Cohen v. Directv, Inc.

• Decision Date: 18 September 2006
• Docket Number: No. B184630.,B184630.
• Court: California Court of Appeals Court of Appeals
• Parties: Philip Kent COHEN, Plaintiff and Respondent, v. DIRECTV, INC., Defendant and Appellant.

48 Cal.Rptr.3d 813

142 Cal.App.4th 1442

Philip Kent COHEN, Plaintiff and Respondent, v. DIRECTV, INC., Defendant and Appellant.

No. B184630.

Court of Appeal, Second District, Division 8.

September 18, 2006.

Kirkland & Ellis, Michael E. Baumann, Melissa D. Ingalls and Becca Wahlquist, Los Angeles, for Defendant and Appellant.

King & Ferlauto, William T. King and Thomas M. Ferlauto for Plaintiff and Respondent.

BOLAND, J.

SUMMARY

A subscriber to services offered by a satellite television programming company filed a class action lawsuit against the company, alleging it covertly degraded some of its high definition television transmissions. The company moved to compel arbitration under the arbitration clause in its customer agreement with the subscriber, which prohibited class litigation of claims in arbitration. The trial court denied the motion and the company timely appealed. We affirm the trial court's order refusing to compel arbitration because the prohibition on class litigation in the arbitration clause is unconscionable and unenforceable.

FACTUAL AND PROCEDURAL BACKGROUND

DirecTV broadcasts satellite television programming to homes. Phillip Cohen began receiving basic services from DirecTV in February 1997. With his first bill he received the customer agreement then in effect. Although that agreement contained no arbitration clause, its change of terms clause allowed DirecTV to unilaterally modify the agreement. Two months later, along with his April 15, 1997 monthly bill, Cohen received an amended customer agreement containing an arbitration clause.

Approximately six years later, in July 2003, Cohen upgraded to DirecTV's High Definition Television (HDTV) programming, which provides better image quality than its standard programming. DirecTV's customers were required to pay additional monthly fees of $10.99 and buy additional equipment costing, in some cases, more than $1,000.

Cohen asserts that, in September 2004, DirecTV degraded some of its HDTV channels by switching them to a lower, non-standard resolution.¹ Five channels were affected: HBO-HD, HDNet Movies, HDTV Pay Per View, BravoHD, and Showtime HD. DirecTV also reduced bandwidth on some channels.²

A month later, in October 2004, DirecTV sent Cohen a revision to its customer agreement.³ The revision included changes to the arbitration clause which prohibited the joinder or class litigation of claims in arbitration.⁴

Cohen filed a class-action suit against DirecTV in November 2004. In his first cause of action, Cohen alleged violation of the California Consumers Legal Remedies Act (CLRA). (Civ.Code, § 1750 et seq.) He alleged DirecTV violated the CLRA and damaged its HDTV customers by broadcasting a below-standard signal, contrary to its advertisements. Cohen sought damages for the costs of equipment and monthly subscription fees, restitution, an injunction preventing DirecTV from representing its channels as HDTV, punitive damages, and reasonable attorney fees. In a second cause of action under Business and Professions Code section 17200, Cohen alleged DirecTV's conduct constituted unlawful, unfair or fraudulent business practices, and sought an injunction and restitution.

DirecTV moved to compel arbitration.⁵ Cohen's opposition argued the arbitration clause was unenforceable because (1) DirecTV's unilateral addition of an arbitration clause in April 1997 did not result in a binding agreement to arbitrate, and (2) the ban on class litigation of claims in arbitration was unconscionable. The trial court denied DirecTV's motion, concluding the arbitration clause was "procedurally and substantively unconscionable, against public policy and unenforceable." Specifically, the court found, inter alia:

(1) The arbitration clause was procedurally unconscionable because DirecTV unilaterally inserted the original arbitration clause in its customer agreement in April 1997, notifying Cohen by including the amended agreement with his monthly bill, and informing him he could accept it or cancel his service. Citing Badie v. Bank of America (1998) 67 Cal.App.4th 779, 79 Cal.Rptr.2d 273, the court concluded DirecTV added an entirely new term, not addressed in or contemplated by the original customer agreement, and that an arbitration clause included in a bill stuffer was "not a legitimate method to revoke [Cohen's] constitutional right to a jury trial. . . ."

(2) The arbitration clause was substantively unconscionable under principles announced in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (Discover Bank), which held that a class action waiver in a consumer contract of adhesion was, under the circumstances of that case, unconscionable and unenforceable.

