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Discover Bank v. Superior Court

Supreme Court of California
30 Cal. Rptr. 3d 76, 36 Cal. 4th 148, 113 P.3d 1100 (2005)
ELI5:

Rule of Law:

Under California law, class action waivers in consumer contracts of adhesion are unconscionable and unenforceable when disputes predictably involve small amounts of damages for each individual, and the party with superior bargaining power is alleged to have carried out a scheme to cheat a large number of consumers. This state-law rule, as a generally applicable contract defense, is not preempted by the Federal Arbitration Act (FAA).


Facts:

  • In April 1986, Christopher Boehr obtained a credit card from Discover Bank.
  • The original cardholder agreement did not contain an arbitration clause.
  • In July 1999, Discover Bank unilaterally added an arbitration clause to the agreement by sending a 'bill stuffer' amendment to its cardholders, including Boehr.
  • The amendment stated that continued use of the credit card would constitute acceptance of the new terms, which included a clause explicitly prohibiting participation in classwide arbitration.
  • Boehr did not object to the new terms and continued to use his Discover card.
  • Boehr alleged that Discover Bank engaged in a practice of charging a $29 late fee if payments were received after an undisclosed 1:00 p.m. cutoff time on the due date.
  • This alleged practice resulted in small individual damages to a large number of consumers, which amounted to a large aggregate sum for Discover Bank.

Procedural Posture:

  • Christopher Boehr filed a putative class action complaint against Discover Bank in California superior court (the trial court).
  • Discover Bank moved to compel individual arbitration and dismiss the class action based on the arbitration agreement's class action waiver.
  • The trial court initially granted Discover Bank's motion.
  • Boehr filed a motion for reconsideration, which the trial court granted, finding the class action waiver unconscionable under California law and severing it from the agreement.
  • Discover Bank, as petitioner, sought a writ of mandate from the California Court of Appeal.
  • The Court of Appeal granted the writ, holding that the Federal Arbitration Act (FAA) preempted California law regarding the unconscionability of class action waivers.
  • The Supreme Court of California granted review to resolve the issue.

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Issue:

Is a class action waiver provision within an arbitration clause of a consumer contract of adhesion unconscionable and unenforceable under California law where the waiver would effectively insulate the drafting party from liability for widespread, low-value fraud?


Opinions:

Majority - Moreno, J.

Yes. A class action waiver in a consumer contract of adhesion is unconscionable and unenforceable under these circumstances. The waiver is procedurally unconscionable because it was presented in a take-it-or-leave-it 'bill stuffer' amendment by a party with superior bargaining power. It is substantively unconscionable because it is unfairly one-sided and operates as an exculpatory clause, effectively immunizing Discover Bank from liability for a scheme that defrauds numerous consumers of small sums. Because class actions are often the only economically feasible means for consumers to vindicate their rights in such cases, the waiver allows the company to 'retain the benefits of its wrongful conduct.' Furthermore, this California rule against certain class action waivers is not preempted by the Federal Arbitration Act (FAA) because it is a generally applicable contract defense of unconscionability, which section 2 of the FAA explicitly permits states to apply to arbitration agreements.


Concurring-in-part-and-dissenting-in-part - Baxter, J.

No. While I concur that the Federal Arbitration Act (FAA) does not preempt California's unconscionability doctrine, the court should not have decided this issue and should have instead enforced the contract's choice-of-law provision. The parties' agreement specified that Delaware law governs, and under Delaware law, the class action waiver is valid and enforceable. Applying California's choice-of-law analysis, Delaware law should control because Delaware has a substantial relationship to the parties and applying its law would not violate a fundamental policy of California. The lack of a class remedy is not equivalent to exculpation, as consumers have other avenues for redress, such as small claims court and individual arbitration. The majority's holding risks making California a magnet for nationwide class action lawsuits that could not be maintained elsewhere.



Analysis:

This decision established a significant consumer protection rule in California, known as the 'Discover Bank rule,' which invalidated class action waivers in many consumer adhesion contracts. It affirmed the state's power to regulate contracts through the generally applicable doctrine of unconscionability, holding that the FAA does not preempt such neutral state laws. However, the precedential value of this case was significantly undermined by the U.S. Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion, which held that the FAA does preempt state laws, like the Discover Bank rule, that stand as an obstacle to the accomplishment of the FAA's objectives by disfavoring arbitration.

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