CALIFORNIA CLASS ACTION LAW

In an important case regarding the enforceability of class action waivers, the Court of Appeal upheld the enforceability of such a waiver.  In Walnut Producers of California et al. v. Diamond Foods, Inc., No. C060346, — Cal. Rptr.3d —-, 2010 WL 3213613 (Cal. Ct. App. 3d Dist. Aug. 16, 2010), plaintiff Walnut Producers of California (“Producers”) appealed the trial court’s order striking all class action allegations from their complaint. Plaintiffs claimed that a class action waiver in their arbitration agreements with Defendant Diamond Foods, Inc. (“Diamond Foods”), was unconscionable. The trial court disagreed.  The Court of Appeal, affirmed. The court distinguished Discover Bank and Gentry, and found that the agreement was neither procedurally nor substantively unconscionable.  With regard to substantive unconsionability, the court reasoned that the claimed damages sought of $70 million, when divided evenly among the  class members would provide each plaintiff with an award of $43,750.  This amount was not so small as to serve as a barrier to bringing individual claims.

At issue is the dispute resolution requirement of the parties’ agreement, and, in particular, its prohibition of class actions. The agreement requires disputes to be resolved by binding arbitration, and it specifically prohibits any type of class action as follows: “Each dispute will be resolved based upon its own facts and merits, and no procedure in the nature of class actions will be permitted.” Id. *1.

Diamond Foods filed a motion to strike all class allegations contained in the complaint, arguing that the agreement’s class action waiver was enforceable.

The Court succinctly described unconscionability analysis as follows:

the doctrine has ” ‘both a “procedural” and a “substantive” element,’ the former focusing on ‘ “oppression” ‘ or ‘ “surprise due” ‘ to unequal bargaining power, the latter on ‘ “overly harsh” ‘ ” or one-sided” ‘ results.” [Citation.] The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, ” ‘which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ” … [¶] Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided.’ [Citations.]” (Discover Bank v. Superior Court (2005) 36 Cal. 4th 148, 160 (Discover Bank ).)

Under this approach, both the procedural and substantive elements must be met before a contract or term will be deemed unconscionable. Both, however, need not be present to the same degree. A sliding scale is applied so that ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’ (Armendariz [v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83,] 114 [Armendariz].)” (Morris, supra, 128 Cal. App. 4th at p. 1317.)

Id. **5-6.

Applying this test to plaintiffs’ allegations, the court concluded plaintiffs failed to plead sufficiently the class action waiver is unconscionable.

Procedural Unconscionability

The court summarized the procedural unconscionability standard as follows:

The procedural element of the unconscionability analysis concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citations.] The element focuses on oppression or surprise. [Citation.] ‘Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.’ [Citations.] Surprise is defined as ‘ “the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.” ‘ [Citations.]” (Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App .4th 571, 581 (Gatton), fn. omitted.)

Id. *6.

The court concluded that “Plaintiffs have not successfully pleaded the Agreement is a contract of adhesion under the unusual circumstances of this case.”  The court found that Diamond Foods lacked superior bargaining strength and that plaintiffs had real alternatives available to them at the time they entered into the Agreement. Id. *7.  “Since plaintiffs controlled the Co-op as members, we cannot say the Agreement was imposed on the members by a party of superior bargaining strength or that they had no other alternative but to merge the Co-op and enter into the agreement.”

The court found that the class action waiver was not a surprise since it was set forth in the same sized text as the rest of the Agreement and under a heading, “Dispute Resolution.”  “Plaintiffs also had an opportunity to read the provision before executing the Agreement, as the Agreement was presented to them before they voted in favor of merging the Co-op into Diamond Foods.”

Because a sliding scale applies, the court proceeded to analyze substantive unconscionability, but concluded that plaintiffs failed to met their burden to plead a greater showing of substantive unconscionability.  Id.

Substantive Unconscionability

The court summarized substantive unconscionability analysis as follows:

“The substantive element of the unconscionability analysis focuses on overly harsh or one-sided results.” (Gatton, supra, 152 Cal.App.4th at p. 586.) “No precise definition of substantive unconscionability can be proffered. Cases have talked in terms of ‘overly harsh’ or ‘one-sided’ results. [Citations.] One commentator has pointed out, however, that ‘… unconscionability turns not only on a “one-sided” result, but also on an absence of “justification” for it.’ [Citation], which is only to say that substantive unconscionability must be evaluated as of the time the contract was made. [Citation.] The most detailed and specific commentaries observe that a contract is largely an allocation of risks between the parties, and therefore that a contractual term is substantively suspect if it reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.” (A & M Produce, supra, 135 Cal.App.3d at p. 487.)

“A provision is substantively unconscionable if it ‘involves contract terms that are so one-sided as to “shock the conscience,” or that impose harsh or oppressive terms.’ [Citation.] The phrases ‘harsh,’ ‘oppressive,’ and ‘shock the conscience’ are not synonymous with ‘unreasonable.’ Basing an unconscionability determination on the reasonableness of a contract provision would inject an inappropriate level of judicial subjectivity into the analysis. ‘With a concept as nebulous as “unconscionability” it is important that courts not be thrust in the paternalistic role of intervening to change contractual terms that the parties have agreed to merely because the court believes the terms are unreasonable. The terms must shock the conscience.’ [Citations.]” (Morris, supra, 128 Cal.App.4th at pp. 1322-1323.)

Id. **7-8.

The court concluded that “Plaintiffs’ complaint does not demonstrate the Agreement is so one-sided that a class action is the only effective means of enforcing plaintiffs’ rights under the Agreement.” Id. *8.  Distinguishing Discover Bank and Gentry, the court found that plaintiffs’ complaint “does not establish that the Agreement’s class action waiver acted as an exculpatory clause or unduly hindered plaintiffs from pursuing a legal remedy.”  Id. *9.

Plaintiffs’ amended complaint shows that a class action is not the only viable means for recovering plaintiffs’ damages or enforcing the contract against Diamond Foods. The amended complaint seeks damages for the class of “at least $70 million.” Divided evenly among 1,600 class action plaintiffs, the alleged size of the class, a damage award of $70 million would provide each plaintiff with an award of $43,750. Obviously, the actual awards would be larger or smaller than that depending on each grower’s claim, but, when considered for unconscionability, requiring a grower to file an individual action for roughly $43,000 in damages does not shock the conscience. [FN6] (See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825, 844 [a claim for $16,000 is not so small as to justify not enforcing class action waiver].)

Thus, the court “conclude[d] plaintiffs have not pleaded sufficient facts showing the class action waiver’s unconscionability to survive Diamond Foods’s motion to strike the class action allegations in the complaint.” Id. *10.

Judges and Attorneys

Justice George Nicholson wrote the opinion for the court, with Justice Vance W. Raye and Justice Harry Hull concurring.

The appeal was taken from a judgment of Judge Lesley Holland of San Joaquin County Superior Court.

Plaintiffs and Appellants were represented by Charles G. Miller, Howard I. Miller of Bartko Zankel Tarrant & Miller; Therese Tuttle, Frank Van Konynenburg of Tuttle & Van Konynenburg; J. Thomas Hannan, Ronald Lovitt, Henry Bornstein of Lovitt & Hannan; Iain A. MacDonald of MacDonald & Associates.

Defendant and Respondent were represented by Jeffrey J. Lederman, Jeffrey S. Bosley, and Leda M. Mouallem of Winston & Strawn.

The Complex Litigator and The UCL Practioner also discuss this case.

By CHARLES H. JUNG