Opinion
No. C-07-01700 RMW, [Re Docket No. 22].
August 2, 2007
ORDER DENYING DEFENDANT'S MOTION TO STAY PROCEEDINGS AND COMPEL ARBITRATION [Re docket No. 22]
Plaintiff Chad Brazil and Steven Seick have sued defendant Dell Inc. ("Dell"). Dell asks this court to stay this proposed class action and compel arbitration pursuant to the purchase contact between Dell and each of the plaintiffs. For the reasons stated below, the court denies Dell's motion.
I. BACKGROUND
Plaintiffs Chad Brazil and Steven Seick, on behalf of themselves and all other similarly situated California customers, filed this case as a class action pursuant to Fed.R.Civ.P. 23 for actual, compensatory and punitive damages; injunctive relief; disgorgement of profits; restitution; and costs of suit, against Dell for falsely advertising price discounts for its computers and other products and services.
Brazil purchased a laptop computer from Dell in December 2006 for personal use; Steven Seick purchased a desktop computer from Dell in June 2006 for use in his business. Both purchased the Dell products online through Dell's website. They claim that discounts offered to them were falsely advertised. Specifically, they allege that the discounts offered were discounts from prices that were higher than those normally offered for the "discounted" item. As putative class representatives, plaintiffs allege violations of the California Consumers Legal Remedies Act ("CLRA"), Cal. Civ. Code §§ 1750 et seq. and California's Unfair Competition Law ("UCL"), Cal. Bus. Prof. Code §§ 17200 et seq.; false advertising, Cal. Bus. Prof. Code §§ 17500 et seq.; breach of contract; negligent and intentional misrepresentation; and unjust enrichment.
Dell moves to compel arbitration based on a dispute resolution clause contained in its "Terms and Conditions of Sale" that it presents to customers at the time of purchase, and again with the shipment of the computer. Pape Decl. ¶ 6, Ex. A ("Agreement" or "Terms and Conditions"). When purchasing Dell's products online, customers are presented with hyperlinks to the Agreement during the online purchase process and are required to respond to the following selection prior to being able to complete their online purchases:
___ I agree to Dell's Terms and Conditions of Sale.
___ I DO NOT AGREE to Dell's Terms and Conditions of Sale
The Terms and Conditions of Sale contain very important information about your rights and obligations as well as limitations and exclusions that may apply to you. They contain limitations of liability and warranty information. They also contain an agreement to resolve disputes through arbitration rather than through litigation. Please read them carefully.Id. ¶ 11. The words "Dell's Terms and Conditions of Sale" are linked to a page setting forth the full Agreement. Id. The electronic confirmation of sale sent to customers via email reminded the plaintiffs that the purchase was subject to Dell's Terms and Conditions and a copy of the Agreement is included inside the box containing the computer. Id. ¶ 17.
Under the title of the document "U.S. Terms and Conditions of Sale," the Agreement states:
READ THIS DOCUMENT CAREFULLY! IT CONTAINS VERY IMPORTANT INFORMATION ABOUT YOUR RIGHTS AND OBLIGATIONS, AS WELL AS LIMITATIONS AND EXCLUSIONS THAT MAY APPLY TO YOU. THIS DOCUMENT CONTAINS A DISPUTE RESOLUTION CLAUSE.
Directly under this cautionary language, the Agreement states that a customer can reject the terms of the contract by returning the product pursuant to "Dell's Return Policy." Id. By accepting delivery of the computer and failing to return it within the prescribed 21-day period, the customer agrees to be bound by the Terms and Conditions. Id. at ¶¶ 13, 17.
The Agreement contains a choice of law provision designating Texas as the governing law, Agreement ¶ 11, and an arbitration clause, Id. ¶ 13. The arbitration clause reads as follows:
Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY . . . BETWEEN CUSTOMER AND DELL . . . SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF). . . . NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATED CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY.
