Michael Omstead v. Dell, Inc. ( 2010 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL OMSTEAD; MELISSA 
MALLOY; LISA SMITH, individually
and on behalf of all others No. 08-16479
similarly situated,
Plaintiffs-Appellants,  D.C. No.
3:06-CV-06293-PJH
v. OPINION
DELL, INC.,
Defendant-Appellee.

Appeal from the United States District Court
for the Northern District of California
Phyllis J. Hamilton, District Judge, Presiding
Argued and Submitted
October 7, 2009—San Francisco, California
Filed February 5, 2010
Before: Mary M. Schroeder and Marsha S. Berzon,
Circuit Judges, and Lyle E. Strom,* District Judge.
Opinion by Judge Strom
*The Honorable Lyle E. Strom, Senior United States District Judge for
the District of Nebraska, sitting by designation.
2101
2104 OMSTEAD v. DELL, INC.
COUNSEL
Jonathan D. Selbin (argued) and Kristen E. Law, Lieff,
Cabraser, Heimann & Bernstein, LLP, New York, New York;
Cynthia B. Chapman and Cory S. Fein, Caddell & Chapman,
Houston, Texas; John L. Malesovas, Malesovas & Martin,
LLP, Waco, Texas; Anthony L. Vitullo, Fee, Smith, Sharp &
Vitullo, LLP, Dallas, Texas; and Paul R. Kiesel and Patrick
DeBlase, Beverly Hills, California, for the plaintiffs-
appellants.
Paul Schlaud (argued), Kim E. Brightwell, and Matt Freder-
ick, Reeves & Brightwell, LLP, Austin, Texas; Douglas R.
Young and C. Brandon Wisoff, San Francisco, California, for
the defendant-appellee.
OPINION
STROM, District Judge:
Plaintiffs-appellants, Michael Omstead, Melissa Malloy,
and Lisa Smith (collectively, “plaintiffs”), brought a proposed
class action1 against Dell, Inc. (“Dell”), asserting various
1
The proposed class consists, with limited exclusions, of “[a]ll individu-
als and entities in the State of California who own or have owned any one
or more of the following Dell Inspiron notebook computer models: 1100,
1150, 5100, or 5160.”
OMSTEAD v. DELL, INC. 2105
claims under California state law predicated on the allegation
that Dell designed, manufactured, and sold defective note-
book computers. The district court granted Dell’s motion to
stay proceedings and compel arbitration. Plaintiffs refused to
comply with the arbitration order, and the district court dis-
missed the action for failure to prosecute. Plaintiffs appeal the
dismissal and the underlying arbitration order. We
REVERSE.
I. BACKGROUND
Between July 2004 and January 2005 plaintiffs purchased
notebook computers for $1200 to $1500 through Dell’s web-
site. At the time of purchase, plaintiffs were required to accept
a written agreement titled “U.S. Terms and Conditions of
Sale” (the “Agreement”). The Agreement contained the fol-
lowing provisions relevant to this appeal:
....
11 Governing Law.
THIS AGREEMENT AND ANY SALES THERE
UNDER SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF TEXAS, WITHOUT
REGARD TO CONFLICTS OF LAWS RULES.
....
13 Binding Arbitration.
ANY CLAIM, DISPUTE, OR CONTROVERSY . . .
BETWEEN CUSTOMER AND DELL . . . SHALL
BE RESOLVED EXCLUSIVELY AND FINALLY
BY BINDING ARBITRATION ADMINISTERED
BY THE NATIONAL ARBITRATION FORUM
(NAF) . . . . NEITHER CUSTOMER NOR DELL
SHALL BE ENTITLED TO JOIN OR CONSOLI-
2106 OMSTEAD v. DELL, INC.
DATE CLAIMS BY OR AGAINST OTHER CUS-
TOMERS, OR ARBITRATE ANY CLAIM AS A
REPRESENTATIVE OR CLASS ACTION . . . .
Dell moved to stay proceedings and compel individual arbi-
tration pursuant to the Agreement, and the district court
granted the motion. Plaintiffs moved for reconsideration of
the arbitration order; the district court denied reconsideration
and directed the parties to file a joint status statement describ-
ing the status of their arbitration proceedings.
