Court of Appeal Upholds Class Arbitration Waiver in Commercial Contract

In a commercial action between an association of walnut growers and a walnut processor, the Third District Court of Appeal affirmed an order striking all class allegations from the plaintiffs' complaint where the parties' commercial arbitration agreement included a class action waiver. Walnut Producers of California v. Diamond Foods, Inc. (August 16, 2010) --- Cal.App.4th ---, 2010 WL 3213613.

The Court held that unconscionability doctrine applies to commercial as well as consumer and employment contracts, Slip op. at 4, and that the same unconscionability standards apply to all types of contracts. Slip op. at 5.

Merely calling the Agreement a commercial or business agreement does not save it from a finding of unconscionability. “[T]here appears to be no basis [in California law] for concluding that class action waivers in the commercial context cannot be found to be unconscionable and unenforceable.” (In re Yahoo! Litigation (C.D.Cal.2008) 251 F.R.D. 459, 468.)

Ibid. This was the high point of the opinion for the plaintiffs. Next, the Court held that the plaintiffs had not pleaded procedural unconscionability.

Plaintiffs have not successfully pleaded the Agreement is a contract of adhesion under the unusual circumstances of this case. It is true that plaintiffs pleaded the Agreement is a standardized contract drafted by Diamond Foods that was presented to plaintiffs without any opportunity to negotiate its terms. However, it is not true according to plaintiffs' allegations that Diamond Foods had superior bargaining strength or that plaintiffs had no real alternatives available to them at the time they entered into the Agreement.

Slip op. at 7. The Court next held that the plaintiffs had not pleaded substantive unconscionability:

We conclude plaintiffs have not sufficiently pleaded substantive unconscionability so as to earn a hearing under Civil Code section 1670.5 to determine whether the class action waiver is in fact and law unconscionable. 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.

Slip op. at 8.

The Court did not cite any authority for the proposition that a plaintiff bears the burden of pleading unconscionability or that it is appropriate to do so. Somebody can tell me if I'm wrong, but my recollection is that plaintiffs are supposed to plead their operative facts, and not try to plead around anticipated defenses.

The Court continued:

Unlike in Discover Bank, 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. 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. (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].)

Finally, the Court rejected the plaintiffs' arguments that "the class action waiver prohibits them from vindicating certain unwaivable statutory rights they possess, and thus the waiver is unenforceable as it violates public policy." Slip op. at 11-12.

Here, plaintiffs claim their complaint seeks in part to enforce their statutory right to have the purchase price for their walnuts stated in writing in a definite sum. Specifically, Section 62801 of the Food and Agriculture Code states in relevant part: “[U]nless the parties agree otherwise, every contract for the sale of edible nuts shall be in writing and shall state the full purchase price in a definite sum which is to be paid in accordance with the terms of the contract....” (Italics added.)

The statute's express language indicates plaintiff's right to have the purchase price stated in a definite sum is not an unwaivable right. The right can be waived by the parties if they agree to do so. Thus, Gentry and Armendariz do not apply here.

Slip op. at 11.

Off the top of my head, I wonder whether the plaintiffs will argue that the defendant has waived its right to compel arbitration by filing a demurrer and motion to strike in the trial court before petitioning to compel arbitration. Further, if defendant has waived its right to compel arbitration, does the class action waiver in the arbitration agreement still control? Please comment if you are so inclined.