Radke v. Brenon

Supreme Court of Minnesota

271 Minn. 35 (1965)

ROGOSHESKE, Justice.

Defendants appeal from a judgment of the district court decreeing specific performance of a contract for the sale of real estate.

The judgment was entered upon findings made after trial that “subsequent to the Defendant acquiring” the property in question they “did offer to sell the property to the Plaintiff for the sum of Two Hundred Sixty-two ($262.00) Dollars, which offer the Plaintiff did accept”; and that “at all times relevant, the Plaintiff has been ready, willing and able to complete the agreement for the sale of Defendants’ property but the Defendants have refused to do so.” The court concluded that defendants “have wrongfully and improperly failed and refused” to deliver a deed of the property to plaintiff.

Resolving the conflicts in the evidence in plaintiff’s favor, as we must, these appear to be the facts. Plaintiff and defendants are neighbors owning adjoining lots in Wakefield Park addition in Ramsey County. At the times each acquired ownership, their lots and eight neighboring lots did not extend to the west shoreline of Wakefield Lake, located nearby. The strip of land between the shoreline of the lake and the east boundary of the platted lots was owned by [defendants]. … Preston Brenon, hereinafter referred to as defendant, was a licensed real estate agent. Following his purchase [of the strip of land], he had the property surveyed, and on June 28, 1960, he sent an identical letter to plaintiff and the eight other neighbors offering to sell them the irregular parcels that separated their lots from the lake. In the letter he explained that since he was interested only in that part of the strip adjoining his property, he had no desire to retain the remainder. He stated he had “no desire to make any profit on this transaction if everyone owning adjoining property is willing to buy their portion” and divide the cost “equally among all 10 including (him)self.” He itemized the total cost at $2,120 and offered to sell each lot for $212 on any terms agreeable. This letter was not signed by defendant but his name was typewritten thereon, he having authorized this and considered such to be tantamount to his signature. Previous to the receipt of this letter, plaintiff and defendant had discussed the latter’s intent of acquiring the property for the neighborhood on at least two occasions. About 2 weeks after plaintiff received this offer, he orally accepted it. Sometime later, plaintiff learned from a neighbor that two neighbors declined to purchase, and thus the divided cost of each lot was increased to $262. Although he was agreeable to pay the increase, he did not immediately so inform defendant. … In any event, it is clear that plaintiff accepted defendant’s offer on May 7, at which time plaintiff knew of the price increase. Defendant testified:

“Q. * * * And did he agree to buy that time?

“A. At that time he did."

… On August 14, plaintiff delivered to his attorney a check for $262 payable to defendants for the purpose of completing the sale. On August 16, plaintiff’s attorney wrote defendant informing him that he held the check for payment of the sale price to be delivered on receipt of a deed. Sometime after August 16, plaintiff received a letter from defendant dated August 16 informing him that the offer to sell was revoked.

The question is whether these facts establish a valid and enforceable contract for the sale of land. Defendants contend they do not.

As admitted by defendant, an oral contract to sell the land was made, and the trial court was clearly justified in so finding. There being no formal, integrated, written contract, however, the problem is whether the oral contract is unenforceable because it comes within Minn.St. 513.05¹ of the statute of frauds. Briefly, that provision decrees void any contract for the sale of lands unless the contract or some memorandum of the contract is in writing. The precise issue in this case is whether, under the circumstances, the letter written by defendant offering the land to plaintiff is a memorandum sufficient to satisfy the requirements of the statute.

The statute expresses a public policy of preventing the enforcement by means of fraud and perjury of contracts that were never in fact made. To inhibit perversion of this policy by those who would deny an oral contract actually made, the statute itself permits enforcement of an oral contract if there exists a note or memorandum as evidence of the contract. To the courts, then, is left promotion of the policy of the statute, either by denying enforcement urged by defrauders or by granting enforcement against wrongful repudiators. As an aid in this objective, the statute itself lists some requisites of a memorandum and this court has added others, so that we have some indication of what content a memorandum normally must have in order to be sufficient evidence of the contract.

The statute requires that the writing express the consideration and that it be subscribed by the party by whom the sale is to be made or by his lawful agent authorized in writing. This court has stated that the memorandum is sufficient when, in addition to the above requirements, it states expressly or by necessary implication the parties to the contract, the lands involved, and the general terms and conditions upon which the sale will be made.

These latter elements are clearly present in the letter written by defendant. Plaintiff’s name is included in the inside address heading the letter, and Brenon’s name is typewritten at the bottom. The land to be sold is positively delineated. The letter offers “their portion” to “everyone owning adjoining property,” and the survey map accompanying the letter depicts each tract. Considering the conversation both before and after the letter was sent, it is inconceivable that the parties could be uncertain concerning the land to be sold. As to other terms of the contract, such as manner of payment, Brenon merely held himself ready “to work out any kind of terms” with the purchasers.

The elements expressly required by statute are not so obvious. First, the consideration of $212 stated in the letter is not the same as the $262 tendered in accord with the oral understanding. Despite this discrepancy, we think that the letter sufficiently expresses the consideration because the $212 represented an equal share of the cost divided by all ten interested parties. As Brenon said in the letter, “I feel the only fair way to share the cost is to divide equally among all 10 including myself.” There is no dispute that the price was changed from that stated in the letter when two property owners declined to buy. The consideration then was simply a mathematical computation according to the formula specified in the letter.  We do not believe this variation in the dollar amount renders the letter’s expression of the consideration insufficient, especially since plaintiff paid more under the admitted agreement than he would have paid according to the letter.

The necessity of a subscription presents the final problem. A “subscription” is the same as a “signing,” and it is clear that Brenon’s typewritten name, which according to his testimony was typed with the intent that it be tantamount to a written signature, is a sufficient subscription. A problem here is that his wife, who owned the property with him in joint tenancy, apparently neither signed the letter nor authorized him in writing to sell her share. But this deficiency was at no time claimed or asserted before the trial court or in defendants’ brief to this court. It was suggested for the first time upon oral argument. If it is a fact, it was not a part of the theory upon which the case was tried and submitted. We must therefore adhere to our well-settled rule that an unlitigated issue may not be asserted for the first time on appeal.

We by no means intend to hold that Brenon’s letter would be a sufficient memorandum in every case. We will overlook technical requirements only if proof of the oral contract is clear and uncontradicted as in this case where defendant admitted that a contract had been made. But those technical requirements are only aids to discern where the truth lies in a given case, and we will not blindly apply those technicalities if they lead to a conclusion repugnant to commonsense. …

Most persuasive is defendant’s admission during trial that a contract was in fact made between plaintiff and himself. Although we have followed the majority rule that admission of the contract does not preclude assertion of the statute of frauds, an admission that a contract was made certainly cannot be ignored when all other evidence submitted supports the same conclusion. Even though it may be argued that the formal requirements contemplated by the statute are lacking, when all the evidence is taken into account we are of the opinion that the letter should be held a sufficient memorandum in this case. The policy of the statute of frauds would be perverted if the admitted contract were not enforced. The judgment of the trial court is therefore affirmed.

DF Activities Corp. v. Brown

United States Court of Appeals, Seventh Circuit

851 F.2d 920 (1988)

POSNER, Circuit Judge.

This appeal in a diversity breach of contract case raises an interesting question concerning the statute of frauds, in the context of a dispute over a chair of more than ordinary value. The plaintiff, DF Activities Corporation (owner of the Domino’s pizza chain), is controlled by a passionate enthusiast for the work of Frank Lloyd Wright. The defendant, Dorothy Brown, a resident of Lake Forest (a suburb of Chicago) lived for many years in a house designed by Frank Lloyd Wright—the Willits House—and became the owner of a chair that Wright had designed, the Willits Chair. This is a stark, high-backed, uncomfortable-looking chair of distinguished design that DF wanted to add to its art collection. In September and October 1986, Sarah–Ann Briggs, DF’s art director, negotiated with Dorothy Brown to buy the Willits Chair. DF contends—and Mrs. Brown denies—that she agreed in a phone conversation with Briggs on November 26 to sell the chair to DF for $60,000, payable in two equal installments, the first due on December 31 and the second on March 26. On December 3 Briggs wrote Brown a letter confirming the agreement, followed shortly by a check for $30,000. Two weeks later Brown returned the letter and the check with the following handwritten note at the bottom of the letter: “Since I did not hear from you until December and I spoke with you the middle of November, I have made other arrangements for the chair. It is no longer available for sale to you.” Sometime later Brown sold the chair for $198,000, precipitating this suit for the difference between the price at which the chair was sold and the contract price of $60,000. Brown moved under Fed.R.Civ.P. 12(b)(6) to dismiss the suit as barred by the statute of frauds in the Uniform Commercial Code. See UCC § 2–20 (The Code is, of course, in force in Illinois, and the substantive issues in this case are, all agree, governed by Illinois law.) Attached to the motion was Brown’s affidavit that she had never agreed to sell the chair to DF or its representative, Briggs. The affidavit also denied any recollection of a conversation with Briggs on November 26, and was accompanied by both a letter from Brown to Briggs dated September 20 withdrawing an offer to sell the chair and a letter from Briggs to Brown dated October 29 withdrawing DF’s offer to buy the chair.

The district judge granted the motion to dismiss and dismissed the suit. DF appeals, contending that although a contract for a sale of goods at a price of $500 or more is subject to the statute of frauds, the (alleged) oral contract made on November 26 may be within the statutory exception for cases where “the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made.” UCC § 2–201(3)(b). DF does not argue that Brown’s handwritten note at the bottom of Briggs’ letter is sufficient acknowledgment of a contract to bring the case within the exemption in section 2–201(1).

