DELAWARE CHOICE OF LAW PROVISION BARRING CLASS WIDE ARBITRATION HELD UNCONSCIONABLE
If California residents sue a Delaware bank and its credit card servicing company for alleged unlawful practices, and the underlying cardholder agreements contain a Delaware choice of law provision and a "hidden" clause prohibiting class-wide arbitration, should California nonetheless compel the name plaintiffs to arbitrate on an individual basis?
Answer: No, according to the First District Court of Appeal in Klussman v. Cross Country Bank, 05 C.D.O.S. 10602 (Dec. 15, 2005).
This is another case where the court of appeal was required to apply the California Supreme Court's opinion in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, which held that a waiver of class-wide arbitration in a consumer contract of adhesion was unconscionable under California law in the circumstances of that case. Here, the cardholder agreement contained both a Delaware choice of law provision and language requiring that arbitration would take place before the National Arbitration Forum (which barred class-wide arbitration). Undaunted, the plaintiffs filed a class action lawsuit on behalf of California residents, arguing that the defendants had engaged in a pattern of unlawful practices such as misrepresenting payoff charges and imposing unauthorized fees.
The defendants moved to compel arbitration on an individual basis, arguing that these claims were governed by the Federal Arbitration Act and fell within the contractual arbitration clause. The trial court denied the motion and the First District affirmed. After holding that under Discover Bank, the FAA did not preempt California law concerning class action waivers, the court held the hidden class-action waiver was unconscionable under California Law. It then held the Delaware choice of law provision was invalid because California's interest in protecting its consumers outweighed Delaware's interest in making sure Delaware banks are subject to uniform regulation. And, since it also found the hidden class action waiver could not be severed, the court denied defendants' motion to compel arbitration in its entirety.
In a footnote, the court noted the Second District Court of Appeal had recently upheld a Delaware choice of law provision prohibiting class-wide arbitration in Discover Bank v. Superior Court, 05 C.D.O.S. 10291 (Dec. 7, 2005). But that case was different: "The factors that distinguish the Discover Bank case from this case are the ones we have already noted: there was no claim under any California consumer law; the plaintiff sought to use California as a platform for a nationwide class action; and the waiver was in the agreement, rather than buried in a website that could be changed at any time without notice."