Opinion ID: 2570216
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Heading: The Enforceability of Class Action Waivers

Text: Keating judicially authorized classwide arbitration in a case in which the arbitration agreement at issue was silent on the matter. It did not answer directly the question whether a class action waiver may be unenforceable as contrary to public policy or unconscionable. Recent cases have addressed that question. First, the Court of Appeal discussed the validity of a contractual class action waiver outside the arbitration context in America Online, Inc. v. Superior Court (2001) 90 Cal. App.4th 1, 108 Cal.Rptr.2d 699 ( America Online ). Several former AOL subscribers alleged that AOL had continued to debit their credit cards for monthly service fees after their subscriptions had been canceled. ( Id. at p. 5, 108 Cal.Rptr.2d 699.) The plaintiffs filed a class action lawsuit alleging violation of the Consumers Legal Remedies Act (CLRA) (Civ.Code, § 1750 et seq.), the Unfair Business Practices Act and several common law causes of action. The subscription contracts contained Virginia forum selection and choice-of-law provisions. Because Virginia law did not permit consumer class action lawsuits, those provisions were the functional equivalent of a waiver of class action lawsuits. ( Ibid. ) The America Online court held the forum selection and choice-of-law provisions to be unenforceable. As to the latter, the court stated: `While California does not have any public policy against a choice of law provision, where it is otherwise appropriate [citation] and choice of law provisions are usually respected by California courts ... [citation] an agreement designating [a foreign] law will not be given effect if it would violate a strong California public policy ... [or] `result in an evasion of ... a statute of the forum protecting its citizens.' [Citation.]' ( America Online, supra, 90 Cal.App.4th at p. 13, 108 Cal. Rptr.2d 699, quoting Hall v. Superior Court (1983) 150 Cal.App.3d 411, 416-417, 197 Cal.Rptr. 757; see also Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148 ( Nedlloyd ) [an arm's length choice-of-law provision between commercial entities will not be enforced if it violates a fundamental California public policy and California has materially greater interests than the chosen state].) The America Online court found in the CLRA a statute that overrode the choice-of-law provision. The court noted that the statute contained an antiwaiver provision, Civil Code section 1751, which states: Any waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void. The court reasoned that following Virginia law would result in a waiver of the CLRA in light of the fact that the equivalent Virginia consumer protection statute, the Virginia Consumer Protection Act of 1977 (Va.Code Ann. § 59.1-196), was significantly weaker. ( America Online, supra, 90 Cal.App.4th at pp. 15-16, 108 Cal.Rptr.2d 699.) Among the most important differences between the two statutes was the lack of a provision permitting class action relief in the Virginia statute. ( Id. at p. 17, 108 Cal.Rptr.2d 699.) After quoting the passage in Vasquez, supra, 4 Cal.3d at page 808, 94 Cal.Rptr. 796, 484 P.2d 964, regarding the importance of class actions in vindicating consumer rights quoted above ( ante, 30 Cal.Rptr.3d at pp. 81-82, 113 P.3d at pp. 1104-06), the court stated: That this view has endured over the last 30 years is of little surprise given the importance class action consumer litigation has come to play in this state. In light of that history, we cannot accept AOL's assertion that the elimination of class actions for consumer remedies if the forum selection clause is enforced is a matter of insubstantial moment. The unavailability of class action relief in this context is sufficient in and by itself to preclude enforcement of the ... forum selection clause. ( America Online, supra, 90 Cal.App.4th at pp. 17-18, 108 Cal.Rptr.2d 699, fn. omitted.) In Szetela, supra, 97 Cal.App.4th at page 1097, 118 Cal.Rptr.2d 862, the court considered a class arbitration waiver. Plaintiff was a member of a class of credit cardholders seeking action against Discover Bank for improperly charging fees for exceeding their credit limits and imposing other penalties. He sued for breach of contract, breach of the covenant of good faith and fair dealing, fraudulent or negligent misrepresentation, and deceptive business practices. The arbitration clause and class arbitration waiver were very similar to those at issue in the present case. The trial court granted Discover Bank's motion for arbitration. Plaintiff recovered $29 in an individual arbitration and then appealed the trial court order compelling arbitration. The court held that the class arbitration waiver was unenforceable. It first recognized that unconscionability was one reason to refuse to enforce an arbitration waiver. ( Szetela, supra, 97 Cal.App.4th at p. 1099, 118 Cal.Rptr.2d 862.) It found procedural unconscionability in the adhesive nature of the contract. ( Id. at p. 1100, 118 Cal.Rptr.2d 862.) The court also found substantive unconscionability in the imposition of a one-sided and oppressive class action waiver provision. This provision is clearly meant to prevent customers, such as Szetela and those he seeks to represent, from seeking redress for relatively small amounts of money, such as the $29 sought by Szetela. Fully aware that few customers will go to the time and trouble of suing in small claims court, Discover has instead sought to create for itself virtual immunity from class or representative actions despite their potential merit, while suffering no similar detriment to its own rights. [¶] ... The clause is not only harsh and unfair to Discover customers who might be owed a relatively small sum of money, but it also serves as a disincentive for Discover to avoid the type of conduct that might lead to