At first glance DF’s case may seem quite hopeless. Far from admitting in her pleading, testimony, or otherwise in court that a contract for sale was made, Mrs. Brown denied under oath that a contract had been made. DF argues, however, that if it could depose her, maybe she would admit in her deposition that the affidavit was in error, that she had talked to Briggs on November 26, and that they had agreed to the sale of the chair on the terms contained in Briggs’ letter of confirmation to her.

There is remarkably little authority on the precise question raised by this appeal—whether a sworn denial ends the case or the plaintiff may press on, and insist on discovery. In fact we have found no authority at the appellate level, state or federal. Many cases hold, it is true, that the defendant in a suit on an oral contract apparently made unenforceable by the statute of frauds cannot block discovery aimed at extracting an admission that the contract was made, simply by moving to dismiss the suit on the basis of the statute of frauds or by denying in the answer to the complaint that a contract had been made. …When there is a bare motion to dismiss, or an answer, with no evidentiary materials, the possibility remains a live one that, if asked under oath whether a contract had been made, the defendant would admit it had been. The only way to test the proposition is for the plaintiff to take the defendant’s deposition, or, if there is no discovery, to call the defendant as an adverse witness at trial. But where as in this case the defendant swears in an affidavit that there was no contract, we see no point in keeping the lawsuit alive. Of course the defendant may blurt out an admission in a deposition, but this is hardly likely, especially since by doing so he may be admitting to having perjured himself in his affidavit. Stranger things have happened, but remote possibilities do not warrant subjecting the parties and the judiciary to proceedings almost certain to be futile.

A plaintiff cannot withstand summary judgment by arguing that although in pretrial discovery he has gathered no evidence of the defendant’s liability, his luck may improve at trial. … By the same token, a plaintiff in a suit on a contract within the statute of frauds should not be allowed to resist a motion to dismiss, backed by an affidavit that the defendant denies the contract was made, by arguing that his luck may improve in discovery. Just as summary judgment proceedings differ from trials, so the conditions of a deposition differ from the conditions in which an affidavit is prepared; affidavits in litigation are prepared by lawyers, and merely signed by affiants. Yet to allow an affiant to be deposed by opposing counsel would be to invite the unedifying form of discovery in which the examining lawyer tries to put words in the witness’s mouth and construe them as admissions.

The history of the judicial-admission exception to the statute of frauds, well told in Stevens, Ethics and the Statute of Frauds, 37 Cornell L.Q. 355 (1952), reinforces our conclusion. The exception began with common-sense recognition that if the defendant admitted in a pleading that he had made a contract with the plaintiff, the purpose of the statute of frauds—protection against fraudulent or otherwise false contractual claims—was fullfilled. (The situation would be quite otherwise, of course, with an oral admission, for a plaintiff willing to testify falsely to the existence of a contract would be equally willing to testify falsely to the defendant’s having admitted the existence of the contract.) Toward the end of the eighteenth century the courts began to reject the exception, fearing that it was an invitation to the defendant to perjure himself. Later the pendulum swung again, and the exception is now firmly established. The concern with perjury that caused the courts in the middle period to reject the exception supports the position taken by Mrs. Brown in this case. She has sworn under oath that she did not agree to sell the Willits Chair to DF. DF wants an opportunity to depose her in the hope that she can be induced to change her testimony. But if she changes her testimony this will be virtually an admission that she perjured herself in her affidavit (for it is hardly likely that her denial was based simply on a faulty recollection). She is not likely to do this. What is possible is that her testimony will be sufficiently ambiguous to enable DF to argue that there should be still further factual investigation—perhaps a full-fledged trial at which Mrs. Brown will be questioned again about the existence of the contract.

With such possibilities for protraction, the statute of frauds becomes a defense of meager value. And yet it seems to us as it did to the framers of the Uniform Commercial Code that the statute of frauds serves an important purpose in a system such as ours that does not require that all contracts be in writing in order to be enforceable and that allows juries of lay persons to decide commercial cases. The methods of judicial factfinding do not distinguish unerringly between true and false testimony, and are in any event very expensive. People deserve some protection against the risks and costs of being hauled into court and accused of owing money on the basis of an unacknowledged promise. And being deposed is scarcely less unpleasant than being cross-examined—indeed, often it is more unpleasant, because the examining lawyer is not inhibited by the presence of a judge or jury who might resent hectoring tactics. The transcripts of depositions are often very ugly documents.

… The chance that at a deposition the defendant might be badgered into withdrawing his denial is too remote to justify prolonging an effort to enforce an oral contract in the teeth of the statute of frauds. If Dorothy Brown did agree on November 27 to sell the chair to DF at a bargain price, it behooved Briggs to get Brown’s signature on the dotted line, posthaste.

Affirmed.

AFFIDAVIT OF DOROTHEA F. BROWN

I, Dorothea F. Brown, having been first duly deposed and sworn to all states as follows:

i. My name is Dorothea F. Brown and I reside at 671 Beverly Place, Lake Forest, Illinois.

ii. I am the defendant in the above-captioned case

iii. On August 19,1986, I drafted a letter to Domino’s Pizza Incorporated regarding my Frank Lloyd Wright chair, which is the subject matter of this suit.

iv. In response to my letter, Helen M. McNulty drafted her August 26, 1986 correspondence. (exhibit A)

v. For a short while thereafter, I negotiated with Sarah Briggs of Domino’s Pizza relative to a possible sale of my chair to Domino Farms.

vi. I terminated my negotiation with the Plaintiff, herein with my correspondence dated September 20, 1986. (exhibit B)

vii. On October 29, 1986, the agent working on behalf of Domino’s Farms drafted her letter to terminate further negotiation with respect to the chair, (exhibit C)

viii. Thereafter, I was contacted by a person who represented that she was Sarah Briggs and in a November 6, 1986 phone conversation, she further discussed the matter with me, but I did not agree to sell my chair to them.

ix. To the best of my recollection, I had no conversation with Sarah Ann Briggs on November 26, 1986.

x. I did not accept any offer from Domino’s Farms or Sarah Briggs for their purchase of my chair.

xi. I did not sign any agreement to sell my chair to DF Activities, Sarah Briggs, or Domino’s Farms nor was any person or entity authorized to enter into any alleged agreement in my behalf.

xii. I have not accepted any payment whatsoever from Domino’s Farms of Sarah Briggs with respect to this matter.

Further deponent saith not.

Professional Bull Riders, Inc. v. Autozone, Inc.

Supreme Court of Colorado, En Banc.

113 P.3d 757 (2005)

COATS, Justice.

Pursuant to 10th Cir. R. 27.1, The United States Court of Appeals for the Tenth Circuit certified to this court the following question:

Under Col.Rev.Stat. § 38–10–112(1)(a), is an oral agreement void when: (1) the agreement contemplates performance for a definite period of more than one year but (2) allows the party to be charged an option to terminate the agreement by a certain date less than a year from the making of the agreement and when (3) the party to be charged has not exercised that option to terminate the agreement?

Pursuant to C.A.R. 21.1, we agreed to answer the question and do so now (in the context provided us) in the negative.

I.

The certifying court provided the following statement of factual and procedural circumstances, giving context to the question.

In the years leading up to this dispute, the defendant AutoZone sponsored events conducted by the plaintiff Professional Bull Riders (PBR). For the years 2001 and 2002, PBR prepared a written agreement to provide for AutoZone’s sponsorship. Section I of that agreement states:

The term of this agreement shall commence as of December 29, 2000 and end on December 31, 2002, unless terminated earlier in accordance with the provisions of this Agreement. Notwithstanding the preceding sentence, AutoZone may, at its option, elect to terminate this Agreement and its sponsorship of PBR and the Series effective as of the end of the Finals in 2001, by giving PBR written notice of termination by no later than August 15, 2001.

AutoZone never signed this agreement. However, PBR alleges that by its actions, AutoZone tacitly accepted its terms set forth in the proposed written agreement and that, as a result, the parties entered into an oral agreement mirroring the terms set forth in writing.

There appears to be a factual dispute as to the communications between the parties during 2001. However, it appears undisputed that in January 2002, AutoZone notified PBR that AutoZone would not be sponsoring PBR events in 2002. However, despite this notice, AutoZone alleges, “PBR continued to use AutoZone’s protected trade name and service mark for an indeterminate period of time in its programs.”

PBR then sued AutoZone for breach of the oral sponsorship agreement. Speedbar, a wholly-owned subsidiary of AutoZone and the owner of the trade name and service mark, “AutoZone,” intervened. AutoZone and Speedbar filed a counterclaim alleging service and trademark infringement, unfair competition, and service mark dilution.

As to PBR’s breach of contract claim, the district court granted summary judgment to AutoZone. The court reasoned that the oral contract could not be performed within one year and was therefore unenforceable under the Colorado statute of frauds, Col.Rev.Stat. § 38–10–112, which provides, in part:

(1) Except for contracts for the sale of goods ... and lease contracts ..., in the following cases every agreement shall be void, unless such agreement or some note or memorandum thereof is in writing and subscribed by the party charged therewith:

(a) Every agreement that by the terms is not to be performed within one year after the making thereof.

The district court explained:

Although no Colorado court has ruled on the question of whether the statute of frauds governs an oral contract which, by its express terms, is to last for more than one year but which contains a provision allowing one party to terminate the contract before the end of the first year, case law from other jurisdictions indicates that the statute of frauds will bar an action on verbal agreements that the parties intend to put into writing. For example, in Klinke v. Famous Recipe Fried Chicken, Inc., [24 Wash.App. 202,] 600 P.2d 1034 (Wash.Ct.App.1979), after noting the general rule that “a verbal agreement to put in writing a contract which will require more than a year to be performed is within the statute of frauds and thus unenforceable,” 600 P.2d at 1037, the court held that “the fact that either party has an option to put an end to the contract within a year does not take it out of the operation of the statute if, independent of the exercise of such power, the agreement cannot be performed within a year.” Id. at 1038.

