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In ordering arbitration of a dispute arising from the lease of a motor vehicle, a Colorado federal court upheld a bar on class-wide proceedings because the claimant's alleged damages, coupled with his claim for punitive damages and the availability of attorney fees, provided sufficient incentive for pursuing his claim on an individual basis.
In Ornelas v. Sonic-Denver T, Inc., No. 06-cv-00253-PSF-MJW, 2007 WL 274738 (D. Colo. Jan. 29, 2007), Ornelas leased a motor vehicle from Sonic-Denver. The lease agreement contained an arbitration clause that barred class-wide proceedings.
Two years later, Ornelas sued Sonic-Denver and its affiliates, alleging that they took advantage of his inability to speak English by fraudulently inducing him to sign a lease agreement when they knew that he intended to buy a vehicle. Sonic-Denver filed a motion to compel arbitration.
In opposing the motion, Ornelas argued that the arbitration agreement was unenforceable because his inability to speak English precluded a meeting of the minds. Since this challenge applied to the contract as a whole and not specifically to the arbitration agreement, the effect of the language barrier was a matter for the arbitrator's determination. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).
Citing footnote 1 from the Buckeye decision, Ornelas argued that the language barrier raised a question for the court because it deprived him of the capacity to enter into a contract. The Court rejected this argument because a language barrier is not "tantamount to lack of capacity or failure to enter into any agreement."
Ornelas also argued that the arbitration agreement was unenforceable because the bar on class-wide proceedings would preclude him and other members of the proposed class from vindicating their statutory rights. In support this argument, Ornelas cited Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006), in which the court held that a bar on class-wide proceedings was unenforceable because the incentive of a class-wide recovery was necessary to justify the high cost of proving an antitrust violation.
In this case, the Court upheld the bar on class-wide proceedings because the rationale underlying Kristian was inapposite. Specifically, Ornelas' consumer protection claim did not entail the complexity and expense that attended the antitrust claim in Kristian. Moreover, the bar on class-wide proceedings would not preclude Ornelas from vindicating his statutory rights because his alleged damages ($3,582), his claim for punitive damages, and the availability of attorney fees gave him sufficient incentive to pursue his claims on an individual basis.
A minority of jurisdictions have adopted a rule that a bar on class-wide proceedings may be unenforceable if it operates as an exculpatory clause by insulating the party with superior bargaining power from liability for conduct that causes a small amount of damages to a large number of people. See, e.g., Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005).
The sine qua non of the minority rule is the notion that the small amount of damages does not provide sufficient incentive for pursuing the claim on an individual basis. The Court in this case recognized that aspect of the rule, but other courts have pushed the rule beyond the limits of its reasoning.
For example, in Vasquez-Lopez v. Beneficial Oregon, Inc., No. A125270, 2007 WL 294116 (Or. Ct. App. Jan. 31, 2007), the court relied on the reasoning of Discover Bank in holding that a bar on class-wide proceedings rendered an arbitration agreement unenforceable. However, the damages in that case were hardly small. In fact, the plaintiffs' ultimate recovery totaled $742,291.23. Compare Delta Funding Corp. v. Harris, 912 A.2d 104, 115 (N.J. 2006) (finding that the homeowner "ha[d] adequate incentive to bring her claim as an individual action").
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