Arnold v. Standard Pac. of Ariz. Inc.

• Court: U.S. District Court — District of Arizona
• Writing for the Court: David G. Campbell United States District Judge
• Decision Date: 12 August 2016
• Docket Number: No. CV-16-00452-PHX-DGC,CV-16-00452-PHX-DGC
• Citation: Arnold v. Standard Pac. of Ariz. Inc., No. CV-16-00452-PHX-DGC (D. Ariz. Aug 12, 2016)
• Parties: Christine Arnold, et al., Plaintiffs, v. Standard Pacific of Arizona Incorporated, et al., Defendants.

Christine Arnold, et al., Plaintiffs, v. Standard Pacific of Arizona Incorporated, et al., Defendants.

No. CV-16-00452-PHX-DGC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

August 12, 2016

ORDER

Plaintiff asks the Court to enter a declaratory judgment that the arbitration clause in Defendants' limited warranty is unenforceable as a matter of law. Doc. 19. The motion has been fully briefed (Docs. 25, 26), and the Court heard oral arguments on August 10, 2016. For the reasons that follow, the Court will rule in Plaintiff's favor.

I. Background.

Plaintiff purchased a single-family home in Avondale, Arizona, from Defendant Standard Pacific of Arizona, Inc. Doc. 25 at 18.¹ The purchase contract provides that "any disputes or claims or controversies of any type between buyer . . . and seller . . . arising out of or relating to this contract, the property, the house, or any other matter . . . shall be resolved pursuant to the procedures specified in the [ADR] addendum." Id. at 2. The contract also includes a limited warranty ("Warranty") covering certain construction defects. Doc. 20-1.

The ADR addendum provides that arbitration shall be governed by the procedures set forth in the Warranty. Doc. 20-2 at 9. The Warranty states that Defendants have contracted with an entity known as Professional Warranty Service Corporation, referred to in the Warranty as "PWC," for "administrative services relative to this LIMITED WARRANTY." Doc 25 at 32. Section VIII of the Warranty contains the following relevant arbitration provisions:

Binding arbitration shall be the sole remedy for resolving any and all disputes between YOU and US, or OUR representative.

* * *

The arbitration shall be conducted by Construction Arbitration Services, Inc., or such other reputable arbitration service that PWC shall select, at its sole discretion, at the time arbitration is submitted.

* * *

Based upon the arbitrator's decisions, WE shall choose whether WE shall (1) repair, replace the CONSTRUCTION DEFECT, (2) pay to YOU the actual amount it would cost US to repair or replace the CONSTRUCTION DEFECT, or (3) PAY to YOU an amount equal to the diminution in fair market value caused by the CONSTRUCTION DEFECT. The decision to repair, replace, or to make payment to YOU is at OUR or OUR authorized representative's sole option.

* * *

YOU should contact PWC . . . if YOU believe WE have not complied with the arbitrator's award. PWC will mediate this dispute and if it cannot be resolved, will advise YOU that a compliance inspection arbitration is available to determine whether WE have performed adequately under the original arbitration ward.

Doc. 25 at 37-38. The capitalized words in this provision are defined terms, with "us," "our," and "we" referring to Defendants. The parties agree that Construction Arbitration Services, Inc. is no longer in business. Thus, under this clause, PWC alone selects the service that will arbitrate Plaintiff's claims.

The ADR addendum includes a fallback provision which takes effect in the event the Warranty arbitration provision is "determined to be unenforceable in whole or material part." Doc. 25 at 26. The fallback provision states that any disputes between the parties shall be submitted to the American Arbitration Association ("AAA"). Id.

In August 2015, Plaintiff filed a demand for arbitration with the AAA, alleging construction defects in her home. Doc. 16, ¶ 20. The AAA appointed Jeffrey S. Cates, a retired Maricopa County Superior Court Judge, to serve as arbitrator. ¶ 21. Defendants filed a motion to dismiss, arguing that Plaintiff was not entitled to proceed under the fallback provision because the Warranty arbitration provision had not been found invalid. ¶ 22. Judge Cates agreed, holding that "without a determination first being made by a court of law that the [arbitration provision] is unenforceable, the [AAA] does not have jurisdiction to render further rulings in this case." Doc. 20-6 at 3 (emphasis in original). Judge Cates stayed the arbitration proceeding to allow Plaintiff to seek a ruling on the validity of the Warranty arbitration provision. Id.

