Omstead v. Dell, Inc.

• Decision Date: 05 February 2008
• Docket Number: No. C 06-6293 PJH.,C 06-6293 PJH.
• Citation: 533 F.Supp.2d 1012
• Parties: Michael OMSTEAD, et al., Plaintiffs, v. DELL, INC., Defendant.
• Court: U.S. District Court — Northern District of California

533 F.Supp.2d 1012

Michael OMSTEAD, et al., Plaintiffs, v. DELL, INC., Defendant.

No. C 06-6293 PJH.

United States District Court, N.D. California.

February 5, 2008.

Henry John Gutierrez, Lieff Cabraser Heimann & Bernstein LLP, San Francisco, CA, Cynthia B. Chapman, Caddell & Chapman, Houston, TX, John Lee Malesovas, Attorney at Law, Waco, TX, Jonathan David Selbin, New York City, for Plaintiffs.

Douglas R. Young, Carl Brandon Wisoff, Farella Braun & Martel LLP, San Francisco, CA, Beverly Reeves, Cory Michelle Mason, Kim Brightwell, Paul Schlaud, Ryan Pierce, Sinead O'Carroll, Reeves & Brightwell LLP, Austin, TX, for Defendant.

ORDER GRANTING REQUEST FOR LEAVE TO FILE MOTION FOR RECONSIDERATION, AND ORDER DENYING RECONSIDERATION

PHYLLIS J. HAMILTON, District Judge.

Before the court is plaintiffs' motion for leave to file a motion for reconsideration of the order granting defendant's motion to compel arbitration. Having read the parties' papers and carefully considered their arguments and good cause appearing, the court hereby GRANTS the motion for leave to file a motion for reconsideration, and DENIES reconsideration.

BACKGROUND

Plaintiffs filed this action on October 6, 2006 as a proposed class action, and filed an amended complaint ("FAC") on November 10, 2006. Plaintiffs allege that defendant Dell, Inc., deliberately manufactured defective laptop computers and sold them. The proposed class consists of "[a]ll individuals and entities in the State of California who own or have owned any one or more of the following Dell Inspiron notebook computer models: 1100, 1150, 5100, or 5160." FAC ¶ 41.

Plaintiffs purchased the allegedly defective computers from Dell, through its website. Each purchase was subject to a written agreement, the "Terms and Conditions." Customers were requested to check either "I agree to Dell's Terms and Conditions of Sale" or "I do not agree to Dell's Terms and Conditions of Sale." If a customer did not check the "I agree" box, the order could not be placed.

The "Terms and Conditions" provided that the purchaser could return the computer within 30 days if he/she was unsatisfied with either the computer or the agreement. Not only was the agreement on Dell's website, but Dell also sent the plaintiff a copy of the agreement with the computer.

The agreement provided that it "shall be governed by the laws of the state of Texas," and included a dispute resolution clause entitled "Binding Arbitration," stating that "any claim, dispute, or controversy ... arising from or relating to this [a]greement, its interpretation, or the breach, interpretation or validity thereof, ... Dell's advertising, or any related purchase shall be resolved exclusively and finally by binding arbitration administered by the National Arbitration Forum."

The arbitration clause also provided that "[t]he arbitration will be limited solely to the dispute or controversy between the customer and Dell," and that neither the customer nor Dell "shall be entitled to join or consolidate claims by or against other customers, or arbitrate any claim as a representative or class action...."

In the FAC, plaintiffs assert claims under the Consumer Legal Remedies Act, Cal. Civ.Code § 1750, et seq. ("CLRA"), and the Unfair Practices Act, Cal. Bus. & Prof.Code §§ 17200 and 17500; and also allege fraudulent concealment/nondisclosure; breach of the Song — Beverly Consumer Warranty Act, Cal. Civ.Code § 1791, et seq.; breach of express warranty; breach of implied warranty; and unjust enrichment.

On December 22, 2006, Dell filed a motion to compel arbitration. Under the Federal Arbitration Act, 9 U.S.C. § 1, et seq. ("FAA"), the question whether an agreement to arbitrate is valid is governed by state law. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Where an arbitration agreement contains a choice-of-law clause, the court must apply the appropriate analysis to determine which state's laws govern the validity of the agreement to arbitrate. Federal courts sitting in diversity look to the law of the forum state in making a choice-of-law determination. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

Thus, the complaint in the present action having been filed in California, California's choice-of-law rules apply. In deciding whether to enforce a contractual choice-of-law provision, California courts follow Restatement (Second) of Conflict of Laws ("Restatement") § 187(2), which reflects a strong policy favoring the enforcement of such provisions. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 464-65, 11 Cal.Rptr.2d 330, 834 P.2d 1148 (1992). Those policy considerations apply equally to all contracts, including consumer contracts of adhesion. Washington Mut. Bank v. Superior Court, 24 Cal.4th 906, 918, 103 Cal.Rptr.2d 320, 15 P.3d 1071 (2001).

