Opinion ID: 150389
Heading Depth: 3
Heading Rank: 1

Heading: Arbitration Agreements and Agreements in General

Text: Under California law ( see Note, Terms and Conditions at 3 (the provisions of this Note will be governed by Federal laws and the laws of the State of California, without regard to conflict of laws rules)), contracts that are exculpatory may be unconscionable and unenforceable. The California Civil Code provides as follows: All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law. Cal. Civ.Code § 1668 (West 1985) (emphases added). This principle is often a consideration in the justifications for class action lawsuits. Discover Bank v. Superior Court, 36 Cal.4th 148, 156, 30 Cal.Rptr.3d 76, 113 P.3d 1100, 1105 (2005) ( Discover Bank ). Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. A class action by consumers produces several salutary by-products, including a therapeutic effect upon those sellers who indulge in fraudulent practices,.... Id. (internal quotation marks omitted) (emphasis added). A company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit; the class action is often the only effective way to halt and redress such exploitation. Id. (internal quotation marks omitted); see, e.g., Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). Discover Bank involved a class action brought by a credit card holder alleging that the issuer, Discover Bank (or the Bank), had a practice of representing to cardholders that late payment fees would not be assessed if payment was received by a certain date, whereas in actuality they were assessed if payment was received after 1:00 p.m. on that date, thereby leading to damages that were small as to individual consumers but large in the aggregate. 36 Cal.4th at 152, 30 Cal.Rptr.3d 76, 113 P.3d at 1103. The applicable credit card agreement provided, inter alia, that either the cardholder or the Bank could elect arbitration; that in the event of such an election, neither side would have the right to litigate the dispute in court; and that neither could conduct arbitration as a member or representative of a class. See id. at 153-54, 30 Cal.Rptr.3d 76, 113 P.3d at 1103. The trial-level court initially, applying Delaware law, granted a motion by the Bank to compel arbitration on an individual basis. Upon reconsideration following the decision in Szetela v. Discover Bank, 97 Cal.App.4th 1094, 118 Cal. Rptr.2d 862 (2002) ( Szetela ) (finding a virtually identical arbitration provision unconscionable under California law), cert. denied, 537 U.S. 1226, 123 S.Ct. 1258, 154 L.Ed.2d 1087 (2003), the court held the class action waiver clause unenforceable; it concluded that the plaintiff was required to submit to arbitration but that he could seek to do so on a class basis. On appeal by the Bank, the court of appeal did not rule on unconscionability but held that the California rule that class arbitration waivers are sometimes unconscionable was preempted by the FAA. See generally Discover Bank, 36 Cal.4th at 155, 30 Cal. Rptr.3d 76, 113 P.3d at 1104-05. The California Supreme Court reversed the preemption ruling, noting, inter alia, 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 153, 30 Cal.Rptr.3d 76, 113 P.3d at 1103 (emphases added). Pointing out that under FAA § 2 a state court may refuse to enforce an arbitration agreement based on generally applicable contract defenses, such as fraud, duress, or unconscionability, id. at 165, 30 Cal.Rptr.3d 76, 113 P.3d at 1111-12 (internal quotation marks omitted), the Discover Bank Court noted that California law, like federal law, favors enforcement of valid arbitration agreements, id. at 163, 30 Cal.Rptr.3d 76, 113 P.3d at 1110 (internal quotation marks omitted); but California law abhors contracts that are unconscionable, whether or not they involve arbitration. The Court concluded that the FAA did not preempt the California principle that unconscionable arbitration waiver clauses are unenforceable because 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 165-66, 30 Cal.Rptr.3d 76, 113 P.3d at 1112 (emphases added). Accordingly, since California law place[s] arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration, Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976, 990 (9th Cir.2007) ( Shroyer ) (emphasis in original), we reject ACS's contention that the FAA preempts California principles as to the conscionability of class arbitration waivers.