How much is an ounce of prevention worth?

• Author: Vendler, David J.

Writing in the May newsletter of the Class Actions and Multi-party Litigation Committee newsletter, David J. Vendler of the Los Angeles office of Morris, Polich, Purdy writes about a split in California courts:

In response to burgeoning litigation costs and a plaintiffs' bar increasingly willing to grab hold of virtually any "technical" violation to support a class action lawsuit, more and more businesses have begun inserting anti-class action poison pill provisions in the fine print of their standardized customer "agreements." These provisions are primarily of two types: clauses stating (1) that by accepting the terms of the "agreement," the customer agrees that he or she will not be party to a class or other kind of representative action, or (2) that the customer agrees to arbitrate all claims arising from the transaction. Most often, these provisions will appear together.

In two recent cases, the California Court of Appeal reached diametrically opposed conclusions regarding the enforceability of these anti-class action provisions, although the courts were reviewing the exact same standardized form agreement governing the relationship between Discover Bank and its customers. The potential ramifications of these decisions, however, reach into virtually every consumer-related industry and suggest a real risk that the use of these clauses may provide more of a detriment than a benefit to the corporations that have adopted them.

Language the same

The two cases are Szetela v. Discover Bank, 118 Cal.Rptr.2d 862, decided April 22, 2002, rehearing denied May 16, 2002, review denied July 31, 2002, and Discover Bank v. Superior Court (Boehr), 129 Cal.Rptr.2d 393, decided January 14, 2003. The contractual language at issue in both cases was:

ARBITRATION OF DISPUTES. In the event of any past, present or future claim or dispute (whether based upon contract, tort, statute, common law or equity) between you and us arising from or relating to your account, any prior account you have had with us, your application, the relationships which result from your account or the enforceability or scope of this arbitration provision, of the agreement or of any prior agreement, you or we may elect to resolve the claim or dispute by binding arbitration. If either you or we elect arbitration, neither you nor we shall have the right to litigate that claim in court or to have a jury trial on that claim. Pre-hearing discovery rights and post-hearing appeal rights will be limited. 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. Even if all parties have opted to litigate a claim in court, you or we may elect arbitration with respect to any claim made by a new party or any new claims later asserted in that lawsuit, and nothing undertaken therein shall constitute a waiver of any rights under this arbitration provision. [Emphasis added] Can't withstand scrutiny

In Szetela, the Fourth District Court of Appeal held that while the arbitration provision could withstand scrutiny, the anti-class action provision could not. It based its opinion on the fact that, notwithstanding the policy favoring arbitration under both California and federal law, this policy does not detract from the viability of traditional state law contract defenses such as undue influence and unconscionability. As the California Supreme Court has stated, the court continued, "under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," quoting Armendariz v. Foundation Health Psychcare Services Inc., 6 P.3d 669 (2000).

Under California law, there are two parallel tests for determining whether an agreement is "unconscionable." On the one side is the test enunciated in Graham v. Scissor-Tail Inc., 623 P.2d 165 (1981), vacating 162 Cal.Rptr. 708 (Cal.App. 1980), which provides that...