“I don’t have any solution, but I certainly admire the problem.” -Ashleigh Brilliant
Why It’s Important to Read and Understand Your Credit Card Agreement
How would you react if, six years after you entered into a credit card agreement, the credit card company took the position that, based upon its one-sided purported amendment, you (the consumer) not only had waived your right to a jury trial but also to your right to institute a class or representative action against them? Would you be surprised? Outraged? Would you even care?
This is precisely the factual situation that appellant John Szetela found himself in before he was awarded a staggering $29.00 award as damages in a binding arbitration in accordance with the “amendment.”
These facts formed the underpinning for an April 2002 decision by California’s Fourth District Court of Appeal. Echoing much of the rationale espoused in Bolter v. Superior Court, 87 Cal.App.4th 900, (2001), the Court agreed with the appellant that an arbitration provision which is procedurally and substantively oppressive and unconscionable will be revoked.
Szetela v. Discover Bank
Filed on April 22, 2002 and certified for publication, Szetela v. Discover Bank is an appeal from an order of the Superior Court in Orange County, California, [Superior Court Case Number OOCC12582].
A putative class action, it was born out of appellant John Szetela’s challenge of the Orange County Superior Court’s order granting Respondent Discover Bank’s motion to compel arbitration where the subject binding arbitration provision sought to prohibit class or representative treatment of small individual claims.
The 4th District Court of Appeal agreed with the appellant that, based upon the facts and circumstances in the case, the arbitration provision contained in the purported ‘amendment’ to the CardMember Agreement was not only unenforceable but also unconscionable. The Court did not rule on the arbitration provision as a whole, but only that portion of it prohibiting class or representative actions.
The Facts of the Case
The material facts in the case were undisputed. The appellant opened a Discover credit card account in 1993, the terms of which were embodied in the CardMember Agreement. Almost to the exact day six years later, he received written notice from the respondent Discover that sought to change the terms of the original CardMember Agreement to include a binding arbitration clause.
The first portion of the clause contained broadly written wording providing for binding arbitration in the event of any claim, as well as the admonition that neither the cardholder (consumer) nor the company (Discover) would have the right to a jury trial on any claim, and pre-hearing discovery and post-hearing appeal rights would be limited. The next portion of the provision was set forth in caps and provided, in pertinent part, “NEITHER YOU NOR WE SHALL BE ENTITLED TO JOIN OR CONSOLIDATE CLAIMS IN ARBITRATION BY OR AGAINST OTHER CARDMEMBERS WITH RESPECT TO OTHER ACCOUNTS, OR ARBITRATE ANY CLAIMS AS A REPRESENTATIVE OR MEMBER OF A CLASS OR IN A PRIVATE ATTORNEY GENERAL CAPACITY”.
If the consumer chose not to accept the terms of this proposed amendment, his only recourse was to notify Discover, which under the very terms of the purported amendment, would then close his account. The consumer would be “allowed” to continue paying his remaining balance, if any, to Discover under the terms of the original Card Member Agreement.
The causes of action alleged against Discover in the First Amended Complaint filed in the superior court included breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent or negligent misrepresentation and deceptive business practices.
Specifically included in the allegations against Discover was one that improper “over limit” fees were charged to those cardholders who exceeded their credit limits (“available credit”). The over limit fee was $29.00. Ultimately, Discover’s motion to compel arbitration of Szetela’s claim on an individual basis was granted. Szetela prevailed at the arbitration and was awarded $29.00 in damages. Appeal followed.
After finding it had the requisite jurisdiction to hear the appeal, the Court exercised its discretion to treat the appeal as a petition for a writ of mandate, denying Discover’s motion to dismiss.
In addressing the differences between procedural and substantive unconscionability, the Court emphasized the unequal bargaining power between the parties. Procedural unconscionability is directed toward the manner in which assent to the disputed term was sought or obtained. Substantive unconscionability relates to the impact of the provision itself.
Was the provision so harsh or oppressive that it should not be enforced? Referencing Armendariz, the Court indicated that these factors don’t have to be present in the same degree. “The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa” (Armendariz v. Foundation Health Psychcare Services, Inc. 2000. 24 Cal.4th 83, 114).