II. ANALYSIS
A. Federal Arbitration ActCongress enacted the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1- 16, to overcome judicial resistance to arbitration. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204, 1207 (2006); see also Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1268 (9th Cir. 2006). The FAA provides that written agreements to arbitrate disputes arising out of transactions involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. There are two types of challenges to the validity of arbitration agreements: "One type challenges specifically the validity of the agreement to arbitrate. [citation omitted] The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid." Buckeye, 126 S. Ct. at 1208. The Supreme Court has held that a challenge of the second type must be brought before an arbitrator. Id. at 1210. ("[A] challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.").
Here, however, plaintiffs have challenged the validity of the arbitration clause by way of their opposition to Dell's motion to compel arbitration. Where the court is asked to determine the validity of the agreement to arbitrate, "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2." Doctor's Assocs. v. Casarotto, 517 U.S. 681, 687 (1996) (citations omitted). When determining whether such defenses might apply to any purported agreement to arbitrate the dispute in question, "courts generally . . . should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
In this case, plaintiffs contend that the agreement to arbitrate is procedurally and substantively unconscionable under California law, and therefore invalid. Plaintiffs assert that the Agreement is procedurally unconscionable because it is a contract of adhesion and that they lacked any meaningful opportunity to negotiate the terms. They also contend that the Agreement was substantively unconscionable because it includes the provision set forth above that precludes arbitrating any claims on behalf of a class (hereinafter "class action waiver provision").
B. Applicable State Law
As an initial matter, the court must determine which state law to apply. The Agreement's choice-of-law provision designates Texas law to govern the contract. Plaintiffs nevertheless argue that the choice-of-law clause is invalid because it is contained in a contract of adhesion and because applying Texas law would "conflict with time-honored fundamental policies embodied in California law protecting consumers." Opp'n at 5. Plaintiffs urge the court to invalidate the choice-of-law clause, conduct a choice-of-law analysis, and conclude that California law governs whether the parties entered into a valid agreement to arbitrate.
A court sitting in diversity applies the choice-of-law rules of the forum state. Downing v. Abercrombie Fitch, 265 F.3d 994, 1005 (9th Cir. 2001). "In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflects a strong policy favoring enforcement of such provisions." Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-65 (1992). Restatement (Second) of Conflicts of Law § 187(2) provides in part:
The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
Here, it is not disputed that the first prong is met. However, the parties dispute whether the second prong — whether application of Texas law in the present case would be contrary to a fundamental policy of the State of California — is met. Under the second prong, if there is a fundamental conflict with California law, "the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue." Nedlloyd, 3 Cal. 4th at 466 (internal citation and quotation marks omitted). If so, the choice of law provision is not enforced. Id.
It is also undisputed that California law would apply under the rule of § 188 absent an effective choice of law provision.
1. Fundamental Conflict
Plaintiffs argue that California has a fundamental policy to protect consumers from the "oppressive use of superior bargaining strength" and the false advertising alleged in this action, while Texas does not have such a policy. In support of this argument, plaintiffs cite Cal. Civ. Code § 1668 which provides:
All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property or another, or violation of the law, whether willful or negligent, are against the policy of the law.
In Discover Bank, the California Supreme Court in held that class action waivers are unenforceable only in those limited circumstances where the
waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money.Id. at 162-63. Discover Bank does not necessarily establish a fundamental policy under Cal. Civ. Code § 1668 that forbids class action waivers in all circumstances. Discover Bank and the cases that have followed it set forth that whether a class action waiver provision will be considered unconscionable in California is a fact-specific, case-by-case inquiry. See, e.g., Cohen v. DirecTV, 142 Cal. App. 4th 1442, 1451 (2006) (to determine whether class waiver provision is unconscionable, must determine how closely the facts surrounding the waiver at issue approximate those in Discover Bank, and to the extent they are different, whether they require the conclusion that the waiver is unconscionable); see also Douglas v. U.S. Dist. Court, 2007 U.S. App. LEXIS 17061 (9th Cir. July 19, 2007) (per curiam) ("A class action waiver provision thus may be unconscionable in California. Whether it is depends on the facts and circumstances developed during the course of litigation.").
