A long awaited California Supreme Court decision involving consumer class actions was handed down this morning, and in a complicated decision with several opinions, California has made clear that a contractual provision barring consumers from filing class action lawsuits can be struck down as unconscionable, and that the FAA does not pre-empt state law in this area, even post-Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444.
Discover Bank v. Superior Court (2005) --- Cal.4th ---, concerns the validity of a provision in an arbitration agreement, between Discover Bank and a credit cardholder, forbidding classwide arbitration. The cardholder, a California resident, filed a class action lawsuit pertaining to unlawful or unfair late charge practices. Discover Bank successfully moved to compel arbitration and argued that the arbitration could not include class action claims because the arbitration agreement has a clause forbidding classwide arbitration. The agreement also has a Delaware choice-of-law provision, and, under Delaware law, a waiver of class action remedies does not violate public policy.
Applying California law, the trial court ruled that the class arbitration waiver was unconscionable and enforced the arbitration agreement with the proviso that plaintiff could seek classwide arbitration. The Court of Appeal reversed, holding (without addressing any choice-of-law issues) that the Federal Arbitration Act (FAA) preempts the state law rule that class arbitration waivers are unconscionable.
The Supreme Court reversed and remanded, holding that: (i) under certain circumstances, California law dictates that class action waivers in consumer contracts of adhesion are unenforceable, whether the waiver applies to class action litigation or classwide arbitration; and (ii) the FAA does not preempt California law in this respect. The case was remand to the Court of Appeal to decide whether the facts in this case require the court to apply California or Delaware law.
On the choice of law issue, the standard reads like a flow-chart.
1. If the trial court finds that the claims at issue fall within the scope of a choice-of-law clause, it must evaluate the clause’s enforceability pursuant to the analytical approach reflected in section 187, subdivision (2) of the Restatement Second of Conflict of Laws (Restatement). Under that approach, the court must first determine:
A. if the chosen state has a substantial relationship to the parties or their transaction, or
B. whether there is any other reasonable basis for the parties’ choice of law.
2. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties’ choice of law. If, however, either test is met, the court must
3. Determine whether the chosen state’s law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties’ choice of law. If, however, there is a fundamental conflict with California law, the court must
4. Determine whether California has a ‘materially greater interest than the chosen state in the determination of the particular issue . . . .’ (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state’s fundamental policy.
In that regard, the Supreme Court seems to have adopted the two-pronged test described in America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, which provides that an agreement designating another state law as the controlling law will not be given effect if:
(i) it would violate a strong California public policy; or
(ii) it would result in an evasion of a statute of the forum protecting its citizens.
For California employees, and, in particular, employees asserting class action claims arising from either wage and working condition violations, unless the class action pursues claims on behalf of employees nationwide, this test will virtually always result in California law being applied, rather than the law of the employer's home state.
"Public policy has long favored the full and prompt payment of wages due an employee. “Wages are not ordinary debts.... [B]ecause of the economic position of the average worker and, in particular, his dependence on wages for the necessities of life for himself and his family, it is essential to the public welfare that he receive his pay promptly." Pressler v. Donald L. Bren Co. (1982) 32 Cal.3d 831, 837.
"It is the policy of this state to vigorously enforce minimum labor standards in order to ensure employees are not required or permitted to work under substandard unlawful conditions, and to protect employers who comply with the law from those who attempt to gain competitive advantage at the expense of their workers by failing to comply with minimum labor standards." Labor Code § 90.5(a).
The opinion includes this gem of a quote:
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.
The opinion also includes this gem of a quote taken from the U.S. Supreme Court in Amchem Products, Inc. v. Windsor (1997) 521 U.S. 591, 617, which explains why class action litigation is such as important right for the general public:
"The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labor."
Many of our wage and hour class action cases would never see the light of day as individual cases. When an employer breaks the law regarding, for example, employee uniforms, and cheats its workers out of $20 at a time, five or six times over the course of a year or two, the only remedy the affected workers can pursue with any effectiveness at all is the class action remedy. No one wants to waste a day, or maybe several days, pursuing $40 or $60 or even $100. But if you can combine 1,000 or 10,000 employees' claims, you can afford to hire an attorney to pursue the claim on behalf of everyone and still find justice, even as the company fights back with its own $450 per hour defense lawyers.
You can download the full text of the Discover Bank opinion in pdf or MS Word format.
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