In the joint status statement, plaintiffs stipulated that they
would not arbitrate their claims individually because it was
not economically feasible for them to do so, and because the
arbitration forum mandated by the Agreement was “blatantly
biased” against consumers. Plaintiffs requested the district
court enter a final order that would allow them to appeal the
arbitration order. Plaintiffs further clarified: “Plaintiffs are not
refusing to prosecute their claims; they are only refusing to
arbitrate them in a manner which . . . would be futile.” Dell
opposed plaintiffs’ request and argued the only final judgment
that would be appropriate under the circumstances would be
a dismissal for failure to prosecute. The district court directed
further briefing on the issue of whether the action should be
dismissed, and if so, on what grounds.
Plaintiffs’ supplemental brief restated their position that
they were not refusing to prosecute their claims but were in
a “procedural bind” because they could not afford to arbitrate
their claims individually, and the arbitration order was not an
appealable order. Plaintiffs identified two alternatives to dis-
missal: (1) stay the action pending this Court’s ruling in
Oestreicher v. Alienware Corp., infra, which at that time, was
fully briefed and before the Court, or (2) certify the issue for
interlocutory review. Dell opposed these alternatives and
again argued for a dismissal for failure to prosecute. On May
21, 2008, the district court dismissed the action for failure to
prosecute pursuant to Federal Rule of Civil Procedure 41(b).
OMSTEAD v. DELL, INC. 2107
II. STANDARD OF REVIEW
We review a dismissal for failure to prosecute for abuse of
discretion. Ash v. Cvetkov, 739 F.2d 493, 495 (9th Cir. 1984).
We review a district court’s order compelling arbitration de
novo. Davis v. O’Melveny & Myers, 485 F.3d 1066, 1072 (9th
Cir. 2007).
III. DISCUSSION
A. The District Court Abused Its Discretion When It
Dismissed Plaintiffs’ Action for Failure to Prosecute.
[1] Federal Rule of Civil Procedure 41(b) provides: “If the
plaintiff fails to prosecute or to comply with these rules or a
court order, a defendant may move to dismiss the action or
any claim against it.” A Rule 41(b) dismissal “must be sup-
ported by a showing of unreasonable delay.” Henderson v.
Duncan, 779 F.2d 1421, 1423 (9th Cir. 1986). In addition, the
district court must weigh the following factors in determining
whether a Rule 41(b) dismissal is warranted: “(1) the public’s
interest in expeditious resolution of litigation; (2) the court’s
need to manage its docket; (3) the risk of prejudice to the
defendants; (4) the public policy favoring disposition of cases
on their merits and (5) the availability of less drastic sanc-
tions.” Id. Where, as here, the district court does not make
explicit findings on each factor, we independently review the
record to determine whether the district court abused its dis-
cretion. Id. at 1424.
[2] In this case, the district court abused its discretion
when it dismissed plaintiffs’ action for failure to prosecute.
Plaintiffs did not cause any unreasonable delay in the progres-
sion of their case below. Upon review of the record, there
were only two possible instances of delay: (1) plaintiffs wait-
ing five months to file a motion for reconsideration of the dis-
trict court’s arbitration order, and (2) plaintiffs waiting two
months to file the parties’ joint status statement after being
2108 OMSTEAD v. DELL, INC.
ordered to do so by the district court. Neither instance sup-
ports a Rule 41(b) dismissal. The motion for reconsideration
was properly filed under the Northern District of California’s
local rules, see Civil L.R. 7-9(a), and the joint status statement
was timely under the deadlines set by the district court and
simply reiterated positions that were well-known to the parties
and the district court. Further, the factors used in evaluating
a Rule 41(b) dismissal favor plaintiffs. The record does not
support a finding that plaintiffs’ actions placed unwarranted
stress on the district court’s docket or prejudiced Dell. The
public’s interest in a resolution on the merits weighed
strongly in plaintiffs’ favor, and less drastic and more appro-
priate alternatives were available.
