## Facts

- John Szetela held a Discover credit-card account governed by a standard-form cardmember agreement drafted by Discover Bank.
- Discover later added an arbitration provision by a unilateral notice included with billing statements.
- The provision required binding arbitration for disputes and barred any class, representative, or private-attorney-general proceedings.
- A cardholder who rejected the amendment could do so only by notifying Discover, after which Discover would close the account.
- Szetela became a putative class representative asserting claims (including contract and fraud-based theories) challenging allegedly improper fees and penalties.
- Szetela’s individual damages were approximately $29, making individual pursuit economically impractical absent aggregate procedures.
- Discover moved to compel individual arbitration and to enforce the class/representative-action prohibition; the trial court granted the motion.

## Issues

1. Whether a class- and representative-action waiver in a consumer adhesion arbitration clause, imposed by unilateral amendment and applied to small-value claims, is unconscionable and unenforceable under California law.
2. If unenforceable, whether the proper remedy is to invalidate the entire arbitration agreement or to sever and strike only the offending waiver.

## Decision

- The Court of Appeal granted writ relief and directed the trial court to strike the portion of the arbitration clause prohibiting class or representative actions.
- The court held the class-action waiver unconscionable and void.
- The court did not invalidate arbitration as a dispute-resolution mechanism; it targeted the class/representative-action ban as the unconscionable term.

## Legal Principles

- Unconscionability under California law requires both procedural unconscionability (oppression or surprise) and substantive unconscionability (overly harsh or one-sided results), applying a sliding-scale analysis.
- Procedural unconscionability may be shown where a consumer contract is adhesive, nonnegotiable, and imposed through unilateral amendment with no meaningful choice other than terminating the relationship.
- A class-action waiver can be substantively unconscionable when, in practical operation, it functions to deter or prevent the prosecution of small-dollar claims and thereby operates as a form of exculpation for widespread minor harms.
- Contract terms that effectively insulate a drafter from liability for alleged wrongdoing affecting many consumers are disfavored as contrary to public policy supporting enforcement of consumer-protection norms.
- When feasible, courts may sever an unconscionable provision and enforce the remainder of the agreement.

## Conclusion

The court concluded that Discover’s class- and representative-action prohibition, imposed through an adhesive amendment and applied to small-value consumer claims, was unconscionable and unenforceable; the proper remedy was to sever and strike the waiver rather than reject arbitration altogether.


Szetela v. Discover Bank, 97 Cal. App. 4th 1094 (Cal. Ct. App. 2002)