Lead Opinion
Opinion
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)
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 WELL 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 CARDMEMBERS WITH RESPECT TO OTHER ACCOUNTS, OR ARBITRATE ANY CLAIM AS A
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.
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)
The lower court found Szetela constituted new and controlling authority for the proposition that, under California law, an arbitration class action waiver is unconscionable and, thus, unenforceable. The trial court further conducted a choice-of-law analysis and concluded that enforcing the class action waiver under Delaware law would violate a fundamental public policy under California law as articulated in Szetela. Upon determining it would be proper to sever the class action waiver clause from the rest of the arbitration agreement, the trial court struck the class action waiver clause from the agreement, ordered plaintiff to arbitrate his claims individually, and left open the possibility that plaintiff may succeed in certifying an arbitration class under California law.
After the lower court granted plaintiff’s motion for reconsideration, Discover Bank filed a writ petition seeking reinstatement of the lower court’s original order enforcing the arbitration clause in its entirety by compelling plaintiff to arbitrate on an individual basis and precluding him from participating in class litigation or class arbitration. The Court of Appeal issued an order to show cause.
The Court of Appeal granted Discover Bank’s writ. It did not take issue with the premise that class action waivers are unenforceable, at least under some circumstances, under California law and that this rule could override the Delaware choice-of-law provision. But the Court of Appeal held, for reasons elaborated below, that any California rule prohibiting class action waivers was preempted by the FAA, and that Szetela had failed to adequately analyze the federal preemption issue. It therefore upheld the Discover Bank class action waiver. We granted review.
A. Class Action Lawsuits and Class Action Arbitration
Before addressing the questions at issue in this case, we first consider the justifications for class action lawsuits. These justifications were set forth in Justice Mosk’s oft-quoted majority opinion in Vasquez v. Superior Court (1971)
We quoted much of the above language with approval almost 30 years later in Linder v. Thrifty Oil Co. (2000)
These same concerns were acknowledged by the United States Supreme Court: “ ‘The policy at the very core of the class action mechanism is to
It is this important role of class action remedies in California law that led this court to devise the hybrid procedure of classwide arbitration in Keating, supra,
The Keating court recognized that “[w]ithout doubt a judicially ordered classwide arbitration would entail a greater degree of judicial involvement than is normally associated with arbitration, ideally ‘ “a complete proceeding, without resort to court facilities.” ’ [Citation.] The court would have to make initial determinations regarding certification and notice to the class, and if classwide arbitration proceeds it may be called upon to exercise a measure of external supervision in order to safeguard the rights of absent class members to adequate representation and in the event of dismissal or settlement. A good deal of care, and ingenuity, would be required to avoid judicial intrusion upon the merits of the dispute, or upon the conduct of the proceedings themselves and to minimize complexity, costs, or delay. [Citation.] [f] An adhesion contract is not a normal arbitration setting, however, and what is at stake is not some abstract institutional interest but the interests of the affected parties.” (Keating, supra,
B. The Enforceability of Class Action Waivers
Keating judicially authorized classwide arbitration in a case in which the arbitration agreement at issue was silent on the matter. It did not answer directly the question whether a class action waiver may be unenforceable as contrary to public policy or unconscionable. Recent cases have addressed that question. First, the Court of Appeal discussed the validity of a contractual class action waiver outside the arbitration context in America Online, Inc. v. Superior Court (2001)
The America Online court held the forum selection and choice-of-law provisions to be unenforceable. As to the latter, the court stated: “ ‘While “California does not have any public policy against a choice of law provision, where it is otherwise appropriate” [citation] and “choice of law provisions are usually respected by California courts . . .” [citation] “an agreement designating [a foreign] law will not be given effect if it would violate a strong California public policy . . . [or] ‘result in an evasion of ... a statute of the forum protecting its citizens.’ ” [Citation.]’ ” {America Online, supra,
The America Online court found in the CLRA a statute that overrode the choice-of-law provision. The court noted that the statute contained an anti-waiver provision, Civil Code section 1751, which states: “Any waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void.” The court reasoned that following Virginia law would result in a waiver of the CLRA in light of the fact that the equivalent Virginia consumer protection statute, the Virginia Consumer Protection Act of
In Szetela, supra,
The court held that the class arbitration waiver was unenforceable. It first recognized that unconscionability was one reason to refuse to enforce an arbitration waiver. {Szetela, supra,
Turning to the present case, we note that plaintiff does not plead a CLRA cause of action and so does not invoke its antiwaiver provision;
“To briefly recapitulate the principles of unconscionability, the doctrine has ‘ “both a ‘procedural’ and a ‘substantive’ element,” the former focusing on “ ‘oppression’ ” or “ ‘surprise’ ” due to unequal bargaining power, the latter on “ ‘overly harsh’ ” ’or “ ‘one-sided’ ” results.’ [Citation.] The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, ‘ “which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” ’...[][] Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided.” (Little v. Auto Stiegler, Inc. (2003)
We agree that at least some class action waivers in consumer contracts are unconscionable under California law. First, when a consumer is given an amendment to its cardholder agreement in the form of a “bill stuffer” that he would be deemed to accept if he did not close his account, an element of procedural unconscionability is present. (Szetela, supra,
Class action and arbitration waivers are not, in the abstract, exculpatory clauses. But because, as discussed above, damages in consumer cases are often small and because “ ‘[a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit’ ” (Linder, supra,
We acknowledge that other courts disagree. Some courts have viewed class actions or arbitrations as a merely procedural right, the waiver of which is not unconscionable. (See, e.g., Strand v. U.S. Bank National Association ND (2005)
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
C. FAA Preemption of California Rules Against Class Action Waivers
1. The Court of Appeal Opinion
The Court of Appeal did not dispute the conclusions of America Online and Szetela that, at least under some circumstances, a class action waiver would be unconscionable or contrary to public policy. The court concluded, however, that when class action waivers are contained in arbitration agreements, California law prohibiting such waivers is preempted by section 2 of the FAA (9 U.S.C. § 2). We conclude the Court of Appeal erred.
