Class Action Waiver Arbitration Agreement (California)

In Discover Bank v. Superior Court (2005) 36 Cal.4th 148, the plaintiff filed a class action against the bank alleging deceptive consumer credit card practices. (Discover Bank, supra, 36 Cal.4th at pp. 152-154.) After the bank successfully moved to compel arbitration pursuant to its arbitration agreement with the plaintiff, the plaintiff sought to compel class arbitration of the dispute. (Id. at pp. 152, 155.) The arbitration agreement expressly precluded class actions and class arbitration. (Id. at pp. 152-154.) In Discover Bank, the California Supreme Court held 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." (Id. at p. 153.) The court noted that although "class action and arbitration waivers are not, in the abstract, exculpatory clauses," they are indisputably one-sided and "such 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." (Id. at p. 161.) Accordingly, under certain circumstances, "such waivers are unconscionable under California law and should not be enforced." (Id. at p. 163.) Discover Bank further concluded the FAA did not preempt its interpretation of California law. (Discover Bank, supra, 36 Cal.4th at p. 163.) It stated: "The principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally. In other words, it applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements." (Id. at pp. 165-166.) Discover Bank noted "the FAA does not federalize the law of unconscionability or related contract defenses except to the extent that it forbids the use of such defenses to discriminate against arbitration clauses." (Id. at p. 167.) Because its principle of California law precluding class action or class arbitration waivers as unconscionable in certain cases did not discriminate against arbitration clauses, Discover Bank concluded the FAA did not preempt that principle. (Ibid.)