Lima v. Gateway, Inc.

• Decision Date: 07 August 2012
• Docket Number: Case No. SACV 09–01366 DMG (MLGx).
• Citation: 886 F.Supp.2d 1170
• Court: U.S. District Court — Central District of California
• Parties: Mark D. LIMA, on behalf of himself and all others similarly situated, Plaintiff, v. GATEWAY, INC., Defendant. Gateway, Inc., Third–Party Plaintiff, v. Top Victory Investments Limited, Third–Party Defendant.

886 F.Supp.2d 1170

Mark D. LIMA, on behalf of himself and all others similarly situated, Plaintiff,

v.GATEWAY, INC., Defendant.

Gateway, Inc., Third–Party Plaintiff,

v.Top Victory Investments Limited, Third–Party Defendant.

Case No. SACV 09–01366 DMG (MLGx).

United States District Court, C.D. California.

Aug. 7, 2012.

Alexis Alexander Phocas, Gordon M. Fauth, Jr., Litigation Law Group, Alameda, CA, Rosemary M. Rivas, Tracy Tien, Danielle A. Stoumbos, Finkelstein Thompson LLP, San Francisco, CA, for Plaintiff.

Paul F. Rafferty, Rhianna S. Hughes, Jones Day, Irvine, CA, for Third–Party Plaintiff.

Eric Michael Kennedy, Jones Day, Irvine, CA, for Defendant.

Mark Alan Samuels, O'Melveny & Myers LLP, Los Angeles, CA, for Third–Party Defendant.

ORDER RE DEFENDANT'S MOTION TO COMPEL ARBITRATION

DOLLY M. GEE, District Judge.

This matter is before the Court on Defendant Gateway, Inc.'s motion to compel arbitration [Doc. # 55]. At issue is whether the arbitration clause is enforceable in light of AT & T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). For the reasons set forth below, the Court concludes that the arbitration provisions are procedurally and substantively unconscionable and therefore unenforceable. Accordingly, Gateway's motion is DENIED.

I.FACTUAL BACKGROUND

In March 2008, Gateway offered the XHD 3000 30? LCD Flat–Panel Display for a total purchase price of $1,638.75. (Hogan Supp. Br. Decl. [Doc. # 77–1] ¶ 5.) Plaintiff Mark D. Lima purchased an XHD 3000 monitor by telephone on March 28, 2008. ( Id. ¶ 9; Lima Decl. [Doc. # 59–8] ¶ 3.) Although Lima does not recall Gateway mentioning during this call that he was waiving any rights to a jury trial or to participate in a class action (Lima Decl. ¶ 3), Gateway had procedures in place at the time requiring its phone sales representatives to disclose to customers that Gateway's “One Year Limited Warranty Agreement” (“Limited Warranty”) applied to their purchase, a copy of which would ship with the product.¹ (Brinkerhoff Decl. [Doc. # 77–2] ¶ 8.) Gateway apparently did not have a policy of disclosing during phone sales that its separate “Standard Terms of Sale” agreement (“Terms Agreement”) would also apply,² and the Limited Warranty does not incorporate the Terms Agreement by reference.³

Before purchasing the monitor, Lima researched the XHD 3000's specifications and capabilities by visiting Gateway's website. (1st Am. Compl. ¶ 27 [Doc. # 7].) At the time, Gateway's website listed the monitor's specifications with a disclaimer at the bottom stating that the sale was “subject to Limited Warranty and Terms & Conditions agreement.” (Hogan Supp. Br. Decl. ¶¶ 7–8, Ex. A.) The term “agreement” was hyperlinked so that by clicking on it a consumer could view Gateway's Limited Warranty and Terms Agreement. ( Id.)

Gateway mails sales receipts to customers who make their purchases online or by telephone before shipping their products. Lima's sales receipt was mailed on March 29, 2008. (Hogan Supp. Br. Decl. ¶ 16.) It states that the sale was “made under Gateway's Terms & Conditions of Sale unless you entered into a separate written agreement with Gateway.” (Lima Decl., Ex. A at 2.) All of Gateway's sales receipts reference the Limited Warranty and invite the customer to visit Gateway.com or call Gateway toll-free to obtain a copy of it. ( Id.; Hogan Supp. Br. Decl. ¶ 15.)

On April 3, 2008, Gateway shipped Lima's monitor to him via UPS standard ground delivery. (Hogan Supp. Br. Decl. ¶ 16.) Lima recalls receiving the sales receipt in the mail after his purchase and receiving the monitor several weeks after his purchase. (Lima Decl. ¶¶ 4–5.) Along with the monitor, inside a bag with power cables, instruction manuals, and other miscellaneous accessories necessary for the monitor's operation, Gateway included a copy of both the Limited Warranty and the Terms Agreement, each of which contained an identical arbitration provision. (Hogan Decl. [Doc. # 55–1], Ex. 1 ¶ 7; Hogan Supp. Br. Decl. ¶¶ 9–10, 13–14; Hogan 2nd Supp. Br. Decl. ¶ 2, Ex. A at 3.)

