36 Cal. 4th 148 (2005)
Christopher Boehr obtained a credit card from Discover Bank in April 1986 under a cardholder agreement that contained a Delaware choice-of-law clause.1
In July 1999 Discover Bank added an arbitration clause to existing accounts by mailing a notice that stated continued use of the card after the effective date would constitute acceptance of the new terms.2 The added clause required binding arbitration of disputes, stated that the agreement was governed by the Federal Arbitration Act, and expressly barred participation in classwide arbitration or consolidation of claims.3
On August 15, 2001, Boehr filed a putative class action complaint in Los Angeles Superior Court alleging breach of contract and violation of the Delaware Consumer Fraud Act.4 The complaint asserted that Discover Bank improperly assessed late fees of approximately $29 on payments received on the due date but after an undisclosed 1:00 p.m. cutoff time.5
Discover Bank moved to compel arbitration on an individual basis and to enforce the class action waiver.6 The trial court initially granted the motion under Delaware law.7 After the Court of Appeal decided Szetela v. Discover Bank, Boehr sought reconsideration.8
The trial court then struck the class action waiver as unconscionable under California law, ordered individual arbitration, and left open the possibility that Boehr could pursue classwide arbitration.9 Discover Bank petitioned the Court of Appeal for a writ of mandate.10 The Court of Appeal granted the writ and held that the Federal Arbitration Act preempts any California rule against class action waivers in arbitration agreements.11 The California Supreme Court granted review.12
Whether a class action waiver in a Discover Bank credit card agreement is unconscionable under California law?13
Under California law a class action waiver in a consumer contract of adhesion is unenforceable when it operates to insulate a party from liability that would otherwise be imposed.14
Yes. The cardholder agreement was presented through a bill-stuffer amendment whose acceptance was deemed by continued use, satisfying the procedural element of unconscionability.15 The waiver is substantively unconscionable because individual damages are small, approximately twenty-nine dollars per late fee, yet aggregate harm is large.16 The provision prevents consumers from aggregating claims while leaving Discover Bank unaffected.17
It thereby exempts the bank from responsibility for its own alleged violations in the precise manner condemned by Civil Code section 1668 and the principles articulated in Vasquez and Linder.18
The class action waiver is unconscionable under California law and unenforceable.19
Related opinions on this issue
Joined by Chin And Brown, Jj.
Justice Baxter dissents on this issue. He contends that the class action waiver is clear and conspicuous in the agreement.20 Baxter emphasizes that the plaintiff had the opportunity to reject the agreement if he found its terms unacceptable by notifying the bank and ceasing use of the account.21
Continued use after receiving the notice constituted knowing acceptance of the terms.22 Therefore, the waiver cannot be characterized as oppressive or exculpatory under California unconscionability doctrine.23 Baxter would affirm the judgment of the Court of Appeal enforcing the waiver according to its terms.24
Whether the Federal Arbitration Act preempts California law holding that class action waivers in consumer arbitration agreements are unconscionable?25
Section 2 of the Federal Arbitration Act preserves generally applicable state-law contract defenses such as unconscionability.26 This preservation applies provided the defense does not single out arbitration agreements for disfavored treatment or derive its meaning solely from the fact that an arbitration agreement is at issue.27
No. California's rule against class action waivers rests on the generally applicable doctrine of unconscionability and the prohibition of exculpatory clauses in Civil Code section 1668.28 The same rule invalidates class action waivers in non-arbitration consumer contracts of adhesion, as the Court of Appeal recognized in America Online.29 Therefore, it does not discriminate against arbitration agreements in the manner forbidden by Perry v. Thomas.30
The Federal Arbitration Act does not preempt California law on this point.31
Related opinions on this issue
Joined by Chin And Brown, Jj.
Justice Baxter dissents on this issue as well. He argues that the majority's rule effectively singles out arbitration agreements for special scrutiny in violation of the FAA's preemption provision.32 Baxter maintains that the FAA requires enforcement of class action waivers contained in valid arbitration agreements according to their terms.33
He would hold the parties to their agreement, expressly governed by Delaware law, which calls for individual arbitration of disputes arising between Discover Bank and its cardholders.34