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Class Action Waiver Upheld; Court Rejects Argument That All Such Waivers Are Unconscionable
In some contracts, a party inserts a clause that prohibits the plaintiff from filing a class action claim – only individual claims are allowed. In Walnut Producers of California v. Diamond Foods, Inc., a group of walnut growers challenged such a waiver on the ground that it was contained in a “contract of adhesion” and was unconscionable as a matter of law.
The court of appeal rejected the argument and upheld the waiver, and in so doing offered a commentary on how courts should approach these questions. First, the court noted that under the California Civil Code (section 1670.5), when a claim of unconscionabililty is made, the court must allow the parties a reasonable opportunity to present evidence regarding the contact’s commercial setting, purpose, and effect to aid the court in deciding the issue.
The standard applied by the court is similar to that used to determine whether the plaintiff has stated a cause of action – the court must assume the allegations of the plaintiff’s complaint are true and makes a ruling on those allegations as a matter of law.
The court made clear that the doctrine of unconscionability can, indeed, be applied to commercial (as opposed to consumer) contracts. The doctrine applies to all contracts. Moreover, the same standard of unconscionability applies to all contracts – there is not one standard for employment/consumer agreements and another one for commercial agreements.
Turing to the merits, the court noted that there are both “procedural” and “substantive” elements to the doctrine of unconscionability. To quote the court:
“To briefly recapitulate the principles of unconscionability, the doctrine has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results. . . . The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. . . . Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided. . . .Under this approach, both the procedural and substantive elements must be met before a contract or term will be deemed unconscionable. Both, however, need not be present to the same degree. A sliding scale is applied so that the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”
Often times, parties make a claim of procedural unconscionability based on an assertion that they were forced into signing the contract; that is, that the agreement is a “contract of adhesion.” The Walnut Growers court said that “[a]n adhesion contract is a standardized contract imposed upon the subscribing party without an opportunity to negotiate the terms. . . . The term signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.”
In the Walnut Growers case, the court concluded that the plaintiffs were not without alternatives; they could have refused the contact at issue (an agreement to sell their crop to a given purchaser) and, instead, sold their crops elsewhere. Moreover, they could not show that the class action waiver was a “surprise.”
On the question of substantive unconscionability, the court noted that: “No precise definition of substantive unconscionability can be proffered. Cases have talked in terms of ‘overly harsh’ or ‘one-sided’ results. . . . One commentator has pointed out, however, that unconscionability turns not only on a one-sided result, but also on an absence of justification for it . . . which is only to say that substantive unconscionability must be evaluated as of the time the contract was made. . . . The most detailed and specific commentaries observe that a contract is largely an allocation of risks between the parties, and therefore that a contractual term is substantively suspect if it reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.”
Only when terms truly “shock the conscience” will they be declared unconscionable. “‘With a concept as nebulous as ‘unconscionability’ it is important that courts not be thrust in the paternalistic role of intervening to change contractual terms that the parties have agreed to merely because the court believes the terms are unreasonable. The terms must shock the conscience.”
The court refused to find substantive unconscionability because the individual claims were substantial, and waiving a class action procedure did not shock the conscience. The court relied on California Supreme Court precedent when it said that all class action waivers are not 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.” (Relying on Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).)
It should be noted that the Walnut Growers case involved sophisticated plaintiffs who had the wherewithal to press their individual claims. In cases involving employees and consumers, the result might well be different, although each case must be determined on its own particular circumstances.
For your convenience, a complete copy of the court’s opinion in the Walnut Growers case is attached.
At Slote & Links, we often advise clients on legal issues such as the unconscionability questions presented in the Walnut Growers case. If you have questions in this area, please feel free to give us a call.