Opinion
05 CV 10097 (GBD).
July 27, 2006
MEMORANDUM DECISION AND ORDER
Plaintiff Sam Sherr ("Sherr") brings a putative class action lawsuit against Dell, Inc., ("Dell") alleging a defect related to an overheating problem with the product line he purchased. Sherr asserts three claims against Dell: 1) unconscionable commercial practices in violation of New York Business Law § 349; 2) breach of express warranty; and 3) unjust enrichment. He seeks damages, injunctive relief, and other equitable and legal relief for inevitable, continuing computer failures. (Sherr Compl. ¶ 3). Dell moves to compel arbitration under the Federal Arbitration Act ("FAA"), 9 U.S.C.A. § 2 (2005). Sherr argues that the mandatory arbitration provision and class action prohibition in his contract with Dell are unconscionable and should therefore not be enforced. Defendant's motion to compel arbitration is granted.
BACKGROUND
Sherr purchased a Dell Inspiron 600m notebook computer over the telephone in April 2004. When purchasers buy products from Dell via the telephone or Internet, they agree to Dell's U.S. Terms and Conditions of Sale ("the Agreement"). (Decl. of Mary Pape in Supp. of Dell, Inc.'s Mot. to Stay Proceedings and Compel Arbitration ("Pape Decl.") ¶ 4). The Agreement begins by advising the consumer to carefully read the document, which contains information about obligations, rights, limitations, and a dispute resolution clause. Texas laws govern "THIS AGREEMENT AND ANY SALES THERE UNDER." The Agreement's dispute resolution clause contains a binding arbitration provision stating that only the National Arbitration Forum ("NAF") will resolve "ANY CLAIM, DISPUTE, OR CONTROVERSY" relating to the Agreement or stemming from "its interpretation, or the breach, termination or validity thereof . . ." (2004 Dell U.S. Terms and Conditions of Sale, Defs.' Ex. A ¶ 13). It applies "IN CONTRACT, TORT, OR OTHERWISE, WHETHER PREEXISTING, PRESENT, OR FUTURE, AND INCLUDING STATUTORY, COMMON LAW, INTENTIONAL TORT AND EQUITABLE CLAIMS." (Id.) The Agreement also prohibits class actions. "The arbitration will be limited solely to the dispute or controversy between customer and Dell. NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATE CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY." (Id.) During the telephone order, a recording further stated that the "purchase [was] subject to Dell's Terms and Conditions of Sale" and directed the consumer to the terms' location on the Internet and by telephone. (Pape Decl. ¶ 7).
Following Sherr's telephone order, Dell shipped a copy of the Agreement with the computer as part of its standard business practice. (Id. ¶ 12). The Agreement notifies the consumer that his acceptance of the product's delivery also serves as an acceptance of the binding terms and conditions. (Pape Decl., Defs.' Ex. A). Additionally, the Agreement informs the consumer that by returning the product or refusing delivery in accordance with Dell's return policy, he can reject the terms and conditions. (Pape Decl. ¶ 9).
ARBITRABILITY
Dell moves under the FAA, 9 U.S.C.A. § 2, and Tex. Bus. Com. Code Ann. § 2.204(a) (Vernon 2004) to compel arbitration pursuant to the Agreement. An arbitration agreement's validity is a matter of state law. "When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary statelaw principles that govern the formation of contracts."Bell v. Cendant Corp., 293 F.3d 563, 566 (2d Cir. 2002) (citingFirst Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). If a district court finds a valid arbitration agreement exists, it may dismiss or stay proceedings and compel arbitration if a party fails to comply with the agreement under the FAA. 9 U.S.C.A. §§ 3- 4. A court must determine both whether the parties agreed to arbitrate and whether the agreement's scope covers the claims in question. See Bank Julius Baer Co., Ltd. v. Waxfield Ltd., 424 F.3d 278, 281 (2d Cir. 2005) (citingCampaniello Imp., Ltd. v. Saporiti Italia S.P.A., 117 F.3d 655, 666 (2d Cir. 1997)). If a party establishes an undisputed right to arbitration, then the court must compel arbitration. Dell, Inc. v. Muniz, 163 S.W.3d 177, 181 (Tex.App. 2005).Additionally, federal policy favors arbitration. See Oldroyd v. Elmira Sav. Bank, 134 F.3d 72, 76 (2d Cir. 1998) (acknowledging the strong federal policy favoring arbitration as an alternate way to resolve disputes). But a court cannot compel a party to arbitrate a dispute beyond what he has agreed. Bell, 293 F.3d at 566-67; AT T Technologies, Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986) (quoting United Steelworkers of America v. Warrior Gulf Nav. Co., 363 U.S. 574, 582 (1960)). "[The FAA] simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 478 (1989). Where the arbitration agreement's scope is ambiguous, the court should, however, favor arbitration. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Bank Julius Baer Co., Ltd., 424 F.3d at 281, 285. Without some ambiguity, the agreement's language delineates the range of disputes subject to arbitration. Equal Employment Opportunity Comm. v. Waffle House, Inc., 534 U.S. 279 (2002).
