Discover Bank Rule California
In its entirety, the California Supreme Court stated its Discover Bank rule as follows:
"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 the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party 'from responsibility for its own fraud, or willful injury to the person or property of another.' Under these circumstances, such waivers are unconscionable under California law and should not be enforced." (Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 162-163 (Discover Bank).)
In AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the United States Supreme Court recently addressed whether the FAA preempted the so-called "Discover Bank rule," which California courts frequently used to find arbitration provisions in certain consumer contracts of adhesion unconscionable because they included a waiver of the consumer's right to bring a class action.
The California Supreme Court created the Discover Bank rule because class-action waivers in consumer contracts of adhesion allowed companies to effectively exonerate themselves from liability for cheating large numbers of consumers out of money individually too small for a consumer to bring an individual action.(Ibid.)
In AT&T Mobility, the lower courts refused to enforce the parties' arbitration agreement based on the Discover Bank rule.
They found the rule "was not preempted by the FAA because that rule was simply 'a refinement of the unconscionability analysis applicable to contracts generally in California.' " (AT&T Mobility, supra, 131 S.Ct. at p. 1745.)
The United States Supreme Court rejected that analysis and held the FAA preempted the Discover Bank rule "because it 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the FAA,' . . . ." (Id. at pp. 1745, 1753.)
The AT&T Mobility court explained that arbitration under the FAA is a contractual matter and the parties are therefore generally free to structure their arbitration as they desire. (AT&T Mobility, supra, 131 S.Ct. at pp. 1748-1749, 1752)
For example, the parties to an arbitration agreement "may agree to limit the issues subject to arbitration, , to arbitrate according to specific rules, , and to limit with whom they will arbitrate their disputes. The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute. It can be specified, for example, that the decisionmaker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution." (AT&T Mobility, at pp. 1748-1749, original italics.)
The Supreme Court emphasized that "'a prime objective of an agreement to arbitrate is to achieve "streamlined proceedings and expeditious results,"' . . . . " (AT&T Mobility, supra, 131 S.Ct. at p. 1749.) Towards that end, the arbitration agreement in AT&T Mobility not only required the parties to arbitrate all disputes, but also prohibited the plaintiffs from asserting any class claims or joining any other parties in the arbitration. The AT&T Mobility court explained that allowing class claims would "sacrifice the principal advantage of arbitration -- its informality -- and make the process slower, more costly, and more likely to generate procedural morass than final judgment" because class claims require procedural formality and necessitate additional and different procedures to protect absent parties' interests. (Id. at p. 1751.)
Because the Discover Bank rule prevented the parties from achieving the benefits of the bilateral arbitration to which they agreed, the AT&T Mobility court found the rule erected an obstacle to the FAA's objective of enforcing arbitration agreements according to their terms. The FAA therefore preempted the Discover Bank rule. (AT&T Mobility, supra, 131 S.Ct. at pp. 1750-1753.)
The plaintiffs in AT&T Mobility "argued that the Discover Bank rule, given its origins in California's unconscionability doctrine and California's policy against exculpation, is a ground that 'existed at law or in equity for the revocation of any contract' under FAA 2" and therefore the FAA did not preempt the rule. (AT&T Mobility, supra, 131 S.Ct. at p. 1746.)
The Supreme Court rejected that argument, explaining the FAA's preemptive effect may "extend even to grounds traditionally thought to exist '"at law or in equity for the revocation of any contract"'" when those grounds "have been applied in a fashion that disfavors arbitration." (Id. at p. 1747.)
The AT&T Mobility court concluded the Discover Bank rule applied California's unconscionability doctrine in a manner that disfavored arbitration because the rule in its practical application had a disproportionate impact on arbitration agreements. (Id. at pp. 1747-1748.)