On May 7, 2008, Lima contacted Gateway's customer service department. (HoganSupp. Decl. [Doc. # 69] ¶ 8; Hogan Supp. Br. Decl. ¶ 18.) Although Lima had not reviewed the Limited Warranty, he believed that his monitor may have been covered under some sort of warranty. (Lima Decl. ¶ 6.) After Lima described the problem that he was experiencing with his monitor, Gateway's customer service representative determined that the monitor was in “theft deterrent mode” and instructed Lima on how to take the monitor out of that mode. Gateway provided this assistance under the Limited Warranty. (Hogan Supp. Decl. ¶ 8; Hogan Supp. Br. Decl. ¶ 18.)

In mid–2009, after experiencing repeated problems with his monitor, Lima called Gateway's customer service department. Gateway refused to repair the monitor, stating that it was outside of the warranty period. Gateway offered to sell Lima a $200 Acer monitor as a replacement, but Lima declined this offer. (Lima Decl. ¶ 6; Bauer Decl. [Doc. # 69–1] ¶¶ 2–4, Exs. 1, 2, 3.) This lawsuit followed.

II.LEGAL STANDARD

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16, provides that written provisions to arbitrate disputes are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Concepcion, 131 S.Ct. at 1744 (quoting 9 U.S.C. § 2) (internal quotation marks omitted). This provision reflects “both a ‘liberal federal policy favoring arbitration’ and the ‘fundamental principle that arbitration is a matter of contract.’ ” Id. at 1745 (quoting Rent–A–Center, West, Inc. v. Jackson, ––– U.S. ––––, 130 S.Ct. 2772, 2776, 177 L.Ed.2d 403 (2010); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)) (internal quotation marks omitted).

As long as an arbitration clause is not itself invalid under “generally applicable contract defenses, such as fraud, duress, or unconscionability,” id. at 1746 (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)) (internal quotation marks omitted) (citing Perry v. Thomas, 482 U.S. 483, 492–93 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987)), it must be enforced according to its terms, id. at 1745 (citing Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)). See also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (“By its terms, the [FAA] leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” (citing 9 U.S.C. §§ 3, 4)). Thus, this Court's role under the FAA is “limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” Kilgore v. KeyBank, Nat'l Ass'n, 673 F.3d 947, 955 (9th Cir.2012) (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir.2000) (internal quotation mark omitted)).

III.DISCUSSION

A. Gateway Did Not Waive Its Right To Compel Arbitration

As a preliminary matter, Lima contends that Gateway waived any right to enforce the arbitration provision through its conduct in this case. (Opp'n at 7–10 [Doc. # 59].) Assuming, without deciding, that the Court is empowered to decide this question,⁴ the Court agrees with Gateway that it has not waived its rights. See Grigsby & Assocs., Inc. v. M Sec. Inv., 664 F.3d 1350, 1353 (11th Cir.2011); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388, 393–94 (6th Cir.2008); Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217–19 (3d Cir.2007); Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 12–14 (1st Cir.2005).

Although the right to arbitration—like other contractual rights—can be waived, waiver is disfavored and “any party arguing waiver of arbitration bears a heavy burden of proof.” United States v. Park Place Assocs., Ltd., 563 F.3d 907, 921 (9th Cir.2009) (quoting Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 758 (9th Cir.1988)). “To demonstrate waiver of the right to arbitrate, a party must show: ‘(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.’ ” Id. (quoting Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir.1986)).

Lima's waiver argument fails at the first step. Gateway had no right to compel arbitration prior to April 27, 2011—the date that Concepcion was decided—because California law previously held that class-action waiver provisions in certain consumer contracts of adhesion are unconscionable. Concepcion, 131 S.Ct. at 1746 (citing Discover Bank v. Superior Court, 36 Cal.4th 148, 162, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005)). While Lima is correct that Discover Bank did not dictate a per se rule against class-action waivers, see Discover Bank, 36 Cal.4th at 162, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (“We do not hold that all class action waivers are necessarily unconscionable.”), it did announce a general rule that class action waivers are unconscionable when “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 sums of money.” Id. at 162–63, 30 Cal.Rptr.3d 76, 113 P.3d 1100.

That is precisely the situation here. Lima seeks damages on behalf of a class based on allegations that Gateway intentionally concealed defects in its monitors so as to convince individual consumers to purchase them for...