The Ninth Circuit recently made it clear that a district court must assess the facts and circumstances of the litigation in order to determine whether a class action waiver provision is substantively unconscionable. Douglas, 2007 U.S. App. LEXIS 17061, at *10 (vacating the district court's order compelling arbitration because the court "clearly erred" in holding that a class waiver provision was consistent with California policy and therefore enforceable as a matter of law). California Court of Appeal cases have since held that when similar circumstances as those in Discover Bank are present, a fundamental public policy is implicated. See, e.g., Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1300 (2005) (stating "Discover Bank establishes the fundamental nature of California's concern with protecting consumers from unscrupulous practices, particularly when only small individual amounts are at issue" and enumerating the California public policy interests at stake along with their statutory bases). Thus the court turns to determining how closely the facts surrounding the waiver in this case approximate those in Discover Bank. Cohen, 142 Cal. App. 4th at 1451.
Cal. Civ. Code §§ 1668 [exculpatory contracts contrary to policy], 1670.5 [court may refuse to enforce unconscionable contract], 3513 [no waiver of a law established for a public reason].
i. Contract of Adhesion
First, the Agreement appears by its form to be a contract of adhesion under California law. A contract of adhesion is defined as "a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms." Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846, 853 (2001). Generally, a finding of a contract of adhesion suggests a finding of procedural unconscionability, however, California courts have also held that although "adhesion contracts often are procedurally oppressive, this is not always the case." Nagrampa, 469 F.3d at 1281 (citing Morris v. Redwood Empire Bancorp, 128 Cal. App. 4th 1305, 1320). The "standards for procedural unconscionability are satisfied by a finding that the arbitration provision was presented on a take-it-or-leave-it basis and that it was oppressive due to an inequality of bargaining power that result[s] in no real negotiation in the absence of meaningful choice." Id. (internal quotation and citation omitted).
In California, procedural unconscionability analysis begins with an inquiry into whether an agreement is one of adhesion. Armendariz v. Foundation Health Psychcare Svcs., Inc., 24 Cal. 4th 83, 113 (2000); Nagrampa, 469 F.3d at 1281.
Procedural unconscionability concerns the manner in which the disputed contract clause is presented to and negotiated with the party in the weaker bargaining position. Nagrampa, 469 F.3d at 1280. Procedural unconscionability analysis focuses on oppression or surprise. Flores, 92 Cal. App. 4th at 853. Oppression arises from an inequality of bargaining power and an absence of real negotiation. Laster v. T-Mobile USA, Inc., 407 F. Supp. 2d 1181, 1187 (S.D. Cal. 2005). Surprise involves the extent to which the terms of the bargain are hidden. Id. As for oppression, the Agreement is a contract of adhesion. There is no real dispute that it was presented to plaintiffs with no opportunity to negotiate its terms and was drafted unilaterally by a party of superior bargaining strength. However, Dell asserts that plaintiffs nevertheless had a meaningful choice not to purchase the Dell products: at the time they purchased the computers, other computer manufacturers were offering computer purchase under terms and conditions that did not include an arbitration clause. Although "[t]he California Court of Appeal has rejected the notion that the availability in the marketplace of substitute employment, goods or services alone can defeat a claim of procedural unconscionability," Nagrampa, 469 F.3d at 1283 (emphasis in original), Dell does not rely solely upon the availability of substitute goods. Dell also provided plaintiffs with a rescission mechanism in the form of its Return Policy, which gave plaintiffs the opportunity to reject the Agreement, including the arbitration provision, if they did not agree to the arbitration terms. Thus, because Dell may reasonably rely on both the availability of substitute goods in the market and the opportunity to rescind to defeat (or at least mitigate) procedural unconscionability, the oppression prong of the procedural unconscionability inquiry is not necessarily met. As for surprise, Dell notified plaintiffs prior to completing the purchase of its arbitration provision by providing notice on the click-throughs presented during the purchase process that the Terms and Conditions included an arbitration clause and by providing bold and conspicuous language on the Agreement. Plaintiffs had access to the Terms and Conditions and express notice of its inclusion of an arbitration provision prior to and after their purchases, therefore the plaintiffs do not meet the surprise prong.