The district court reasoned that the purported oral contract provided for a term of two years and was thus unenforceable.

II.

The origin of the statute of frauds traces to the English parliament of 1677, which adopted “An Act for Prevention of Frauds and Perjuries,” commonly known as the Statute of Frauds. The overriding purpose of the Statute of Frauds was to prevent the perpetration of fraud by the device of perjury While the English statute of frauds has since been repealed, almost every state has enacted (and currently has in force) a statute containing language substantially similar to portions of the original act.

Few indicators of the precise intent of the framers of the original English provisions exist. Commentators have noted that the purpose of the one-year provision is especially puzzling. Due to this provision’s questionable effectiveness in carrying out the general purposes of the statute, under virtually any rationale, courts have tended to construe it narrowly, to void the fewest number of oral contracts. The provision is therefore universally understood to apply only to agreements that, by their terms, are incapable of being performed within one year.

Nevertheless, courts and commentators have disagreed sharply about the effect of various contingencies that may result in termination of an agreement in less than a year. Debate persists about whether particular kinds of termination amount to performance or merely a defeasance short of breach, such as annulment, frustration of the purposes of the contract, or excuse for nonperformance. Disagreement among authorities is particularly prevalent concerning options for one or both parties to terminate merely by giving notice. See 2 Farnsworth, § 6.4, at 129–130 (stating that while some courts have held that a contract is within the statute even though it provides that one or both parties have the power to terminate the contract within one year of its making, there is a strong contrary view, with a growing number of courts coming to regard a contract as not within the statute if one party can terminate within a year); 4 Caroline N. Brown, Corbin on Contracts § 19.6, at 603–04 (Joseph M. Perillo ed., Revised ed.1997) (stating that a contract with an option to terminate within a year should “be held not within the one year clause but a good many cases take the contrary view”).

While there is little agreement whether an option to terminate should itself be considered an alternative way of performing, compare Hopper v. Lennen & Mitchell, Inc., 146 F.2d 364 (9th Cir.1944) (holding that “the contract would be fulfilled in a sense originally contemplated by the parties,” either by performing without exercising option to terminate or by performing until exercising option), and Johnston v. Bowersock, 62 Kan. 148, 61 P. 740, 744 (1900) (holding that if termination is authorized then it is not a breach and “if not a breach, it must be performance”), with French v. Sabey Corp., 134 Wash.2d 547, 951 P.2d 260 (1998) (holding that option to end contract within a year does not take it out of the statute if, independent of option, the agreement cannot be performed within a year), there is, at the same time, little question that a promise of two or more performances, in the alternative, does not fall within the one-year provision if any one of the alternatives could be fully performed within one year. 2 Farnsworth, § 6.4, at 133 (“If a party’s performance can be rendered in two or more ways, the contract is not within the one-year provision if any of the alternatives can be performed within the one-year period.

Whether a contract actually contemplates alternate performance obligations or merely provides an excuse for nonperformance, however, necessarily depends on the purposes of the parties, as expressed in the terms of the contract. Restatement (Second) of Contracts § 130 cmt. b (2004) (“This distinction between performance and excuse for nonperformance is sometimes tenuous; it depends on the terms and the circumstances, particularly on whether the essential purposes of the parties will be attained.”). It does not matter which party has the right to name the alternative, 4 Corbin, § 19.11; Calamari, § 302, at 475 n. 7, as long as the agreement contemplates that the election will establish the performance obligations of the parties rather than merely relieving the electing party of its obligations under the agreement. In keeping with the accepted narrow construction of the one-year provision of the statute of frauds, no contract that may be “fairly and reasonably interpreted such that it may be performed within one year,” Cron v. Hargro Fabrics, Inc., 91 N.Y.2d 362, 670 N.Y.S.2d 973, 694 N.E.2d 56 (1998), will be voided by it.

III.

Colorado enacted the one-year provision of the statute of frauds in 1861, drawing heavily from the English statute, and the language of that provision has never been amended. See Sec. 12, 1861 Colo. Sess. Laws 241 (currently § 38–10–112(1)(a), C.R.S. (2004)). Although we have not before expressly addressed an option like the one presented by the certification, we have long construed the one-year provision narrowly, to bring within the statute only those agreements that exclude, by their very terms, the possibility of performance within one year. If the agreement “could have been performed” within one year, the statute is inapplicable. Kuhlmann v. McCormack, 116 Colo. 300, 302, 180 P.2d 863, 864 (1947). That an agreement was not actually performed within one year of its making is, by this construction, clearly of no consequence in determining the applicability of the statute of frauds.

As described by the Tenth Circuit, the agreement that is the subject of its certification required AutoZone to sponsor “PBR and the Series.” With regard to the length of AutoZone’s required sponsorship, however, the agreement provided an election. By its own terms, the sponsorship agreement was to run for two seasons, unless sooner terminated as contemplated by the agreement itself. The agreement then expressly left to AutoZone the choice to terminate not only the Agreement, but also its obligation of sponsorship, effective upon the conclusion of only one season.

While the agreement was couched in terms of an agreement to sponsor for two seasons, with an option to terminate after sponsoring for only one season, it cannot be reasonably understood as other than an agreement of sponsorship for either one or two seasons, at AutoZone’s choice. The agreement did not purport to grant AutoZone an option to terminate the agreement at will or upon the occurrence of some particular event; rather it provided AutoZone with two alternative ways of satisfying its obligations as contemplated by the agreement. Although the agreement contemplated performance for two seasons (a definite period of more than one year), if AutoZone chose that option, it also contemplated that AutoZone could completely perform its obligation by sponsoring PBR for one full season. Whether or not AutoZone effectively elected its option to limit its sponsorship obligation to only one season, the agreement expressly provided, by its owns terms, an alternative performance that could be completed in less than one year.

Under the circumstances of this case, it is unnecessary for us to decide whether an option to terminate a contract must always be construed as an alternative and sufficient means of performance. Where the terms of an agreement can fairly and reasonably be interpreted to define alternate obligations, one or more of which can be performed within one year, the agreement in question may be fairly and reasonably interpreted such that it may be performed within one year. The one-year provision therefore does not bring such an agreement within the statute of frauds. And at least where, as here, the word “terminate” not only applies to the agreement itself but expressly limits the electing party’s performance obligation to a specific task—sponsorship for one season—an interpretation of the election as defining alternate obligations is not only fair and reasonable, it is clear.

IV.

Because exercise of the option to terminate could reasonably be construed, by the terms of the agreement, to constitute complete performance of AutoZone’s sponsorship obligation, whether or not it effectively exercised that option, nothing in § 38–10–112(1)(a), C.R.S. (2004), renders the agreement void. We therefore answer the certified question in the negative.

Halpert v. Rosenthal

Supreme Court of Rhode Island

107 R.I. 406 (1970)

KELLEHER, Justice.

This is a civil action wherein the plaintiff vendor seeks damages for the breach by the defendant vendee of a contract for the sale of real estate. The defendant filed a counterclaim in which he sought the return of his deposit. A jury trial was held in the Superior Court. The jury found for the defendant and judgment followed. The case is before us on the plaintiff’s appeal.

On February 21, 1967, the parties hereto entered into a real estate agreement whereby plaintiff agreed to convey a one-family house located in Providence on the southeasterly corner of Wayland and Upton Avenues to defendant for the sum of $54,000. The defendant paid a deposit of $2,000 to plaintiff. The agreement provided for the delivery of the deed and the payment of the balance of the purchase price by June 30, 1967.

On May 17, 1967, a termite inspection was made of the premises, and it was discovered that the house was inhabited by termites. The defendant then notified plaintiff that, because of the termite infestation, he was not going to purchase the property. The defendant did not appear for the title closing which plaintiff had scheduled for June 30, 1967.

The plaintiff immediately commenced this suit. Her complaint prayed for specific performance or monetary damages. When the case came on for trial, the property had been sold to another buyer for the sum of $35,000. The plaintiff then sought to recover from defendant the $19,000 difference between the selling price called for in the sales agreement and the actual selling price. The defendant in his answer alleged that plaintiff and her agent had, during the pre-agreement negotiation, intentionally misrepresented the house as being free of termites. The defendant’s counterclaim sought the return of the $2,000 deposit.

* * *

Since we consider only the evidence favorable to defendant, we shall set forth defendant’s version of three different occasions in 1967 when the alleged misrepresentations relative to absence of any termites were made.

1. In early February, defendant and his wife inspected the Halpert home. They asked the agent about termites and he told them that there was no termite problem and that he had never experienced any termite problem with any of the houses he sold in the East Side section of Providence.
2. Later on in February, defendant, his wife, his sister-in-law and his brother-in-law met plaintiff. The brother-in-law inquired about the presence of termites; plaintiff said that there were no termites in the house.
3. When defendant was about to sign the purchase and sales agreement, he asked plaintiff’s real estate agent whether it might not be advisable if the home be inspected for termites before the agreement was signed. The agent told defendant that such a step was unnecessary because there were no termite problems in the house.

...

The defendant concedes that there was no evidence which shows that plaintiff or her agent knowingly made false statements as to the existence of the termites but he maintains that an innocent misrepresentation of a material fact is grounds for rescission of a contract where, as here, a party relies to his detriment on the misrepresentation.

…

The distinction between a claim for damages for intentional deceit and a claim for rescission is well defined. Deceit is a tort action, and it requires some degree of culpability on the misrepresenter’s part. An individual who sues in an action of deceit based on fraud has the burden of proving that the defendant in making the statements knew they were false and intended to deceive him. On the other hand, a suit to rescind an agreement induced by fraud sounds in contract. It is this latter aspect of fraud that we are concerned with in this case, and the pivotal issue before us is whether an innocent misrepresentation of a material fact warrants the granting of a claim for rescission. We believe that it does.

