California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable

On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law.