We begin by reviewing some basic principles pertaining to the enforcement of arbitration agreements. “California law, like federal law, favors enforcement of valid arbitration agreements. [Citation.] .... Thus, under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (Armendariz, supra, 24 Cal.4th at pp. 97-98, fn. omitted; see also 9 U.S.C. § 2; Code Civ. Proc., § 1281.) In other words, although under federal and California law, arbitration agreements are enforced “in accordance with their terms” (Volt Info. Sciences v. Leland Stanford Jr. U. (1989)
At the outset of our discussion, we note that the FAA is silent on the matter of class actions and class action arbitration. Indeed, not only is classwide arbitration a relatively recent development, but class action litigation for damages was for the most part unknown in federal jurisdictions at the time the FAA was enacted in 1925. (Act of Feb. 12, 1925, ch. 213, 43 Stat. 883.)
In support of its conclusion, the Court of Appeal cited Perry v. Thomas (1987)
The Court of Appeal observed that the court in Perry did not address whether the contract was unconscionable, because this issue had not been addressed in the lower courts. But while noting that the issue may be considered on remand, the Perry court clarified the limits the FAA imposed on the unconscionability defense: “We note ... the choice-of-law issue that arises when defenses such as [plaintiff’s] so-called ‘standing’ and unconscionability arguments are asserted. In instances such as these, the text of § 2 provides the touchstone for choosing between state-law principles and the principles of federal common law envisioned by the passage of that statute: An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law [citation], ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ 9 U.S.C. § 2 ... . Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of § 2. [Citations.] A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a
Based on the above, the Court of Appeal concluded: “While a state may prohibit the contractual waiver of statutory consumer remedies, including the right to seek relief in a class action, such protections fall by the wayside when the waiver is contained in a validly formed arbitration agreement governed by the FAA. The antiwaiver provisions in statutes such as section 229 of the Labor Code ... are preempted by section 2 of the FAA. Similarly, we conclude the antiwaiver language found in judicial decisions such as [America Online] and Szetela also has been preempted by section 2 of the FAA.”
The Court of Appeal’s conclusion is puzzling, because it ignores the critical distinction made by the Perry court between a “state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue,” which is preempted by section 2 of the FAA, and a state law that “govem[s] issues concerning the validity, revocability, and enforceability of contracts generally,” which is not. (Perry, supra,
The Court of Appeal also relied on statements found in Volt, supra,
The Court of Appeal in the present case concluded that, unlike in Volt, the imposition of class action arbitration despite a class action waiver in the arbitration agreement would defeat the purpose of the FAA because it would not be enforcing the arbitration agreement according to its terms. We disagree. Volt’s dictum that the primary purpose of the FAA is to “ensur[e] that private agreements to arbitrate are enforced according to their terms” (Volt, supra,
Discover Bank cites various cases holding that the requirement of section 4 of the FAA, that federal district courts petitioned to compel arbitration will do so “in accordance with the terms of the agreement,” precludes class action arbitration when the agreement does not provide for it. (See, e.g., Champ v. Siegel Trading Co., Inc., supra,
The Court of Appeal opinion below also relied on the supposed shortcomings of arbitration to bolster its conclusion that a class action waiver is enforceable under the FAA. As the court stated: “Although California courts have recognized the consumer protection value of classwide arbitration, that is not the sole consideration. Courts should also consider the ‘California rule which prevents reweighing the merits of an arbitrator’s decision.’ [Citation.] The FAA does not preempt this rule. [Citation.] As judicial review of the merits of an arbitrator’s decision may not be had under California law, a multi-million dollar class arbitration award entered on nothing more than mere whim cannot be corrected under California law.”
