Tuesday, June 28, 2005
Contractual Bar to Class Action Arbitrations May Be Invalid—S.C.
U.S. Law Does Not Require State to Enforce Unconscionable Agreement, Moreno Writes
By KENNETH OFGANG, Staff Writer/Appellate Courts
Federal law does not require California to apply another state’s laws to a contractual arbitration proceeding where those laws violate this state’s fundamental public policy, the California Supreme Court ruled yesterday.
The justices reversed a ruling by Div. One of this district’s Court of Appeal, which two years ago upheld the enforceability of a Discover Card user agreement that expressly bars class action arbitrations.
Even if the agreement was substantively unconscionable under California law, the panel held, state courts were required to honor a provision in the contract applying Delaware law, under which the right to initiate class-wide arbitration may be waived.
But Justice Carlos Moreno, writing yesterday for the high court, said the Court of Appeal was in error in holding that the Federal Arbitration Act preempts California law with respect to the issue. The case was sent back to the Court of Appeal, so that it may decide whether California or Delaware law should apply under traditional choice-of-law rules.
Contract of Adhesion
If California law applies, Moreno added, the clause may well be unenforceable. “[W]e conclude that, at least under some circumstances, the law in California is that class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to classwide arbitration,” the justice wrote.
The clause that moved Christopher Boehr to sue Discover and seek class action status was added by notice to cardholders in July 1999. It eliminates access to court in the event of a claim by either Discover or the cardholder when either chooses arbitration.
It also bars either side from joining or consolidating actions in arbitration by or against other cardholders with respect to other accounts, or arbitrating any claim as a representative of a class or in a private attorney general capacity.
Boehr charged that Discover breached the cardholder agreement by imposing a late fee of $29 on payments that were received on the due date but after an undisclosed 1 p.m. “cut-off time.”
The Court of Appeal based its preemption ruling on Sec. 2 of the FAA, a 1925 statute described as a response to “longstanding judicial hostility to arbitration agreements.”
In so ruling, the Court of Appeal acknowledged that the same clause in the Discover agreement had been held unconscionable and unenforceable by the Fourth District’s Div. Three in Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094.
But the Szetela court, since-retired Justice Reuben A. Ortega wrote for Div. One, ruled on the basis of California public policy and did not address the preemption issue.
Moreno, however, said there was nothing in the language of the FAA, or in the Supreme Court opinions interpreting it, to suggest that it preempts state law as to whether, and when, class action waivers are enforceable. Indeed, the justice wrote, class actions were largely unknown when the FAA was enacted.
“Nothing in...any...Supreme Court case,” he added, “...suggests that state courts are obliged to enforce contractual terms even if those terms are found to be unconscionable or contrary to public policy under general contract law principles.”
Unfair to Consumers
Moreno also embraced the Szetela court’s reasoning that under California law, a waiver of classwide remedies is unconscionable if the effect would be to allow a large company to unfairly deprive large numbers of its customers of small sums of money without legal recourse.
Moreno’s opinion was joined by Chief Justice Ronald M. George and Justices Joyce L. Kennard and Kathryn M. Werdegar.
Justice Marvin Baxter, joined by Justices Ming Chin and Janice Rogers Brown, dissented in part. While agreeing with the majority that federal law does not compel enforcement of class action waivers, Baxter said there is no fundamental public policy of California that should bar the parties’ choice to apply Delaware law.
The case was argued in the high court by Julia B. Strickland of Stroock & Stroock & Lavan in Century City for Discover Bank, Brian R. Strange of the Westside firm of Strange & Carpenter for the plaintiff, and F. Paul Bland Jr. of Washington, D.C. for Trial Lawyers for Public Justice, amicus in support of the plaintiff.
The case is Discover Bank v. Superior Court (Boehr), 05 S.O.S. 3115
Copyright 2005, Metropolitan News Company