Klussman v. Cross Country Bank

• Court: California Court of Appeals
• Writing for the Court: Marchiano
• Citation: Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 36 Cal. Rptr. 3d 728 (Cal. App. 2005)
• Decision Date: 15 December 2005
• Docket Number: No. A108572.,A108572.
• Parties: Dana KLUSSMAN et al., Plaintiffs and Respondents, v. CROSS COUNTRY BANK et al., Defendants and Appellants.

36 Cal.Rptr.3d 728

134 Cal.App.4th 1283

Dana KLUSSMAN et al., Plaintiffs and Respondents, v. CROSS COUNTRY BANK et al., Defendants and Appellants.

No. A108572.

Court of Appeal, First District, Division One.

December 15, 2005.

Morrison & Foerster, William Stern, Ballard, Spahr, Andrews & Ingersoll, Martin C. Bryce, Jr., Alan S. Kaplinsky, for Defendants and Appellants—Cross Country Bank et al.

Bramson, Plutzik, Mahler & Birkhaeuser, Robert M. Bramson, Walnut Creek, The Mills Law Firm, Robert W. Mills, Harry Shulman, for Plaintiffs and Respondents — Dana Klussman et al.

Office of the Attorney General, Bill Lockyer, Attorney General, Ronald A. Reiter, Supervising Deputy Attorney General, Catherine Z. Ysrael, Deputy Attorneys General, for Amicus Curiae — Office of the Attorney General.

MARCHIANO, P.J.

Defendants Cross Country Bank (Bank), its credit card servicing company Applied Card Systems, Inc. (ACS), and Rocco A. Abessinio appeal from an order denying their motion to compel arbitration.¹ Most of the issues originally raised on appeal have been settled by our Supreme Court's recent decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (Discover Bank). Consequently, the principal issue remaining for decision is the proper application of the choice of law rules outlined in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148 (Nedlloyd). We conclude that the trial court correctly applied the appropriate choice of law analysis; that under California law the hidden waiver of the right to bring classwide arbitration in this case is unconscionable; and therefore, the arbitration clause is unenforceable.

BACKGROUND

California residents, Dana Klussman and Samantha L. Klussman filed a class action complaint for damages and injunctive relief alleging five causes of action against Bank, ACS and Abessinio. The operative complaint for purposes of this appeal is the fourth amended complaint filed on May 28, 2004.² Bank is a Delaware corporation headquartered in Delaware that issues VISA and MasterCard credit cards and solicits a substantial amount of business in California. ACS is a Delaware corporation headquartered in Florida that services Bank's credit card operations and collects related debts. Abessinio is the owner and Chief Executive Officer of Bank and ACS.

The complaint alleged that Bank's California customers were primarily low credit individuals including elderly and disabled persons who had experienced bankruptcies or had other credit management problems, and who were "generally unsophisticated and vulnerable to financial predation." The complaint alleged that Bank has earned hundreds of millions of dollars by offering credit cards to these consumers and subsequently engaged in a pattern of unlawful practices such as misrepresenting payoff charges, imposing unauthorized fees, charging late fees for timely payments, automatically subscribing customers to unauthorized and costly programs and using abusive and harassing tactics in collecting fees and charges.

The first cause of action alleged violations of the California Consumers Legal Remedies Act (CLRA). (Civ.Code, § 1750 et seq.) The second cause of action alleged violations of the Delaware Unfair Business Practices Act. The third cause of action alleged breach of contract in that defendants failed to honor payoff agreements and promises of free credit increases. The fourth cause of action alleged fraud and imposition of excessive bank fees. The fifth cause of action alleged violations of the California Unfair Competition Law (UCL). (Bus. & Prof.Code, § 17200 et seq.) The complaint requested damages, restitution, interest, an injunction and attorney fees.

The relevant cardholder agreements stated that Delaware law governed except where federal law applied. The VISA and MasterCard cardholder agreements issued to Dana Klussman in 1997 contained a paragraph regarding arbitration that stated: "You and we agree that all claims, demands, or disputes that you may have against us or that we may have against you, which in any way relate to or arise out of this Agreement, your Account, or your use or attempted use of the Card, or the servicing of your Account by Applied Card Systems, or this agreement to arbitrate, as well as involving claims of fraud or misrepresentation, shall be brought in arbitration before the National Arbitration Forum ("NAF")." The paragraph concluded with the statement that: "Rules and forms of the NAF may be obtained by calling (800) 474-2371 and all claims shall be filed at any NAF office, on the World Wide Web at www.arb-forum.com or at P.O. Box 50191, Minneapolis, Minnesota 55405. This arbitration agreement is made pursuant to a transaction involving interstate commerce."