Far from holding that the invalidation of a class action waiver discriminates against arbitration, the Court of Appeal below reasoned in effect that arbitration is an inferior forum and therefore cannot be entrusted with classwide claims. The court’s conclusion regarding the unsuitability of arbitration to class actions reflects, as we stated in the context of another proposed limitation on arbitration, “the very mistrust of arbitration that has been repudiated by the United States Supreme Court.” (Armendariz, supra,
2. Gilmer v. Inter state/Johnson Lane Corp.
Discover Bank and its amici curiae also argue that their position on FAA preemption is supported by language in Gilmer v. Interstate/Johnson Lane Corp. (1991)
The above passage does not support Discover Bank’s position. At most, the Gilmer court can be understood to mean that a party can still vindicate his or her rights under the ADEA even if no class action remedy is available. The ADEA is an employment discrimination statute in which large individual awards are commonplace. (See Carnahan, Removing the Scarlet A (Aug. 12, 2002) Forbes, at p. 78 [reporting that the median award in employee age discrimination suits is $269,000].) Under California law, classwide arbitration is only justified when “gross unfairness would result from the denial of opportunity to proceed on a classwide basis.” (Keating, supra,
Moreover, in Gilmer the plaintiff sought to use the supposed lack of a class action remedy as a reason for invalidating the entire arbitration agreement. In the present case, the enforceability of the arbitration agreement itself is not in question, only enforcement of the class action waiver. Gilmer's determination that the lack of class action remedies does not give rise to an inherent conflict between the ADEA and the FAA does not lend support to the proposition that the FAA categorically precludes states from enforcing arbitration-neutral rules that prohibit consumer class action waivers in some circumstances.
Discover Bank argues that Green Tree Financial Corp. v. Bazzle (2003)
In Bazzle, several customers sued Green Tree Financial Corp. (Green Tree), alleging that the company failed to provide them with a form informing them of their right to name their own lawyer and insurance agent, contrary to South Carolina law. They sought class certification, and Green Tree sought to compel arbitration pursuant to arbitration agreements with the plaintiffs. The trial court both certified a class action and entered an order compelling arbitration. Two class arbitration proceedings were conducted, and in both instances, the arbitrators awarded the class several million dollars in statutory damages. The trial court confirmed the awards. {Bazzle, supra, 539 U.S. at pp. 448-449.) Green Tree challenged on appeal, among other things, the legality of the class arbitration. The South Carolina Supreme Court held that the arbitration agreements were silent with respect to classwide arbitration and that, under South Carolina law, silence would be construed to permit such arbitration. {Id. at p. 450.)
The Bazzle court addressed a narrow question: Green Tree disputed whether the arbitration clause was silent on classwide arbitration, arguing that the contract language in fact prohibited such arbitrations. As the court’s plurality framed the issue: “[W]e must deal with that argument at the outset, for if it is right, then the South Carolina court’s holding is flawed on its own terms; that court neither said nor implied that it would have authorized class arbitration had the parties’ arbitration agreement forbidden it.” {Bazzle, supra,
Even on this narrow issue, Bazzle produced no majority opinion. A plurality of four justices held that the question whether the contract was in fact silent on arbitration was for the arbitrator to decide, and remanded for an arbitral determination. As the plurality stated: “In certain limited circumstances, courts assume that the parties intended courts, not arbitrators, to decide a particular arbitration-related matter (in the absence of ‘clea[r] and unmistakabl[e]’ evidence to the contrary). [Citation.] These limited instances typically involve matters of a kind that ‘contracting parties would likely have expected a court’ to decide. [Citation.] They include certain gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy. [Citations.] [f] The question here whether the contracts forbid class arbitration does not fall into this narrow exception. It concerns neither
Justice Stevens filed a concurring and dissenting opinion that stated in part: “The Supreme Court of South Carolina has held as a matter of state law that class-action arbitrations are permissible if not prohibited by the applicable arbitration agreement, and that the agreement between these parties is silent on the issue. [Citation.] There is nothing in the Federal Arbitration Act that precludes either of these determinations by the Supreme Court of South Carolina. See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., [supra,]
“Arguably the interpretation of the parties’ agreement should have been made in the first instance by the arbitrator, rather than the court. [Citation.] Because the decision to conduct a class-action arbitration was correct as a matter of law, and because petitioner has merely challenged the merits of that decision without claiming that it was made by the wrong decisionmaker, there is no need to remand the case to correct that possible error. [][] Accordingly, I would simply affirm the judgment of the Supreme Court of South Carolina. Were I to adhere to my preferred disposition of the case, however, there would be no controlling judgment of the Court. In order to avoid that outcome, and because JUSTICE BREYER’s opinion expresses a view of the case close to my own, I concur in the judgment.” {Bazzle, supra, 539 U.S. at pp. 455-456 (conc. & dis. opn. of Stevens, J.).)
