has been interpreted by the courts reflects an intention to narrowly circumscribe the class of persons who may seek injunction under its terms."). In Consumers Union of United States, Inc. v. Fisher Development, Inc. (1989) 208 Cal.App.3d 1433, rev. denied, the issue before the court was whether Consumers Union, which was not a "person aggrieved" under the Unruh Act, might nonetheless bring an action under 17200, alleging a violation of the Unruh Act against a housing developer who restricted occupancy in a residential subdivision to persons of 55 years or older. The court held that Consumers Union had standing under 17204, regardless of its lack of standing under the Unruh Act itself, finding that "courts have repeatedly permitted persons not personally aggrieved to bring suit for injunctive relief under the unfair competition statute on behalf of the general public, in order to enforce other statutes under which such parties would otherwise lack standing." Id. at 1440 (emphasis in original).60 In Committee on Children's TV, supra, the Court noted further that it is "immaterial" whether a private right of action can be implied under the underlying statute (the violation of

See also Committee on Children's TV, supra, 35 Cal.3d at 210-11, (non-aggrieved organizational plaintiff had standing under 17204 to bring suit for violation of Sherman Food, Drug and Cosmetic Law); Mid-Peninsula Citizens, supra, 221 Cal.App.3d at 1390-93 and Pines v. Tomson (1984) 160 Cal.App.3d 370, 379-83 (non-aggrieved organizational plaintiffs had standing under 17204 to bring suit to enjoin discrimination in violation of Unruh Act); Hernandez, supra, 105 Cal.App.3d at 71 (non-aggrieved individual plaintiff had standing under 17204 to bring suit against used car dealership and finance company to enjoin violation of Rees-Levering Automobile Sales Finance Act).

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which forms the basis of the 17200 claim) if that statute does not expressly provide for private enforcement because "any unlawful business practice . . . may be redressed by a private action charging unfair competition in violation of Business and Professions Code 17200 and 17203." Committee on Children's TV, supra, 35 Cal.3d at 210-211. Nor is there any specific requirement, when the prayer includes an ancillary request for restitution, that there be any "cognizable direct victim to be made whole." People v. Thomas Shelton Powers, M.D., Inc. (1992) 2 Cal.App.4th 330, 341, reh. denied. In this case, the beneficiaries of an injunctive order will be the more than twelve million Bank of America consumer customers on whose behalf the case was filed and prosecuted. B. There is no Requirement That an Action to Enjoin an Unfair Business Practice be Prosecuted as a Class Action; A 17200 Representative Action May In Fact Be Preferable to a Class Action The Bank argues that plaintiffs' failure to bring a class action violates due process, claiming there is no evidence that other customers oppose the ADR clause. In support of this argument, the Bank cites only Bronco Wine Co. v. Frank A. Logoluso Farms (1989) 214 Cal.App.3d 699, 717, rev. denied (1990). As explained below, reliance on Bronco Wine is inapposite here because the due process issue raised by the Bank applies only in a case requesting monetary damages. Moreover, due process does not necessitate the utilization of the class action device here; indeed, a 17200 action is preferable under the circumstances of this case. In Bronco Wine, a grape grower sued for underpayments under a grape sales contract. Among other things, he sought restitution under 17203 on his own behalf and on behalf of over 100 non-party growers under contract to Bronco in 1982, alleging that Bronco had engaged in various unfair business practices in connection with the acceptance and non-acceptance of grapes from the growers. The trial judge denied Bronco's pre-trial motion to strike Logoluso's claims on behalf of non-party growers, or, alternatively, to require that the class action procedure be utilized, relying on Fletcher v. Security Pacific National Bank (1979) 23 Cal.3d 442. On the representative cause of action, the trial court awarded a total of $457,005 in restitutionary recovery to 27 non-party growers.

The Court of Appeal affirmed the judgment in favor of Logoluso, but reversed the judgment in favor of the non-party growers, concluding that the court abused its discretion in denying Bronco's pre-trial motion, and committed reversible error by awarding restitution in the manner employed. The court noted that the trial court had failed to consider language in Fletcher which establishes that individual representative actions are not a matter of right, but are permissible only at the discretion of the trial court; the trial court, in exercising that discretion, must consider whether the representation of the nonparties affected by the defendant's acts will be adequate in a proposed individual action when compared to a class action. Id. In passing, the Bronco Wine court noted that the court in Dean Witter, supra, had stated that a judgment in an individual representative action would not be binding upon nonparties, and that individual representative actions could present serious questions of procedural due process. Dean Witter was then distinguished on three grounds. First, the fact and amount of liability of the defendant to each of the nonparties in that case was a relatively simple question of whether the termination fee was legal, as opposed to the complex determinations of fact and amount of liability of the defendant in the case before the court. Second, in Dean Witter the amount of restitution for each nonparty was nominal, while in the case at bar the restitutionary awards were substantial. Finally, the court noted that the nonparties in the case before the court had a prior opportunity, which they chose not to exercise, to recover underpayments in an inexpensive and effective administrative hearing. Bronco, supra, 211 Cal.App.3d at 720-21. In this case, where plaintiffs seek declaratory and injunctive relief, but no damages, the due process issues raised in Bronco Wine are simply inapplicable. The Supreme Court in Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797 explained what process is due in order to bind absent class members to a judgment in a suit for monetary damages: the unnamed class members must be adequately represented, must receive adequate notice of the suit, and must be afforded the right to exclude themselves from the suit. 472 U.S. at 808-14. These requirements are designed to ensure protection of the unnamed class members' constitutionally protected property interests. Thus, the court in Shutts limited its holding to "those class actions which seek to bind known plaintiffs concerning claims wholly or predominantly for money judgment [i.e., Rule 23(b)(3) opt out classes and their state