Plaintiffs sufficiently communicated to Dell and the district
court that they wanted to prosecute their claims on a class-
wide basis, they believed the district court’s arbitration order
was fatal to their action, and they wanted the district court to
enter an order that would permit appellate review of the arbi-
tration issue. Not only was the district court’s Rule 41(b) dis-
missal unsupported by the facts of this case, it also failed to
accomplish plaintiffs’ requested result because under our law,
an appeal from a Rule 41(b) dismissal does not permit review
of interlocutory orders. See Al-Torki v. Kaempen, 78 F.3d
1381, 1386 (9th Cir. 1996).
Plaintiffs were not certain how they could procedurally
obtain appellate review of the arbitration order while main-
taining consistency with circuit law, given the then pending
appeal from Oestreicher v. Alienware Corp., 502 F. Supp. 2d
1061 (N.D. Cal. 2007) (Oestreicher I), which presented simi-
lar issues. The appropriate order would have been a voluntary
dismissal with prejudice under Federal Rule of Civil Proce-
dure 41(a)(2). We agree with the First Circuit’s reasoning in
John’s Insulation, Inc. v. L. Addison and Associates, Inc., that
“a plaintiff that deems an interlocutory ruling to be so prejudi-
cial as to deserve immediate review . . . has the alternative of
dismissing the complaint voluntarily [with prejudice].” 156
OMSTEAD v. DELL, INC. 2109
F.3d 101, 107 (1st Cir. 1998). As John’s Insulation noted,
such a tactic is risky: “Plaintiffs pursuing such an avenue of
appeal risk forfeiting their potentially meritorious claims . . .
because the appellate court could affirm the dismissal.” Id.Plaintiffs have demonstrated their understanding and accep-
tance of the risks involved.
[3] To avoid a useless remand for entry of a modified judg-
ment, we will construe the district court’s Rule 41(b) dis-
missal as a Rule 41(a)(2) voluntary dismissal with prejudice
and consider the underlying issue in this case, which is
whether the case should have been ordered to arbitration.
B. The District Court Erred When It Granted Dell’s Motion
to Stay Proceedings and Compel Arbitration.
[4] Under the Federal Arbitration Act, 9 U.S.C. §§ 1-16, a
written arbitration provision is valid and enforceable “save
upon such grounds as exist at law or in equity for the revoca-
tion of any contract.” 9 U.S.C. § 2. Generally applicable con-
tract defenses, such as unconscionability, may render an
arbitration provision unenforceable. Shroyer v. New Cingular
Wireless Servs., Inc., 498 F.3d 976, 981 (9th Cir. 2007).
Whether an arbitration provision is unconscionable is gov-
erned by state contract law. See id.[5] The Agreement in this case contains a choice-of-law
provision that states the Agreement is governed by Texas law.
Plaintiffs argue the choice-of-law provision is unenforceable,
and California law applies. During this case’s pendency on
appeal, this Court decided, in an unpublished, non-
precedential memorandum disposition, Oestreicher v. Alien-
ware Corp., 322 F. App’x 489 (9th Cir. Apr. 2, 2009) (mem.)
(Oestreicher II), which affirmed a district court decision that
appropriately dealt with a similar choice-of-law determina-
tion. See Oestreicher I, 502 F. Supp. 2d 1061. We adopt the
reasoning of Oestreicher I and apply it to this case. This Court
agreed that the choice-of-law provision was not enforceable
2110 OMSTEAD v. DELL, INC.
and that under California choice-of-law rules, California law
applied. Oestreicher II, 322 F. App’x at 491.
