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In ruling that a bar on class-wide proceedings rendered an arbitration agreement unenforceable, the California Court of Appeal held that an opt-out provision did not preclude a finding of procedural unconscionability because exercise of the opt-out provision would necessarily result in delayed termination of the underlying relationship. The Court's holding creates a split of authority within the California courts of appeal because in Jones v. Citigroup, Inc., 38 Cal. Rptr. 3d 461 (Cal. Ct. App. 2006), review granted 135 P.3d 2 (Cal. 2006), the court held that an identical opt-out provision precluded a finding of procedural unconscionability.
In Firchow v. Citibank (South Dakota), N.A., No. B187081, 2007 WL 64763 (Cal. Ct. App. Jan. 10, 2007), Firchow brought a putative statewide class action against Citibank, alleging that Citibank had prematurely terminated a credit card rebate program in violation of California consumer protection statutes.
Citibank filed a motion to compel arbitration. In opposing the motion, Firchow argued that the arbitration agreement was unconscionable because it barred class-wide proceedings. The trial court denied the motion on the ground the arbitration agreement was unconscionable under California law.
On appeal, Citibank argued that the trial court erred by applying California law when the cardmember agreement provided that South Dakota law would govern interpretation of the arbitration clause. The Court conducted a choice-of-law analysis and concluded that California law governed the issue of unconscionability because "California has a materially greater interest in litigation involving alleged violations of its own consumer protection statutes" than does a foreign state such as South Dakota.
To reach this conclusion, the Court had to distinguish Discover Bank v. Superior Court, 36 Cal. Rptr. 3d 456 (Cal. App. Dist. 2005) [hereinafter "Discover Bank II"], in which the court honored a Delaware choice-of-law provision and therefore upheld an arbitration agreement that barred class-wide proceedings. The Court distinguished Discover Bank II on the ground that the plaintiff in that case asserted substantive claims under Delaware law.
Citibank also argued that the trial court erred in finding that the arbitration agreement was procedurally unconscionable even though the agreement contained an opt-out provision that allowed the cardholder to reject the arbitration agreement and continue to use the card until its expiration date. In rejecting this argument, the Court reasoned that "there [wa]s no right to 'opt-out'; the cardholder still [had to] take it or leave it; he or she simply ha[d] a somewhat more extended period in which to make that decision."
Apart from its finding that "the so-called opt-out opportunity [wa]s largely illusory," the Court did not identify any indicia of procedural unconscionability. Instead, the Court concluded, without any elaboration, that the bar on class-wide proceedings "contain[ed] significant elements of procedural unconscionability."
The Court also concluded that the bar on class-wide proceedings rendered the arbitration agreement substantively unconscionable under Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005). Having concluded that the arbitration agreement was both procedurally and substantively unconscionable, the Court affirmed the trial court's order denying Citibank's motion to compel arbitration.
This case should not be misconstrued as abandoning the principle that an opt-out provision precludes a finding of procedural unconscionability. Instead, the Court merely concluded that a person does not have a legitimate opt-out opportunity when exercise of the opt-out provision necessarily results in delayed termination of the underlying relationship.
In any event, the Court's treatment of the opt-out provision has only temporary significance since the California Supreme Court is currently reviewing an arbitration agreement with an identical opt-out provision. See Jones v. Citigroup, Inc., 38 Cal. Rptr. 3d 461 (Cal. Ct. App. 2006), review granted 135 P.3d 2 (Cal. 2006).
In Jones, the court found there was no procedural unconscionability because the "plaintiffs were given an opportunity to opt out of arbitration." See 38 Cal. Rptr. 3d at 465; see also Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 274 (Ill. 2006) (noting that "a class action waiver will not be found unconscionable if the plaintiff had a meaningful opportunity to reject the contract term"). The California courts of appeal are thus split on the question of whether an opt-out provision with delayed consequences precludes a finding of procedural unconscionability.
The Court's choice-of-law analysis also raises some lingering questions. The Court distinguished Discover Bank II on the ground that the plaintiffs in that case asserted substantive claims under Delaware law, which implies that California courts will disregard an agreement's choice-of-law provision only if the claimant presupposes its invalidity by asserting claims under California law and not under the law designated in the agreement.
This implication forces a Catch-22 on future claimants in light of California's rule against splitting causes of action, see, e.g., Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1270 (9th Cir. 2006), because asserting claims under the designated law would undermine any challenge to the choice-of-law provision, but if the choice-of-law provision is upheld, failure to assert claims under the designated law would imperil any recovery under the doctrine of res judicata.
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