36 Cal.4th 148, S113725, Discover Bank v. Superior Court

Docket Nº:S113725
Citation:36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100
Party Name:Discover Bank v. Superior Court
Case Date:June 27, 2005
Court:Supreme Court of California

Page 148

36 Cal.4th 148

30 Cal.Rptr.3d 76, 113 P.3d 1100

DISCOVER BANK, Petitioner,



CHRISTOPHER BOEHR, Real Party in Interest.


Supreme Court of California

June 27, 2005

Court: Superior County: Los Angeles Super. Ct. No. BC 256167, Ct.App. 2/1 B161305, Judge: Carolyn B. Kuhl

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Kirkland & Ellis, Jeffrey S. Davidson, Rick Richmond, C. Robert Boldt, Amy M. Wilkins, Timothy B. Jafek; Stroock & Stroock & Lavan and Julia B. Strickland for Petitioner.

Morrison & Foerster and Maren E. Nelson for California Bankers Association as Amicus Curiae on behalf of Petitioner.

M. Jane Brady, Attorney General (Delaware); Severson & Werson and William L. Stern for Robert A. Glen, Delaware State Bank Commissioner as Amicus Curiae on behalf of Petitioner.

Rintala, Smoot, Jaenicke & Rees, G. Howden Fraser; Wilmer, Cutler & Pickering and Christopher R. Lipsett for American Bankers Association, American Financial Services Association and Consumer Bankers Association as Amici Curiae on behalf of Petitioner.

Gibson, Dunn & Crutcher, Mark E. Weber, Gabriel J. Pasette; Stokes Lawrence, Kelly T. Noonan and Bradford Axel for AT&T Wireless Services, Inc., as Amicus Curiae on behalf of Petitioner.

Littler Mendelson, Henry D. Lederman, Marissa M. Tirona and James Y. Wu for Ralphs Grocery Company as Amicus Curiae on behalf of Petitioner.

No appearance for Respondent.

Trial Lawyers for Public Justice, F. Paul Bland, Jr., Michael J. Quirk, Arthur H. Bryant, Leslie A. Bailey, Kate Gordon; Strange & Carpenter,

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Brian R. Strange, Gretchen Carpenter; Law Offices of Barry Kramer and Barry L. Kramer for Real Party in Interest.

Bramson, Plutzik, Mahler & Birkhaeuser and Robert M. Bramson for National Association of Consumer Advocates as Amicus Curiae on behalf of Real Party in Interest.

Deborah M. Zuckerman, Michael R. Schuster; Kemnitzer, Anderson, Barron & Ogilvie and Mark F. Anderson for AARP as Amicus Curiae on behalf of Real Party in Interest.

The Sturdevant Law Firm, James C. Sturdevant; Ian Herzog; Michael Adler; Sharon J. Arkin; Stuart B. Esner; Brian S. Kabateck; David A. Rosen; Daniel U. Smith; Christine D. Spagnoli; Lea-Ann Tratten; Steven B. Stevens and Scott H. Z. Sumner for Consumer Attorneys of California as Amicus Curiae on behalf of Real Party in Interest.

Ghalchi & Associates, Kamran Ghalchi; Adhoot & Wolfson, Tina Wolfson and Robert Adhoot for Rebecca Shakib and Karen Bernard as Amici Curiae on behalf of Real Party in Interest.



This case concerns the validity of a provision in an arbitration agreement between Discover Bank and a credit cardholder forbidding classwide arbitration. The credit cardholder, a California resident, alleges that Discover Bank had a practice of representing to cardholders that late payment fees would not be assessed if payment was received by a certain date, whereas in actuality they were assessed if payment was received after 1:00 p.m. on that date, thereby leading to damages that were small as to individual consumers but large in the aggregate. Plaintiff filed a complaint claiming damages for this alleged deceptive practice, and Discover Bank successfully moved to compel arbitration pursuant to its arbitration agreement with plaintiff.

Plaintiff now seeks to pursue a classwide arbitration, which is well accepted under California law. (See Keating v. Superior Court (1982) 31 Cal.3d 584, 613-614 [183 Cal.Rptr. 360] (Keating), overruled on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1 (Southland).) But plaintiff’s arbitration agreement with Discover Bank has a clause forbidding classwide arbitration. Moreover, the agreement has a Delaware choice-of-law provision. Discover Bank argues that Delaware law allows contracting parties to waive class action remedies.

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The trial court ruled that the class arbitration waiver was unconscionable and enforced the arbitration agreement with the proviso that plaintiff could seek classwide arbitration. The Court of Appeal, without disputing that such class arbitration waivers may be unconscionable under California law and without addressing the choice-of-law issue, nonetheless held that the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts the state law rule that class arbitration waivers are unconscionable.

