Ninth Circuit Invalidates Another Class Arbitration Waiver

In Omstead v. Dell, Inc., --- F.3d ----, 2010 WL 396089 (C.A.9 (Cal.), February 05, 2010), customers who purchased notebook computers directly from manufacturer's website brought a putative class action against Dell, alleging violations of California's Consumer Legal Remedies Act, fraudulent concealment, and breach of express and implied warranty, alleging that Dell sold them defective notebook computers. District Judge Phyllis J. Hamilton (N.D. CA) granted manufacturer's motion to stay proceedings and compel arbitration, and denied customers' motion for reconsideration. 473 F.Supp.2d 1018; 533 F.Supp.2d 1012. After the plaintiffs failed to comply with the arbitration order, the Court granted Dell's motion to dismiss for failure to prosecute. The plaintiffs appealed.

The Ninth Circuit reversed, holding, in part:

1. The District Court abused its discretion when it dismissed plaintiffs' action for failure to prosecute because the plaintiffs had not caused unreasonable delay: "Plaintiffs sufficiently communicated to Dell and the district court that they wanted to prosecute their claims on a classwide basis, they believed the district court's arbitration order was fatal to their action, and they wanted the district court to enter an order that would permit appellate review of the arbitration issue. Not only was the district court's Rule 41(b) dismissal unsupported by the facts of this case, it also failed to accomplish plaintiffs' requested result because under our law, an appeal from a Rule 41(b) dismissal does not permit review of interlocutory orders." Slip opinion at pp. 2-3.
2. The District Court erred when it granted Dell's motion to stay proceedings and compel arbitration. First, the agreement's choice of law provision was unenforceable, and the Court should have applied California law. Second, the class action waiver is unconscionable under California law because it satisfies the Discovery Bank test, and California has a materially greater interest than Texas in applying its own law. Slip opinion at p. 4.
3. The class action waiver could not be severed from the remainder of the arbitration agreement because the waiver was "central" to the arbitration provision. Slip opinion at p. 4.