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A federal court in California honored a Texas choice-of-law provision in upholding a class action waiver because the party opposing arbitration failed to demonstrate that California has a fundamental public policy against class action waivers.
In Omstead v. Dell, Inc., No. C 06-6293 PJH, 2007 WL 486724 (N.D. Cal. Feb. 13, 2007), Omstead bought a notebook computer from Dell for approximately $1,200. The purchase was subject to various terms and conditions, including a Texas choice-of-law provision and an arbitration agreement containing a class action waiver.
When Omstead experienced problems using the computer, he brought a putative class against Dell, alleging manufacturing defects and violations of California law. Dell filed a motion to compel arbitration.
In opposing the motion, Omstead argued that under California law, the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. In response, Dell argued that the Texas choice-of-law provision precluded the application of California law.
To determine the enforceability of the Texas choice-of-law provision, the Court applied the standard set forth in section 187 of the Restatement (Second) of Conflicts of Laws (Restatement). See Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-65 (Cal. 1992) (instructing courts to "apply the principles set forth in Restatement section 187, which reflects a strong policy favoring enforcement of [choice-of-law] provisions").
Under section 187(2)(b) of the Restatement, a choice-of-law provision is unenforceable if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue."
Omstead argued that the Texas choice-of-law provision was unenforceable under section 187 because the application of Texas law would allow enforcement of the class action waiver and therefore run contrary to California's policy that class action waivers are unenforceable in some instances.
The Court rejected this argument because Omstead failed to establish that "there is a fundamental public policy against class-action waivers in California." In fact, as the Court noted, the California Supreme Court has "made it clear that there is no blanket policy in California against class action waivers in the consumer context."
Moreover, the Court found that the rule set forth in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) was inapplicable for at least three reasons: (1) the damages at issue were not small; (2) the arbitration agreement was not offered a "take it or leave it" basis because Omstead had 21-day rescission option; and (3) the facts alleged did not suggest a deliberate scheme to "cheat large numbers of consumers out of individually small amounts of money" because it would make no sense for Dell to deliberately sell defective computers.
This is the second decision by a California court upholding a class action waiver under the laws of another state. See also Discover Bank v. Superior Court, 134 Cal. App. 4th 886 (Cal. Ct. App. 2005) (applying Delaware choice-of-law provision).
In Comment e to section 187, the drafters of the Restatement gave the following explanation for the policy favoring enforcement of choice-of-law provisions: "Prime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. These objectives may best be attained in multistate transactions by letting the parties choose the law to govern the validity of the contract and the rights created thereby. In this way, certainty and predictability of result are most likely to be secured."
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