class action litigation in the first place. By imposing this clause on its customers, Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits, fully aware that relatively few, if any, customers will seek legal remedies, and that any remedies obtained will only pertain to that single customer without collateral estoppel effect. The potential for millions of customers to be overcharged small amounts without an effective method of redress cannot be ignored. Therefore, the provision violates fundamental notions of fairness. [¶] ... This is not only substantively unconscionable, it violates public policy by granting Discover a `get out of jail free' card while compromising important consumer rights. ( Szetela, supra, 97 Cal.App.4th at p. 1101, 118 Cal.Rptr.2d 862; see also Ting v. AT & T (9th Cir.2003) 319 F.3d 1126, 1151 [concluding class action waivers in CLRA claim violated California law, relying in part on Szetela ]; Ingle v. Circuit City Stores, Inc. (9th Cir.2003) 328 F.3d 1165, 1176 [same].) Turning to the present case, we note that plaintiff does not plead a CLRA cause of action and so does not invoke its antiwaiver provision; [2] nor does he seek recovery under any other California statute as to which a class action remedy is essential. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100-101, 99 Cal.Rptr.2d 745, 6 P.3d 669 ( Armendariz ).) Rather, plaintiff contends that class action or arbitration waivers in consumer contracts, and in this particular contract, should be invalidated as unconscionable under California law. To briefly recapitulate the principles of unconscionability, the doctrine has `both a `procedural' and a `substantive' element, the former focusing on `oppression' or `surprise' due to unequal bargaining power, the latter on `overly harsh' `or `one-sided' results.' [Citation.] The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, `which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.' ... [¶] Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided. ( Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071, 130 Cal.Rptr.2d 892, 63 P.3d 979 ( Little ), cert. den. sub nom. Auto Stiegler, Inc. v. Little (2003) 540 U.S. 818, 124 S.Ct. 83, 157 L.Ed.2d 35.) We agree that at least some class action waivers in consumer contracts are unconscionable under California law. First, when, a consumer is given an amendment to its cardholder agreement in the form of a bill stuffer that he would be deemed to accept if he did not close his account, an element of procedural unconscionability is present. ( Szetela, supra, 97 Cal.App.4th at p. 1100, 118 Cal.Rptr.2d 862.) Moreover, although adhesive contracts are generally enforced ( Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817-818, 171 Cal.Rptr. 604, 623 P.2d 165), class action waivers found in such contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy. As stated in Civil Code section 1668: 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. (Italics added.) Class action and arbitration waivers are not, in the abstract, exculpatory clauses. But because, as discussed above, damages in consumer cases are often small and because `[a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit' ( Linder, supra, 23 Cal.4th at p. 446, 97 Cal.Rptr.2d 179, 2 P.3d 27), `the class action is often the only effective way to halt and redress such exploitation.' ( Ibid. ) Moreover, such class action or arbitration waivers are indisputably one-sided. Although styled as a mutual prohibition on representative or class actions, it is difficult to envision the circumstances under which the provision might negatively impact Discover [Bank], because credit card companies typically do not sue their customers in class action lawsuits. ( Szetela, supra, 97 Cal.App.4th at p. 1101, 118 Cal.Rptr.2d 862.) Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable. We acknowledge that other courts disagree. Some courts have viewed class actions or arbitrations as a merely procedural right, the waiver of which is not unconscionable. (See, e.g., Strand v. U.S. Bank National Association ND (N.D. 2005) 693 N.W.2d 918, 926 ( Strand ); Blaz v. Belfer (5th Cir.2004) 368 F.3d 501, 504-505; Johnson v. West Suburban Bank (3d Cir.2000) 225 F.3d 366, 369; Champ v. Siegel Trading Co., Inc. (1995) 55 F.3d 269, 277; but see Leonard v. Terminix Intern. Co. L.P. (Ala.2002) 854 So.2d 529, 538 [class action waiver together with limitation of damages clause in adhesive consumer arbitration agreement deprives plaintiffs of a meaningful remedy and is therefore unconscionable]; State v. Berger (2002) 211 W.Va. 549, 567 S.E.2d 265, 278 [holding contract provision limiting class action rights unconscionable]; Powertel v. Bexley (Fla.Dist. Ct.App.1999) 743 So.2d 570, 576 [same].) But as the above cited cases of this court have continually affirmed, class actions and arbitrations are, particularly in the consumer context, often inextricably linked to the vindication of substantive rights. Affixing the procedural label on such devices understates their importance and is not helpful in resolving the unconscionability issue. [3] Nor are we persuaded by the rationale stated by some courts that the potential availability of attorney fees to the prevailing party in arbitration or litigation ameliorates the problem posed by such class action waivers. ( Strand, supra, 693 N.W.2d at p. 926; Snowden v. Checkpoint Check Cashing (4th Cir.2002) 290 F.3d 631, 638.) There is no indication other than these courts' unsupported assertions that, in the case of small individual recovery, attorney fees are an adequate substitute for the class action or arbitration mechanism. Nor do we agree with the concurring and dissenting opinion that small claims litigation, government prosecution, or informal resolution are adequate substitutes. 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. (Civ.Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.