When he denied plaintiff’s motion, the trial justice indicated that a false, though innocent, misrepresentation of a fact made as though of one’s knowledge may be the basis for the rescission of a contract. While this issue is one of first impression in this state, it is clear that the trial judge’s action finds support in the overwhelming weight of decision and textual authority which has established the rule that where one induces another to enter into a contract by means of a material misrepresentation, the latter may rescind the contract. It does not matter if the representation was ‘innocent’ or fraudulent.

In 12 Williston, supra, § 1500 at 400-01, Professor Jaeger states:

"It is not necessary, in order that a contract may be rescinded for fraud or misrepresentation, that the party making the misrepresentation should have known that it was false. Innocent misrepresentation is sufficient, for though the representation may have been made innocently, it would be unjust and inequitable to permit a person who has made false representations, even innocently, to retain the fruits of a bargain induced by such representations."

This statement of law is in accord with Restatement of Contracts,§476 at 908 which states:

"Where a party is induced to enter into a transaction with another party that he was under no duty to enter into by means of the latter’s fraud or material misrepresentation, the transaction is voidable as against the latter * * *."

Misrepresentation is defined as

"* * * any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts." Restatement of Contracts,§470 at 890-91.

The comment following this section explains that a misrepresentation may be innocent, negligent or known to be false. A misrepresentation becomes material when it becomes likely to affect the conduct of a reasonable man with reference to a transaction with another person. Restatement of Contracts, § 470(2) at 891.

It is true that some courts require proof of knowledge of the falsity of the misrepresentation before a contract may be invalidated. However, the weight of authority follows the view that the misrepresenter’s good faith is immaterial. We believe this view the better one.

A misrepresentation, even though innocently made, may be actionable, if made and relied on as a positive statement of fact. The question to be resolved in determining whether a wrong committed as the result of an innocent misrepresentation may be rectified is succinctly stated in 12 Williston, supra, §1510 at 462 as follows:

"When a defendant has induced another to act by representations false in fact although not dishonestly made, and damage has directly resulted from the action taken, who should bear the loss?"

The question we submit is rhetorical. The answer is obvious. Simple justice demands that the speaker be held responsible. Accordingly, we hold that here defendant vendee could maintain his counterclaim.

* * *

Before leaving this phase of plaintiff’s appeal, we think it appropriate that we allude to the tendency of many courts to equate an innocent misrepresentation with some species of fraud. Usually the word "fraud" connotes a conscious dishonest conduct on the part of the misrepresenter. Fraud, however, is not present if the speaker actually believes that what he states as the truth is the truth. We believe that it would be better if an innocent misrepresentation was not described as some specie of fraud. Unqualified statements imply certainty. Reliance is more likely to be placed on a positive statement of fact than a mere expression of opinion or a qualified statement. The speaker who uses the unqualified statement does so at his peril. The risk of falsity is his. If he is to be liable for what he states, the liability is imposed because he is to be held strictly accountable for his words. …

* * *

The appeal of the plaintiff is denied and dismissed, and the case is remanded to the Superior Court for entry of judgment thereon.

Swinton v. Whitinsville Savings Bank

Supreme Judicial Court of Massachusetts

311 Mass. 677 (1942)

QUA, Justice.

The declaration alleges that on or about September 12, 1938, the defendant sold the plaintiff a house in Newton to be occupied by the plaintiff and his family as a dwelling; that at the time of the sale the house “was infested with termites, an insect that is most dangerous and destructive to buildings;” that the defendant knew the house was so infested; that the plaintiff could not readily observe this condition upon inspection; that “knowing the internal destruction that these insects were creating in said house,” the defendant falsely and fraudulently concealed from the plaintiff its true condition; that the plaintiff at the time of his purchase had no knowledge of the termites, exercised due care thereafter, and learned of them about August 30, 1940; and that, because of the destruction that was being done and the dangerous condition that was being created by the termites, the plaintiff was put to great expense for repairs and for the installation of termite control in order to prevent the loss and destruction of said house.

There is no allegation of any false statement or representation, or of the uttering of a half truth which may be tantamount to a falsehood. There is no intimation that the defendant by any means prevented the plaintiff from acquiring information as to the condition of the house. There is nothing to show any fiduciary relation between the parties, or that the plaintiff stood in a position of confidence toward or dependence upon the defendant. So far as appears the parties made a business deal at arm’s length. The charge is concealment and nothing more; and it is concealment in the simple sense of mere failure to reveal, with nothing to show any peculiar duty to speak. The characterization of the concealment as false and fraudulent of course adds nothing in the absence of further allegations of fact.

If this defendant is liable on this declaration every seller is liable who fails to disclose any nonapparent defect known to him in the subject of the sale which materially reduces its value and which the buyer fails to discover. Similarly it would seem that every buyer would be liable who fails to disclose any nonapparent virtue known to him in the subject of the purchase which materially enhances its value and of which the seller is ignorant. The law has not yet, we believe, reached the point of imposing upon the frailties of human nature a standard so idealistic as this. That the particular case here stated by the plaintiff possesses a certain appeal to the moral sense is scarcely to be denied. Probably the reason is to be found in the facts that the infestation of buildings by termites has not been common in Massachusetts and constitutes a concealed risk against which buyers are off their guard. But the law cannot provide special rules for termites and can hardly attempt to determine liability according to the varying probabilities of the existence and discovery of different possible defects in the subjects of trade. The rule of nonliability for bare nondisclosure has been stated and followed by this court in [a series of cases].

The order sustaining the demurrer is affirmed, and judgment is to be entered for the defendant.

So ordered.

Weintraub v. Krobatsch

Supreme Court of New Jersey

64 N.J. 445 (1974)

JACOBS, J.

…

Mrs. Weintraub owned and occupied a six-year-old Englishtown home which she placed in the hands of a real estate broker (The Serafin Agency, Inc.) for sale. The Krobatsches were interested in purchasing the home, examined it while it was illuminated and found it suitable. On June 30, 1971 Mrs. Weintraub, as seller, and the Krobatsches, as purchasers, entered into a contract for the sale of the property for $42,500. The contract provided that the purchasers had inspected the property and were fully satisfied with its physical condition, that no representations had been made and that no responsibility was assumed by the seller as to the present or future condition of the premises. A deposit of $4,250 was sent by the purchasers to the broker to be held in escrow pending the closing of the transaction. The purchasers requested that the seller have the house fumigated and that was done. A fire after the signing of the contract caused damage but the purchasers indicated readiness that there be adjustment at closing.

During the evening of August 25, 1971, prior to closing, the purchasers entered the house, then unoccupied, and as they turned the lights on they were, as described in their petition for certification, “astonished to see roaches literally running in all directions, up the walls, drapes, etc.” On the following day their attorney wrote a letter to Mrs. Weintraub, care of her New York law firm, advising that on the previous day “it was discovered that the house is infested with vermin despite the fact that an exterminator has only recently serviced the house” and asserting that “the presence of vermin in such great quantities, particularly after the exterminator was done, rendered the house as unfit for human habitation at this time and therefore, the contract is rescinded.” On September 2, 1971 an exterminator wrote to Mr. Krobatsch advising that he had examined the premises and that “cockroaches were found to have infested the entire house.” He said he could eliminate them for a relatively modest charge by two treatments with a twenty-one day interval but that it would be necessary to remove the carpeting “to properly treat all the infested areas.”

Mrs. Weintraub rejected the rescission by the purchasers and filed an action in the Law Division joining them and the broker as defendants. Though she originally sought specific performance she later confined her claim to damages in the sum of $4,250, representing the deposit held in escrow by the broker. The broker filed an answer and counterclaim seeking payment of its commission in the sum of $2,550. There were opposing motions for summary judgment by the purchasers and Mrs. Weintraub, along with a motion for summary judgment by the broker for its commission. At the argument on the motions it was evident that the purchasers were claiming fraudulent concealment or nondisclosure by the seller as the basis for their rescission. Thus at one point their attorney said: “Your honor, I would point out, and it is in my clients’ affidavit, every time that they inspected this house prior to this time every light in the place was illuminated. Now, these insects are nocturnal by nature and that is not a point I think I have to prove through someone. I think Webster’s dictionary is sufficient. By keeping the lights on it keeps them out of sight. These sellers had to know they had this problem. You could not live in a house this infested without knowing about it.”

…

Before us the purchasers contend that they were entitled to a trial on the issue of whether there was fraudulent concealment or nondisclosure entitling them to rescind; if there was, then clearly they were under no liability to either the seller or the broker and would be entitled to the return of their deposit held by the broker in escrow.

Mrs. Weintraub asserts that she was unaware of the infestation and the Krobatsches acknowledge that, if that was so, then there was no fraudulent concealment or nondisclosure on her part and their claim must fall. But the purchasers allege that she was in fact aware of the infestation and at this stage of the proceedings we must assume that to be true. She contends, however, that even if she were fully aware she would have been under no duty to speak and that consequently no complaint by the purchasers may legally be grounded on her silence. She relies primarily on cases such as Swinton v Whitinsville National Bank… Swinton is pertinent but, as Dean Prosser has noted, it is one of a line of “singularly unappetizing cases” which are surely out of tune with our times.

