Walnut Producers of Cal. v. Diamond Foods, Inc.

• Decision Date: 10 November 2010
• Docket Number: No. C060346.,C060346.
• Court: California Court of Appeals Court of Appeals
• Parties: WALNUT PRODUCERS OF CALIFORNIA et al., Plaintiffs and Appellants, v. DIAMOND FOODS, INC., Defendant and Respondent.

187 Cal.App.4th 634

114 Cal.Rptr.3d 449

WALNUT PRODUCERS OF CALIFORNIA et al., Plaintiffs and Appellants,

v.DIAMOND FOODS, INC., Defendant and Respondent.

No. C060346.

Court of Appeal, Third District, California.

Aug. 16, 2010.

Review Denied Nov. 10, 2010.

Bartko Zankel Tarrant & Miller, Charles G. Miller, Howard I. Miller, San Francisco; Tuttle & Van Konynenburg, Therese Tuttle, Frank Van Konynenburg; Lovitt & Hannan, J. Thomas Hannan, Ronald Lovitt, Henry Bornstein, San Francisco; MacDonald & Associates and Iain A. MacDonald, San Francisco, for Plaintiffs and Appellants.

Winston & Strawn, Jeffrey J. Lederman, Jeffrey S. Bosley, and Leda M. Mouallem, San Francisco, for Defendant and Respondent.

NICHOLSON, Acting P.J. Plaintiffs, producers of walnuts, appeal the trial court's order striking all class action allegations from their complaint. Plaintiffs claim that a class action waiver in their arbitration agreements with defendant, a walnut processor, was unconscionable. The trial court disagreed with their argument, as do we. We affirm the trial court's order.

ALLEGATIONS

For purposes of this appeal, we assume all factual allegations in the complaint are true.

Plaintiff Walnut Producers of California (Producers) is a nonprofit cooperative marketing association. Its members are persons and entities who grow walnuts. Its members have assigned to it all of their claims against the defendant.

Plaintiff George J. Miller Ranch, Inc. (Miller Ranch) is a corporation engaged in the production of walnuts.

Defendant Diamond Foods, Inc. (Diamond Foods) is the successor by way of merger to an agricultural cooperative known as the Diamond Walnut Growers, Inc. (the Co-op). Diamond Foods hadbeen a wholly owned subsidiary of the Co-op.

Prior to 2005, the Co-op's members would deliver their walnut crops to the Co-op, and they would be paid on a cooperative crop pool basis based on the net proceeds generated by the sale of the walnuts.

In 2005, Diamond Foods proposed the merger with the Co-op. As part of that process, it gave to the Co-op members a proposed Walnut Purchase Agreement (the Agreement) that it would use with the members. The Agreement would replace the marketing agreements that existed between the Co-op and its members once the Co-op ceased to exist.

On July 1, 2005, the Co-op's members approved the merger with Diamond Foods. With the cancellation of the marketing agreements, the Co-op's members needed to find an entity to purchase their walnuts. They could either deliver their crops to Diamond Foods as arm's length suppliers pursuant to the terms of the Agreement or, because smaller processors did not have sufficient capacity to process the members' crops, they could let their crops fall to the ground and go to waste.

The Agreement was presented to the growers on a "take-it-or-leave-it" basis without an explanation of its terms and without an opportunity to negotiate its terms. With no real options available to them, most of the growers had no choice but to sign the Agreement. Approximately 95 percent of the Co-op's members, including Miller Ranch, signed the Agreement.¹

Under the Agreement, the growers agreed to sell, and Diamond Ranch agreed to buy, their entire crop of walnuts each year during the Agreement's term. The Agreement's terms were for three, five, or ten years. The Agreement did not set forth a purchase price. Rather, it provided that Diamond Foods would establish the price in good faith each year following the harvest, taking into account market conditions, quality, variety, and other relevant factors.

This appeal concerns the Agreement's dispute resolution requirements and, in particular, its prohibition of class actions. The Agreement in general requires all disputes to be resolved by binding arbitration. It specificallyprohibits any type of class action as follows: "Each dispute will be resolved based upon its own facts and merits, and no procedure in the nature of class actions will be permitted."

Plaintiffs filed this action in 2008, alleging Diamond Foods breached the Agreement by failing to pay them the reasonable market value for their walnuts, the price plaintiffs alleged the Agreement required. Plaintiffs sought damages, reformation and declaratory relief. Despite the Agreement's class action waiver, plaintiffs brought this action as a class action on behalf of all California walnut growers who executed the Agreement with Diamond Foods, a class of growers in excess of 1,600 persons and entities.

