Wednesday, August 18, 2010

Third District Upholds Class Action Waiver: Walnut Producers of California v. Diamond Foods, Inc.

On August 16, 2010, the Third District issued an opinion in Walnut Producers of California v. Diamond Foods, Inc., __ Cal.App.4th __ (2010), upholding the trial’s court order striking class allegations based on a class action waiver. The case was not a typical consumer case, as it involved a walnut marketing association challenge to “marketing agreement” with a walnut processor brought on the behalf of a class of walnut growers.

Material to the Court’s decision was its finding that the plaintiff could not establish procedural unconsciability due to the fact the association was comprised of sophisticated business people who, as members of the association, yielded significant power and control:
Plaintiffs have not successfully pleaded the Agreement is a contract of adhesion under the unusual circumstances of this case. It is true that plaintiffs pleaded the Agreement is a standardized contract drafted by Diamond Foods that was presented to plaintiffs without any opportunity to negotiate its terms. However, it is not true according to plaintiffs' allegations that Diamond Foods had superior bargaining strength or that plaintiffs had no real alternatives available to them at the time they entered into the Agreement.
The obvious alternative for plaintiffs was not to approve the Co-op's merger into Diamond Foods. Plaintiffs' choice was not limited to entering into the Agreement. Rather, their choice was between continuing in the Co-op, or merging the Co-op with Diamond Foods and entering into the Agreement. Since plaintiffs controlled the Co-op as members, we cannot say the Agreement was imposed on the members by a party of superior bargaining strength or that they had no other alternative but to merge the Co-op and enter into the agreement.
Slip Opinion, at 15-16.

On the issue of substantive unconscionability, the Court concluded that under Discovery Bank, “the issue of a class action waiver's substantive unconscionability must be decided on its exculpatory effect, not merely on whether a class action may be an amenable or even favored remedy.” See Slip Opinion, at 22-23. As reasoned by the Court, the claims of each individual walnut grower was sufficiently large so as to not render adjudication contingent on the class mechanism:
Unlike in Discover Bank, plaintiffs' complaint does not establish that the Agreement's class action waiver acted as an exculpatory clause or unduly hindered plaintiffs from pursuing a legal remedy. Plaintiffs' amended complaint shows that a class action is not the only viable means for recovering plaintiffs' damages or enforcing the contract against Diamond Foods. The amended complaint seeks damages for the class of “at least $ 70 million.” Divided evenly among 1,600 class action plaintiffs, the alleged size of the class, a damage award of $ 70 million would provide each plaintiff with an award of $ 43,750. Obviously, the actual awards would be larger or smaller than that depending on each grower's claim, but, when considered for unconscionability, requiring a grower to file an individual action for roughly $ 43,000 in damages does not shock the conscience. n6 (See Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825, 844 [109 Cal. Rptr. 3d 289] [a claim for $ 16,000 is not so small as to justify not enforcing class action waiver].)
Slip Opinion, at 20-21.

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