Wednesday, January 15, 2003
Discover Card Bar on Class Action Arbitrations Upheld
By ROBERT GREENE, Associate Editor
A Discover Card user agreement that expressly bars class action arbitrations was upheld yesterday by this district’s Court of Appeal, setting up a conflict with a ruling last year from the Fourth District.
In Christopher Boehr’s case against Discover, this district’s Div. One ruled that the Federal Arbitration Act preempts provisions of the California Unfair Practices Act and other California law that makes the class action waiver substantively unconscionable.
Sec. 2 of the FAA, a 1925 statute passed to reverse what this district has called “longstanding judicial hostility to arbitration agreements,” mandates enforcement of arbitration agreements.
“While a state may prohibit the contractual waiver of statutory consumer remedies, including the right to seek relief in a class action, such protections fall by the wayside when the waiver is contained in a validly formed arbitration agreement governed by the FAA,” Justice Reuben A. Ortega wrote.
The clause that moved 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 Fourth District Court of Appeal’s Div. Three ruled last April that the same class action waiver clause takes a back seat to California’s public policy.
“The clause is not only harsh and unfair to Discover customers who might be owed a relatively small sum of money, but it also serves as a disincentive for Discover to avoid the type of conduct that might lead to class action litigation in the first place,” Justice Eileen C. Moore wrote in Szetela v. Discover Bank.
Moore wrote that the provision violates fundamental notions of fairness and violates public policy “by granting Discover a ‘get out of jail free’ card while compromising important consumer rights.”
It also violates public policy, Moore wrote, by working against judicial economy.
“To allow litigants to contract away the court’s ability to use a procedural mechanism that benefits the court system as a whole is no more appropriate than contracting away the right to bring motions in limine, seek directed verdicts, or use other procedural devices that allow the court to operate in an efficient manner,” Moore said.
But Moore’s opinion in Szetela did not deal with the federal preemption question. Ortega said that meant it was wrongly decided.
A threshold issue was whether to rely on Delaware or California law. Los Angeles Superior Court Judge Carolyn Kuhl said Szetela showed there was a difference between them because of California’s unconscionability policy, and struck the class action waiver clause from the agreement since pursuing Delware law would violate a fundamental public policy here.
But Ortega said Boehr failed to adequately brief his stance that no arbitration agreement was formed. The issue being conceded, Ortega said, the court is left to look at a valid arbitration agreement which necessarily is governed by the FAA.
The case is Discover Bank v. Superior Court, B161305.
Copyright 2003, Metropolitan News Company