Status of Class Action Waivers in California after California Supreme Court’s Decision in Discover Bank V. Superior Court (Boehr)
Consumer Attorneys of California, Forum Magazine
Copyright CAOC, Forum, July/August2005.
Reprinted with permission.
By John N. Quisenberry and Susan E. Abitanta
A. Introduction
In the June issue of Forum, we authored an article entitled, “Can Employers Preclude Class Actions Through Mandatory Arbitration Agreements that are Silent as to Whether Classes are Permitted?” In a footnote, we mentioned that the case of Discover Bank v. Superior Court (Boehr) was pending before the California Supreme Court. On June 27, 2005, the Supreme Court issued a consumer-friendly decision,1 and held (1) class action waivers in consumer contracts of adhesion are unconscionable and unenforceable under certain circumstances, and (2) the Federal Arbitration Act (“FAA”) does not preempt a state’s prohibition of such waivers. Since the arbitration agreement contained a choice-of- law provision for the application of Delaware and federal law, and the complaint contained Delaware causes of action, the California Supreme Court remanded the case to the court of appeal to decide the choice-of-law issue.
Boehr, a California resident, filed a class action against the bank and alleged an improper late fee practice. The bank successfully moved to compel arbitration under a mandatory arbitration provision in its credit card agreement. When Boehr sought classwide arbitration, the bank sought to enforce the arbitration agreement’s class action waiver. The trial court, applying Delaware law, granted the bank’s motion to compel arbitration and upheld the class action waiver. Shortly thereafter, the Fourth District Court of Appeal in Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094 found the class action waiver in an identical credit card agreement unconscionable. On a motion for reconsideration, the Discover Bank trial court found Szetela controlling and held that arbitration class waivers are unconscionable. They also held that “enforcing the class action waiver under Delaware law would violate a fundamental public policy under California law as articulated in Szetela.” (Discover Bank at p. 3.) On the bank’s writ, the court of appeal upheld the class action waiver, finding that the California rule prohibiting class action waivers was preempted by the FAA. The California Supreme Court granted review.
B. Enforceability of Class Action Waivers
The Supreme Court noted that the class device is sometimes the only way to stop and redress exploitation and that classwide arbitration is available in California. (Citing, inter alia, Keating v. Superior Court (1982) 31 Cal.3d 584, 613.) The court also discussed whether class action waivers are unenforceable in California as unconscionable or against public policy. In considering choice-of-law provisions, the court noted that such provisions would not be given effect if to do so would violate a strong California public policy. (Citing Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 466.)2
Boehr was not alleging a cause of action under any California statute where a class action remedy is essential. Instead, he claimed that under California contract law the “class action or arbitration waivers in consumer contracts and in this particular contract, should be invalidated as unconscionable.” (Discover Bank at p. 7.) The court held that some class action waivers in consumer contracts are unconscionable – first, because they are contracts of adhesion (procedural unconscionability) and second, because they “may operate effectively as exculpatory contract clauses that are contrary to public policy” and, thus, are substantively unconscionable. (Ibid. citing Cal. Civ. Code § 1668, which bars exculpatory contracts as against public policy.)
Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.” (Discover Bank at p. 7.)
The court disagreed with other courts that view “class actions or arbitrations as a merely procedural right, the waiver of which is not unconscionable.” (Id. at p. 8.) Instead, its decisions have “continually affirmed, class actions and arbitrations are, particularly in the consumer context, often inextricably linked to the vindication of substantive rights.” (Ibid.) The court also rejected those decisions that find the availability of attorney’s fees an adequate substitute for class treatment. “Nor do we agree with the concurring and dissenting opinion that small claims litigation, government prosecution, or informal resolution are adequate substitutes.” (Ibid.)
We do not hold that all class action waivers are 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.” (Civ. Code § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced. (Ibid.)
