In Action Alleging California Consumers Legal Remedies Act (CLRA) and Unfair Business Practices (UCL) Claims, California Court of Appeal Affirms Trial Court Order Denying Defense Motion to Compel Arbitration of Under Arbitration Clause that Prohibited Class Action Litigation
Philip Cohen filed a putative class action in California state court against DirecTV under California’s Consumers Legal Remedies Act (CLRA) and unfair business practices (UCL) on the grounds that DirecTV broadcast to its HDTV customers a “below-standard signal, contrary to its advertisements.” Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1445 (Cal.App. 2006). Defense attorneys moved to compel arbitration; plaintiff’s lawyer argued that the arbitration clause was unconscionable because it prohibited class action litigation of claims, and that the arbitration clause was not binding on plaintiff because of the manner in which it had been added to DirecTV’s customer agreement. The trial court denied the defense motion on the grounds that the arbitration provision was “procedurally and substantively unconscionable, against public policy and unenforceable.” Id., at 1446. DirecTV appealed, and the Court of Appeal affirmed.
Cohen became a DirecTV customer in February 1997; the customer agreement then in effect did not contain an arbitration clause. In April 1997, DirecTV added an arbitration clause to the customer agreement by means of a “bill stuffer” – i.e., an amendment to the customer agreement included with Cohen’s monthly bill. The arbitration clause was amended several times over the following years, but it was not until October 2004 that DirecTV modified the arbitration provision to prohibit class action litigation. Cohen, at 1444-45. In July 2003, Cohen “upgraded” his service to HDTV; this required that he pay a higher monthly fee and that he purchase additional equipment that could cost up to $1,000. Id., at 1445. Cohen claims that in September 2004 DirecTV “degraded some of its HDTV channels by switching them to a lower, non-standard resolution.” Id. (footnote omitted). He filed suit in November 2004. Id.
In affirming the trial court order denying DirecTV’s motion to compel arbitration, the Court of Appeal relied upon and applied the holdings of the California Supreme Court in Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). It highlighted the relevant principles at pages 1449 through 1451 as follows:
… Discover Bank recapitulated the principles of unconscionability, noting its procedural and substantive elements. The procedural element focuses on oppression or surprise due to unequal bargaining power, and generally takes the form of a contract of adhesion… . The substantive element focuses on overly harsh or one-sided results, with substantively unconscionable terms generally described as “‘unfairly one-sided.’” … The court then “agree[d] that at least some class action waivers in consumer contracts are unconscionable under California law.” The court explained that:
· When a consumer is given an amendment to a customer agreement in the form of a bill stuffer that he would be deemed to accept if he did not close his account, “an element of procedural unconscionability is present.” …
· While adhesive contracts are generally enforced, class action waivers found in those contracts may also be substantively unconscionable “inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy.” …
· Class action waivers are not, in the abstract, exculpatory clauses. However, because damages in consumer cases are often small, and because the wrongful exaction of “ ‘a dollar from each of millions of customers’ ” will result in a handsome profit, the class action is often the only effective way to halt and redress such exploitation… .
· Class action waivers are “indisputably one-sided,” as “‘credit card companies typically do not sue their customers in class action lawsuits.’” …
· “Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.” …
The court summarized:
“We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is 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, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ … Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” . . (Citations and footnote omitted.).
In applying these principles, the appellate court agreed that the arbitation clause was unconscionable and unenforceable. The class action waiver was part of a contract of adhesion that was provided to the customer via a “bill stuffer.” Cohen, at 1451. Further, the amount in dispute is small (less than $11 per month), and the Court of Appeal was not persuaded by the fact that customers additionally paid $1000 or more for equipment in order to receive the high definition signal: “the class action device remains, in our view, the only practicable way for consumers of services such as DirecTV’s to deter and redress wrongdoing of the type Cohen alleges.” Id. Finally, the appellate court found that the reduction of signal quality adequately supported an alleged scheme to “‘cheat large numbers of consumers out of individually small sums of money.’” Id. (citation omitted).
NOTE: Importantly, Cohen recognized that Discover Bank “did not hold ‘that all class action waivers are necessarily unconscionable.’” Cohen, at 1451. The opinion does highlight, however, that a company that wishes to compel individual arbitration of claims must exercise great care in addressing the substantive and procedural elements of unconscionability.
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