Academic journal article Defense Counsel Journal

How Much Is an Ounce of Prevention Worth?

Academic journal article Defense Counsel Journal

How Much Is an Ounce of Prevention Worth?

Article excerpt

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:

   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. …

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