In Swinton the plaintiff purchased a house from the defendant and after he occupied it he found it to be infested with termites. The defendant had made no verbal or written representations but the plaintiff, asserting that the defendant knew of the termites and was under a duty to speak, filed a complaint for damages grounded on fraudulent concealment. The Supreme Judicial Court of Massachusetts sustained a demurrer to the complaint and entered judgment for the defendant. In the course of its opinion the court acknowledged that “the plaintiff possesses a certain appeal to the moral sense” but concluded that the law has not “reached the point of imposing upon the frailties of human nature a standard so idealistic as this.” 42 N.E.2d at 808—809. That was written several decades ago and we are far from certain that it represents views held by the current members of the Massachusetts court. In any event we are certain that it does not represent our sense of justice or fair dealing and it has understandably been rejected in persuasive opinions elsewhere. [string cite omitted]

In Obde v. Schlemeyer, Supra, 56 Wash.2d 449, 353 P.2d 672, the defendants sold an apartment house to the plaintiff. The house was termite infested but that fact was not disclosed by the sellers to the purchasers who later sued for damages alleging fraudulent concealment. The sellers contended that they were under no obligation whatever to speak out and they relied heavily on the decision of the Massachusetts court in Swinton. The Supreme Court of Washington flatly rejected their contention, holding that though the parties had dealt at arms length the sellers were under “a duty to inform the plaintiffs of the termite condition” of which they were fully aware. In the course of its opinion the court quoted approvingly from Dean Keeton’s article Supra, in 15 Tex.L.Rev. 1. There the author first expressed his thought that when Lord Cairns suggested … that there was no duty to disclose facts, no matter how "morally censurable," he was expressing nineteenth century law as shaped by an individualistic philosophy based on freedom of contracts and unconcerned with morals. He then made the following comments which fairly embody a currently acceptable principle on which the holding in Obde may be said to be grounded:

“In the present stage of the law, the decisions show a drawing away from this idea, and there can be seen an attempt by many courts to reach a just result in so far as possible, but yet maintaining the degree of certainty which the law must have. The statement may often be found that if either party to a contract of sale conceals or suppresses a material fact which he is in good faith bound to disclose then his silence is fraudulent.”

The attitude of the courts toward nondisclosure is undergoing a change and contrary to Lord Cairns’ famous remark it would seem that the object of the law in these cases should be to impose on parties to the transaction a duty to speak whenever justice, equity, and fair dealing demand it. This statement is made only with reference to instances where the party to be charged is an actor in the transaction. This duty to speak does not result from an implied representation by silence, but exists because a refusal to speak constitutes unfair conduct.

* * *

If the trial judge finds such deliberate concealment or nondisclosure of the latent infestation not observable by the purchasers on their inspection, he will still be called upon to determine whether, in the light of the full presentation before him, the concealment or nondisclosure was of such significant nature as to justify rescission. Minor conditions which ordinary sellers and purchasers would reasonably disregard as of little or no materiality in the transaction would clearly not call for judicial intervention. While the described condition may not have been quite as major as in the termite cases which were concerned with structural impairments, to the purchasers here it apparently was of such magnitude and was so repulsive as to cause them to rescind immediately though they had earlier indicated readiness that there be adjustment at closing for damage resulting from a fire which occurred after the contract was signed. We are not prepared at this time to say that on their showing they acted either unreasonably or without equitable justification.

Our courts have come a long way since the days when the judicial emphasis was on formal rules and ancient precedents rather than on modern concepts of justice and fair dealing. While admittedly our law has progressed more slowly in the real property field than in other fields, there have been notable stirrings even there. ... [W]e are satisfied that current principles grounded on justice and fair dealing, embraced throughout this opinion, clearly call for a full trial below; to that end the judgment entered in the Appellate Division is:

Reversed and Remanded.

Williams v. Walker-Thomas Furniture Co.

United States Court of Appeals District of Columbia Circuit

350 F.2d 445 (1965)

SKELLY WRIGHT, Circuit Judge:

Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item.

The contract further provided that

“the amount of each periodical installment payment to be made by (purchaser) to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by (purchaser) under such prior leases, bills or accounts; and all payments now and hereafter made by (purchaser) shall be credited pro rata on all outstanding leases, bills and accounts due the Company by (purchaser) at the time each such payment is made.”

The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings.

On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95.¹ She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants’ motion for leave to appeal to this court.

Appellants’ principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

“Appellant’s second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant’s financial position. The reverse side of the stereo contract listed the name of appellant’s social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.

“We cannot condemn too strongly appellee’s conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable. While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. …

Since we have never adopted or rejected such a rule, the question here presented is actually one of first impression.

Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived. Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced.

Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.

In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered ‘in the light of the general commercial background and the commercial needs of the particular trade or case.’ Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” 1 CORBIN, op. cit. supra Note 2. We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract.

Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.

So ordered.

DANAHER, Circuit Judge (dissenting):

The District of Columbia Court of Appeals obviously was as unhappy about the situation here presented as any of us can possibly be. Its opinion in the Williams case, quoted in the majority text, concludes: “We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

My view is thus summed up by an able court which made no finding that there had actually been sharp practice. Rather the appellant seems to have known precisely where she stood.

There are many aspects of public policy here involved. What is a luxury to some may seem an outright necessity to others. Is public oversight to be required of the expenditures of relief funds? A washing machine, e.g., in the hands of a relief client might become a fruitful source of income. Many relief clients may well need credit, and certain business establishments will take long chances on the sale of items, expecting their pricing policies will afford a degree of protection commensurate with the risk. …

I mention such matters only to emphasize the desirability of a cautious approach to any such problem, particularly since the law for so long has allowed parties such great latitude in making their own contracts. I dare say there must annually be thousands upon thousands of installment credit transactions in this jurisdiction, and one can only speculate as to the effect the decision in these cases will have.¹

I join the District of Columbia Court of Appeals in its disposition of the issues.

Uniform Commercial Code § 2-302. Unconscionable Contract or Clause.

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

OFFICIAL COMMENT

Purposes:

1. This section is intended to make it possible for the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract. This section is intended to allow the court to pass directly on the unconscionability of the contract or particular clause therein and to make a conclusion of law as to its unconscionability. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection (2) makes it clear that it is proper for the court to hear evidence upon these questions. The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and not of disturbance of allocation of risks because of superior bargaining power. …

2. Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.

3. The present section is addressed to the court, and the decision is to be made by it. The commercial evidence referred to in subsection (2) is for the court’s consideration, not the jury’s. Only the agreement which results from the court’s action on these matters is to be submitted to the general triers of the facts.

Heckman v. Live Nation Entertainment, Inc.

United States Court of Appeals, Ninth Circuit

120 F.4th 670 (9^th Cir. 2024)

FLETCHER, Circuit Judge:

Plaintiffs-Appellees Skot Heckman, Luis Ponce, Jeanene Popp, and Jacob Roberts (collectively, “Plaintiffs”) brought a putative class action against Live Nation Entertainment, Inc., and Ticketmaster LLC (collectively, “Defendants”) in January 2022, alleging anticompetitive practices in violation of the Sherman Act. Live Nation is the largest concert promoter for major entertainment venues in the United States. Ticketmaster is the largest primary ticket seller for live events at major concert venues in the United States. Live Nation and Ticketmaster merged in 2010.

Plaintiffs bought tickets to live entertainment promoted by Live Nation and sold through Ticketmaster’s website. Their online ticket purchase agreement on the Ticketmaster website included an agreement to comply with Ticketmaster’s Terms of Use (“Terms”). Ticketmaster’s Terms provide that any claim arising out of the ticket purchase, as well as any prior ticket purchase, will be decided by an arbitrator employed by a newly created entity, New Era ADR (“New Era”), using novel and unusual procedures.

The district court denied Defendants’ motion to compel arbitration pursuant to the arbitration agreement. It held that the clause delegating to the arbitrator the authority to determine the validity of the arbitration agreement—the “delegation clause”—was unconscionable under California law, both procedurally and substantively. …

We affirm. We hold that the delegation clause of the arbitration agreement, and the arbitration agreement as a whole, are unconscionable and unenforceable under California law. We hold further that the application of California’s unconscionability law to the facts of this case is not preempted by the Federal Arbitration Act (“FAA”). Finally, we hold, as an alternate and independent ground, that the FAA does not preempt California’s prohibition of class action waivers contained in contracts of adhesion in large-scale small-stakes consumer cases.

I. Background

In 2011, the Supreme Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), holding that states cannot require companies to use class arbitration in dealing with individual large-scale small-stakes consumer claims. For several years in the wake of Concepcion, plaintiff-side attorneys saw no practical way to bring large numbers of individual small-stakes consumer claims. See Epic Sys. Corp. v. Lewis, 584 U.S. 497, 550 (2018) (Ginsburg, J., dissenting) (“Expenses entailed in mounting individual claims will often far outweigh potential recoveries.”). In recent years, however, plaintiff-side attorneys have had some success in bringing large numbers of parallel individual small-stakes consumer claims in arbitration. This case arises out of an attempt to counter this success.

In Oberstein v. Live Nation Entertainment, Inc., 60 F.4th 505 (9th Cir. 2023), a separate case from the one now before us, we upheld the district court’s grant of Defendants’ motion to compel individual arbitration of claims by ticket purchasers. However, while proceedings were still underway in the district court in Oberstein, Defendants foresaw that if their motion to compel in that case were granted, they would be faced with a large number of parallel individual claims by ticket purchasers. In anticipation of such claims, Defendants sought to gain in arbitration some of the advantages of class-wide litigation while suffering few of its disadvantages. They turned to New Era, a newly formed arbitration company.

New Era was founded in 2020. Its stated mission is to provide a “critical prophylactic measure for client’s mass arbitration risk.” Heckman, 686 F. Supp. 3d at 962. While the parties dispute the extent of their collaboration, it is undisputed that New Era and Defendants’ attorneys, Latham & Watkins LLP, have shown a “remarkable degree of coordination” in devising a set of procedures to be followed when large numbers of similar consumer claims are brought in arbitration. New Era offered a subscription option under which a client company pays an annual subscription fee. On June 21, 2021, Defendants executed a subscription agreement as New Era’s first subscriber. Later that same day, New Era published procedures applicable to large-scale arbitrations in consumer cases.