C. FAA Does Not Preempt Rules Against Class Action Waivers
The Court next rejected the argument that the FAA preempts California’s rules against class action waivers. The Court held: (1) the FAA is silent on the subject of class actions or arbitrations; (2) state law applies if it governs issues concerning the validity, revocability, and enforceablilty of contracts generally; and (3) states can refuse to enforce arbitration agreements based on “‘generally applicable contract defenses, such as fraud, duress or unconscionability.’” Nothing in the FAA precludes classwide arbitration. (Id. at p. 11, citing Blue Cross of California v. Superior Court (1998) 67 Cal.App.4th 42, 62-64.) “[T]he FAA does not federalize the law of unconscionability or related contract defenses except to the extent that it forbids the use of such defenses to discriminate against arbitration clauses. (Discover Bank at p. 11.) Here, the California principle – that class action waivers are unconscionable as unlawfully exculpatory – applies equally to arbitration agreements and to contracts generally (id. at p. 10) and, thus, is not discriminatory. (Id. at p. 11.) The court disagreed with the bank’s argument that “the FAA categorically precludes states from enforcing arbitration-neutral rules that prohibit consumer class action waivers in some circumstances.” (Id. at p. 12.)
The Court also disagreed that the decision in Green Tree Fin. Corp. v. Bazzle (2003) 539 U.S. 444 held that state rules against class arbitration waivers are preempted by the FAA. (Discover Bank at p. 13.) The Bazzle decision had a narrow holding that whether an arbitration agreement allows classwide arbitration is a matter for the arbitrator, not the court, to decide. (Id. at p. 14.)
The court did not address whether a state court can, consistent with the FAA, hold a class action waiver appearing in a contract of adhesion for arbitration unconscionable or contrary to public policy, as part of an arbitration-neutral law that finds all such waivers unenforceable. . . . Under California law, as discussed, class arbitration may be authorized, even when a contract of adhesion forbids it, because a class arbitration waiver may be unconscionable. Bazzle does not call into question the principle that state courts may enforce contract rules regarding unconscionability and public policy that preclude class action waivers. . . . Under California law, the question of whether “grounds exist for the revocation of the [arbitration] agreement” based on “grounds as exist for the revocation of any contract” is for the courts to decide, not an arbitrator. (Ibid., quoting Code Civ. Proc. § 1281.2.)
The Court concluded that the determination of whether an arbitration agreement is unconscionable or contrary to public policy is a gateway issue to be resolved by the court.
We continue to believe that the alternatives – either not enforcing arbitration agreements and requiring class action litigation, or allowing arbitration agreements to be used as a means of completely inoculating parties against class liability – are unacceptable. Nothing in the FAA nor in Bazzle requires us to reconsider that assessment. (Id. at p. 16.)
D. Choice-of-law Issue
The court then turned to the choice-of-law issue. The Discover Bank agreement contained a Delaware choice-of-law provision, and Delaware law permits class action waivers.
[Indeed, Boehr] has brought this action under the Delaware Consumer Fraud Act and Delaware contract law, but seeks to enforce those Delaware laws in a California court with a California unconscionability rule against class action waivers that arguably is not found under Delaware law. Whether he may do so remains to be determined on remand. (Id. at p. 17.)
Since the court of appeal never addressed the choice-of-law issue, the Supreme Court remanded the case and provided some guidance as to the analytical approach to the issue. (Ibid.)3
E. Concurring and Dissenting Opinion
The concurring and dissenting opinion by Baxter, J., with Chin J. and Brown, J., concurring, agreed that federal law does not compel enforcement of class action waivers simply because they are in arbitration agreements. The dissenters disagreed, however, with the ultimate decision and “the majority’s determination to use this case as a vehicle to resolve the issue of California’s policy on class action waivers,” finding Delaware law should apply, and individual arbitration should be compelled. (Ibid.; original emphasis.)
FOOTNOTES
1 See Discover Bank v. Superior Court (Boehr), 113 P.3d 1100, 30 Cal.Rptr.3d 76, 2005 WL 1500866 (“Discover Bank”).
2 The court provided examples of public policy overriding choice-of-law provisions. In America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, 5 (“AOL”), a Virginia choice-of-law provision did not permit consumer class action lawsuits. (Discover Bank at p. 6.) The AOL court found the provision unenforceable and against public policy, because the California statute (CLRA, Civ. Code § 1751) contained an express anti-waiver provision.
3 In determining what law to apply, the court must analyze: (1) whether the chosen state has a substantial relationship to the parties or transaction; (2) whether there is a conflict between the states’ laws; and (3) if there is a fundamental conflict with California law, whether California has a “materially greater interest” than Delaware in the determination of the issue. (Id at p. 16.)