The foregoing discussion of procedural unconscionability highlights one way in which the present case is distinct from Discover Bank. In that case, the defendant effected the amendment adding the class action waiver in the form of a "bill stuffer" such that the consumer would be deemed to accept the newly-added provision if the consumer did not close his account. Discover Bank, 36 Cal. 4th at 161; see also Cohen, 142 Cal. App. 4th at 1451 (also finding that plaintiff was given an amendment to his customer agreement in the form of a bill stuffer); cf. Douglas, 2007 U.S. App. LEXIS 17061, at *4-5 (discussing the contract formation implications of changing the terms and conditions of a customer agreement on a website without notifying the customer). Here, by contrast, the class action waiver provision was part of the original terms and conditions: plaintiffs were made aware that the purchase was subject to those original terms and conditions throughout the purchase process, including having to acknowledge that the Agreement included alternative dispute resolution terms in order to complete the purchase. However, it appears that substantive unconscionability, not procedural unconscionability, governs the determination as to whether a class action waiver provision violates the fundamental public policy set forth in Cal. Civ. Code § 1668. Discover Bank, 36 Cal. 4th at 161 (class action waivers in otherwise enforceable adhesive contracts may be substantively unconscionable "inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy"); see also Klussman, 134 Cal. App. 4th at 1297-98 (in which the California Court of Appeal determined that the class action waiver provision was unconscionable without examining procedural unconscionability).
Defendant argues that Discover Bank only applies to "consumer" contracts and since plaintiff Seick bought his computer for his business, he is not a consumer. See Cal. Civ. Code § 1761(d) (which limits a consumer under the Consumer Remedies Act to one who buys for "personal, family, or household purposes"). The rationale of Discovery Bank, however, does not apply only to consumers under the Consumer Remedies Act but rather may apply to other types of customers, such as an individual like Seick buying a computer for his business.
ii. Scheme to Deliberately Cheat Large Numbers of Consumers
Second, here, as in Discover Bank, "it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers." Plaintiffs have alleged that Dell advertises "limited time" specific-dollar discounts from expressly referenced former prices, but that the discounts are false because the reference prices are inflated beyond Dell's true regular prices. First Am. Complaint ("FAC") ¶¶ 17-24. Plaintiffs set forth examples of advertisements directed to the consumer public that offer specific-dollar discounts off of advertised prices that were higher than the true regular prices, id. ¶¶ 21-22, as well as free upgrades and add-ons and rebates that are not actually discounts because Dell marks up the true regular price of the product to which those upgrades, add-ons and rebates pertain, id. ¶¶ 25-34. They also allege particular instances in which the plaintiffs were offered specific-dollar discounts off of advertised prices that were higher than the true regular prices. Id. ¶¶ 57, 63. Taken together, plaintiffs' complaint alleges that Dell has carried out a scheme to cheat large numbers of consumers.
Plaintiffs also allege that these discounts are sometimes not truly time-limited either.
iii. Small Damages Amounts
Finally, as in Discover Bank, the amount of damages plaintiffs claim are small. Plaintiffs argue that they seek only damages in the amount of the difference in the cost to them caused by the alleged inflation of the price from which the discounts were taken from the usual price of the discounted item. Opp'n at 7. Such alleged damages would, as required by Discover Bank, predictably be small, given that they allegedly represent discounts from prices that were elevated from a normally-lower price for the purposes of generating up to a few hundred dollars in the sale of Dell products and services.
iv. Conclusion
Based upon the allegations of the complaint, it appears that the circumstances surrounding the class action waiver in Dell's Agreement are comparable to those in Discover Bank. Thus, per Klussman, the inclusion of the class action waiver violates fundamental California policies, "including the statutory policies against exculpatory waivers, prohibiting enforcement of unconscionable contract provisions and against waivers of laws established for a public purpose," in the particular factual circumstances presented by this case. Klussman, 134 Cal. App. 4th at 1300; see also id. at 1297 (although Discover Bank "did not reject all class action waivers, it did denounce waivers such as the one in this case"). It appears that Texas would enforce arbitration clauses containing class action waivers such as the one at issue here. See, e.g., Opp'n at 8; Reply at 6. Therefore, it appears that Texas law conflicts with California public policy in the circumstances presented by this case.