New Era offered two kinds of arbitration—Standard Arbitration and Expedited/Mass Arbitration. Standard Arbitration is “[g]enerally sought after for complex and/or more evidence intensive disputes. This product is the most similar to a traditional arbitration[.]” New Era Arbitration Rules, ¶ 1.c.ii.1 (“Rules”). Expedited/Mass Arbitration is “[g]enerally sought after for disputes that would benefit from an even more streamlined process [than Standard Arbitration].” Rules, ¶ 1.c.iii.1. A “Mass Arbitration” is “[a] specific type of expedited arbitration where there are Common Issues of Law and Fact among five or more cases.” Rules, ¶ 1.c.iii.3.a. With limited exceptions, proceedings in Mass Arbitrations are virtual.

On July 2, 2021, while a motion to compel arbitration was pending in the district court in Oberstein, Ticketmaster amended the Terms on its ticket sales website to require that any person using its website agree to arbitrate any dispute arising out of a ticket purchase, whenever that purchase took place, and to arbitrate under New Era’s Rules applicable to Expedited/Mass Arbitrations.

II. Defendants’ New Terms and New Era’s Expedited/Mass Arbitration Rules

The most salient provisions of Defendants’ new Terms and New Era’s Rules for Expedited/Mass Arbitration are as follows. In this section of our opinion, we do our best to describe the process established by the Rules. However, we note at the outset that New Era’s Rules are internally inconsistent, poorly drafted, and riddled with typos, and that Live Nation’s counsel struggled to explain the Rules at oral argument.

Under the new Terms of Ticketmaster’s website, a person using the website agrees to Expedited/Mass Arbitration not only for any claim arising out of a current ticket purchase but also for all claims arising out of prior ticket purchases. Terms, § 17. Any updates to the Terms become “effective immediately when [Ticketmaster posts] a revised version of the Terms on the Site.” By merely “continuing to use [the Ticketmaster] Site after that date, [a consumer] agrees to the changes.” This provision is particularly disadvantageous to consumers because they often revisit the site in order to use previously purchased digital tickets. It is thus nearly impossible to avoid retroactive application of any changes Ticketmaster imposes.

New Era’s Rules for Expedited/Mass Arbitration proceedings differ significantly from the rules of traditional arbitration fora such as Judicial Arbitration and Mediation Services (“JAMS”) or the American Arbitration Association. New Era’s Rules provide for Mass Arbitration whenever “more than five” cases involve common issues of law or fact. The Rules purport to provide that the “[d]etermination of whether case(s) [sic] involve Common Issues of Law and Fact rests solely in the hands of the neutral handling the proceeding or a New Era ADR neutral.” But a close reading of the Rules reveals that New Era, and only New Era, will unilaterally make a determination to group, or “batch,” similar cases. Under the Rules’ order of operations, the arbitrator assigned to the batched cases cannot be determined without input from the lawyers representing the plaintiffs, and the lawyers representing the plaintiffs cannot be identified until after the batching decision is made. Thus, New Era will always unilaterally decide which cases will proceed in a batch. Live Nation conceded this point at argument.

After cases are batched, a single arbitrator is chosen to decide all cases in the batch. The Rules purport to give plaintiffs an equal say in the selection of the arbitrator through a rank and strike process. In batched cases specifically, “the attorneys for that party (ies) [sic] are responsible for meeting and conferring internally and achieving consensus for purposes of making selections for the rank/strike process.” While plaintiffs may be able to participate in the selection, New Era “may also otherwise replace a neutral at its sole discretion, upon what New Era ADR deems a legitimate request or concern [sic] or upon unforeseeable circumstances.” The suggestion in the Rules that plaintiffs will have input into the selection of an arbitrator is thus undermined by the fact that the neutral may be replaced at New Era’s sole discretion.

Three “bellwether cases” are chosen from the batched cases—one chosen by the plaintiffs, one by the defendant, and one “through a process to be determined by the [arbitrator].” The arbitrator’s decisions in these cases become “precedent” on all common issues in the batched cases, as well as in any later-filed cases added to the batch. “Only if a party can demonstrate that there are no Common Issues of Law and Fact will a case be removed from the Mass Arbitration.”

Though decisions in bellwether cases are precedential, the arbitration hearing and award in those cases proceed individually and are confidential, known only to the particular plaintiffs, to the defendant company, and to the arbitrator. Decisions by the arbitrator in a bellwether case that favors a defendant will thus be binding on non-bellwether plaintiffs, who had no chance to participate in the arbitration and who are ignorant of the decision until it is invoked against them.

A complaint before the arbitrator must set forth the “nature of the dispute, including applicable dates and times, parties involved, as well as the facts,” but complaints are limited to ten pages. There is no right to discovery in Expedited/Mass Arbitration proceedings. A party in an Expedited/Mass Arbitration proceeding may get discovery only by requesting an “upgrade” to a Standard Arbitration proceeding. The arbitrator “has discretion” to grant or deny such a request.

Both parties must “upload their documents,” which comprise all evidence and briefing, within 14 days of filing the complaint. All “[u]ploads are limited to the lesser of 10 total files, 25 total pages for each file or 25MB of aggregate uncompressed uploads.” The arbitrator “has discretion to allow evidence in excess of the stated limits [on documents] as necessary to ensure a fundamentally fair process.”

After the parties exchange documents and submit briefs, the arbitrator may (but need not) hold a hearing. There is no separate hearing or briefing allowed for threshold issues such as “arbitrability, governing law, [or] jurisdiction.” Those issues “shall be argued and decided at ... hearings on the merits of the case, and not through any preliminary hearings or motion practice.” After a hearing, or a ruling that “no hearing is necessary,” the parties’ briefs on their “final arguments based on the documents and initial arguments submitted earlier in the proceeding” are limited to “15K characters” (about five pages).

Once decisions are issued in the three bellwether cases, all plaintiffs batched with those bellwether plaintiffs must participate in a single settlement conference. It is not specified in the Rules, but Live Nation contended during oral argument that Batched Plaintiffs receive bellwether decisions sometime before the settlement conference. It is not until after the settlement conference that plaintiffs can finally argue for removal from the mass arbitration. Even then, plaintiffs are removed from the batch only if they can show their case shares “no Common Issues of Law and Fact” with the bellwether cases. It is unclear how a batched plaintiff who did not participate in the bellwether case could demonstrate this, because the Rules do not provide access to the bellwether record for non-bellwether plaintiffs in the batch. Without such access, plaintiffs will struggle to differentiate their cases from the bellwethers. Notably, this lack of access is asymmetrical: the defendant will always have access to the record as a party to bellwether cases.

These hurdles are even greater for later-filed cases that are added to the batch. At oral argument, Live Nation contended that later-filing plaintiffs will receive bellwether decisions after they file. However, the Rules do not state when plaintiffs with later-filed cases will receive the bellwether decisions. No provision is made in the Rules for later-filing plaintiffs to receive the associated briefing or discovery from the bellwether cases. This is particularly problematic because the records for earlier-decided cases are permanently deleted 60 days after the end of the proceedings in those cases.

An award of injunctive relief by the arbitrator may be appealed to a panel of arbitrators employed by JAMS, but a denial of injunctive relief may not be appealed. As a practical matter, given that injunctive relief will virtually always be sought by the plaintiff rather than by the defendant, this provision operates asymmetrically. It provides a right of appeal if the plaintiff’s request for an injunction is granted, but denies a right of appeal if the plaintiff’s request is denied.

III. Decision of the District Court

The district court concluded that the delegation clause is unconscionable, both procedurally and substantively, and is therefore unenforceable under California state law. It concluded, further, that the FAA does not preempt the application of California law in this case. The court denied Defendants’ motion to compel arbitration.

The district court first determined that the delegation clause is procedurally unconscionable “to an extreme degree.” The court then identified four elements of New Era’s model that rendered the delegation clause substantively unconscionable: (1) the application of precedent from the bellwether decisions to the claimants who had no opportunity to participate in, or even learn the content of, those decisions; (2) the lack of discovery and other procedural limitations; (3) the provisions governing the selection of arbitrators; and (4) the limited right of appeal. The district court declined to sever the unconscionable provisions because “unconscionability permeates” the Terms and Rules.

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IV. Unconscionability Analysis

“In determining whether a valid arbitration agreement exists, federal courts ‘apply ordinary state-law principles that govern the formation of contracts.’” Nguyen v. Barnes & Noble Inc., 763 F.3d 1171, 1175 (9th Cir. 2014) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). Under the FAA, a court may declare an arbitration agreement unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U.S.C. § 2, and may invalidate an arbitration agreement by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” Concepcion, 563 U.S. at 339.

A. Unconscionability of the Delegation Clause

The first question before us is whether the clause delegating to the arbitrator the authority to decide the validity of the arbitration agreement—the delegation clause—is unconscionable and therefore unenforceable. In deciding whether a delegation clause is unenforceable, our analysis is not limited to the bare text of the clause. “A party is ... permitted under Rent-A-Center to challenge the enforceability of a delegation clause by explaining how ‘unrelated’ provisions make the delegation unconscionable.” Holley-Gallegly, 74 F.4th at 1002. “In evaluating an unconscionability challenge to a delegation provision under California law, a court must be able to interpret the provision in the context of the agreement as a whole, which may require examining the underlying arbitration agreement as well.” Bielski v. Coinbase, Inc., 87 F.4th 1003, 1012 (9th Cir. 2023). A court must “consider the parts of the agreement that impact[] the delegation provision to decide its enforceability.” Id. at 1011. “[I]f a court cannot look through the delegation provision to the rest of the contract, a court would fail to see how delegating questions of arbitrability to an arbitrator was unconscionable.” Id. at 1012.

