California court rejects consumer class action waiver
In Klussman v. Cross Country Bank,Download file, a California appeals court has held that a credit card agreement should be construed under California law when applied to California consumers, and under California law a hidden waiver of the right to bring classwide arbitration is unconscionable and unenforceable.
Cross Country Bank is a credit card company whose customers, according to the complaint, are "generally unsophisticated and vulnerable to financial predation." The case was brought as a class action on behalf of California customers alleging violation of the California Consumers Legal Remedis Act (Civ. Code Section 1750 et seq.) as well as the California Unfair Competition Law (Bus. & Prof. Code Section 17200 et seq.).
The relevant cardholder agreements stated that Delaware law governed except where federal law applied. In determining which law to apply, the Court stated:
"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."
The Court concluded that California's interest in the issue was "materially greater" than Delaware's. Relevant factors were that the plaintiff class was limited to California residents and contained claims under California consumer laws. Because Delaware law enforces class action waivers, the Court applied California law, on the grounds that the right to bring a class action implicates important policy issues in California.
The California Supreme Court in Discover Bank v. Superior Court,Download file, held earlier this year that while not all class action waivers are unenforceable, 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 sumes of money, then, at least to the extent the obligation at issue is governed by California law, . . . such waivers are unconscionable under California law and should not be enforced."
In finding the class action waiver unconscionable, the Court noted that unconscionability has both a procedural and a substantive element, and that both must be present. Consumer contracts may easily satisfy the procedural element because they are generally adhesion contracts. Thus, companies should be mindful to avoid substantative overreaching in this context in order to maintain enforceable contracts.
The outcome in this case is similar to the recent ruling in Aral v. Earthlink, in which Earthlink's dispute resolution clauses were held to be unenforceable -- see prior post.