A. The Arbitration Agreement's Enforceability
Under the FAA, an arbitration agreement is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C.A. § 2. Approve-or-return contracts have been found to be enforceable in consumer transactions. See, M.A. Mortenson Co., Inc. v. Timberline Software Corp., 998 P.2d 305, 313 n. 10 (Wash. 2000) (en banc); see also Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097 (C.D. Cal. 2002); Lozano v. ATT Wireless, 216 F. Supp. 2d 1071 (C.D. Cal. 2002), overruled on other grounds by Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1176 (9th Cir. 2003);Beneficial Nat'l Bank, U.S.A. v. Payton, 214 F. Supp. 2d 679, 686 n. 8 (S.D. Miss. 2001). In this case, the arbitration provision at issue appears in a "standard `approve-or-return' contract." See Provencher v. Dell, Inc., 409 F. Supp. 2d 1196 (C.D. Cal. 2006) (a standard approve-or-return contract is enforceable). In order to avoid ineffectual, costly steps, it is not practical to expect salespeople to read legal documents to customers before ringing up sales. Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149 (7th Cir. 1997). Due to this reality, some clauses received even after the initial transactions are enforceable. The United States Supreme Court has held that a forum selection clause in a non-negotiated form contract was valid, although consumers did not receive notice of it until after they had paid for their cruise tickets. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595 (1991) (Plaintiffs could have rejected the contract after they received notice of the clause). Texas courts, and courts applying Texas law, have applied the U.S. Supreme Court's holding in Carnival Cruise Lines. See, e.g., Stenzel v. Dell, Inc., 870 A.2d 133, 140 (Me. 2005) (Under Texas law, the plaintiffs agreed to be bound by the Agreement, including its arbitration clause, when they accepted the computer's delivery and did not return it as provided in the Agreement.). After having an opportunity to read the contract's terms, an individual may indicate acceptance through conduct or use. In re Advance PCS Health L.P., 172 S.W.3d 603, 608 n. 8 (Tex. 2005); see also In re Halliburton Co., 80 S.W.3d 566, 569 (Tex. 2002).
Before receiving the actual computer product, plaintiff Sherr had numerous opportunities to review the Agreement's terms. On various occasions, defendant Dell notifies its customers that their purchases are subject to the Agreement. The customer need only return the product according to the return policy in order to reject the Agreement. By keeping his computer, Sherr voluntarily accepted the Agreement's terms, including its binding arbitration provision, through his conduct.
B. The Arbitration Agreement's Scope
Once an arbitration agreement is found enforceable, its scope must be assessed. In order to determine whether a claim falls within the arbitration agreement's scope, courts examine the factual allegations of the complaint. Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) (citing Moses H. Cone Mem'l Hosp., 460 U.S. at 24-25); see also Dell, Inc. v. Muniz, 163 S.W.3d at 181 (citing In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001)). A broadly phrased arbitration agreement "creates a presumption of arbitrability which is only overcome if it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Bank Julius Baer Co., 424 F.3d at 284 (citing WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 74 (2d Cir. 1997) (internal quotation marks omitted)). Parties must arbitrate claims if their underlying factual allegations touch issues encompassed by the contracts. JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 178 (2d Cir. 2004) (citingOldroyd, 134 F.3d at 77).
