Discover Bank v. Superior Court

129 Cal.Rptr.2d 393

105 Cal.App.4th 326

DISCOVER BANK, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Christopher Boehr, Real Party in Interest.

No. B161305.

Court of Appeal, Second District, Division 1.

January 14, 2003.

Review Granted April 9, 2003.

Kirkland & Ellis, Jeffrey S. Davidson, Rich Richmond, C. Robert Boldt, Los Angeles, and Amy M. Wilkins for Petitioner.

No appearance for Respondent.

Strange & Carpenter, Brian R. Strange and Gretchen Carpenter; Law Offices of Barry L. Kramer and Barry L. Kramer, Los Angeles, for Real Party in Interest.

ORTEGA, J.

According to Blue Cross of California v. Superior Court (1998) 67 Cal.App.4th 42, 78 Cal.Rptr.2d 779 (Blue Cross), where an arbitration agreement governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (FAA) is silent with regard to classwide arbitration, section 4¹ of the FAA does not bar state courts from ordering classwide arbitration where permitted by California law. (Blue Cross, supra, 67 Cal. App.4th at pp. 62-63, 78 Cal.Rptr.2d 779.) Blue Cross also found that permitting the plaintiff to proceed with class certification efforts in such instances would not violate section 2² of the FAA: "In the absence of an express agreement not to proceed to arbitration on a classwide basis, ordering the parties to arbitrate class claims as authorized by state law does not conflict with their contractual arrangement." (Id. at p. 64, 78 Cal.Rptr.2d 779.)

The present case concerns a Discover Bank cardholder agreement that also contains an arbitration clause governed by the FAA. Unlike the arbitration agreement in Blue Cross, however, the agreement herein expressly prohibits arbitration on a classwide basis (the prohibition will sometimes be referred to herein as a "class action waiver"). Although section 2 of the FAA mandates the enforcement of arbitration agreements that fall within the scope of the act and preempts a state court's ability to invalidate on state substantive law grounds the express terms of a validly formed arbitration agreement,³ the lower court struck the class action waiver as substantively unconscionable and invalid under California law. (See Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094,118 Cal.Rptr.2d 862 (Szetela), in which the identical class action waiver in the same Discover Bank cardholder agreement was declared unconscionable and invalid under California law.) Having invalidated the class action waiver, the lower court granted Discover Bank's motion to compel arbitration, but permitted the plaintiff to attempt to certify a class for arbitration. (See Keating v. Superior Court (1982) 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 (Keating), disapproved on other grounds sub nom. Southland Corp. v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (Southland).)⁴

In this proceeding, Discover Bank, seeking relief from the order striking the class action waiver, has petitioned for extraordinary writ relief on the ground that the FAA precludes states from forcing parties to arbitrate in a manner contrary to their agreement. (9 U.S.C. § 2.) Apart from the question of whether the FAA preempts a state court's ability to strike a class action waiver on substantive state law grounds, the validity of the arbitration agreement as a whole is not otherwise at issue in this proceeding. We hold that where a valid arbitration agreement governed by the FAA prohibits classwide arbitration, section 2 of the FAA preempts a state court from applying state substantive law to strike the class action waiver from the agreement. Accordingly, we disagree with the Szetela decision and grant Discover Bank's petition.

BACKGROUND

Plaintiff Christopher Boehr obtained a credit card from defendant Discover Bank in April 1986. The Discover Bank cardholder agreement ("agreement") governing plaintiffs credit card account contained a choice of law clause providing for the application of Delaware and federal law.

A. Addition of the Arbitration Clause to the Agreement

When plaintiffs 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.⁵ Relying on the change of terms provision, Discover Bank added the arbitration clause by sending to its existing cardmembers (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 U.S. 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 WILL 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 REPRESENTATIVE OR MEMBER OF A CLASS OR IN A PRIVATE ATTORNEY GENERAL CAPACITY."

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 objection and cease using their account. Their continued use of the account would be deemed to constitute acceptance of the new terms. Plaintiff did not notify Discover Bank of his objection to the arbitration clause or cease using his account before the stated deadline.

B. Plaintiffs Putative Class Action Complaint

On August 15, 2001, plaintiff filed a putative class action complaint in superior court against Discover Bank alleging breach of contract and violation of the Delaware Consumer Fraud Act (6 Del. Code, § 2511 et seq.). The complaint alleged that both causes of action arose under Delaware law.

Allegedly, 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 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 p.m.

C. Discover Bank's Motion to Compel Arbitration

Discover Bank moved to compel arbitration of plaintiffs 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 the unilateral addition of the arbitration clause was unconscionable under California law (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 79 Cal.Rptr.2d 273) (Bank of America ).⁶ In addition, plaintiff contended the class action waiver was unconscionable and unenforceable under California law. Discover Bank, on the other hand, argued that Delaware law permits the unilateral addition of arbitration clauses to cardholder agreements (5 Del.Code § 952), and the FAA requires the enforcement of the express provisions of an arbitration clause, including class action waivers. Discover Bank contended that under section 2 of the FAA, arbitration agreements should not be singled out for suspect status under state laws applicable only to arbitration provisions.⁷

Plaintiffs counsel conceded below that if the trial court applied Delaware law to the agreement, the unilateral addition of the arbitration clause would be valid under Delaware law. (5 Del.Code § 952, subd. (a).) After the parties presented additional briefing on the applicability of Delaware law (particularly whether the Delaware statute allowing the unilateral addition of the arbitration clause was retroactively applicable to the agreement in this case), the trial court concluded that Delaware law governed the agreement.

The trial court initially granted Discover Bank's motion in its entirety under Delaware law. The trial court found no fundamental California public policy requiring it to reject the parties' selection of Delaware law, under which the unilateral addition of the arbitration clause was conceded to be valid. The trial court stated in part: "Moreover, I don't find in [Bank of America] an articulation of a public policy against using a clause allowing a unilateral right to amend as a way of adding an arbitration clause. [¶] California law and Delaware law may differ in their analysis of contract formation principles regarding unilateral amendment of contracts, but that does not mean that Delaware's contract formation principles offend fundamental California policy."

The trial court also found no California public policy reason to invalidate the class action waiver, which was alleged to be a valid waiver under Delaware law. (See Johnson v. West Suburban Bank (3d Cir. 2000) 225 F.3d 366 (Johnson), which Discover Bank cites in support of its position that Delaware law permits class action waivers.)⁸ The lower court noted the availability of small claims court actions to resolve disputes involving minor sums, and also the availability of the California Unfair Practice Act (Bus. & Prof.Code, § 17200) for injunctive relief. The trial court found no fundamental policy in California to supplant federal and Delaware law permitting contractual waivers of class actions.⁹

D. Plaintiffs Motion for Reconsideration

After Discover Bank's motion to compel arbitration was granted, the Fourth...