Respondent Discover argued that since the appellant could have contracted with another credit card company, which did not require such a provision, the subject provision was not procedurally unconscionable. The Court rejected that theory, specifying the appellant’s weaker bargaining position: “When the weaker party is presented the clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.”
The Court also found the subject arbitration provision substantively unconscionable: “The manifest one-sidedness of the no class action provision at issue here is blinding obvious”. Essentially, the Court opined that the provision was designed to prevent Discover’s consumers from seeking legal redress for small amounts of money ($29.00).
Instead, the respondent was attempting to insulate itself from potential class actions while suffering no such corresponding detriment itself. As such, the provision violated fundamental notions of fairness as well as public policy.
In essence, the provision bestowed a ‘get out of jail free’ card upon the respondent, with no such similar benefit given to the consumer. To the contrary, since such a provision seriously jeopardized the consumer’s rights, the provision also violated public policy.
It did so in another important way as well: “One of the policy reasons for class actions is to promote judicial economy and streamline the litigation process in appropriate cases. To allow litigants to contract away the court’s ability to use a procedural mechanism that benefits the court system as a whole is no more appropriate than contracting away the right to bring motions in limine, seek directed verdicts, or use other procedural devices that allow the courts to operate in an efficient manner.”
The Court of Appeal issued a writ of mandate directing the superior court to vacate its order directing the appellant to arbitrate his claim, and to enter a new order striking the provision against representative or class actions from the arbitration provision.
The Court’s ruling is yet another sobering reminder to lawyers who draft and interpret arbitration provisions. The defenses that exist for contracts shall likewise be applied by courts to arbitration agreements, where applicable, because arbitration is inherently contractual by nature.
Arbitrators receive their authority from the parties’ arbitration agreements, some of which are entered into years in advance of the actual arbitration. Although the liberal federal policy arising out of the Federal Arbitration Act does create a presumption in favor of arbitration, the presumption does not mean that a court is free to compel a party to arbitrate when it has not agreed to do so, nor may the court compel a party to accept an amendment to a card member agreement which was “oppressive in nature” and procedurally unconscionable.
Lawyers should insert a choice of law provision in the arbitration agreement so that later there is no (or inconsequential) debate. In Szetela, the respondent argued that Delaware law governs the Discover CardMember Agreement. But the Court said that it applied the law of California because the respondent had not established that the law of another state should apply.
What it All Means
Although adhesive and unconscionable contractual qualities are not mutually exclusive, we are reminded that even if a contract is not adhesive per se, it may nevertheless be deemed unconscionable.
Citing Villa Milano Homeowners Assn. V. Il Davorge (2000. 84 Cal.App.4th, 819, 827) the Court noted that the availability of goods or services from an alternate source goes to the issue of whether or not a contract is adhesive in nature. Unconscionability has separate standards.
As it relates to consumer transactions, lawyers are reminded that a “take it or leave it” approach adopted by the stronger party against the weaker party might provide the foundation for a defense of procedural unconscionability. This may be particularly true where little or no opportunity for meaningful negotiation exists.
Assessing one party’s relative bargaining strength against that of the other is important to the analysis. Determining, in advance, how a court might analyze what constitutes “meaningful” negotiation is critical.
We are reminded that contract terms that are so one-sided as to shock the conscience might have the corresponding defense of substantive unconscionability. And while adhesive arbitration provisions are not per se unconscionable, “there may be arbitration provisions which do give an advantage to one party…In those cases…it is not the requirement of arbitration alone which makes the provision unfair but rather the…manner in which the arbitration is to occur” (Szetela, citing Strotz v. Dean Witter Reynolds, Inc., (1990) 223 Cal.App.3d 208, 216).
“It is the manner of arbitration, specifically, prohibiting class or representative actions, we take exception to here. 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” (Szetela).
We are reminded to “think contract.” We must pay scrupulous attention when drafting arbitration agreements so that our clients are as insulated as possible from the assertion of certain defenses to the contract. We are also reminded to “think contract” when, on our client’s behalf, we seek to successfully assert contract defenses.