In June of 1999, Bank issued Dana Klussman new cards and a new agreement. The 1999 agreement added language stating that the arbitration agreement: "shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16[FAA]. You and we waive the right to a jury trial."³ Samantha Klussman was issued a VISA card in 1999 with an agreement that was similar to Dana Klussman's 1999 agreement.

On June 11, 2004, Bank, ACS and Abessinio filed a motion to compel arbitration.⁴ Defendants based the motion on the contentions that the claims were governed by the FAA, that they fell within the scope of the arbitration clauses and that the defendants had not waived the right to compel arbitration.

Plaintiffs opposed the motion, first arguing that the CLRA and UCL claims for injunctive relief are not subject to arbitration under Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066, 90 Cal.Rptr.2d 334, 988 P.2d 67 (Broughton) and Cruz v. Pacificare Health Systems, Inc. (2003) 30 Cal.4th 303, 133 Cal.Rptr.2d 58, 66 P.3d 1157 (Cruz). Noting that the CLRA expressly authorizes class actions, plaintiffs contended that to the extent enforcement of the arbitration clause would preclude class actions, enforcement was prohibited under America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, 108 Cal.Rptr.2d 699 (AOL). Plaintiffs explained that although the arbitration clause at issue did not mention class actions, it was the functional equivalent of a waiver because the rules of NAF, the designated arbitrator, prohibit classwide arbitration unless all parties consent. The only way a consumer could discover this fact would be to obtain, read and understand the meaning of the lengthy NAF rules.⁵ Applying California choice of law rules, plaintiffs argued that California law governed and would prohibit enforcement of the class action waiver as unconscionable.

The superior court agreed with plaintiffs that the CLRA and UCL claims for injunctive relief were not subject to arbitration under Broughton, supra, 21 Cal.4th 1066, 90 Cal.Rptr.2d 334, 988 P.2d 67 and Cruz, supra, 30 Cal.4th 303, 133 Cal.Rptr.2d 58, 66 P.3d 1157. The court then applied the FAA and California law in a choice of law analysis pursuant to Nedlloyd, supra, 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148 and concluded that the arbitration clause was unenforceable because the NAF restriction on class actions could not be severed. The court denied the motion to compel arbitration.⁶ Defendants promptly appealed.

DISCUSSION

On appeal, defendants argue that a proper application of the choice of law rules mandates a finding that Delaware law governs and Delaware courts enforce class action waivers.

After defendants filed their opening brief, our Supreme Court decided Discover Bank, holding that a waiver of classwide arbitration in a consumer contract of adhesion was unconscionable in the circumstances of that case, and that the FAA does not preempt California's invalidation of such waivers. (Discover Bank, supra, 36 Cal.4th at pp. 162, 171, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) Plaintiffs commented on the Discover Bank case in their brief and defendants addressed the case in their reply brief. After reviewing the arguments of the parties and the relevant authorities, we conclude that the pertinent arbitration clauses are unenforceable under California law.

The CLRA and UCL Claims for Injunctive Relief

Initially, we note that in Broughton and Cruz, our Supreme Court held that claims for injunctive relief under the CLRA (Broughton) and UCL (Cruz) are intended to remedy public wrongs and further the public interest and are not subject to arbitration.⁷ In both cases, the court rejected the claim that federal law was inconsistent with the decisions. (Broughton, supra, 21 Cal.4th at pp. 1077-1078, 1080, 1082-1084, 90 Cal.Rptr.2d 334, 988 P.2d 67; Cruz, supra, 30 Cal.4th at pp. 311-315, 133 Cal.Rptr.2d 58, 66 P.3d 1157.) Under the authority of Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937 (Auto Equity), we must follow the holdings of those cases that injunctive relief claims under the CLRA and UCL are not subject to arbitration.

FAA Preemption

Defendants initially argued that the trial court erred when it failed to apply federal law, which preempts any applicable state law. The 1997 arbitration clause in the credit card agreements provides that the clause concerns a transaction involving commerce. The 1999 clause expressly states that it is governed by the FAA. The FAA provides: "A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.)

The court in Discover Bank, supra, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 responded to the argument that the FAA preempts California law concerning class action waivers in arbitration agreements. The court...