Chief Justice Rehnquist, writing also for Justices Kennedy and O’Connor, would have held that the question whether the agreement is silent on classwide arbitration is for the court, rather than the arbitrator, to decide. {Bazzle, supra, 539 U.S. at pp. 457-458 (dis. opn.).) The dissent viewed the choice of class arbitration as relating to the choice of arbitrator {Bazzle, supra,
Justice Thomas adhered to his previous view that the FAA does not apply to state court proceedings. {Bazzle, supra,
Reading the plurality opinion together with Justice Stevens’s opinion, the most that might be derived from Bazzle is a narrow holding: that when the question of whether a class action arbitration is available depends on whether
More significant than Bazzle’s holding, for purposes of the present case, is what it did not decide. 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. As noted, the plurality in framing the issue stated “that [the South Carolina Supreme Court] neither said nor implied that it would have authorized class arbitration had the parties’ arbitration agreement forbidden it.” (Bazzle, supra,
Nor did the court address the question whether that determination of unconscionability should be made by a court or an arbitrator. The court was in general agreement that courts should be left to decide certain “gateway matters” (Bazzle, supra,
Amicus curiae United States Chamber of Commerce argues that the imposition of classwide arbitration undermines the purpose of the FAA by drastically altering the rules by which the parties agreed to arbitrate, transforming arbitration into a less efficient and less desirable mechanism of
Nor are we directed to anything concrete that would cause us to reconsider Keating’s holding over 20 years ago that classwide arbitrations are workable and appropriate in some cases. (See Stemlight, As Mandatory Binding Arbitration Meets the Class Action, Will the Class-action Survive? (2000) 42 Wm. & Mary L.Rev. 1, 38-44 & fns. 148-151 [reporting, based on surveys of court decisions and discussions with attorneys, that class action arbitration is rare but viable, with trial courts acting to resolve class issues and other collateral matters]; see also Bazzle v. Green Tree Financial Corp. (2002)
We reiterate what this court said over 20 years ago in Keating-. “Classwide arbitration, as Sir Winston Churchill said of democracy, must be evaluated, not in relation to some ideal but in relation to its alternatives.” {Keating,
D. Choice-of-law Issue
Our holding that the FAA does not prohibit a California court from refusing to enforce a class action waiver that is unconscionable does not bring a resolution to this case. The agreement between Discover Bank and plaintiff has a Delaware choice-of-law agreement and Discover Bank argues that under Delaware law, a class arbitration waiver is enforceable. Because the Court of Appeal concluded that any California rule against class arbitrations waivers was preempted by the FAA, it did not address the question whether the Delaware choice-of-law provision requires the enforcement of the class arbitration waiver. It must do so on remand. For the Court of Appeal’s guidance on remand, we offer these comments.
We have summarized California’s choice-of-law provisions
Assuming that Discover Bank establishes the “substantial relationship” and “reasonable basis” prongs of the choice-of-law analysis, and assuming that Delaware law regarding class arbitration waivers is contrary to California law, the court must then resolve whether and to what extent Delaware law should apply. As reviewed above, in America Online the court concluded that a Virginia choice-of-law provision that would have compelled waiver of the plaintiff’s right to bring a class action lawsuit under the CLRA would not be enforced against a California resident, concluding that the CLRA class action remedy furthered a “strong public policy of this state.” {America Online, supra,
III. Disposition
The judgment of the Court of Appeal is reversed, and the cause is remanded for proceedings consistent with this opinion.
George, C. J., Kennard, L, and Werdegar, J., concurred.
Notes
Plaintiff also contended below that the unilateral addition of the arbitration clause was unconscionable under California law. (See Badie v. Bank of America (1998)
Plaintiff’s counsel clarified at oral argument that plaintiff did not plead a CLRA cause of action because he would be ultimately seeking to certify a national class, and therefore did not wish to rely on a California statute.
