Facts
- Christopher Boehr obtained a Discover credit card governed by a standard-form cardholder agreement containing a Delaware choice-of-law clause.
- Discover amended the agreement in 1999 to add an arbitration provision and a waiver barring classwide arbitration; cardholders could reject by closing their accounts.
- Boehr continued using the card and did not opt out.
- Boehr alleged Discover deceptively assessed late fees and finance charges when payments were received after an undisclosed 1:00 p.m. cutoff on the stated “due date.”
- Boehr filed a putative class action alleging breach of contract and a statutory consumer-fraud claim based on the late-fee practice.
Issues
- Whether a class-action waiver in an arbitration clause within a consumer contract of adhesion is unconscionable and unenforceable under California law in certain circumstances.
- Whether the Federal Arbitration Act preempts California’s unconscionability doctrine as applied to invalidate such class-action waivers.
- Whether Delaware or California law governs enforceability given the contract’s Delaware choice-of-law clause.
Decision
- The California Supreme Court reversed the Court of Appeal.
- The court held that, under California law, class-action waivers in consumer contracts of adhesion may be unconscionable and unenforceable when they operate as practical exculpation for small-value claims affecting many consumers.
- The court held the FAA does not preempt this rule because it rests on generally applicable contract defenses and does not single out arbitration.
- The court remanded for resolution of the choice-of-law question under California choice-of-law principles.
Legal Principles
- Unconscionability under California law requires both procedural and substantive unconscionability, assessed on a sliding scale; adhesion contracts commonly supply procedural unconscionability.
- A class-action waiver is generally unconscionable when: (1) it appears in a consumer contract of adhesion; (2) disputes predictably involve small individual damages; and (3) the allegations describe a deliberate scheme by a stronger party to obtain small sums from many consumers.
- In that setting, a class-action waiver may function as an exculpatory clause contrary to California public policy, including Civil Code § 1668’s prohibition on contract terms that exempt a party from responsibility for fraud or violation of law.
- The FAA permits enforcement defenses of general applicability (including unconscionability); a state rule is not preempted when it applies equally to arbitration and nonarbitration contracts and does not discriminate against arbitration as such.
- A waiver of classwide arbitration is treated similarly to a waiver of class litigation for unconscionability analysis; invalidation of the waiver may allow class proceedings to occur in arbitration.
Conclusion
The court held that certain class-action waivers in consumer arbitration agreements are unenforceable under California unconscionability principles and are not preempted by the FAA on that basis, reversed the contrary appellate ruling, and remanded to determine whether Delaware or California law governs under California choice-of-law rules.