Plaintiff alleges that the Dell Inspiron 600m is defectively designed because he has had overheating problems. (Opp. to Def. Dell, Inc.'s Motion to Stay Proceedings and Compel Arbitration ("Opposition") at 1). A "defect" in a consumer item is "a condition of the goods that renders them unfit for the ordinary purpose for which they are used because of a lack of something necessary for adequacy." Plas-Tex, Inc. v. United States Steel Corp., 772 S.W.2d 442, 444 (Tex. 1989) (interpreting the term "defect" within the implied warranty of merchantability context). Dell's Agreement covers "ANY CLAIM, DISPUTE, OR CONTROVERSY" relating to the Agreement or stemming from "its interpretation, or the breach, termination or validity thereof . . ." (Pape Decl., Ex. A ¶ 13). Sherr's design defect claims relate to his computer purchase under the Agreement and thus touch the contract's broad subject matter. The parties should therefore arbitrate these claims.
C. The Arbitration Agreement's Fairness
1. Unconscionability
Both parties agree that Texas law governs this dispute. Texas law favors arbitration when resolving disputes over an agreement.Cantella Co., Inc. v. Goodwin, 924 S.W.2d 943, 944 (Tex. 1996) (per curiam). Yet plaintiff argues that this arbitration agreement should be declared invalid and not binding because it is unconscionable. Under Texas law and the FAA, the party opposing arbitration bears the burden of proof with respect to unconscionability since the law favors arbitration.See In re FirstMerit Bank, N.A., 52 S.W.3d at 756. In order to determine whether a provision is unconscionable, the court must decide whether the clause at issue is "so one-sided that it is unconscionable under the circumstances existing when the parties made the contract," given the parties' commercial background and the particular trade's commercial needs.FirstMerit Bank, N.A., 52 S.W.3d at 757.
The unconscionability analysis has both a procedural and a substantive component. Procedurally, courts look at the circumstances surrounding the arbitration clause's adoption. In re Halliburton Co., 80 S.W.3d at 571. A party must have had "no real choice" except to enter into the contract in order to prove a disparity in bargaining power surrounding the clause's adoption. Dillee v. Sisters of Charity of Incarnate Word Health Care Sys., Houston, Tex., 912 S.W.2d 307, 309 (Tex.App. 1995),reh'g overruled by, Dillee v. Sisters of Charity of Incarnate Word Health Care Sys., No. 14-94-00659-CV, 1995 WL 739416 (Tex.App. Dec. 14, 1995) (not designated for publication). Adhesion contracts are not inherently unconscionable on procedural grounds. In re Oakwood Mobile Homes, Inc, 987 S.W.2d 571, 574 (Tex. 1999), abrogated on other grounds by, In re Halliburton Co., 80 S.W.3d at 571. Plaintiff must demonstrate a lack of alternatives or a significant restriction on his choices based on his relative bargaining position.
Plaintiff has not met his burden. Under the circumstances, plaintiff could have chosen not to enter into the Agreement with defendant. He could have chosen to buy a computer from another company. See, e.g., Ranieri v. Bell Atlantic Mobile, 759 N.Y.S.2d 448, 449 (N.Y.App.Div. 2003) ("Inequality of bargaining power alone does not invalidate a contract as one of adhesion when the purchase can be made elsewhere."), leave to appeal denied by, 807 N.E.2d 290 (N.Y. 2003); see also Lindemann v. Eli Lilly Co., 816 F.2d 199, 203 (5th Cir. 1987) (To decide whether a contract is unconscionable under Texas law, a court must examine the alternatives available at the time the parties formed the contract, in addition to evidence concerning a party's nonbargaining ability and the contract's illegality or disparity with public policy).
