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Discover Bank v. Superior Court - 105 Cal. App. 4th 326, 129 Cal. Rptr. 2d 393 (2003)

Rule:

If a state statute requiring a nonwaivable judicial forum for resolution of consumer disputes must give way to 9 U.S.C.S. § 2 of the Federal Arbitration Act, 9 U.S.C.S. § 1 et seq., it necessarily must follow that a state judicial policy precluding classwide arbitration waivers must also give way to 9 U.S.C.S. § 2. Accordingly, the California Court of Appeal believes that Szetela v. Discover Bank, 97 Cal.App.4th 1094 (2002), which found a class action waiver to be substantively unconscionable under California law, was wrongly decided.

Facts:

Plaintiff, who obtained a credit card from the bank, filed a putative class action against the bank alleging breach of contract. The bank moved to compel arbitration of plaintiff's claim on an individual basis and to dismiss the class action pursuant to an arbitration agreement's class action waiver. Plaintiff opposed the motion, arguing that the class action waiver was unconscionable and unenforceable under California law. 

Issue:

Did the superior court's decision to strike a classwide arbitration ban from a valid agreement alter substantive, and not just procedural, rights of both parties?

Answer:

Yes.

Conclusion:

The appellate court concluded that the superior court erred in granting plaintiff's motion for reconsideration and striking the class action waiver from the agreement. The FAA preempted a state court from applying state substantive law to strike the class action waiver from the arbitration agreement. The prejudice to the bank that would have been caused by altering the agreement was clear. Classwide arbitration in California vastly increased the scope of potential liability and damages that the bank faced without the ability to seek judicial review of the arbitrator's decision. The superior court's decision to strike a classwide arbitration ban from a valid agreement altered substantive, and not just procedural, rights of both parties.

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