Of relevance here, plaintiffs' sixth cause of action sought declaratory relief that the Agreement's dispute resolution clauses, including the class action waiver, were unenforceable and unconscionable. Plaintiffs contended the class action waiver was unconscionable because the Agreement was a contract of adhesion, and the prohibition effectively insulated Diamond Foods fromany liability towards the growers for its wrongful conduct.

Diamond Foods filed a motion to strike all class allegations contained in the complaint. It argued the Agreement's class action waiver was enforceable and that plaintiffs could not demonstrate as a matter of law that the waiver was unconscionable. Diamond Foods also filed a demurrer.

The trial court granted the motion to strike the class allegations, and it sustained the demurrer with leave to amend. The court did not state its reasoning.

Plaintiffs appeal from the trial court's order granting the motion to strike the class allegations. They claim the doctrine of unconscionability applies to commercial contracts, they successfully pleaded facts showing the Agreement is an adhesion contract, and the Agreement's arbitration provisions, including the class action waiver, are unconscionable.²,³

DISCUSSION

I

Standard of Review

Initially, we must determine which standard of review applies to this appeal. Plaintiffs argue we are to review the trial court's decision de novo. Diamond Foods asserts we are to review the court's decision only for an abuse of discretion. We agree with plaintiffs.

Generally, an order granting a motion to strike is not an appealable order. ( Yandell v. City of Los Angeles (1931) 214 Cal. 234, 235, 4 P.2d 947; 9 Witkin, Cal. Procedure (5th ed. 2008) Appeal, § 155, p. 231.) And when the order is reviewed on appeal following entry of final judgment, the appellate court usually applies the abuse of discretion standard. ( Quiroz v. Seventh Ave. Center (2006) 140 Cal.App.4th 1256, 1282, 45 Cal.Rptr.3d 222.)

This case, however, is not the usual case. The trial court's order is appealable in this instance because it effectively was a final judgment. The order struck all class allegations from the complaint, essentially dismissing the action as to all members of the purported class other than the named plaintiffs. Such an order is appealable, even if made at the pleading stage. "Whatever its form, an order that has the effect of denying certification as a class action disposes of that action and is an appealable final judgment." ( Prince v. CLS Transportation, Inc. (2004) 118 Cal.App.4th 1320, 1322, fn. 2, 13 Cal.Rptr.3d 725.)

Moreover, our review of this particular order is de novo. Although an appeal from a denial of class certification is subject to an abuse of discretion standard ( Sav-on Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 326-327, 17 Cal.Rptr.3d 906, 96 P.3d 194), Diamond Foods's motion did not attack plaintiffs' factual allegations regarding the merits of certifying the class. Instead, it argued theclass allegations should be stricken because plaintiffs did not successfully allege, and could not as a matter of law allege, facts showing that the class action waiver in the Agreement was unconscionable. The motion was akin to a general demurrer, the sustaining of which without leave to amend we would review as a question of law after assuming all factual allegations to be true. ( Brunius v. Parrish (2005) 132 Cal.App.4th 838, 849, 34 Cal.Rptr.3d 55.)

Civil Code section 1670.5 requires a trial court to make a preliminary determination of whether a contract may be unconscionable. If it finds the contract may be unconscionable, it must afford the parties an evidentiaryhearing before it determines as a matter of law whether the contract is unconscionable. The statute reads: "When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination." (Civ.Code, § 1670.5, subd. (b).)

In this instance, Diamond Foods's motion to strike the class allegations triggered the court's obligation to make a preliminary determination under Civil Code section 1670.5 whether the class action prohibition appeared to be unconscionable. This determination is similar to determining whether plaintiffs have pleaded sufficient facts to state a cause of action. Because the issue was raised as a motion to strike, the court was required to assume the truthfulness of the complaint's factual allegations and could rule on the issue only as a matter of law.

Thus, our review on this appeal is the same. At the pleading stage of this case, where Diamond Foods has sought to strike the class allegations, and plaintiffs assert the contractual prohibitions of those class allegations are unconscionable, our review under Civil Code section 1670.5, subdivision (b), is to determine de novo whether plaintiffs have pleaded sufficient facts demonstrating the class action waiver may be unconscionable. ( Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1316-1324, 27 Cal.Rptr.3d 797 ( Morris ).) If plaintiffs have met this burden, they are entitled to a full evidentiary hearing at which the trial court can definitively determine whether the class action waiver is unconscionable.

Even the case cited by Diamond Foods, Freeman v. Wal-Mart Stores, Inc. (2003) 111 Cal.App.4th 660, 3...