To demonstrate unconscionability of Defendants’ delegation clause under California law, Plaintiffs must show that the clause is both procedurally and substantively unconscionable. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83 (2000). “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Id. If there is “substantial procedural unconscionability ..., even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable.” OTO, LLC v. Kho, 8 Cal.5th 111 (2019).

The delegation clause of Ticketmaster’s arbitration agreement provided in relevant part:

Delegation; Interpretation. The arbitrator, and not any federal, state or local court or agency, shall have exclusive authority to the extent permitted by law to resolve all disputes arising out of or relating to the interpretation, applicability, enforceability, or formation of this Agreement, including but not limited to, any claim that all or any part of this Agreement is void or voidable .... Terms, ¶ 17.

We conclude, as did the district court, that the delegation clause is both procedurally and substantively unconscionable.

1. Procedural Unconscionability

The district court concluded that the delegation clause is “procedurally unconscionable to an extreme degree.” Heckman, 686 F. Supp. 3d at 952. We agree.

“Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion,” Armendariz, 6 P.3d at 689, defined as “a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms,” Flores v. Transamerica HomeFirst, Inc., 93 Cal.App.4th 846 (2001). The parties agree that the delegation clause is part of a contract of adhesion. See Heckman, 686 F. Supp. 3d at 952 (“The agreement is certainly contained within a contract of adhesion ....”). Some California courts have held that in itself “[a] finding of a contract of adhesion is essentially a finding of procedural unconscionability.” Flores, 113 Cal. Rptr. 2d at 382. The contract between Plaintiffs and Ticketmaster is much more than a mere garden variety contract of adhesion.

In deciding procedural unconscionability, California courts “focus[ ] on the factors of oppression and surprise.” Patterson v. ITT Consumer Fin. Corp., 14 Cal.App.4th 1659 (1993). “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.” Flores, 113 Cal. Rptr. 2d at 381. Surprise is a “function of the disappointed reasonable expectations of the weaker party,” Harper v. Ultimo, 113 Cal.App.4th 1402 (2003), and can arise when “the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms,” Patterson, 18 Cal. Rptr. 2d at 565. The elements of oppression and surprise are “satisfied by a finding that the arbitration provision was presented on a take-it-or-leave-it basis and that it was oppressive due to ‘an inequality of bargaining power that result[ed] in no real negotiation and an absence of meaningful choice.’” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1281 (9th Cir. 2006) (en banc). Both oppression and surprise are present here.

The district court wrote, with respect to oppression, “[I]t is hard to imagine a relationship with a greater power imbalance than that between Defendants and its consumers, given Defendants’ market dominance in the ticket services industries.” Heckman, 686 F. Supp. 3d at 952. Because Ticketmaster is the exclusive ticket seller for almost all live concerts in large venues, prospective ticket buyers in most instances are faced with a choice. They can either use Ticketmaster’s website and accept its Terms, or refuse to use the website and be entirely foreclosed from purchasing tickets on the primary market.

We note, with respect to surprise, that Ticketmaster’s Terms state they may be changed without notice and changes apply retroactively. Ticketmaster changed the Terms on its website on July 2, 2021, requiring all website users to agree to arbitration under New Era’s Rules. Its website provides that a person merely browsing the website without purchasing a ticket agrees to Ticketmaster’s changed Terms. Binding consumers who merely browse a website to the terms specified in the website has been “consistently held ... to be unenforceable, as individuals do not have inquiry notice.” Keebaugh v. Warner Bros. Ent. Inc., 100 F.4th 1005, 1014 (9th Cir. 2024).

Ticketmaster’s Terms also permit unilateral modification of the Terms without prior notice. The Terms provide that Ticketmaster retains the power to “make changes to the Terms at any time” which would “be effective immediately when we post a revised version of the Terms on the Site.” Under California law, “oppression is even more onerous” when a “clause pegs both the scope and procedure of the arbitration to rules which might change.” Harper, 7 Cal. Rptr. 3d at 422.

The changed Terms apply not only prospectively but also retroactively. That is, they apply to “any dispute, claim or controversy ... irrespective of when that dispute, claim, or controversy arose.” Heckman, 686 F. Supp. 3d at 954. “[A] customer who purchased a ticket prior to the changes to the [Terms] ... could then be required to bring any dispute regarding that same purchase before New Era merely because the customer opened Defendants’ website at some later date (regardless of whether they had any intention of transacting business on that occasion).” Id. (footnote omitted). Indeed, customers may be required to visit the website again to access and use previously purchased tickets. Even standing alone, this provision is procedurally unconscionable under California law. Peleg v. Neiman Marcus Grp., Inc., 204 Cal.App.4th 1425 (2012) (“[A]n arbitration contract containing a modification provision is illusory if ... a contract change[ ] applies to claims that have accrued or are known.”); see also Szetela, 118 Cal. Rptr. 2d at 867 (holding that a take-it-or-leave-it amendment to terms “establishe[d] the necessary element of procedural unconscionability”).

Finally, the Terms on Ticketmaster’s website are affirmatively misleading. For example, they specifically state that all claims will be resolved by “individual arbitration,” and not “in any purported class or representative proceeding.” This statement is flatly inconsistent with New Era’s Rules, to which the Terms bind any person even browsing the site. As described above, the Rules contemplate that cases with common issues or facts will be batched, and that “batched” claims are not resolved by individual arbitration, but are rather treated in a “class or representative” fashion. The ability to request removal from the batch does not arise until after the arbitration proceedings and settlement conference, and removal is conditioned on a showing of “no Common Issues of Law and Fact” with the bellwether cases.

Read together with the Terms, New Era’s Rules form the final element of surprise. They are printed in a legible font and clearly linked to the Terms on Ticketmaster’s website, but the Rules are so dense, convoluted and internally contradictory to be borderline unintelligible. Given that Live Nation’s own experienced appellate counsel strained to explain the Rules during oral argument, we are left with no confidence that a reasonable consumer would have any hope of understanding them.

In sum, the Terms on Ticketmaster’s website, and the manner in which Ticketmaster bound users to those Terms, “evince[ ] an extreme amount of procedural unconscionability far above and beyond a run-of-the-mill contract-of-adhesion case.” Heckman, 686 F. Supp. 3d at 953.

2. Substantive Unconscionability

“Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided.” OTO, LLC, 251 Cal.Rptr.3d 714. When there is “substantial procedural unconscionability ... even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable.” [Id.]

The district court held that four features of New Era’s Rules support a finding of substantive unconscionability of the delegation clause: (1) the mass arbitration protocol, including the application of precedent from the bellwether decisions to other claimants; (2) procedural limitations, such as the lack of a right to discovery; (3) the limited right of appeal; and (4) the arbitrator selection provisions.¹ We agree.

a. Mass Arbitration Protocol

“[A]bsent members [in a class] must be afforded notice, an opportunity to be heard, and a right to opt out of the class.” Concepcion, 563 U.S. at 349. This holds true in the arbitral context: “[A]t least this amount of process would presumably be required for absent parties to be bound by the results of arbitration” as well. Id.

If the arbitrator in the bellwether cases holds that the delegation clause is valid, that holding is binding on the plaintiffs in all of the batched non-bellwether cases. That is, the validity of the delegation clause in all cases is decided in bellwether cases, even though plaintiffs in the non-bellwether cases have no right to participate in the bellwether cases. Indeed, plaintiffs in the non-bellwether cases will not even know the decision in the bellwether case as to the validity of the delegation clause until that decision is invoked against them.

It is black-letter law that binding litigants to the rulings of cases in which they have no right to participate—let alone case of which they have no knowledge—violates basic principles of due process. Hansberry v. Lee, 311 U.S. 32, 40–43 (1940). Further, although the procedures set forth in New Era’s Rules for Expedited/Mass Arbitrations are superficially similar to the familiar procedures in conventional class actions, they differ in critical respects. A batched plaintiff whose case is not a bellwether case has no notice of the bellwether cases and no opportunity to be heard in those cases. Further, that plaintiff has no guarantee of adequate representation in those cases and has no right to opt out of the batched cases that will be bound by the results in the bellwether cases.

Recognizing the dissimilarity between New Era’s Rules and the rules governing conventional class actions, Defendants contend that the procedures provided in the Rules are similar to those used in federal multidistrict litigation (“MDL”). See 28 U.S.C. § 1407. The comparison is inapt, as a quick review of MDL procedures makes clear. The MDL statute authorizes temporary consolidation of civil actions that are filed in different district courts but involve common questions of fact. MDL cases are transferred to a single district court for pretrial proceedings pursuant to an order of a special MDL court, but they remain separate cases. A panel of seven Article III judges decides the fairness of transfers after a hearing; proceedings and judicial rulings are public; the court appoints adequate lead counsel to represent all plaintiffs; and any plaintiff has the opportunity to be heard. After pretrial proceedings in the transferee court are completed, cases that have not settled are typically transferred back to their original district for trial.

In their brief to us, Defendants contend that the arbitrator’s application of “precedent” from the bellwether cases is completely discretionary. It is true that the Rules provide that an arbitrator “may” apply the “precedent” created by the decisions in the bellwether cases. Rules § 2.x, y. However, it is obvious that anything more than an occasional failure to apply precedent established in the bellwether cases would defeat the very purpose of the mass arbitration protocol. Indeed, it is implausible to the point of near impossibility that an arbitrator, absent some compelling reason, would fail to apply the precedent established in the bellwether cases. Defendants have not suggested a compelling reason—or indeed any reason—that would lead an arbitrator to fail to apply those precedents in a significant number of the batched non-bellwether cases. Further, even if some discretion exists as to when bellwether precedent is applied to non-bellwether cases, the “Rules provide no guidance as to how the neutral is to exercise that discretion.” Heckman, 686 F. Supp. 3d at 961.

