The Discover Bank Decision and Wireless Phone Contract Disputes

About a couple of years ago, the California Supreme Court issued a decision that has a significant impact on wireless phone contracts. This decision was well anticipated because of the increasing number of wireless contract disputes.

The case was widely known as Discover Bank v. Superior Court resulted in a decision that class action and class arbitration waiver clauses in consumer contracts are not enforceable "at least under some circumstances.” With this decision a window of opportunity for the use and enforcement of class action and class arbitration waiver clauses in the employment context was opened.


Case Background

Let us explore the events behind this ground breaking decision.

The case was all about a credit card holder filing a class action claim against Discover Bank in California. The person accused the bank of imposing a late fee of $29 on payments that were received on the payment due date, but after the bank's undisclosed 1:00 p.m. “cut off” time therefore breaching the cardholder agreement.

In response to this accusation, the accused moved to compel arbitration on an individual basis and to dismiss the class action. The bank argued that class arbitration and class actions are expressly prohibited in the arbitration provision of the cardholder agreement. It also contained of law clause stating that Delaware law governed.

However, the plaintiff argued that the class action/arbitration waiver clause, as stated in the cardholder agreement, is unenforceable under California law because it was unconscionable.


The Impact

The decision strike down the class action/arbitration waiver clause in the Discover Bank case may have nationwide implications. The presiding also noted that California could now become a magnet for class actions because the majority decided to ignore the choice of law provision in the arbitration agreement.

The decision can also affect the contracts of wireless phone service providers because these contracts requires the customer to accept a form of class action waiver. Take a look at this condition in Sprint's Terms and Conditions:

We each agree not to pursue arbitration on a classwide basis. We each agree that any arbitration will be solely between you and us (not brought on behalf of or together with another individual's claim). If for any reason any court or arbitrator holds that this restriction is unconscionable or unenforceable, then our agreement to arbitrate doesn't apply and the dispute must be brought in court.

It's clear that the Discover Bank decision has affected the formation of this condition. The discover bank decision was also applied in a contract dispute between a customer and a wireless phone carrier. The California Federal Court denied the motion to compel arbitration under the agreement barring class action lawsuits made because the clause was held unconscionable. The motion was made by the defense in the Winig v. Cingular Wireless-Class Action Defense cases.