Discover Bank argues that Washington Mutual Bank v. Superior Court (2001)
Our conclusion that the defendant was not precluded from varying the state law that would control its agreements “merely because it may hinder the prosecution of a multistate or nationwide class action” is a long way from categorically approving class action waivers. It is one thing to hold that class action waivers are unenforceable under certain circumstances, and quite another to require companies to structure their agreements so as to optimize the chance that those who litigate against them will be able to obtain nationwide class certification. Moreover, the Washington Mutual Bank court did not foreclose the possibility of class certification in the case before it. Nor did it express any views on the choice-of-law provision before it, affirming the conclusion of Restatement Second of Conflict of Laws, section 187, comment b, that in the case of contracts of adhesion “ ‘the forum will scrutinize such contracts with care and will refuse to apply any choice-of-law provision they may contain if to do so would result in substantial injustice to the adherent.’ ” (Washington Mutual Bank, supra,
“It was not until the promulgation of the original Rule 23 and the first Federal Rules of Civil Procedure in 1938 that law and equity were merged and class suits for damages in the United States first became available.” (1 Conte & Newberg, Newberg on Class Actions (4th ed. 2002) § 1:9, p. 32.) Even under the original rule 23, class actions did not come into their own. “[Mjodem class action practice emerged in the 1966 revision of Rule 23.” (Ortiz v. Fibreboard Corp. (1999)
We note that although the Southland court overruled the portion of our Keating decision holding that the statute was not preempted by the FAA, it expressly declined to rule on the portion of the Keating decision regarding classwide arbitrations, concluding the issue had not been properly raised below. {Southland, supra,
Several federal cases, relying in part on Gilmer, have held that enforcement of arbitration clauses prohibiting class actions did not inherently conflict with the federal Truth in Lending Act (TILA; 15 U.S.C. § 1601 et seq.) (See Snowden v. Checkpoint Check Cashing, supra, 290 F.3d at pp. 638-639; Randolph v. Green Tree Fin. Corp. (11th Cir. 2001)
Amicus curiae Ralphs Grocery Co. argues that section 5 of the FAA forbids the enforcement of classwide arbitrations not consented-to by the parties. Section 5 provides, in pertinent part: “If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.” (9 U.S.C. § 5.) Amicus curiae contends that the imposition of a class action is inconsistent with the right to choose a method of selecting arbitrators under section 5.
We note both parties agree that, in the event a classwide arbitration is compelled, Discover Bank may waive the arbitration agreement and have the matter brought in court.
Because the Delaware choice-of-law provision appears to apply to itself, we would normally start by reviewing Delaware choice-of-law principles. (See Nedlloyd, supra,
Though the cardholder agreement contains no forum selection clause, and thus does not bar suits in California courts, a question may arise whether, pursuant to the choice-of-Zaw provision, the small claims court would be obliged to apply Delaware law to any dispute before it.
Concurrence Opinion
I concur in part and dissent in part. I agree with the majority that federal law does not compel enforcement of contractual class action waivers simply because they are contained in
First, because the Court of Appeal upheld the instant waiver solely by finding federal preemption of any California antiwaiver policy, that court did not decide whether such a policy exists. Ordinarily, we do not address, on review, issues that were not decided by the Court of Appeal.
Second, the majority’s questionable decision to deem the class action waiver in this contract unconscionable by California standards—a determination at odds with the vast weight of authority elsewhere (see discussion, post)—is simply moot under the particular circumstances. The parties reasonably agreed that Delaware law would govern all aspects of their contractual relationship, and plaintiff has asserted only Delaware causes of action. Thus, regardless of California’s position on class waivers, California has a manifest obligation to evaluate the waiver under Delaware law alone. Because Delaware, like most other jurisdictions, would uphold the waiver, California—the fortuitous venue for this “nationwide” class action—must honor it.
If the majority insists on reaching beyond the issues addressed by the Court of Appeal, it should at least identify and resolve the dispositive one. Instead, the majority, so bold on the waiver issue, avoids deciding the choice-of-law issue. Despite some mild cautionary admonitions, the majority leaves the Court of Appeal free on remand to dishonor the class waiver under California law despite the contrary Delaware rule.
In that event, the parties’ reasonable contractual expectations, as well as the strong interest of Delaware itself in the application of its own law to this issue, would be frustrated. Moreover, if California courts must, or may, dishonor class action waivers that are perfectly valid under the governing law selected by the parties themselves, California—which now takes a minority position on this issue—might well become the magnet for countless nationwide consumer class lawsuits that could not be maintained elsewhere. I cannot accept such a result.
I briefly review what I deem the pertinent aspects of this controversy. The cardholder agreement at issue in this case, as modified by Discover Bank in 1999, specifies that either party may choose arbitration, rather than litigation, of a dispute under the contract, and that neither party may obtain class treatment. As plaintiff concedes, the agreement provides that it will be governed, not by the law of California, but by federal law and the law of Delaware.
The choice of Delaware law is hardly startling in view of Discover Bank’s Delaware domicile. Indeed, Delaware requires that “[a] revolving credit plan
For all but one purpose, plaintiff has embraced the choice of Delaware law. He has expressly and intentionally asserted only Delaware causes of action. At oral argument, his counsel explained that his complaint is so framed in deference to the agreement’s choice of law, and also in hopes of certifying a nationwide class subject to uniform legal principles.