As explained below, we 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. We further conclude that the Court of Appeal is incorrect that the FAA preempts California law in this respect. Finally, we will remand to the Court of Appeal to decide the choice-of-law issue.

I. Factual and Procedural Background

The following undisputed facts are largely drawn from the Court of Appeal opinion. Plaintiff Christopher Boehr obtained a credit card from defendant Discover Bank in April 1986. The Discover Bank cardholder agreement (agreement) governing plaintiff’s credit card account contained a choice-of-law clause providing for the application of Delaware and federal law.

When plaintiff’s credit card was issued, the agreement did not contain an arbitration clause. Discover Bank subsequently added the arbitration clause in July 1999, pursuant to a change-of-terms provision in the agreement. Relying on the change-of-terms provision, Discover Bank added the arbitration clause by sending to its existing cardholders (including plaintiff) a notice that stated in relevant part: “NOTICE OF AMENDMENT . . . WE ARE ADDING A NEW ARBITRATION SECTION WHICH PROVIDES THAT IN THE EVENT YOU OR WE ELECT TO RESOLVE ANY CLAIM OR DISPUTE BETWEEN US BY ARBITRATION, NEITHER YOU NOR WE SHALL HAVE THE RIGHT TO LITIGATE THAT CLAIM IN COURT OR TO HAVE A JURY TRIAL ON THAT CLAIM. THIS ARBITRATION SECTION WILL NOT APPLY TO LAWSUITS FILED BEFORE THE EFFECTIVE DATE.”

In addition, the arbitration clause precluded both sides from participating in classwide arbitration, consolidating claims, or arbitrating claims as a representative or in a private attorney general capacity: “. . . NEITHER YOU NOR WE SHALL BE ENTITLED TO JOIN OR CONSOLIDATE CLAIMS IN ARBITRATION BY OR AGAINST OTHER CARD MEMBERS WITH RESPECT TO OTHER ACCOUNTS, OR ARBITRATE ANY CLAIM AS A

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The arbitration agreement also stated that the FAA would govern the agreement: “Your Account involves interstate commerce, and this provision shall be governed by the Federal Arbitration Act (FAA).” “The arbitrator shall follow applicable substantive law to the extent consistent with the FAA and applicable statutes of limitations and shall honor claims of privilege recognized at law.” Existing cardholders were notified that if they did not wish to accept the new arbitration clause, they must notify Discover Bank of their objections and cease using their accounts. Their continued use of an account would be deemed to constitute acceptance of the new terms. Plaintiff did not notify Discover Bank of any objection to the arbitration clause or cease using his account before the stated deadline.

On August 15, 2001, Boehr filed a putative class action complaint in superior court against Discover Bank. Plaintiff alleged two causes of action — breach of contract and violation of the Delaware Consumer Fraud Act (Del. Code Ann., tit. 6, §§ 2511-2527). The latter act in part prohibits misrepresentations “of any material fact with intent that others rely upon such concealment, suppression or omission in connection with the sale, lease or advertisement of any merchandise.” (Id., § 2513.) He alleged that Discover Bank breached its cardholder agreement by imposing a late fee of approximately $29 on payments that were received on the payment due date, but after Discover Bank’s undisclosed 1:00 p.m. “cut-off time.” Discover Bank also allegedly imposed a periodic finance charge (thereby disallowing a grace period) on new purchases when payments were received on the payment due date, but after 1:00 p.m. The complaint acknowledged that the contract with Discover Bank provided that the contract was “governed by federal law and the law of Delaware.” Plaintiff alleged, however, that “this choice of law provision applies only to plaintiff’s substantive claims and not to other issues related to the contract, which plaintiff contends are governed by California or other applicable law.”

Discover Bank moved to compel arbitration of plaintiff’s claim on an individual basis and to dismiss the class action pursuant to the arbitration agreement’s class action waiver.

Plaintiff opposed the motion, contending among other things that the class action waiver was unconscionable and unenforceable under California law.1

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Discover Bank, on the other hand, argued that the FAA requires the enforcement of the express provisions of an arbitration clause, including class action waivers. Discover Bank contended that under section 2 of the FAA, arbitration agreements should not be singled out for suspect status under state laws applicable only to arbitration provisions.

The trial court initially granted Discover Bank’s motion in its entirety under Delaware law. After Discover Bank’s motion to compel arbitration was granted, the Fourth District Court of Appeal decided Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094 [118 Cal.Rptr.2d 862] (Szetela), which held, for reasons explained below, that a virtually...

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