The district court concluded, with some understatement, “that the mass arbitration protocol creates a process that poses a serious risk of being fundamentally unfair to claimants, and therefore evinces elements of substantive unconscionability.” Id. at 963. We agree. New Era’s Rules provide to defendants many of the protections and advantages of a class action, but provide to non-bellwether plaintiffs virtually none of its protections and advantages.

b. Lack of Discovery and Procedural Limitations

Under California law, an arbitral forum must provide “such procedures as are necessary to vindicate th[e] claim.” Armendariz, 6 P.3d at 684.

New Era’s Rules are inadequate vehicles for the vindication of plaintiffs’ claims. To recapitulate briefly: There is no right to discovery. Complaints are limited to 10 total pages and must set forth the “nature of the dispute, including applicable dates and times, parties involved, as well as the facts.” The evidentiary record and initial briefing is limited to 10 documents, subject to limited exceptions. Closing briefs are limited to 15,000 characters, or about five pages.

“The denial of adequate discovery in arbitration proceedings leads to the de facto frustration of” statutory rights. Armendariz, 6 P.3d at 683. Discovery is often necessary to decide threshold issues such as the validity of the delegation clause. For example, a plaintiff may wish to object to the arbitrator charged with ruling on the validity of the delegation clause in one of the bellwether cases on the ground that the arbitrator is unqualified or improperly appointed. Such an objection would ordinarily require discovery as to the background and possible conflicts of the arbitrator. Indeed, the district court in this case deemed discovery necessary to fairly resolve such questions. And the district court evidentiary record in this case is several hundred pages long. Discovery included not only documents requested from Defendants and New Era, but also extensive depositions.

New Era’s restrictions on briefing border on the absurd. A bellwether plaintiff would have to work a miracle to successfully brief the merits of his or her claim, make any arbitrability arguments, and provide all evidence in only 10 documents totaling 250 pages, and with 15,000 characters of “final arguments.” We note for comparison that Defendants’ memorandum in the district court in support of their motion to compel arbitration—which exclusively addressed threshold issues of arbitrability—was approximately 66,000 characters. Plaintiffs’ opposition brief in the district court was approximately 63,000 characters. On appeal to us, Defendants’ brief arguing the same threshold issues was approximately 110,000 characters, spanning 82 pages. And in support of its argument, Defendants submitted over 300 pages of record. The briefing and record on arbitrability alone far exceeds the limits that would apply in a New Era arbitration, which apply to both arbitrability and the merits of a dispute.

It is clear that the procedures specified in the Rules are insufficient to “vindicate” the rights of a single claimant, Armendariz, 6 P.3d at 684, let alone sufficient “to protect the nonparties’ interests” in a representative proceeding. Sturgell, 553 U.S. at 897.

c. Right of Appeal

When evaluating substantive unconscionability, California courts consider “mutuality” and whether procedures make “[t]he odds ... far more likely” for one side. Harper, 7 Cal. Rptr. 3d at 423.

The Terms on Ticketmaster’s website provide: “[I]n the event that the arbitrator awards injunctive relief against either you or us, the party against whom injunctive relief was awarded may ... appeal that decision to JAMS.” Terms § 17 (emphasis added). Because only plaintiffs are likely to pursue injunctive relief, the right to appeal an award of injunctive relief to JAMS is functionally reserved for Defendants. “As a practical matter, the benefit which the [appeals] clause confers on [claimants] is nothing more than a chimera.” Saika v. Gold, 49 Cal.App.4th 1074 (1996). There is no right to appeal the denial of injunctive relief.

Defendants contend that the California Supreme Court decision in Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741, 751 (2015), allows the asymmetrical appeal provision. The Court in Sanchez upheld a law asymmetrically providing that only arbitral grants of injunctive relief are subject to second arbitration. The Court noted that the review of an order granting injunctive relief furnishes a corporate defendant a “‘margin of safety’ that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need.” Id.

We agree with the district court that Sanchez does not protect the asymmetrical appeal provision in Ticketmaster’s Terms. As the district court pointed out, Sanchez involved traditional arbitration between two individual parties, and the “fate of the rest of the putative class of claimants was not in jeopardy.” Heckman, 686 F. Supp. 3d at 965. Here, Ticketmaster created “much more than a ‘margin of safety’; they [ ] effectively stacked the deck so they [could] arbitrate thousands of claims in a single go, and if they lose, simply go back to JAMS to take an appeal.” Id. at 966. The denial of injunctive relief, however, is final for the entire batched class of plaintiffs.

Defendants argue that even if the asymmetric appeal of injunctive relief is unconscionable, that “has nothing to do with the parties’ delegation clause.” We disagree. Plaintiffs challenging the validity of the delegation clause may be seeking an injunction against the unconscionable arbitration provisions in the rest of the agreement. Or they may be seeking an injunction barring the use of a New Era arbitrator. See Heckman, 686 F. Supp. 3d at 967 n.21. If the arbitrator denies such requests for injunctive relief, the Terms prohibit appeal of any of the arbitrator’s decisions leading to the denial, including the arbitrator’s threshold decision under the delegation clause that the parties’ dispute is arbitrable.

d. Procedure for Selecting the Arbitrator

Plaintiffs challenge the procedures provided in New Era’s Rules for selecting the arbitrator. If the selection Rules are unconscionable, any decision by an arbitrator selected under those Rules, including a decision under the delegation clause, is infected by that unconscionability.

The district court noted three ways in which it is undisputed that the arbitrator selection Rules are inconsistent with California law:

Plaintiffs point to three features of New Era’s Rules that they claim violate California law: (1) New Era has the power to override a claimant’s decision to disqualify an arbitrator; (2) each side, rather than each individual party, has a right to disqualify an arbitrator; and (3) a single arbitrator presides over several cases at one time. Defendants do not dispute that New Era’s Rules violate these state law requirements[.] Heckman, 686 F.Supp.3d at 964.

Defendants did not argue in the district court, and do not argue here, that these Rules are consistent with the California Arbitration Act (“CAA”). Instead, they contend that the CAA is preempted by the FAA. We disagree.

The FAA does not “reflect a congressional intent to occupy the entire field of arbitration.” Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 477 (1989). The relevant provisions of the CAA do not empower courts to invalidate arbitration agreements; nor do they interfere with or otherwise burden or obstruct arbitration. Rather, they are procedural requirements whose stated purpose is to protect the interests of parties to arbitration and thereby “promote public confidence in the arbitration process.” Cal. R. Ct. RB Ethics Standards, Standard 1. They are not “an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.” Lamps Plus, Inc. v. Varela, 587 U.S. 176, 183 (2019).

3. Unconscionability of the Delegation Clause

Based on the foregoing, we conclude that the delegation clause is procedurally unconscionable to an extreme degree and substantively unconscionable to a substantial degree. Taken in combination, this procedural and substantive unconscionability is fatal to the delegation clause contained in Ticketmaster’s Terms.

B. Unconscionability of the Arbitration Agreement

Because the delegation clause is unconscionable and unenforceable, it falls to the district court, and to our court on appeal, to determine whether the arbitration agreement as a whole is unconscionable and unenforceable. We conclude that it is.

1. Unconscionability

The provisions of the arbitration agreement and New Era’s Rules that make the delegation clause unconscionable also serve to make the entire agreement unconscionable, both procedurally and substantively. Even limiting our analysis to the provisions described above, it is plain that it would be impossible for plaintiffs to present their claims on equal footing to Live Nation. Forced to accept Terms that can be changed without notice, a plaintiff then must arbitrate under New Era’s opaque and unfair Rules. As explained, the Rules contain multiple interrelated substantive provisions that overtly favor defendants. Read together, the Rules and the Terms are so “overly harsh or one-sided,” OTO, LLC, 447 P.3d at 690, as to unequivocally represent a “systematic effort to impose arbitration ... as an inferior forum” designed to work to Live Nation’s advantage. Armendariz, 6 P.3d at 697.

2. Severability

Ticketmaster’s Terms contain a provision stating that in the event New Era cannot conduct the arbitration for any reason, “the arbitration will be conducted by FairClaims pursuant to its FastTrack Rules & Procedures,” and, failing that, by an alternative, mutually selected arbitration provider. Terms, § 17. The Terms also include a global severability clause providing that “if any part of the Terms is determined to be illegal, invalid, or unenforceable,” then (a) “that part shall nevertheless be enforced to the extent permissible in order to effect the intent of the Terms” and (b) “the remaining parts shall be deemed valid and enforceable.” Terms, § 19.

California law grants broad leeway to trial courts to remedy unconscionable contracts: “[T]he court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.” Cal. Civ. Code § 1670.5(a). “At the outset, a court should ask whether ‘the central purpose of the contract is tainted with illegality’” and whether “the interests of justice would be furthered” by severance. Ramirez, 551 P.3d at 546. The presence of multiple unconscionable clauses weighs in favor of severance. We review the district court’s choice for abuse of discretion.

The district court found that Defendants engaged in a “systematic effort to impose arbitration ... as an inferior forum.” Armendariz, 6 P.3d at 697. The district court found, further, that the effects of these unconscionable provisions were “entirely foreseeable and intended,” and that under an overly generous severability policy, “companies could be incentivized to retain unenforceable provisions designed to chill customers’ vindication of their rights.” MacClelland v. Cellco P’ship, 609 F. Supp. 3d 1024, 1046 (N.D. Cal. 2022). The district court found that unconscionability permeates all aspects of the arbitration agreement because “the central purpose of the contract” was unlawful and contrary to public interest, and the agreement contained multiple unconscionable provisions. The district court did not abuse its discretion in so finding and in declining to sever the offending provision of Ticketmaster’s Terms and New Era’s Rules.

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D. Unconscionability Conclusion

For the reasons articulated above, we hold that the delegation clause and the arbitration agreement as a whole are both unconscionable under California law, and that the application of California’s unconscionability law is not preempted by the FAA.

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