Under this analysis, the court must first determine whether the chosen state has a substantial relationship to the par ties or their transaction, or whether there is any other reasonable basis for the parties' choice of law. If either of these tests is met, the court must decide whether the chosen state's law is contrary to a "fundamental policy" of the forum state. If there is no such conflict, the court must enforce the choice-of-law provision. If there is such a conflict, the court must then determine whether the forum state has a materially greater interest than the chosen state in the determination of the particular issue. If the forum state has a materially greater interest, the court should decline to enforce a law that is contrary to the state's fundamental policy. See Nedlloyd, 3 Cal.4th at 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148.

In this case, plaintiffs conceded that "a reasonable basis exists" for the application of Texas law. Thus, the issues remaining for the court to decide in determining which state's law applies were, first, whether Texas law (allowing class action waivers) is contrary to a fundamental policy of California; and, if so, whether California has a materially greater interest than Texas does in the determination of the particular issue. As explained above, if both conditions exist, then the choice-of-law provision should not be enforced.

On June 27, 2005, a little over a year before plaintiffs filed the present action, the California Supreme Court issued its decision in Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005). The plaintiff in that case had obtained a credit card from Discover Bank in April 1986. The Bank's cardholder agreement provided for the application of Delaware and federal law to any dispute between the Bank and the cardholder. In July 1999, the Bank added a provision to the agreement, requiring arbitration "in the event you or we elect to resolve any claim or dispute between us by arbitration." The arbitration clause also precluded both sides from participating in classwide arbitration, from consolidating claims, or from arbitrating claims as a representative or a private attorney general.

In 2001, the plaintiff filed a proposed class action — Boehr v. Discover Bank (No. BC 256167, Superior Court, Los Angeles County) — alleging breach of contract and violation of Delaware consumer law. The plaintiff asserted that the Bank had breached the cardholder agreement by imposing a late fee of $29 and finance charges when payments were received on the due date but after the Bank's undisclosed 1:00 p.m. "cut-off time."

The Bank moved to compel arbitration and to dismiss the class action pursuant to the class action waiver. In response, the plaintiff argued that the class action waiver was unconscionable and unenforceable under California law. The Bank asserted, however, that the FAA requires enforcement of the express provisions of an arbitration clause, including class action waivers.

The trial court initially granted the Bank's motion to compel arbitration, finding no fundamental California public policy requiring it to reject the parties' selection of Delaware law, and also finding no California public policy reason to invalidate the class action waiver. The plaintiff filed a motion for reconsideration, based on a newly-filed decision by the California Court of Appear, Szetela v. Discover Bank, 97 Cal.App.4th 1094, 118 Cal.Rptr.2d 862 (2002). The plaintiff asserted that the Court of Appeal had articulated a fundamental public policy basis for invalidating the class action waiver.

Szetela involved the identical Discover Bank arbitration provision that was at issue in Boehr v. Discover Bank. The Szetela court found that the class action waiver was both procedurally and substantively unconscionable under California law.¹ The court held that the class-action waiver was substantively unconscionable because it gave the advantage to Discover Bank, in that customers such as the proposed class members would be essentially prevented "from seeking redress for relatively small amounts of money, such as the $29 sought by [the plaintiff]." Id. at 1101, 118 Cal. Rptr.2d 862. The court found that this "manner of arbitration" was harsh and unfair, and violated both the Legislature's stated policy of discouraging unfair business practices (referring to California Business & Professions Code § 17200, et seq.), and the public policy of promoting judicial economy, which the court noted is inherent in the procedural mechanism of the class action. Id. at 1101-02, 118 Cal. Rptr.2d 862.

Based on the Szetela ruling, the trial court in Boehr v. Discover Bank granted the motion for reconsideration, and invalidated the class action waiver. The Bank petitioned for writ of mandate, and the Court of Appeal granted the petition. Discover Bank v. Superior Court, 129 Cal. Rptr.2d 393 (2003). Because the plaintiff failed to provide any authority to support the contrary proposition, the Court of Appeal assumed that a valid...