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Arbitration Clause Was Contrary to Public Policy

California Supreme Court Strikes Down Class Action Limits in Arbitration Agreements

SAN FRANCISO, CA -- July 15, 2005 -- An arbitration agreement in a consumer contract is illegal if it does not allow class actions, the California Supreme Court has ruled (Discover Bank v. Superior Court of Los Angeles, S113725). The Court also decided that the Federal Arbitration Act does not supercede or preempt California law in this regard.

Christopher Boer, the plaintiff, sought to protest the bank's late fee policy. Although his damages were minimal, the combined damages of all Discover Bank credit card holders would be substantial. Therefore, Mr. Boer wanted to pursue a class action lawsuit or at least a class action within an arbitration proceeding. However, Discover Bank requires its credit card holders to sign an arbitration agreement that precludes class actions.

Discover Bank's arbitration clause was "unconscionable" and "contrary to public policy," according to the California Supreme Court. The clause was added as part of a "bill stuffer." If it was not accepted, the account would be closed. The Court called the agreement a "contract of adhesion," noting that it could be used to cheat large numbers of consumers out of individually small sums of money. It also pointed to a California law against exempting a business "from responsibility for [its] own fraud or willful injury to the person or property of another."

Mr. Boer is a California resident, whereas Discover Bank is located in Delaware. Although illegal in California, the arbitration clause would most likely be allowed under Delaware law. The California Supreme Court sent the case to an appeals court to decide the question of whether Delaware or California law should apply.

The Value of Class Action Claims

Class actions can save time and money in arbitration proceedings and in the courts, when compared to many people filing small individual claims. Class actions may also help ensure that large companies cannot get away with unfair consumer policies.

Brayton Purcell accepts both class actions and individual cases. If you have a valid individual claim, we will help you and give you the personal attention you deserve. If we determine that you may be part of a larger group of injured people, we will discuss whether it makes sense to bring your case as a class action. For more information about your particular case, please feel free to contact us.

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