In Discover Bank v. Superior Court (Boehr) (2005) 36 Cal,4th 148, the California Supreme Court held that arbitration clauses in consumer contracts that prohibit class arbitration are unconscionable, and that such clauses are not preempted by the Federal Arbitration Act (FAA). Six years later, in AT&T Mobility LLCv. Concepcion (2011) 131 S. Ct. 1740, the United States Supreme Court held that Discover Bank was wrongly decided. Get the business lawyer free consultation about business matters.
Now, more than six months after Concepcion, plaintiff after plaintiff has tried to invalidate arbitration clauses and bring class actions concerning matters covered by arbitration clauses in consumer agreements characterized as adhesion contracts. Almost all of them have failed. The claims that have survived principally seek only injunctive relief.
This review of the cases in the wake of Concepcion cautions those bringing claims covered by arbitration clauses, and identifies the features of those narrow claims that have threaded the needle of FAA preemption.
Discover Bank recalled
Understanding Concepcion starts with a few facts and the Court of Appeal’s opinion in Discover Bank. The claim in Discover Bank arose out of the bank’s representation “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.” The Discover Bank cardholder agreement “governing plaintiff’s credit card account contained a choice- of-law clause providing for the application of Delaware and federal law.” An arbitration clause was added by a subsequent amendment which “precluded both sides from participating in classwide arbitration, consolidating claims, or arbitrating claims as a representative or in a private attorney general capacity,” and which stated that the provision would be governed by the FAA.
Plaintiff filed a class-action complaint. Discover Bank moved to compel arbitration on an individual basis and to dismiss the class action pursuant to the arbitration agreement’s class action waiver. After reconsideration, the trial court denied the motion to compel. Discover Bank obtained writ review by a petition, and the Court of Appeal reversed the trial court. Without disputing that class arbitration waivers may be unconscionable under California law, and without addressing whether California or Delaware law controlled, the Court of Appeal held that the FAA preempts the state law rule that class arbitration waivers are unconscionable.
On review, the California Supreme Court disagreed, holding that “at least under some circumstances, the law in California is that class action waivers in consumer contracts of adhesion (“a standardized contract, 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”) and with no opportunity to negotiate are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to class-wide arbitration.” The court reasoned that “one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.”
Finally, the Discover Bank Court concluded that the FAA does not preempt California law in this respect. In doing so, it noted that “the FAA. is silent on the matter of class actions and class action arbitration,” and that its “conclusions with respect to FAA preemption must come from the United States Supreme Court’s articulation of general principles regarding such preemption.”