Plaintiff argues that the arbitration provision is substantively unconscionable. Substantive unconscionability deals with the arbitration clause's fairness. In re Halliburton Co., 80 S.W.3d at 571. To prove substantive unconscionability, a party must show a contract is so unfair that "no man in his senses and not under a delusion would enter into [it] and . . . no honest and fair person would accept" its terms. Provencher, 409 F. Supp. 2d at 1204 (quoting Blount v. Westinghouse Credit Corp., 432 S.W.2d 549, 554 (Tex.Civ.App. 1968)). Plaintiff alleges that the lack of any filed arbitration claims against Dell illustrates the arbitration agreement's unfairness because several complaints concerning the computer's defectiveness exist. (Opposition at 8). However, the lack of any filed arbitration claims does not demonstrate an inherent lack of fairness. The arbitration provision is also not so unfair that no one in his right mind would enter into it. Rather, it is a standard quid pro quo relationship. In exchange for having the opportunity to purchase these particular products, plaintiff agreed to submit potential future claims to individual arbitration.
Plaintiff's further argument is that he will not have a fair opportunity to prove his case in arbitration. He alleges that NAF aided Dell in structuring the arbitration proceedings in a manner that makes a consumer's effort to prevail in arbitration futile. However, a claim regarding a particular arbitrator's partiality would not negate the fact that the parties agreed to submit this issue to arbitration.
2. Prohibitive Costs
Plaintiff also argues that the high cost of arbitration bars customers from seeking remedies there since consumers cannot afford to assert a complex design defect, such as this one, due to the necessity of expert testimony and extensive discovery. (Opposition at 9-10). He further argues that arbitration's filing costs are also cost prohibitive. (Id. at 13.) To avoid undermining the federal policy favoring arbitration, the party opposing arbitration has the burden of proving the probability of incurring prohibitive costs. Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 91 (2000) (citing Moses H. Cone Mem'l Hosp., 460 U.S. at 24). In fact, the possibility for a less costly and more efficient resolution is one of an arbitration agreement's potential benefits. See In re Currency Conversion Fee Antirust Litig., 265 F. Supp. 2d 385, 400 (S.D.N.Y. 2003). For indigent claimants, the National Arbitration Forum Code of Procedure allows for a waiver of certain fees. Nat'l Arbitration Forum Code of Procedure R. 45, eff. Jan. 1, 2005. In addition, Dell has agreed to pay plaintiff's arbitration fees required to obtain a hearing to the extent they exceed general court filing fees. (Pape Decl., Ex. A ¶ 13). The Agreement also allows the arbitrator to award reasonable fees under the fee-shifting standards provided by law to the prevailing party "on a statutory claim that affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees." (Id.) Given NAF's code of procedure as well as defendant's offer to pay fees, plaintiff has failed to establish that the arbitration costs would render the arbitration provision unconscionable. Furthermore, plaintiff has failed to identify any specific discovery costs or other expenses of arbitration that would be prohibitively costly.
3. Complexity
Plaintiff's third contention is that his design defect claim and other claims are too complex for an arbitral forum. (Opposition at 10-11). He argues that NAF rules limit discovery to the claim's amount and thus prevent consumers from obtaining necessary discovery. (Opposition at 11). Plaintiff, however, has failed to demonstrate that his case is more complex than other cases that parties have submitted to arbitration. See, e.g., Hubbert v. Dell Corp., 835 N.E.2d 113, 118 (Ill.App.Ct. 2005) appeal denied by, Hubbert v. Dell Corp., 844 N.E.2d 965 (Ill. 2006) (compelling arbitration where the plaintiff alleged the microprocessor's speed and power did not meet the defendant's marketed speed and power). Indeed, Sherr has failed to present any support for the contention that the arbitrators cannot understand and adjudicate his computer claims.
4. Class Action Ban
Finally, plaintiff argues that the Agreement's class-wide arbitration prohibition itself should render the arbitration clause unenforceable on unconscionability grounds, and that NAF rules essentially ban class-wide arbitration since the rules allow joinder "only with the consent of all other Parties." (Opposition at 13) (citing Nat'l Arbitration Forum Code of Procedure Rule 19A eff. Jan 1, 2005). At oral argument, plaintiff's counsel additionally argued that arbitration becomes an improper forum if a plaintiff can show that a defendant is utilizing the arbitration provision's class action waiver to swindle a large class of people out of a small amount of money, citing the California Supreme Court's decision in Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005). TheDiscover court however, specifically limited its holding to California law, relying explicitly on California statutory authority:
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." (Civ. Code. § 1668). Under these circumstances, such waivers are unconscionable under California law and should not be enforced. Id.
