Discover Bank v. Superior Court
113 P.3d 1100 · California Supreme Court · 2005
Facts
Discover Bank allegedly engaged in a deceptive practice by representing that late payment fees would not be assessed if payment was received by a certain date, but then assessed them if payment was received after 1:00 p.m. on that date. This practice led to individually small damages for credit cardholders but large aggregate damages. Christopher Boehr, a California resident, obtained a credit card from Discover Bank in April 1986, with an agreement containing a Delaware choice-of-law clause. In July 1999, Discover Bank added an arbitration clause to the agreement via a change-of-terms notice, which included a provision forbidding classwide arbitration. Boehr did not object to the new terms and continued using his account, thereby accepting the arbitration clause.
Procedural history
Plaintiff Christopher Boehr filed a putative class action complaint in superior court against Discover Bank. Discover Bank successfully moved to compel arbitration. The trial court initially granted Discover Bank's motion in its entirety under Delaware law, but later, citing *Szetela*, reconsidered and ruled the class arbitration waiver unconscionable under California law, striking the waiver. Discover Bank filed a writ petition, and the Court of Appeal granted it, holding that the FAA preempted California's rule against class action waivers. The Supreme Court granted review.
Issue
Is a classwide arbitration waiver in a consumer contract of adhesion unconscionable under California law, and if so, is this state law rule preempted by the Federal Arbitration Act (FAA)?
Holding
The court held that class action waivers in consumer contracts of adhesion are unenforceable as unconscionable under California law when disputes predictably involve small damages and the superior party allegedly cheats many consumers out of small sums. The court further held that the FAA does not preempt this California law. The case was remanded to the Court of Appeal to decide the choice-of-law issue.
Rule
Under California law, class action waivers in consumer contracts of adhesion are unconscionable and unenforceable when disputes predictably involve small damages and the party with superior bargaining power allegedly engages in a scheme to defraud numerous consumers of individually small sums. Such waivers are deemed substantively unconscionable because they operate as exculpatory clauses, insulating the party from liability for fraud or willful injury, contrary to Civil Code section 1668. Procedural unconscionability is present in adhesive contracts, especially when terms are added via "bill stuffers" requiring continued use for acceptance. The FAA does not preempt state laws that apply generally to all contracts, including arbitration agreements, as long as the state law does not single out arbitration agreements for disfavored treatment.
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