California Courts Find That Class Action Waivers and Arbitration Clauses in Computer Sale Contracts Were Unenforceable

Two recent Northern California federal court decisions have held that arbitration, choice of law and class action waiver provisions in computer purchase contracts were not enforceable, and that the consumers could proceed with class action claims in federal court against the computer sellers.



In Brazil v. Dell, Inc., (N.D. Cal. No. 5:07-CV-01700 RMW, 8/3/07), the plaintiffs filed a class action claiming that Dell had misrepresented the price of its computers by artificially inflating prices before advertising discounts. Dell moved to stay the action and compel arbitration due to the following clause in the Dell contracts:

Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY . . . BETWEEN CUSTOMER AND DELL . . . SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) . . . . NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATED CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY.

Judge Ronald Whyte held in Brazil that:

• Although the purchase contract called for application of Texas law, California law should be applied because application of Texas law would violate a fundamental policy of California law.
• Despite a clause allowing the consumer to rescind the contract if the terms were unacceptable, the purchase contract was procedurally unconscionable because it was a contract of adhesion presented without an opportunity to meaningfully negotiate.
• Substantive unconscionability was also found because there was an allegation of a scheme to cheat large numbers of customers, and small damages would be suffered by many consumers.

In Oestreicher v. Alienware Corp. (N.D. Cal. No. 3:07-CV-00512 MHP, 8/10/07), the plaintiff had filed a class action claiming that Alienware had knowingly sold defective computers. Alienware moved to stay the case and compel arbitration. Judge Marilyn Patel refused to compel arbitration. Like Judge Whyte did in the Brazil decision, Judge Patel found that California law should be applied due to a conflict with the law provided in the contract (in this case, Florida law). Judge Patel concluded that the agreement was procedurally and substantively unconscionable, and that the class action and arbitration provisions should not be enforced.

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Credit Card Processors Sued for Knowingly Aiding and Abetting Web Site's Illegal Lottery Were Not Entitled to Dismissal

Case: Schultz v. Neovi Data Corp., No. G033879 (Cal. Ct. App. 6/15/07)

The One Sentence Summary: Complaint alleging that credit card processors had knowledge of and provided substantial assistance to web site's operation of illegal lottery, wherein consumers had to make online purchases for the chance to win expensive home electronics products, stated a cause of action for aiding and abetting unfair competition under California Business and Professions Code section 17200.


What They Were Fighting About:

Plaintiff Schultz alleged that defendant EZ Expo operated a web site "matrix" wherein a consumer could receive expensive home electronics products (such as a 50-inch plasma television) for a fraction of the price, if he paid a $150 fee for three "E-books" and if 50 other consumers also joined the same matrix after him. Defendants PaySystems and Ginix allegedly provided credit card processsing and billing services for EZ and were used by matrix customers to pay for their purchases of E-books.

Plaintiff's complaint pleaded, on behalf of himself and as a representative in a class action, an unfair competition cause of action against all defendants pursuant to California Business and Professions Code section 17200 et. seq. Plaintiff alleged that the credit card processors aided and abetted EZ's operation of an illegal lottery or pyramid scheme in violation of California statutes. Trial court sustained demurrers by PaySystems and Ginix (as well as defendants PayPal and Neovi) on the grounds that the complaint failed to state facts sufficient to constitute a cause of action for aiding and abetting unfair competition. Plaintiff appealed.

Court Holdings: Court of appeal reversed the granting of PaySystems' and Ginix's demurrers (while affirming as to PayPal and Neovi) and held that plaintiff had adequately pleaded facts to support aiding and abetting unfair competition. Court reasoned that:

• The elements of aiding and abetting an intentional tort by another are (1) knowing that the other's conduct constitutes a breach of duty, and (2) giving substantial assistance or encouragement to the other to so act. Plaintiff's complaint contained facts satisfying each.


• Plaintiff alleged that PaySystems and Ginix reviewed EZ's web site and recognized that it was an illegal lottery, that it generated substantial revenue, and that it could be very profitable for them as credit card processors. Plaintiff also claimed that PaySystems and Ginix knew that the money being paid by consumers for E-books was for purposes of participation in the lottery. These allegations satisfied the knowledge element.


• As for the substantial assistance or enouragement element, plaintiff alleged that PaySystems and Ginix authorized EZ to configure its web site so consumers could click on their logos and be linked directly to their sites for credit card payment processing. Plaintiff further alleged that they did this with the intent of aiding and abetting EZ's illegal lottery operation and realized that their services would "lend an aura of respectability" to EZ's operation and encourage consumer participation. These allegations were sufficient to defeat PaySystems' and Ginix's demurrers.


• By contrast, plaintiff's conclusory allegations did not plead sufficient facts to satisfy the elements of knowledge and substantial assistance as to defendants PayPal and Neovi.


• Court of appeal remanded the case as to defendants PaySystems and Ginix and instructed the trial court to give plaintiff the opportunity to amend the complain to plead facts satisfying the standing and class action requirements of section 17200 as amended by Proposition 64 in November 2004 (which added injury-in-fact requirement to section 17200 during pendency of plaintiff's appeal).

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