equivalents]." 472 U.S. at 811 n.3. The court specifically declined to express a view concerning class actions seeking equitable relief. Id. Lower federal courts have held that in actions brought under Rule 23(b)(2) (injunctive or declaratory relief), individual notice is not mandatory, nor do class members have the right to opt out of the lawsuit.61 See, e.g., Kincade v. General Tire & Rubber Co. (5th Cir. 1981) 635 F.2d 501, 506-07; Warren v. City of Tampa (M.D.Fla. 1988) 693 F.Supp. 1051, 1062, aff'd 893 F.2d 347 (11th Cir. 1989); Avagliano v. Sumitomo Shoji America, Inc. (S.D.N.Y. 1985) 614 F.Supp. 1397, 1399-1400. Nowhere in federal decisional law is there any due process requirement in class actions seeking predominantly equitable relief that unnamed class members be given notice and the opportunity to opt out. The same is true for California courts. California Code of Civil Procedure 382 is silent on the issue of notice. In the absence of state court precedent, however, California courts follow the procedures set forth in Federal Rule 23. LaSala v. American Savings & Loan Ass'n (1971) 5 Cal.3d 864, 872; Green v. Obledo (1981) 29 Cal.3d 126, 145-46. Rule 23 lists three types of class actions and defines the notice requirement applicable to each. While notice is mandatory in 23(b)(3) actions, there is no specific requirement of notice in (b)(1) and (b)(2) actions, and courts have held that notice therein is discretionary with the trial court. Frazier v. City of Richmond (1986) 184 Cal.App.3d 1491, 1499. In Home Savings and Loan Ass'n v. Superior Court (1974) 42 Cal.App.3d 1006 (Home Savings I), the Court held that an order requiring Home Savings to go to trial on the merits before determining the suitability of the case as a class action failed to protect Home Savings' right to due process. Commenting on the requirement that members of the class be given notice of the pendency of the action, the court stated: Prompt and early determination of the class is essential because until the composition of the class has been determined defendants cannot tell what the action involves, and until members of the class receive notice of the action they will not be bound by any judgment in the action. Once the composition of the class has been determined, its members are entitled to appropriate notice of the pendency of a class action that will affect their interests . . . After the members of the class have been properly notified of the action, they are required to decide whether to remain members of the class represented by plaintiffs' counsel and A (b)(2) action is one for injunctive or declaratory relief; a (b)(3) action is one predominantly for money damages.
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become bound by a favorable or unfavorable judgment in the action, whether to intervene in the action through counsel of their own choosing, or whether to "opt out" of the action and pursue their own independent remedies, such as negotiation with defendants, initiations of their own action, or intervention in some other action. Id. at 1010. The procedural safeguards identified by the court -- i.e., proper notice and opportunity to opt out -- are required only in a class action seeking monetary damages. The court in Frazier specifically declined to extend the notice requirement of Home Savings (a (b)(3) case) to the dispute at issue in Frazier (a (b)(2) case) because, among other reasons, to do so would be to abrogate the case law that notice in (b)(2) actions is discretionary. Frazier, supra, 184 Cal.App.3d at 1501-03. The court also found that in a (b)(2) type case, it could not be said "that by failing to receive notice an absent class member may have suffered a detriment by being deprived of an opportunity to opt out of the action." Under California law, a 17200 representative action may substitute for a class action and may in some circumstances be preferable. A 17200 action may be prosecuted by a person "acting for the interests of itself, its members, or the general public," and the court "is empowered to grant equitable relief, including restitution in favor of absent persons, without certifying a class action." Dean Witter, supra, 211 Cal.App.3d at 773. The court in Dean Witter held that the trial court had abused its discretion by permitting an unfair competition action to proceed by class action where there was no showing that class treatment was superior to an individual, representative action. The court noted that a plaintiff seeking class certification in California "must show substantial benefit will result to both litigants and to the court." Id. at 772. The court compared the "difficult legal and administrative task" of managing a class action with the "streamlined procedure expressly provided by the Legislature" when it enacted Business and Professions Code 17200, and directed the lower court to weigh the unfair competition claims in light of the factors identified in Fletcher, supra, 23 Cal.3d at 453-54 (potentially significant expense of pre-trial certification and notice vs. the possibility that the adequacy of representation of allegedly injured individuals would be best assured if the case proceeded as a class action). Given the inevitable expense and complexity of pretrial certification, and the fact that plaintiffs in this case seek, not damages for injuries suffered, but rather injunctive and declaratory