In Oestreicher I, plaintiff Harry Oestreicher brought a pro-
posed class action against Alienware Corporation
(“Alienware”), asserting various violations of California state
law arising out of Alienware’s alleged sale of defective note-
book computers. Id. at 1064. Oestreicher purchased his com-
puter through Alienware’s website and was required to accept
a sales agreement at the time of purchase, which contained an
arbitration provision with a class action waiver and a choice-
of-law provision designating Florida law as the governing
law. Id. at 1063-64. Alienware moved to compel arbitration
pursuant to the terms of the sales agreement. Id. at 1064. The
district court denied the motion, id. at 1072, and this Court
affirmed on appeal, Oestreicher II, 322 F. App’x at 491-93.2
[6] Applying California’s choice-of-law rule, which adopts
section 187 of the Restatement (Second) of Conflict of Laws,
Oestreicher I found that the sales agreement’s choice-of-law
provision was unenforceable and that the validity of the arbi-
tration provision should be determined in accordance with
California law. 502 F. Supp. 2d at 1065-69. The district court
first concluded that application of Florida law would be con-
trary to a fundamental policy of California because the sales
agreement’s class action waiver was unconscionable under
California law. Id. at 1067-68. Specifically, the district court
found the class action waiver satisfied all three prongs of the
Discover Bank3 test: (1) the sales agreement was an adhesion
2
After the district court denied Alienware’s motion to compel, it dis-
missed plaintiffs’ action for failure to state a claim upon which relief can
be granted. See Oestreicher v. Alienware Corp., 544 F. Supp. 2d 964(N.D. Cal. 2008). This Court also reviewed and affirmed that ruling on
appeal. Oestreicher II, 322 F. App’x at 493. At this time, we do not
address the impact of this second ruling to the case-at-hand.
3
Under Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal.
2005), class action waivers are unconscionable under California law if (1)
OMSTEAD v. DELL, INC. 2111
contract, (2) $4000, which was the approximate purchase
price of Oestreicher’s computer, was a small enough amount
to prevent consumers from pursuing their individual claims,
and (3) Oestreicher alleged a deliberate practice to deprive
consumers of money because he alleged “Alienware was
aware of material defects in its products, concealed these
defects from consumers, and chose to sell defective products.”
Id. The district court next found that California had a materi-
ally greater interest in applying its law because the proposed
class consisted solely of California residents asserting viola-
tions of California consumer protection laws for goods
shipped into California. Id. at 1069. California’s interest
therefore outweighed Florida’s interest as the place of con-
tracting and place of performance. Id.
[7] Here, the Agreement’s choice-of-law provision is
unenforceable for the same reasons identified in Oestreicher
I.4 The class action waiver is unconscionable under California
law because it satisfies the Discover Bank test, and California
has a materially greater interest than Texas in applying its
own law. Accordingly, the validity of the arbitration provision
is governed by California law. Having found the class action
waiver unconscionable under California law, the only remain-
ing question is whether the class action waiver can be severed
from the remainder of the arbitration provision. See Cal. Civ.
“the waiver is found in a consumer contract of adhesion,” (2) the contrac-
tual setting is one in which “disputes between the contracting parties pre-
dictably involve small amounts of damages,” and (3) “it is alleged that the
party with the superior bargaining power has carried out a scheme to
deliberately cheat large numbers of consumers out of individually small
sums of money.”
4
However, unlike the district court in Oestreicher I, see id. at 1065-66
& n.2, we decline to resolve whether the burden of proof set forth in
Washington Mutual Bank, FA v. Superior Court, 15 P.3d 1071, 1079 (Cal.
2001) or America Online, Inc. v. Superior Court, 90 Cal. App. 4th 1, 9-11
(Cal. Ct. App. 2001) applies in this case, as we would find the choice-of-
law provision unenforceable regardless of which burden of proof applies.
2112 OMSTEAD v. DELL, INC.
Code § 1670.5(a) (making discretionary a court’s decision to
sever an unconscionable contract clause). We find it cannot be
severed because the class action waiver is “central” to the
arbitration provision. See Circuit City Stores, Inc. v. Mantor,
335 F.3d 1101, 1109 (9th Cir. 2003). Because we decline “to
assume the role of contract author rather than interpreter,” id.(quoting Ingle v. Circuit City Stores, Inc., 328 F.3d 1165,
1180 (9th Cir. 2003)), the class action waiver renders the
entire arbitration provision unenforceable. The district court
erred when it found to the contrary and granted Dell’s motion
to stay proceedings and compel arbitration.
IV. CONCLUSION
We reverse the district court’s Rule 41(b) dismissal and
construe the dismissal as a voluntary dismissal with prejudice
under Rule 41(a)(2). We also reverse the district court’s order
granting Dell’s motion to stay proceedings and compel arbi-
tration. We remand for further proceedings consistent with
this opinion.
REVERSED and REMANDED.