Despite the California Supreme Court's particular ruling inDiscover, class action waivers in arbitration agreements have been enforced even in response to unconscionability claims.See, e.g., Snowden v. CheckPoint Check Cashing, 290 F.3d 631, 638 (4th Cir. 2002) (Arbitration Agreement was not unconscionable, even though it eliminated the class action vehicle); Metro E. Ctr. for Conditioning Health v. Qwest Commc'ns Int'l, Inc., 294 F.3d 924, 927 (7th Cir. 2002) (arguments based on arbitration's costs and class actions' preclusion are "the sort of litany the Federal Arbitration Act is supposed to silence"); In re American Express Merchants Litigation, No. 03 CV 9592, 2006 WL 6662341 at *9 (S.D.N.Y. Mar. 16, 2006) ("Whether or not the defendants violated the California Unfair Competition Law by allegedly forcing small merchants to waive the right to participate in both class actions and class-wide arbitrations . . . is not a bar to sending all the plaintiffs to arbitration pursuant to their contractual agreement . . ."); Med Ctr. Cars, Inc. v. Smith, 727 So. 2d 9, 20 (Ala. 1998) ("to require class-wide arbitration would alter the agreements of the parties, whose arbitration agreements do not provide for class-wide arbitration"); Rains v. Found. Health Sys. Life Health, 23 P.3d 1249, 1253 (Colo.Ct.App. 2001) ("arbitration clauses are not unenforceable simply because they might render a class action unavailable"); Edelist v. MBNA Am. Bank, 790 A.2d 1249, 1261 (Del.Super.Ct. 2001) ("The surrender of that class action right was clearly articulated in the arbitration amendment. The Court finds nothing unconscionable about it and finds the bar on class actions enforceable"); Rosen v. SCIL, LLC, 799 N.E.2d 488, 494 (Ill.App.Ct. 2003) (arbitration clause enforceable even though it prohibits class actions); Ranieri, 759 N.Y.S.2d at 449 (". . . a contractual proscription against class actions . . . is neither unconscionable nor violative of public policy"). Since both parties agree Texas law governs the arbitration provision's application, the Discover court's holding which expressly relies on California statutory authority is not determinative.
Plaintiff argues that the class action bar in his contract is unconscionable since it denies individuals the cost benefit of a class action as well as the benefit of information from other arbitrations. (Opposition at 13, 14). However, even without Dell's offer to assist with the filing fees exceeding court filing fees, plaintiff is not entitled to a class action suit or class-wide arbitration to vindicate the rights of everyone else with a similar problem. The FAA's primary purpose is not to create a right to sue as a class. Its main purpose is "to ensure that private agreements to arbitrate are enforced according to their terms." AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 200 (Tex.App. 2003) (citing Volt Info. Scis., Inc., 489 U.S. at 478-79). As in the instant case, the plaintiff in AutoNation USA Corp. argued that "without the class action device, consumers will be disinclined to pursue individual remedies for small damages." That court rejected the unconscionability argument and ordered arbitration, finding that no entitlement to proceed as a class exists. The court reasoned that
[Plaintiff's argument] assumes that the right to proceed on a class-wide basis supercedes a contracting party's right to arbitrate under the FAA. However, the primary purpose of the FAA is to overcome courts' refusals to enforce agreements to arbitrate and to ensure that private agreements to arbitrate are enforced according to their terms. The Texas Supreme Court has made it clear that the FAA is part of [the] substantive law of Texas, and has stressed that procedural devices such as . . . class actions, may not be construed to enlarge or diminish any substantive rights or obligations of any parties to any civil action. Accordingly, there is no entitlement to proceed as a class action.
Id. at 200 (internal citations and quotation marks omitted). Plaintiff's argument, that consumers are disadvantaged and individually burdened because of the class-wide arbitration bar, is similarly unavailing here. He has failed to demonstrate that this provision is unconscionable.
This court finds the arbitration agreement is neither procedurally nor substantively unconscionable. The parties agreed to this arbitration provision, and plaintiff's claims fall within its scope. Under Texas law and the FAA, the arbitration agreement is fair and valid.
Dell's motion to compel arbitration is granted. This case is dismissed.