relief only, it is unlikely that a court following the Dean Witter and Fletcher standards would have agreed to certify this case as a class action. C. The Bank Has Waived Any Right It May Have Had to Insist on Consideration of Class Treatment For This Action In its trial brief at 24, the Bank for the first time raised the argument that plaintiffs' failure to bring this case as a class action is "an improper use" of 17200 and violates due process. The lack of substantive merit aside, this argument fails for an additional reason: by failing to request the court to consider the suitability of this case for class action treatment at an early stage, and by instead moving for summary judgment on the merits, the Bank has waived any right it may arguably have had to insist on class certification. Had the Bank been seriously concerned about this issue prior to the trial, it could have taken affirmative steps to have the matter brought before the court. For example, it could have requested an informal conference on class issues. The Manual for the Conduct of Pre-trial Proceedings in Class Actions ("Class Action Manual") of the San Francisco Superior Court authorizes the plaintiffs or any named party to schedule a conference with the court to discuss class issues. Class Action Manual, Rules 411-416. Or the Bank could, as did the winery operator in Bronco Wine, have moved the court for an order requiring that the class action procedure be utilized. Bronco Wine, supra, 214 Cal.App.3d at 715-16. The Bank, however, did neither of these things. Although a defendant in a class action has a due process right to secure a determination of the class issues prior to determination of the merits, People v. Pacific Land Res. Co. (1977) 20 Cal.3d 10, 16, the Bank, by moving for summary judgment, has waived any right it may have possessed to request class treatment of this case. In Civil Service Employees Insurance Co. v. Superior Court (1978) 22 Cal.3d 362, 373, the plaintiff filed a class action. Prior to notification to absent class members of the pendency of the action, the plaintiff moved for partial summary judgment. The trial court granted the motion, and the insurer sought a writ to compel the trial court to vacate the order, on the ground that due process prohibits a trial court from ruling on the merits of a class action plaintiff's substantive claim before notification to the absent class members. The Supreme Court ruled that because the

insurer had failed to object to the trial court's entertainment of the motion prior to class certification, but rather had simply contested the motion on the merits, the insurer had "waived whatever due process rights it may have had to object to the court's resolution of the partial summary judgment motion prior to class certification." 22 Cal.3d at 373, citing Home Savings & Loan Ass'n v. Superior Court (1976) 54 Cal.App.3d 208 (Home Savings II); Colwell Co. v. Superior Court (1975) 50 Cal.App. 3d 32, 34-35. In the Colwell case, Colwell Co. chose to waive the protection of a judgment binding on all members of the class, and to forego the protections against "one-way intervention," as set forth in Home Savings I, supra, 42 Cal.App.3d at 1012-13. Plaintiffs in Colwell filed a class action against Colwell Co., and the parties, at Colwell's behest, stipulated to bifurcate the issues of class determination and liability in order to obtain an early trial on the liability issues. The trial court approved the stipulation and ordered the trial bifurcated, but subsequently vacated the order on its own motion, citing Home Savings I. Colwell sought mandamus to compel the trial court to try the liability issue first. The Court of appeal issued the writ, declaring that Home Savings I, which adopted the notice requirement of Rule 23 of the Federal Rules of Civil Procedure, stood for the proposition that the purpose of the notice requirement is to advise members of a class, as soon as practicable after it is determined that an action may be maintained as a class action, that they may be excluded from the class if they request exclusion; but if they are not excluded, they will be bound by the judgment whether it be favorable or unfavorable to the class. Home Savings merely enforced the defendant's "right" to a judgment binding on all members of the class not excluded. Colwell Co., 50 Cal.App.3d at 34. Taking this reasoning a step further, the Court of Appeal in Rose v. City of Hayward (1981) 126 Cal.App.3d 926, cited Civil Service for the proposition that "where a defendant voluntarily accedes to a trial court hearing on the merits prior to determination of the class issue, he thereby waives his right to a class certification prior to hearings on the substantive merits." Id. at 937. In Rose, the parties had stipulated to a trial court determination of liability prior to deciding whether the action could be maintained as a class action. The court held that the defendant had thereby waived his due process right to a pre-trial determination of class maintainability. Id.

In accordance with the reasoning in Civil Service and Rose, this Court should find that the Bank, by moving for summary judgment and failing until it submitted its trial brief to raise any due process issues with respect to class treatment of plaintiffs' claims, has waived any right it may have had to claim that a class should be certified. X. CONCLUSION At issue in this case is not whether the Bank and its customers can choose to resolve their individual disputes by arbitration or class-wide disputes by judicial reference. Any parties who desire to use those mechanisms can agree to do so after a dispute has arisen. The question is whether the Bank can unilaterally impose the requirement in this secretive and uninformative way. Sending a notice of the term, which was unprecedented for consumers in the banking industry, by a stuffer unlikely to be read, in a format not likely to capture the customer's attention, using language which is unclear, is a trap for the unwary and cannot constitute an enforceable contract. Dated:April 14, 1994 Respectfully submitted, Attorneys for Plaintiffs