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In Klussman v. Cross Country Bank, ___ Cal.App.4th ___ (Dec. 15, 2005), the Court of Appeal (First Appellate District, Division One) joined several other recent decisions by refusing to enforce a no-class-action arbitration clause under Discover Bank.
Yesterday, the Court of Appeal (Second Appellate District, Division Four) affirmed a trial court order denying a motion to compel arbitration of a UCL class action. Aral v. EarthLink, Inc., ___ Cal.App.4th ___ (Nov. 29, 2005). First, the Court determined that the plaintiff's UCL claim for monetary restitution, as opposed to injunctive relief, would have been arbitrable:
Under the holding in Cruz [v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003)], when a party brings a claim under the UCL seeking both injunctive and restitutionary relief and the dispute is subject to arbitration, the proper procedure is to sever the claim for injunctive relief and compel arbitration of the claim for restitutionary relief only. Aral is seeking both injunctive relief and restitution of funds which were allegedly acquired by means of unfair business practices. Thus, the trial court erred in ruling that the entire claim should go forward in court.
(Slip op. at 9.) Nonetheless, the Court of Appeal affirmed the trial court's order because the arbitration clause was invalid in its entirety under Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). Its provisions prohibiting class actions and requiring California consumers to arbitrate in Georgia were both procedurally and substantively unconscionable:
The arbitration provision in the DSL service agreement put forth as the parties’ final agreement by EarthLink requires California consumers with minor monetary claims to arbitrate in Georgia and forbids class actions. Under recent Supreme Court authority, provisions in adhesion contacts that preclude class actions are unconscionable where the case involves allegations that a large number of consumers have been cheated out of a small sum of money. Moreover, EarthLink sought an order specifying that arbitration of a minor monetary claim by a California resident take place in Georgia. A forum selection clause that discourages legitimate claims by imposing unreasonable geographical barriers is unenforceable under well-settled California law.
(Slip op. at 2, 10-21.) The Court also rejected the defendant's argument that Georgia law, rather than California law, should govern the question of whether the arbitration clause was unconscionable:
[The plaintiff] resides in California, seeks to represent only California consumers, and relies solely on California’s UCL to support his claim. The fundamental policy at issue is not simply the right to pursue a class action remedy, but the right of California to ensure that its citizens have a viable forum in which to recover minor amounts of money allegedly obtained in violation of the UCL. Forcing consumers to travel to a far location and depriving them of any hope of class litigation would pose an insurmountable barrier to recovery of small sums unjustly obtained, and undermine the protections of the UCL.
(Slip op. at 25.)
Last Thursday, October 13, 2005, the Court of Appeal (Fourth Appellate District, Division One) ordered publication of International Association of Mailbox Center Owners, Inc. v. Superior Court (Mail Boxes Etc. USA, Inc.), ___ Cal.App.4th ___ (Sept. 16, 2005). The Court applied Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) in a non-consumer context. Its holding invalidates a no-class-action arbitration clause in certain franchise agreements, permitting group arbitration of the franchisees' claims against the franchisor. Significantly, one of those claims is for UCL violations.
First of all, the Court explained why it granted writ review of the trial court's order denying consolidation of the arbitrations (under Code of Civil Procedure section 1281.3), rather than awaiting an ordinary appeal:
One important public policy reason for allowing class actions is to promote judicial economy and streamline the litigation process in appropriate cases, involving common issues of law and fact, and this policy is also evidently promoted through an arbitration forum. To allow appropriate consideration to these policies, we have issued an order to show cause (OSC), obtained further briefing on the Discover Bank authority, and heard oral argument. Under these unusual circumstances, writ relief is proper.Slip op. at 10-11 (citations omitted) (emphasis added).
Next, the Court determined that "franchise agreements, in some cases, have the same qualities of adhesion contracts as do certain consumer contracts ... with regard to the availability of group arbitration." Id. at 18. Accordingly, the Court applied Discover Bank:
For the reasons outlined in Discover Bank, supra, 36 Cal.4th 148 and [Green Tree Financial Corp. v.] Bazzle [2003] 539 U.S. 444, group arbitration can be a valid means of dispute resolution where the statutory and case law criteria for consolidation are satisfied. Here, the franchisees made an adequate showing under section 1281.3 that there were common issues of law and fact and that group arbitration would be a preferred means of dispute resolution. The trial court should have accepted that showing, ... and it was error not to strike the ban on group arbitration from the JAMS agreement on this record.Id. at 19-20.
The Court did not address the arbitrability of the injunctive relief component of the UCL claim, presumably leaving that to the trial court to decide in the first instance. See Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003). It did hold, however, that because the franchisees sought arbitration of unwaivable statutory claims, including their UCL claims, the arbitration agreement's fee-shifting clause was unenforceable, and that a pre-arbitration fee award might even be appropriate:
[A]t this point in the proceedings, franchisees have made a prima facie showing that some of their statutory claims are the type which should be entitled to an advance fee allocation ruling, before the arbitration proceedings take place, to the extent that fee allocation is necessary to enable those statutory rights to be vindicated. We believe that the franchise factual context is sufficiently similar to mandatory employee/employer arbitration, or consumer arbitration, to allow these principles to be applied in this case. .... The trial court must accordingly conduct further appropriate proceedings regarding the requests for fee shifting with respect to determining what appropriate fee allocation orders must be made, if any, to enable the franchisees to go forward in arbitration to vindicate any unwaivable statutory claims that affect the public interest and therefore are not personal to the franchisees.Slip op. at 29-30.
In sum, this case has implications both for classwide arbitration and arbitration of UCL claims. Interestingly, the Court did not mention Proposition 64, or the amended UCL's so-called "class action" requirement. It also appears that Discover Bank is becoming a very powerful precedent. [Hat tip: May it Please the Court]
