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Dreher Tomkies LLP
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Columbus, Ohio 43215
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CLASS ACTION WAIVER IN ARBITRATION AGREEMENT HELD ENFORCEABLE UNDER DELAWARE LAW

On December 7, 2005, the California Court of Appeal for the Second District held that a class action waiver within an arbitration agreement was enforceable under Delaware law. Discover Bank v. Superior Court, 134 Cal. App. 4th 886, 36 Cal. Rptr. 456 (Cal. Ct. App. 2005). In that case, a California cardholder brought a nationwide class action against Discover Bank claiming breach of contract and a violation of the Delaware Consumer Fraud Act. The cardholder alleged that Discover Bank breached the cardholder agreement by imposing late fees and finance charges on payments received after an undisclosed 1:00 p.m. deadline on the payment due date. Discover Bank moved to compel arbitration on an individual basis based upon an arbitration clause prohibiting classwide arbitration within the cardholder agreement. The cardholder agreement also contained a Delaware and federal choice-of-law provision.

The trial court found that the class action waiver was unenforceable under California law. Upon writ relief, however, the court of appeal held that California law was preempted by the Federal Arbitration Act ("FAA") on this issue. Upon further review, the California Supreme Court held that under certain circumstances California law does prohibit class action waivers without being preempted by the FAA and remanded the case to the court of appeal to determine whether the enforceability of the waiver should be governed by Delaware law pursuant to the choice-of-law provision in the cardholder agreement.

The court of appeal indicated that pursuant to Section 187(2) of the Restatement Second of Conflict of Laws, the court of appeal must determine: (i) whether Delaware has a substantial relationship to the parties or their transaction; or (ii) whether there is any other reasonable basis for the parties’ choice of law. If neither of these tests is met, then the court of appeal need not enforce the parties’ choice of law. If either test is met, the court must determine whether Delaware law is contrary to a fundamental policy of California, If there is no such conflict, the court of appeal must enforce the parties’ choice of law. If there is a conflict, then the court must determine whether California has a materially greater interest than Delaware in the determination of the particular issue. If so, then the choice of law is unenforceable.

According to the court of appeal, Delaware has a substantial relationship to the parties and there is another reasonable basis for the Delaware choice of law because (i) Discover Bank is domiciled in Delaware and (ii) a Delaware statute requires that a revolving credit plan between a Delaware-chartered bank and an individual borrower be governed by Delaware law. In addition, the court of appeal indicated that class action waivers are enforceable and not unconscionable under Delaware law as evidenced by relevant case law. Moreover, the court of appeal indicated that California does not have a materially greater interest in the determination of the issue than Delaware because (i) Delaware is the home of the sole defendant, (ii) Delaware has demonstrated by statute its concern that Delaware law should apply to claims between Delaware banks and their cardholders and (iii) the cardholder asserted claims only under Delaware law. For these reasons, the court of appeal held that the parties’ choice of Delaware law governed the enforceability of the class action waiver, which would be enforced in the case.

Jeff Langer and Chuck Gall