II. Legal Standards.

A. Summary Judgment.

The Court will treat Plaintiff's request for declaratory relief as a motion for summary judgment. See Kam-Ko Bio-Pharm Trading Co. Ltd-Australasia v. Mayne Pharma (USA) Inc., 560 F.3d 935, 943 (9th Cir. 2009). A party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).

B. Federal Arbitration Act and Applicable Law.

The Federal Arbitration Act ("FAA") provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (emphasis added). The Supreme Court has held that "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2." Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); see alsoChavarria v. Ralphs Grocery Co., 733 F.3d 916, 921 (9th Cir. 2013) ("Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability.").

The Supreme Court has recognized that choice-of-law issues can arise when an arbitration clause is challenged. The Court has explained that "[a]n agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, 'save upon such grounds as exist at law or in equity for the revocation of any contract.' Thus state 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, 482 U.S. 483, 492 n.9 (1987). Arbitration-specific state laws are inconsistent with the FAA and cannot be applied. Id.

The parties do not address which law should be applied to Plaintiff's claims of unfairness and unconscionability, but both sides cite federal and Arizona law. The Court will do the same.

Arizona recognizes both procedural and substantive unconscionability. A contract is procedurally unconscionable if it results from a grossly unfair bargaining process. Thus, procedural unconscionability "is concerned with unfair surprise, fine print clauses, mistakes or ignorance of important facts or other things that mean bargaining did not proceed as it should." Maxwell v. Fid. Fin. Servs., Inc., 184 Ariz. 82, 88-89 (1995) (citation and quotation marks omitted). A contract is substantively unconscionable if it gives rise to grossly unfair results; for example, if the contract is "so one-sided as to oppress or unfairly surprise an innocent party," if there is "an overall imbalance in the obligations and rights imposed by the bargain," or if there is a "significant cost-price disparity." Id. at 89. "[A] claim of unconscionability can be established with a showing of substantive unconscionability alone." See id. at 90.

The party seeking to avoid application of an arbitration provision has the burden of proving the provision unenforceable. See Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000).

III. Analysis.

Plaintiff claims that various provisions of the Warranty arbitration clause are invalid. The Court will address them separately.

A. PWC's Sole Right to Select the Arbitration Service.

As noted above, because Construction Arbitration Services, Inc. is out of business, the Warranty empowers PWC to select the arbitration service that will arbitrate Plaintiff's claims. Doc. 25 at 38. Plaintiff argues that this provision is unconscionable because PWC is closely aligned with Defendants.

In Nishimura v. Gentry Homes, Ltd., 134 Haw. 143 (2014), the Hawaii Supreme Court invalidated this very arbitration provision. The court applied the Sixth Circuit's "fundamental fairness" standard for determining whether an arbitration provision is enforceable. Id. at 149 (citing McMullen v. Meijer, Inc., 355 F.3d 485 (6th Cir. 2004)). An arbitration provision is fundamentally unfair if it "'grants one party to the arbitration unilateral control over the pool of potential arbitrators.'" Id. at 149-50 (citing McMullen, 355 F.3d at 494). A provision is also fundamentally unfair if the entity charged with selecting the pool of arbitrators has a "'symbiotic relationship'" with a party, such that the party effectively determines the pool of arbitrators. Id. at 150 (citing Walker v. Ryan's Family Steak Houses, Inc., 400 F.3d 370, 388 (6th Cir. 2005)).

Applying this standard, the Hawaii Supreme Court explained:

Ordinarily, an arbitration agreement is valid unless there is some basis to refuse to enforce it. In this case, PWC's identification with [the homebuilder] provides a basis for finding the arbitrator-selection provision unenforceable as fundamentally unfair. The plain language of the arbitration agreement shows that PWC acts on [the builder's] behalf in administering the [warranty], which would include selecting an arbitration service, at PWC's "sole discretion," now that Construction Arbitration Services, Inc. is no longer available. As PWC acts on [the builder's] behalf under the [warranty], the [plaintiffs'] concern that PWC's exercise of its sole discretion is akin to [the homeowner's] exercise of such discretion is legitimate. As such, under [the Sixth Circuit's test], the [warranty's] arbitrator-selection provision, which "grants one party to the arbitration unilateral control over the pool of potential arbitrators . . . prevents [the arbitration] from being an effective substitute for a judicial forum

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