The Discover Bank Rule

In AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 131 S.Ct. 1740, the United States Supreme Court held that the Discover Bank rule (Discover Bank v. Superior Court (2005) 36 Cal.4th 148), which classified certain class arbitration waivers in consumer contracts as unconscionable, was preempted by the FAA. (Concepcion, supra, 131 S.Ct. at pp. 1746, 1753.) The Supreme Court explained that under the FAA, "courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms ." (Id. at pp. 1745-1746.) However, the "saving clause" of section 2 of the FAA (9 U.S.C. 2), which "permits arbitration agreements to be declared unenforceable 'upon such grounds as exist at law or in equity for the revocation of any contract,'" "permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. " (Concepcion, supra, 131 S.Ct. at p. 1746.) The Supreme Court observed that "when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration. . . . The FAA's preemptive effect might extend even to grounds traditionally thought to exist '"at law or in equity for the revocation of any contract."' . . . A court may not 'rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.' " (Id. at p. 1747) The Concepcion court explained that "an obvious illustration of this point would be a case finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from those articulated in Discover Bank v. Superior Court (2005). A court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing. Or the court might simply say that such agreements are exculpatory--restricting discovery would be of greater benefit to the company than the consumer, since the former is more likely to be sued than to sue. See Discover Bank, supra, 36 Cal.4th at p. 161 (arguing that class waivers are similarly one-sided). And, the reasoning would continue, because such a rule applies the general principle of unconscionability or public-policy disapproval of exculpatory agreements, it is applicable to 'any' contract and thus preserved by 2 of the FAA. In practice, of course, the rule would have a disproportionate impact on arbitration agreements; but it would presumably apply to contracts purporting to restrict discovery in litigation as well." (Concepcion, supra, 131 S.Ct. at p. 1747.) The Supreme Court determined that the Discover Bank rule stood "'as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.'" (Concepcion, supra, 131 S.Ct. at p. 1753.) The Court explained that "the overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." (Id. at p. 1748.) The Court observed that based on the FAA, the Court had previously held that "parties may agree to limit the issues subject to arbitration, , to arbitrate according to specific rules, , and to limit with whom a party will arbitrate its disputes, ." (Concepcion, supra, 131 S.Ct. at pp. 1748-1749.) The Court explained that "the point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures . . . . And the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution." (Id. at p. 1749.) According to the Supreme Court, the Discover Bank rule "'interferes' with arbitration." (Concepcion, supra, 131 S.Ct. at p. 1750.) The rule essentially allows consumers to "demand classwide arbitration ex post." (Ibid.) Such "class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA." (Id. at p. 1751.) Among other things, "the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration--its informality--and makes the process slower, more costly, and more likely to generate procedural morass than final judgment." (Ibid.) The Supreme Court further stated that "states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." (Id. at p. 1753.) In Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), the defendant bank sought to compel arbitration of the plaintiff's contract and statutory claims on an individual basis and to dismiss class claims pursuant to a class action waiver in the parties' arbitration agreement. (Id. at p. 154.) The trial court determined that the class action waiver was unconscionable and unenforceable. (Id. at p. 155.) The California Supreme Court agreed that "some class action waivers in consumer contracts are unconscionable under California law." (Id. at p. 160.) Specifically, the California Supreme Court determined that "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.' (Civ. Code, 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced." (Id. at pp. 162-163.)