But Delaware permits arbitration agreements that preclude class treatment, even if such provisions are contained in standard-form consumer contracts. (E.g., Edelist v. MBNA America Bank (Del.Super.Ct. 2001)
He should not be allowed to do so. The solution to this case lies in a straightforward application of the choice-of-law test set forth in Nedlloyd Lines B.V. v. Superior Court (1992)
The first two considerations favoring application of the chosen state’s law are easily satisfied here. Delaware, where Discover Bank is domiciled, has a substantial relationship to the parties and the transaction. Moreover, the choice of Delaware’s law as uniformly applicable to Discover Bank’s nationwide credit card business is entirely reasonable. The relationship to Delaware becomes even more substantial, and the choice of its law even more reasonable, by virtue of Delaware’s express statutory requirement that its law shall govern.
Furthermore, in the circumstances of this case, the contractual waiver is not so contrary to “fundamental” California policy that California should invalidate it despite contrary Delaware law. The majority suggests the waiver is unconscionable. But unconscionability is simply a matter of contract law—it constitutes a “ ‘generally applicable contract defenseQ’ ” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000)
As noted, these parties chose Delaware law to govern and construe their agreement. Even if California, applying its own contract law, might find certain class waivers unconscionable, there is no “fundamental” reason to impose that defense upon an agreement in which the parties, acting reasonably, chose the contract law of a jurisdiction where such a defense would not apply.
The majority also notes that California affords certain substantive rights, particularly those specified by statute, that are “unwaivable.” (See, e.g., Civ. Code, §§ 1751, 1781 [unwaivable right to bring class action under Consumers Legal Remedies Act]; see also Armendariz, supra,
The majority suggests that class waivers in standard consumer contracts may violate California’s arguably “fundamental” statutory policy against direct or indirect “exculpatory” clauses. (See Civ. Code, § 1668.) In the majority’s view, such waivers may have an exculpatory effect because, given the usually modest amount of each cardholder’s personal claim against Discover Bank, litigation or arbitration on an individual basis is impractical and uneconomic. The majority posits that because cardholders and their attorneys have no incentive to pursue such claims except by aggregating them with other similar complaints, Discover Bank will escape liability or punishment for its improper practices.
I find this analysis unpersuasive for several reasons. At the outset, I cannot accept the facile premise that lack of a class remedy is equivalent to exculpation of an alleged wrongdoer. Class treatment, in whatever forum, is a relatively recent invention, designed to encourage and facilitate the resolution of certain kinds of disputes. It may provide valuable procedural leverage to one side. But as we noted in Washington Mutual, supra,
Moreover, the majority exaggerates the difficulty of pursuing modest claims where class treatment is unavailable and overlooks the many other means by which Discover Bank could be called to account for the mischarges plaintiff alleges. For example:
(1) The cardholder may contact the bank and attempt to resolve the matter informally. Discover Bank’s cardholder agreement specifically provides a 60-day period in which to contact the company with billing questions and disputes. Plaintiff’s complaint does not state that he pursued this avenue. (Indeed, though the complaint asserts widespread improper billing practices by Discover Bank, it does not allege that the bank has ever mischarged plaintiff himself. Plaintiff admitted in his deposition that he does not know whether Discover Bank has ever done so.)
(2) Pursuant to the agreement, the cardholder may pursue one-on-one arbitration of Delaware state law claims, including those under the Delaware Consumer Fraud Act (Del. Code Ann., tit, 6, § 2511 et seq.). The agreement includes several provisions designed to make the individual arbitration process fair and accessible. Under the agreement’s terms, Discover Bank will arbitrate in the federal judicial district where the cardholder resides. Further, the cardholder may obtain an advance of all forum costs and will never pay forum costs exceeding those he or she would have had to pay in court litigation.
(3) For claims under $5,000, the cardholder may proceed in small claims court. (See Code Civ. Proc., § 116.210 et seq.) In the cardholder agreement, Discover Bank promises that it “will not invoke [its] right to arbitrate an individual claim,” involving less than $5,000, which is pending only in a small claims court.2 The only mandatory expense of a small claims action is a modest filing fee plus the actual cost of any mail service by the court clerk. (Id., §§ 116.230, subds. (a), (c), 116.910.) The claim is pled by filling out a standard form. (Id., §§ 116.310, subd. (a), 116.320.) No formal discovery is permitted (id., § 116.310, subd. (b)), and neither party may be represented by*180 a lawyer (id., § 116.530, subd. (a)), though free advisory assistance is available to the claimant (id., § 116.260).
(4) The cardholder may arbitrate, pursuant to the terms of the cardholder agreement, his rights under such federal statutes as TELA. (15 U.S.C. § 1601 et seq.)4 This statute imposes mandatory disclosure requirements for consumer credit transactions, including those arising on credit card accounts. As to the latter, the statute provides for detailed disclosure of the terms on which credit is being extended, including annual percentage rates, methods of computing outstanding balances, finance charges, grace periods, and late fees. (15 U.S.C. § 1637.) The cardholder, if he or she prevails, may recover actual damages, twice the finance charge imposed in connection with each violative transaction, and attorney fees and costs. (Id., § 1640(a)(1), (2)(A), (3).)