Although plaintiffs do argue that Texas would not enforce the Agreement, it appears to be an alternative position to their main argument regarding choice of law.
2. Greater Interest
Dell asserts that plaintiffs have failed to establish that California has a materially greater interest in this dispute than that of Texas. According to Dell, Texas has at least a comparable interest in protecting its resident business's expectations of consistent legal standards as does California in protecting its consumers. Dell further asserts that Texas, like California, has an interest in preventing false internet pricing. Reply at 5. Although it is a close call, the court nevertheless finds that California has stated a strong interest in "protecting its citizens from `take it or leave it' agreements that incorporate one-sided protections," Klussman, 134 Cal. App. 4th at 1299, and thus finds that California has a greater interest in this dispute than does Texas. Accordingly, under the facts of this case and purely in the context of these claims for false advertising, the court declines to enforce the Texas choice of law in the Dell Agreement and will instead apply California law.
To be clear, the court does not hold that a class action waiver provision such as the one at issue here (or even the identical provision in Dell's Agreement) would be considered unconscionable under other circumstances than those presented here. Other courts have held the class waiver provision in Dell's Agreement to be enforceable in circumstances involving, for instance, warranty claims. See, e.g., Omstead v. Dell, Inc., 473 F. Supp. 2d 1018 (N.D. Cal. 2007) (Hamilton, J.); Carideo v. Dell Inc., ___ F. Supp. 2d ___, 2007 WL 1753511, at *3 (W.D. Wash. June 18, 2007). The instant order does not purport to address nor does it apply to the facts or circumstances of those cases.
C. Unconscionability of the Arbitration Clause
Under California law, an agreement is enforceable unless it is both procedurally and substantively unconscionable. Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000). Both procedural and substantive unconscionability must be present in order for the court to refuse to enforce a contract under the doctrine of unconscionability. Wilens v. TD Waterhouse Group, Inc., 120 Cal. App. 4th 746, 753 (2003). The more substantively oppressive a contract term is, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa. O'Hare v. Municipal Resource Consultants, 107 Cal. App. 4th 267, 272 (2003); McManus v. CIBC World Markets Corp., 109 Cal. App. 4th 76, 87 (2003).As set forth above, plaintiffs assert that the Agreement is procedurally unconscionable because it is a contract of adhesion and they lacked any meaningful choice to negotiate the terms and that the Agreement was substantively unconscionable because it includes the class action waiver provision. The court has concluded in the course of its conflict of laws analysis that the class action waiver was procedurally unconscionable under California law because it is a contract of adhesion imposed upon the plaintiffs by a party with superior bargaining power. Although, as set forth above, the court believes that the plaintiffs had meaningful alternatives and a chance to rescind the contract, thereby reducing the procedural unconscionability, it has also concluded that the class action waiver provision is substantively unconscionable under California law — considerably so, given that this case exhibits similar circumstances to those in Discover Bank. Because the class waiver provision is part of the arbitration provision and central to the mechanism to resolving the dispute between the parties, it cannot be severed.
Accordingly, the court finds that the arbitration provision substantively unconscionable and that the arbitration provision is therefore invalid and unenforceable under § 2 of the FAA. The court declines to order the parties to arbitration.
Dell asserts that the FAA preempts California rules against class action waivers. The California Supreme Court addressed this issue squarely in Discover Bank and concluded that nothing in the FAA prohibits California courts from not enforcing an arbitration agreement that "completely innoculate[s] parties against class liability." Discover Bank, 36 Cal. 4th at 172.