Caveat Empty Box

by Cozen O'Connor

In a strong defense victory from earlier this year, the U.S. District Court for the Eastern District of California denied a proposed class of laptop purchasers the opportunity to proceed against Toshiba as a class, instead forcing individuals with complaints to engage in arbitration with the manufacturer.  In the decision, Herron v Best Buy Stores LP, Senior Judge Garland Burrell upheld the enforceability of an arbitration provision contained within the box packaging for Toshiba laptops–and only brought to the court’s attention two years after the case was initiated. 

The case, originally filed in state court on behalf of a proposed class of consumers who purchased Toshiba laptops at Best Buy, alleged violations of California’s Consumer Legal Remedies Act and California’s Unfair Competition Law.  The plaintiff claimed that the defendants misrepresented the lifespan of Toshiba laptop batteries, and as a result of these misrepresentations, the plaintiff (and his proposed class) were induced to purchase the laptops for a higher fee.  Importantly, a Limited Warranty was found in the box for each laptop and contained a capitalized and bold-faced arbitration provision.  The provision stated that any disputes between the customer and Toshiba “arising from or relating to” the Limited Warranty or use of the laptop would be resolved “exclusively and finally by binding arbitration.”  The provision continued:  “Customer understands that, in the absence of this provision, customer would have had a right to litigate disputes through a court in front of a judge or jury, including the right to litigation claims on a class-wide or class action basis, and that customer has expressly and knowingly waived those rights and agreed to resolve any disputes through binding arbitration … .”  Moreover, the laptop itself was sealed in a plastic bag, affixed to which was a sticker repeating the arbitration provision language.

The motion to compel arbitration arrived at a unique procedural posture.  The parties initially engaged in motion practice on the merits, which resulted in the filing of three amended complaints following partial grants of motions to dismiss.  Only upon the filing of the Third Amended Complaint – nearly two years after the case was originally filed – did Toshiba file a motion to compel arbitration.  In its motion, Toshiba argued that the plaintiff unequivocally agreed to submit his claims to arbitration, and that any delay in compelling such arbitration was not prejudicial to plaintiff and should therefore not preclude arbitration.  The plaintiff attacked Toshiba’s motion as “forum shopping,” pointing out that the case had been litigated on the merits for two years and that only upon losing on the merits did Toshiba attempt to move the case before an arbitration panel.  The plaintiff argued that the right to arbitrate had been waived and further argued that the arbitration clause in the packaging was provided only after the laptop was purchased; as such, arbitration was not agreed to and was rather only a “proposal for additional terms,” which the plaintiff had not accepted.  Finally, the plaintiff argued that the arbitration clause itself was unconscionable – procedurally, because it was a “form contract” that provided plaintiff only with a “take it or leave it” option, and substantively, because the arbitration clause was unclear as to the range of disputes over which it would govern.

In a concise, strongly-worded opinion, Judge Burrell gave little credence to the plaintiff’s concerns and forced the matter into arbitration.  The court first held that the placement of the arbitration provision in the laptop box – to be found only after its purchase – did not undermine the provision’s enforceability.  The court relied on existing case law that “contracts contained in boxes are no less enforceable than any other type of contract.”  The court also declined to find the arbitration provision unconscionable.  Rather than determining the issue of unconscionability, the court noted that the arbitration provision contained a delegation clause vesting the arbitration panel with the exclusive power to hear challenges to the validity of the agreement – including claims of unconscionability.  Finally, the court refused to find that Toshiba had waived its right to arbitrate the dispute.  Citing the “strong federal policy favoring enforcement of arbitration agreements,” the court dismissed the plaintiff’s concerns that he had already expended considerable resources and time litigating the case in court and his argument that Toshiba was merely seeking “a second bite at the apple” in an alternate forum.  The court summarily called these concerns “conclusory” and noted simply that the plaintiff had not met his high burden to demonstrate prejudice from the delay.  Notably, the court did not specifically address the lapse in time or the motion practice that had been initiated prior to the filing of the motion to compel.

Defendants should take comfort in the Herron ruling.  If there were ever circumstances that would defeat a strongly-worded arbitration provision, the two-year delay and extensive motion practice in this case would surely qualify.  And yet, the court gave these concerns the back of the hand, demonstrating that federal courts still really, really (really) want to find ways for cases to go to arbitration.  The case is continuing against Best Buy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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