Discover Bank v. Superior Court

36 Cal. 4th 148, 30 Cal. Rptr. 3d 76, 113 P.3d 1100 (2005)

 

RULE:

All class action waivers are not necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when 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, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party from responsibility for its own fraud, or willful injury to the person or property of another. Cal. Civ. Code § 1668. Under these circumstances, such waivers are unconscionable under California law and should not be enforced.

FACTS:

The trial court initially granted petitioner bank’s motion to compel arbitration of a credit cardholder’s claim on an individual basis and to dismiss the class action pursuant to the arbitration agreement’s class action waiver. The trial court granted the cardholder’s motion for reconsideration, struck the class action waiver clause from the agreement, ordered the cardholder to arbitrate his claims individually, and left open the possibility that the cardholder could succeed in certifying an arbitration class under California law. The credit cardholder, a California resident, alleged that the petitioner bank represented to cardholders that late payment fees would not be assessed if payment was received by a certain date, whereas in actuality they were assessed if payment was received after 1:00 p.m. on that date. On review, the court that the Federal Arbitration Act (FAA), 9 U.S.C.S. § 1 et seq., preempted the state law rule that class arbitration waivers were unconscionable. The court of appeal upheld the class action waiver. The Supreme Court reversed the judgment of the Court of Appeal and remanded the cause for further proceedings. 

ISSUE:

Was the class action waiver in petitioner's contract unconscionable?

ANSWER:

Yes.

CONCLUSION:

The court held that when a class action waiver was found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involved small amounts of damages, and when it was alleged that the party with the superior bargaining power had carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then the waiver became in practice an exculpatory clause, in violation of Cal. Civ. Code § 1668. Under these circumstances, such waivers were unconscionable under California law and should not be enforced. The Federal Arbitration Act, 9 U.S.C.S. § 1 et seq., did not prohibit a California court from refusing to enforce a class action waiver that was unconscionable. Remand was necessary, however, for the trial court to determine whether the Delaware choice-of-law provision required enforcement of the class arbitration waiver.

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