DirecTV filed a timely appeal from the trial court's order.

DISCUSSION

We agree with the trial court that the provision in the arbitration clause prohibiting class or representative claims in arbitration (class action waiver) is unconscionable and unenforceable. Because DirecTV's customer agreement expressly prohibits the severance of the class action waiver from the remainder of the arbitration clause, the entire arbitration clause is unenforceable.

We begin our analysis with the principles announced by the Supreme Court in Discover Bank, supra, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100. Before turning to that case, however, several preliminary comments on matters raised by the parties are in order.

First, DirecTV argues at length that the trial court lacked jurisdiction to rule on the enforceability of the class action waiver, because it found that Cohen did not agree to the arbitration clause that DirecTV unilaterally added to Cohen's customer agreement in 1997. According to DirecTV, because the court in effect concluded no agreement to arbitrate was formed in the first instance, it should have ended its analysis and denied DirecTV's motion to compel arbitration on that basis. The court's further ruling on the unenforceability of the class action waiver was an "advisory opinion" on a "hypothetical issue" in a "non-justiciable dispute," and for that reason should be reversed by this court. We find DirecTV's argument both puzzling and without legal basis. It is perplexing because DirecTV contends the trial court was wrong to find no agreement to arbitrate was formed, and asks this court to hold the parties did agree to arbitrate their disputes. If they did agree to arbitrate, the enforceability of the clause, including its class action waiver, would necessarily be directly at issue. Moreover, the trial court did not analyze the matter in terms of whether a contract to arbitrate was formed in the first instance. Rather, it expressly found that the agreement was procedurally unconscionable because of DirecTV's unilateral insertion of the original arbitration clause in a bill stuffer. In any event, there is no legal merit to the claim that the enforceability of the class action waiver is "a purely hypothetical and non-justiciable dispute." The issue was directly presented to the trial court in Cohen's opposition to DirecTV's motion to compel arbitration. DirecTV cannot seek enforcement of an arbitration clause with a class action waiver and at the same time contend the court has no jurisdiction to rule on the enforceability of that clause. Nothing was "hypothetical" about the trial court's ruling.

Second, the validity and unconscionability of an arbitration agreement are matters of law subject to de novo review where, as here, no material facts are in dispute. (Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 713-714, 129 Cal.Rptr.2d 659.) Moreover, if a trial court's order is correct on any applicable theory of law, the order will be affirmed regardless of the basis for the trial court's conclusion, as we review the correctness of the order, not the reasons given for the order. (Estate of Beard (1999) 71 Cal.App.4th 753, 776, 84 Cal. Rptr.2d 276.) Because we conclude the class action waiver is unenforceable, and because it cannot be severed from the arbitration clause, we need not and do not decide whether the parties formed a valid agreement to arbitrate in 1997, when DirecTV first amended its customer agreement to include an arbitration clause, or whether Cohen effectively ratified the arbitration clause by continuing to use DirecTV's programming services for the ensuing seven years.⁶

We turn now to the principles governing the enforceability of the class action waiver in DirecTV's customer agreement, as established in Discover Bank, and then apply those principles to this case.

A. Discover Bank v. Superior Court

In Discover Bank, supra, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100, the Supreme Court began its analysis by reviewing the justifications for class action lawsuits and the important role of class action remedies under California law in deterring and redressing wrongdoing, beginning 35 years ago with Justice Mosk's much-quoted opinion in Vasquez v. Superior Court (1971) 4 Cal.3d 800, 808, 94 Cal.Rptr. 796, 484 P.2d 964, and concluding with the Supreme Court's endorsement of classwide arbitration in Keating v. Superior Court (1982) 31 Cal.3d 584, 613-614, 183 Cal. Rptr. 360, 645 P.2d 1192 [authorizing classwide arbitration in a case where the arbitration clause was silent on the issue].⁷ (Discover Bank, supra, 36 Cal.4th at pp. 156-157, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) The court then turned to the question whether a class action waiver might be unenforceable as contrary to public policy or unconscionable, and quoted at length from a court of appeal case involving an arbitration clause and a class action waiver "virtually identical" (id. at p. 155, 30 Cal. Rptr.3d 76, 113 P.3d 1100) to the waiver before the court in Discover Bank:

"`[The class action waiver] provision is clearly meant to prevent customers . . . from seeking redress for relatively small amounts of money . . . . Fully aware that few...