(5) If Discover Bank’s conduct violates California’s unfair competition statutes (Bus. & Prof. Code, § 17200 et seq.), which broadly prohibit “any unlawful, unfair or fraudulent business act or practice” (id., § 17200), the Attorney General and designated local law enforcement officials (who are not bound by the cardholder agreement) may sue on the People’s behalf for injunctive relief and for mandatory civil penalties of up to $2,500 for each violation (id., §§ 17203, 17204, 17206). The amount of a civil penalty shall be calculated in accordance with “any one or more of the relevant circumstances . . . including, but not limited to ... the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.” (Id., § 17206, subd. (b).)
(6) Finally, in the highly regulated banking and credit industry, other means of sanctioning and remediating illegal conduct are available at the behest of both federal and Delaware law. (See, e.g., 12 U.S.C. § 1818 (b) [Federal Deposit Insurance Corporation may issue cease-and-desist orders and order corrective measures including restitution]; Del. Code Ann., tit. 5, § 121*181 et seq. [investigative and enforcement powers of Delaware State Banking Commissioner]; Del. Code Ann., tit. 29, § 2504 [investigative and enforcement powers of Delaware Attorney General].)
Under these circumstances, it cannot be said that, by upholding cardholders’ contractual waiver of a class remedy under Delaware law, we would effectively absolve Discover Bank of its objectionable conduct. Thus, there is no basis to conclude that enforcement of the class waiver pursuant to the parties’ choice of Delaware law would contravene a fundamental California statutory policy against exculpatory agreements.
Finally, even if the application of Delaware law permitting class waivers would violate fundamental California public policy, I conclude that California has no materially greater interest in applying its own policy to this controversy than does Delaware. California is, to be sure, the home of this individual plaintiff, with his modest personal monetary claim, and of some of the other similarly situated Discover Bank cardholders, with similarly modest individual claims, he seeks to represent. But to the extent plaintiff proposes to vindicate the rights of a nationwide class under Delaware consumer protection laws, California has no greater interest than any other jurisdiction, including Delaware, in protecting the interests of its resident class members.
Indeed, California, its courts, and its judicial resources will be negatively impacted if, by invoking its own liberal antiwaiver rule in derogation of contrary law chosen by the parties, this state attracts nationwide consumer class litigation of the sort plaintiff seeks to maintain. Such an adverse affect on California detracts further from this state’s interest in applying its own law under such circumstances.
Moreover, any factors in California’s favor are outweighed by Delaware’s far greater concern with the primacy of its own law, both contractual and regulatory, in relations between Discover Bank and its nationwide cardholders. Delaware is Discover Bank’s domicile, as well as the source of the substantive law plaintiff expressly seeks to apply. Robert A. Glen, the Delaware State Bank Commissioner, explains in his amicus curiae brief that Delaware has a paramount interest in the economic and business regulation of financial and banking institutions domiciled in that state.
As Discover Bank’s domicile, Delaware has a specific regulatory interest in applying its own laws and policies, uniformly and exclusively, to Discover Bank’s operations. Delaware thereby seeks to minimize Discover Bank’s exposure to the varying and possibly conflicting laws, regulations, and procedures of 49 sister jurisdictions. In particular, Delaware has ample grounds for concern that the terms of the standardized credit agreements
As Commissioner Glen observes, Delaware also strives, for the benefit of the banks’ customers, including their nationwide credit card customers, to promote financial stability, safety, and soundness in such institutions. These interests are substantially affected by the banks’ costs of consumer litigation, including their exposure to consumer class actions. In Commissioner Glen’s words, “[arbitration helps keep the costs of dispute resolution down because it is more efficient, expeditious and economical than litigation. If a bank has to spend substantial sums in connection with litigation and, in particular, class action litigation, that threatens the bank’s safety and soundness and forces the bank to increase the costs of operations, all of which redounds to the detriment of the bank and its customers, including customers located in states outside of Delaware.”
Delaware has evidenced its concerns, as noted above, by specifically providing that credit card agreements issued by Delaware-chartered banks must be governed by Delaware law. (Del. Code Ann., tit. 5, § 956.) Commissioner Glen explains that “[t]he purpose of this requirement is to ensure the safe and sound operation of Delaware banks by effectuating the uniform construction of credit card agreements issued by [such] banks in accordance with Delaware law, no matter where disputes concerning those agreements might arise.”
Because Delaware has a substantial relationship to this controversy, the parties’ choice of Delaware law was reasonable, and Delaware’s interest in applying its own law—including its acceptance of class waivers—exceeds California’s, California must uphold that choice of law. Under Delaware law, the parties’ waiver of class treatment of disputes between them is valid, and California courts must enforce it.
