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Walnut Producers of California v. Diamond Foods

August 16, 2010

WALNUT PRODUCERS OF CALIFORNIA ET AL., PLAINTIFFS AND APPELLANTS,
v.
DIAMOND FOODS, INC., DEFENDANT AND RESPONDENT.



APPEAL from a judgment of the Superior Court of San Joaquin County, Lesley Holland, Judge. Affirmed. (Super. Ct. No. CV034984).

The opinion of the court was delivered by: Nicholson, Acting P. J.

CERTIFIED FOR PUBLICATION

Plaintiffs, producers of walnuts, appeal the trial court's order striking all class action allegations from their complaint. Plaintiffs claim that a class action waiver in their arbitration agreements with defendant, a walnut processor, was unconscionable. The trial court disagreed with their argument, as do we. We affirm the trial court's order.

ALLEGATIONS

For purposes of this appeal, we assume all factual allegations in the complaint are true.

Plaintiff Walnut Producers of California (Producers) is a nonprofit cooperative marketing association. Its members are persons and entities who grow walnuts. Its members have assigned to it all of their claims against the defendant.

Plaintiff George J. Miller Ranch, Inc. (Miller Ranch) is a corporation engaged in the production of walnuts.

Defendant Diamond Foods, Inc. (Diamond Foods) is the successor by way of merger to an agricultural cooperative known as the Diamond Walnut Growers, Inc. (the Co-op). Diamond Foods had been a wholly owned subsidiary of the Co-op.

Prior to 2005, the Co-op's members would deliver their walnut crops to the Co-op, and they would be paid on a cooperative crop pool basis based on the net proceeds generated by the sale of the walnuts.

In 2005, Diamond Foods proposed the merger with the Co-op. As part of that process, it gave to the Co-op members a proposed Walnut Purchase Agreement (the Agreement) that it would use with the members. The Agreement would replace the marketing agreements that existed between the Co-op and its members once the Co-op ceased to exist.

On July 1, 2005, the Co-op's members approved the merger with Diamond Foods. With the cancellation of the marketing agreements, the Co-op's members needed to find an entity to purchase their walnuts. They could either deliver their crops to Diamond Foods as arm's length suppliers pursuant to the terms of the Agreement or, because smaller processors did not have sufficient capacity to process the members' crops, they could let their crops fall to the ground and go to waste.

The Agreement was presented to the growers on a "take-it-or-leave-it" basis without an explanation of its terms and without an opportunity to negotiate its terms. With no real options available to them, most of the growers had no choice but to sign the Agreement. Approximately 95 percent of the Co-op's members, including Miller Ranch, signed the Agreement.*fn1

Under the Agreement, the growers agreed to sell, and Diamond Ranch agreed to buy, their entire crop of walnuts each year during the Agreement's term. The Agreement's terms were for three, five, or ten years. The Agreement did not set forth a purchase price. Rather, it provided that Diamond Foods would establish the price in good faith each year following the harvest, taking into account market conditions, quality, variety, and other relevant factors.

This appeal concerns the Agreement's dispute resolution requirements and, in particular, its prohibition of class actions. The Agreement in general requires all disputes to be resolved by binding arbitration. It specifically prohibits any type of class action as follows: "Each dispute will be resolved based upon its own facts and merits, and no procedure in the nature of class actions will be permitted."

Plaintiffs filed this action in 2008, alleging Diamond Foods breached the Agreement by failing to pay them the reasonable market value for their walnuts, the price plaintiffs alleged the Agreement required. Plaintiffs sought damages, reformation and declaratory relief. Despite the Agreement's class action waiver, plaintiffs brought this action as a class action on behalf of all California walnut growers who executed the Agreement with Diamond Foods, a class of growers in excess of 1,600 persons and entities.

Of relevance here, plaintiffs' sixth cause of action sought declaratory relief that the Agreement's dispute resolution clauses, including the class action waiver, were unenforceable and unconscionable. Plaintiffs contended the class action waiver was unconscionable because the Agreement was a contract of adhesion, and the prohibition effectively insulated Diamond Foods from any liability towards the growers for its wrongful conduct.

Diamond Foods filed a motion to strike all class allegations contained in the complaint. It argued the Agreement's class action waiver was enforceable and that plaintiffs could not demonstrate as a matter of law that the waiver was unconscionable. Diamond Foods also filed a demurrer.

The trial court granted the motion to strike the class allegations, and it sustained the demurrer with leave to amend. The court did not state its reasoning.

Plaintiffs appeal from the trial court's order granting the motion to strike the class allegations. They claim the doctrine of unconscionability applies to commercial contracts, they successfully pleaded facts showing the Agreement is an adhesion contract, and the Agreement's arbitration provisions, including the class action waiver, are unconscionable.*fn2 ,*fn3

DISCUSSION

I. Standard of Review

Initially, we must determine which standard of review applies to this appeal. Plaintiffs argue we are to review the trial court's decision de novo. Diamond Foods asserts we are to review the court's decision only for an abuse of discretion. We agree with plaintiffs.

Generally, an order granting a motion to strike is not an appealable order. (Yandell v. City of Los Angeles (1931) 214 Cal. 234, 235; 9 Witkin, Cal. Procedure (5th ed. 2008) Appeal, ยง 155, p. 231.) And when the order is reviewed on appeal following entry of final judgment, the appellate court usually applies the abuse of ...


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