Arbitration Clauses are a Dealership’s Best Friend

By Patricia E.M. Covington

HUDSON COOK, LLP

We track litigation in the

auto sales, finance, and lease areas each month, and we’ve done so for nearly 30

years. In the beginning, we saw a lot of cases based on claims of fraud, improper disclosures, and violations of state and federal consumer protection laws and regulations. A very unscientific study—basically an informed guess by me—indicates that the theories of the cases we have tracked over the years have changed and that the overall volume of cases has dropped.

A reduction in the number of cases is due, in my view, to improved vehicle quality—car buyers whose cars are performing well tend not to voice complaints and hire lawyers. I believe that there is another factor in the reduction of reported cases, however—the growing use by dealers and finance sources of arbitration agreements in their deal documents.

Those arbitration clauses seem to be working pretty well at getting buyer-dealer disputes out of the courtrooms. Here’s an example of an arbitration clause in action.

Darryl Green went to Kline Chevrolet Sales Corp., d/b/a Priority Chevrolet, to service his 2014 Chevrolet Silverado. While Green was at the dealership, he traded in his vehicle for a new Silverado.

Among the documents Green signed as part of the purchase transaction was a Buyer’s Order, which contained an arbitration provision. Kline later informed Green that it was unable to obtain financing for him and asked him to return the vehicle.

Green allegedly asked for his 2014 vehicle back, but Kline had already sold it. Green sued Kline for violating the Truth in Lending Act and the Fair Credit Reporting Act.

Kline moved to compel arbitration pursuant to the arbitration provision in the Buyer’s Order. The federal trial court granted Kline’s motion.

First, the court concluded that the language in the arbitration provision clearly delegated power to the arbitrator to decide “gateway” issues of arbitrability. Green argued that he was fraudulently induced to enter into the Buyer’s Order containing the arbitration provision because of Kline’s representations that it had secured financing for the vehicle.

Because Green contended that he was fraudulently induced into entering the Buyer’s Order generally, not the arbitration provision specifically, the court found that the issue of the validity of the Buyer’s Order as a whole must be decided by the arbitrator, not the court.

The court did address Green’s argument that the arbitration provision was unconscionable because the argument was directed at the arbitration provision itself, not the Buyer’s Order as a whole. The court found that the arbitration provision was part of a contract of adhesion, which suggested a degree of procedural unconscionability.

However, the court found that the arbitration provision was not substantively unconscionable (a $10 lawyer word that essentially means “really unfair”). Among other things, the court found that the terms of the arbitration provision did not unfairly favor one party over the other and did not impose an undue burden on one of the parties.

Finally, the court rejected Green’s argument that the arbitration provision was substantively unconscionable because it waived his federal claims and thus violated public policy. The court found that nothing precluded the arbitrator from considering potential violations of federal law.

First, this dealership’s use of an arbitration agreement in its transactions with its customers gave it a first and effective line of defense in a forum (an arbitration proceeding) that is probably less hostile to dealers than a jury might be.

Second, this federal trial court determined that the arbitration agreement in question was not substantively unconscionable and, thus, was enforceable, adding to the large majority of court decisions that conclude that the arbitration agreements commonly used by dealerships these days are generally fair and should be binding on car buyers.

Finally, although Kline won this round, the fight isn’t over yet. Green still has a shot at recovering damages awarded by the arbitrator.

Green v. Kline Chevrolet Sales Corp., 2019 U.S. Dist. LEXIS 133293 (E.D. Va. August 7, 2019).

*Patricia E.M. Covington is a partner in the

Virginia office of Hudson Cook, LLP. Patty has significant experience in, and is a frequent writer and speaker on, matters relating to dealer, credit, marketing, and privacy law. She can be reached at 804.212.1201 or by email at pcovington@hudco.com.

IN MEMORIAM

Beverly Bruno, Bruno Independent Living AIds

NMEDA was recently informed of the passing of Beverly Bruno, co-founder of Bruno Independent Living Aids. Below is the notice we received from the company:

Launching a successful business takes courage and drive from the entrepreneur, and commitment and support from the entrepreneur’s family.

Bruno mourns the passing of Beverly Bruno, wife of Mike Bruno, Sr., the late founder of the company. Several of Beverly’s children and grandchildren—including current CEO Mike Bruno—along with over 400 other employees now work at Bruno.

Beverly was the “wind beneath the wings” of her entrepreneur husband, loving mother of seven children, grandmother of 17, and great-grandmother of 12.

Marcus Smith, Access Vans of Louisiana

NMEDA is sad to share the passing of Marcus Smith, former owner of Access Vans of Louisiana Inc. and NMEDA board member. A long-time supporter of the mobility industry and NMEDA, Marcus was inducted into the NMEDA Hall of Fame in 2013. Our thoughts are with Marcus’s family and loved ones.