Plaintiff suggests that the choice-of-law principles set forth in Washington Mutual, supra,
Assuming without deciding that we confront an issue of “procedure,” plaintiff’s argument nonetheless lacks merit. As primary support for his position, plaintiff cites Restatement sections 122 and 125. The former section states that the forum “usually applies its own” litigation rules even when the
But Restatement sections 122 and 125, like most of the Restatement, set forth principles for determining which jurisdiction’s law to apply “[i]n the absence of an effective choice of law by the parties.” (Rest., § 188, subd. (2).) Nothing in those sections, or in the comments thereto, indicates a purpose to supersede Restatement section 187 where the parties have contractually chosen the applicable law, or to impose a forum rule for dispute resolution despite the express contrary provisions of an agreement that specifies the law of a jurisdiction in which that choice is valid.
Indeed, the comments to both these Restatement sections demonstrate their inapplicability here. For example, the comments to section 122 point out that “in matters of judicial administration, it would often be disruptive or difficult for the forum to apply the local law rules of another state [without any repayment] by a furtherance of the values that the application of another state’s local law is designed to promote.” (Rest., § 122, com. a, p. 350.)
Moreover, it is explained, “[pjarties do not usually give thought to matters of judicial administration before they enter into legal transactions. They do not usually place reliance on the applicability of the rules of a particular state to issues that would arise only if litigation should become necessary. Accordingly, the parties have no expectations as to such eventualities, and there is no danger of unfairly disappointing their hopes by applying the forum’s rules in such matters.” (Rest., § 122, com. a, p. 351.)
Here, the parties gave extensive and detailed contractual consideration to the “issues that would arise ... if litigation [became] necessary.” They specifically agreed that disputes would be resolved, upon either party’s election, by mandatory arbitration, and that class treatment of the dispute would not be permitted. Further, they expressly provided that their agreement would be governed by the law of Delaware—a jurisdiction which, for policy reasons of its own, allows contractual provisions requiring nonclass arbitration and further demands that credit card agreements issued by Delaware-chartered banks be applied according to that state’s law. The reasonable expectations of both Discover Bank and the State of Delaware would thus be
Moreover, by honoring the parties’ agreement in this respect, California courts risk no disruption or confusion in matters of judicial administration. There is no need to delve deeply into the procedural rules of another jurisdiction. All that is required is to compel arbitration, and to deny class certification, as the parties agreed.
Similarly, the comments to section 125, like the text of that section itself, make clear that the forum’s rules on the identity of parties will not be applied “when [such] application would substantially affect the rights and duties of the parties.” (Rest., § 125, com. a, p. 356.) Here, Discover Bank’s rights would be substantially affected were it forced into a class proceeding contrary to a specific term of its contract with plaintiff.
Finally, as the majority must concede, neither Szetela v. Discover Bank (2002)
If, as the majority hints, California would refuse to enforce the parties’ agreement for individual arbitration as Delaware law demands, the legitimate purpose of that agreement—uniform, inexpensive, efficient dispute resolution—will be entirely frustrated. No matter how many other courts, state and federal, would enforce the agreement according to its terms, if California declines to do so, this state will simply become a forum of choice for putative nationwide class suits like this one. It will only be necessary to find a single California cardholder to act as a representative plaintiff, and to sue in a California court. I cannot join the majority’s willingness to countenance such a result.
I 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. Accordingly, I would affirm the
Chin, J., and Brown, J., concurred.
Delaware’s position is in accord with the vast majority of decisions, applying federal law or the law of other states, which hold that arbitration clauses are not invalid either because they specifically exclude class treatment or because they preclude such treatment by failing expressly to provide for it. (E.g., Livingston v. Associates Finance, Inc. (7th Cir. 2003)
The agreement does not eliminate the theoretical possibility that Discover Bank might seek to remove a small claims action to another court, then elect to arbitrate. However, a small claimant can suffer removal to another forum only if the defendant files a counterclaim exceeding the $5,000 small claims jurisdictional limit—an unlikely development in cases like plaintiff’s. (Code Civ. Proc., § 116.390.)
As indicated above (see fn. 1, ante), federal circuits addressing the issue have uniformly held that claimants must arbitrate TILA claims pursuant to agreement, that arbitration precludes class relief under TELA, that arbitration agreements containing express waivers of class treatment, even for small individual amounts in dispute, are not unconscionable with respect to TILA claims, and that, although TELA contemplates class actions, it includes no “unwaivable” right to class relief. (Livingston, supra,
Restatement section 122 provides: “A court usually applies its own local law rules prescribing how litigation shall be conducted even when it applies the local law rales of another state to resolve other issues in the case.” Section 125 provides: “The local law of the forum determines who may and who must be parties to a proceeding unless the substantial rights and duties of the parties would be affected by the determination of this issue.”