Discover Bank v. Superior Court

Facts

Christopher Boehr, a Discover credit cardholder, filed a class action alleging that Discover Bank improperly imposed late-payment fees — charging late fees on payments received on the due date but after a cutoff hour. (36 Cal.4th at pp. 154–156.) The cardholder agreement, a standardized adhesion contract, contained an arbitration clause with a class-action waiver and a Delaware choice-of-law provision. (Ibid.) Discover moved to compel individual (non-class) arbitration, relying on the waiver. (Ibid.)

Procedural history

The trial court initially refused to enforce the class waiver, then reconsidered in light of intervening authority; the Court of Appeal held the waiver enforceable. (36 Cal.4th at pp. 155–156.) The Supreme Court granted review, held that such waivers may be unconscionable under California law, addressed the Delaware choice-of-law clause, and concluded the FAA did not preempt the rule. (Id. at pp. 156–174.)

Issue

Is a class-action waiver in a consumer arbitration agreement unconscionable and unenforceable under California law, and does the Federal Arbitration Act preempt a state-law rule refusing to enforce such waivers? (36 Cal.4th at pp. 152–153.)

Holding

Reasoning

1. Class waivers as functional exculpatory clauses. The Court acknowledged that class waivers “are not, in the abstract, exculpatory clauses.” (36 Cal.4th at p. 161.) But it reasoned that “because 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, the class action is often the only effective way to halt and redress such exploitation.” (Ibid.) A waiver that eliminates the class device in such a setting “indisputably one-sided” functions, in practice, to “insulate a party from liability that otherwise would be imposed under California law.” (Id. at pp. 161–162.)

2. The unconscionability framework and Civil Code section 1668. Applying the Armendariz procedural/substantive framework, the Court held that, in the defined circumstances, the waiver “becomes in practice the exemption of the party from responsibility for its own fraud, or willful injury,” which Civil Code section 1668 forbids. (36 Cal.4th at pp. 162–163.) The decisive factors were the adhesive setting, the predictably small individual damages, and the allegation of a deliberate scheme to cheat many consumers. (Ibid.)

3. Choice of law. The Court addressed the Delaware choice-of-law clause, holding that California law governed the unconscionability question because applying Delaware law (which would enforce the waiver) would contravene a fundamental California public policy, and California had a materially greater interest. (36 Cal.4th at pp. 173–174.)

4. No FAA preemption (as then understood). Finally, the Court held the FAA did not preempt the rule. (36 Cal.4th at pp. 164–173.) Section 2 of the FAA preserves “generally applicable contract defenses, such as . . . unconscionability,” and the Discover Bank rule, the Court reasoned, applied unconscionability evenhandedly to class waivers whether or not they appeared in an arbitration agreement, and did not single out arbitration for disfavor. (Ibid.) This conclusion was later rejected in Concepcion. (Ibid.)

5. The partial dissent. Justice Baxter, joined by Justices Chin and Brown, concurred in part and dissented in part, arguing that the majority’s rule effectively disfavored arbitration and was inconsistent with the FAA — a position the United States Supreme Court would vindicate six years later in Concepcion. (36 Cal.4th at pp. 174 et seq. (conc. & dis. opn. of Baxter, J.).)

Significance

Discover Bank created the most consequential — and ultimately the most decisively overruled — California rule on class waivers. For six years the “Discover Bank rule” allowed courts to strike class-action waivers in consumer (and, via Gentry v. Superior Court (2007) 42 Cal.4th 443, employment) adhesion contracts. AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 then held the rule preempted by the FAA, reasoning that conditioning enforceability on the availability of classwide procedures “interferes with fundamental attributes of arbitration.” California acknowledged the abrogation in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348. Discover Bank thus marks both the high-water mark of state-law resistance to class waivers and the doctrine whose fall reshaped American arbitration law. It remains essential reading for understanding the Concepcion/Epic Systems/Viking River line and the surviving PAGA carve-out. See the Review’s coverage of the arbitration line.

Key quotes

“[T]he class action is often the only effective way to halt and redress such exploitation.” (Discover Bank, supra, 36 Cal.4th at p. 161.)

“[W]hen it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . such waivers are unconscionable under California law and should not be enforced.” (Id. at pp. 162–163.)

Read the full opinion (California Supreme Court — full text) →

Practice pointer

Open questions

The continuing aftermath of Discover Bank’s fall defines much of modern arbitration litigation: how far generally applicable unconscionability may still police arbitration terms after Concepcion; the precise scope of the surviving PAGA carve-out after Viking River and Adolph; and whether any consumer-protection rationale for class adjudication can be reconciled with the FAA. These remain heavily contested.