Firchow v. Citibank

Filed 1/10/07 Firchow v. Citibank CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
DALE FIRCHOW,
Plaintiff and Respondent,
v.
CITIBANK (SOUTH DAKOTA), N.A.,
Defendant and Appellant.
B187081
(Los Angeles County
Super. Ct. No. BC287691)
APPEAL from an order of the Superior Court of Los Angeles County, Carl J.
West, Judge. Affirmed.
Stroock & Stroock & Lavan, Julia B. Strickland, Andrew W. Moritz and
Marcos D. Sasso for Defendant and Appellant.
Hagens Berman Sobol Shapiro, Lee M. Gordon and Steve W. Berman for Plaintiff
and Respondent.
_______________________

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Citibank (South Dakota), N.A. appeals from an order denying its petition to
compel arbitration of a putative statewide class action lawsuit filed by Dale Firchow, a
Citibank credit card member. The lawsuit alleges Citibank and Ford Motor Company
(Ford)
1
prematurely and improperly terminated a credit card rebate program in violation
of the Consumer Legal Remedies Act (CLRA) (Civ. Code, § 1750 et. seq.) and
California’s false advertising and unfair competition laws (Bus. & Prof. Code, §§ 17500,
17200). Citibank unsuccessfully sought arbitration of the dispute in accordance with a
provision in the applicable credit card agreement that subjects such disputes to individual
binding arbitration and prohibits proceeding in arbitration on a class or representative
basis.
On appeal Citibank contends the trial court erred in finding the class action waiver
provision unconscionable under California law and denying the motion to compel
arbitration. Citibank urges the trial court should have applied South Dakota law in
accordance with the choice-of-law provision in the credit card agreement and contends
under South Dakota law the arbitration clause, including the class action waiver
provision, is enforceable. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. Ford-Citibank’s Rebate Program and Termination of the Program
In February 1993 Citibank began issuing a co-branded Ford-Citibank credit card.
According to the terms of the credit card agreement, users of the card (either a VISA or
Mastercard) could earn with card purchases up to $700 in rebate credits annually, and up
to $3,500 in rebate credits over a five-year period, to apply to the purchase of a new Ford
vehicle. Rebate credits would expire five years from the calendar quarter in which they
were earned.
In June 1997 Citibank notified cardholders, including Firchow, that it was
terminating the rebate program effective December 31, 1997. According to the written
notice of termination, after December 31, 1997 cardholders would no longer earn rebates
1
Ford is not a party to this appeal.

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on purchases made with the Ford-Citibank card. Rebates that had already been earned
would expire five years after the calendar year in which they had been earned -- but only
if the cardholder kept the account open and in good standing. Card members who wished
to close their accounts in light of the cancellation of the rebate program would receive
Ford rebate certificates that would expire 45 days after the account was closed. Firchow
did not close his account.
2. Citibank’s Modification of the Card Agreement by Requiring Arbitration and
Waiver of a Card Holder’s Right to Participate in a Class Action Proceeding
In October 2001 Citibank mailed Firchow a “change of terms” document in the
same envelope as his monthly billing statement.
2
At the top of the billing statement
Citibank printed, “Please see the enclosed change in terms notice for important
information about the binding arbitration provision we are adding to your Citibank credit
card agreement.” The change of terms included an arbitration clause and class action
waiver provision in bold print and all capital letters: “ARBITRATION: PLEASE
READ THIS PROVISION OF THE AGREEMENT CAREFULLY. IT PROVIDES
THAT ANY DISPUTE MAY BE RESOLVED BY BINDING ARBITRATION.
ARBITRATION REPLACES THE RIGHT TO GO TO COURT, INCLUDING
THE RIGHT TO A JURY AND THE RIGHT TO PARTICIPATE IN A CLASS
ACTION OR SIMILAR PROCEEDING. IN ARBITRATION, A DISPUTE IS
RESOLVED BY AN ARBITRATOR INSTEAD OF A JUDGE OR JURY.
ARBITRATION PROCEDURES ARE SIMPLER AND MORE LIMITED THAN
2
Prior to October 2001 Firchow’s agreement with Citibank did not include an
arbitration provision. However, that original agreement did provide that Citibank could
change the terms of the agreement at any time by following specific procedures: “We
can change this Agreement including the annual membership fee, finance charge and the
annual percentage rate at any time. However, if we do, we will mail you written notice at
least 15 days before the beginning of the billing cycle in which the changes become
effective. If you do not agree to the changes, you must notify us in writing within 25
days after the effective date of the changes and pay us the balance, either all at once or
under the existing terms of the unchanged Agreement. Otherwise, you will have agreed
to the changes in the notice. Use of the card after the effective date of the change shall be
deemed acceptance of the new terms, even if the 25 days have not expired.”

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COURT PROCEDURES.” The new terms also included the following explanation as
to the effect of the class action waiver: “Claims and remedies sought as part of a class
action, private attorney general or other representative action are subject to arbitration on
an individual (non-class, non-representative) basis, and the arbitrator may award relief
only on an individual (non-class, non-representative) basis.” “If you or we require
arbitration of a Claim, neither you, we, nor any other person may pursue the Claim in
arbitration as a class action, private attorney general action or other representative action,
nor may such Claim be pursued on your or our behalf in any litigation in any court. . . .”
Also included in the agreement to arbitrate is what Citibank denominates an
“opt-out provision,” allowing the card member to decline to accept the arbitration
agreement and to continue to use his or her account under the existing terms until the end
of his or her current membership year or the expiration date on the card, whichever is
later, at which time the account would be cancelled and the member’s credit card
privileges revoked.
3
In addition, the change of terms provided that any dispute involving
the credit card agreement was to be governed by the Federal Arbitration Act (FAA) (9
U.S.C. § 1 et seq.) and South Dakota law. Firchow did not notify Citibank that he did not
wish to accept the arbitration agreement.
3. The Instant Putative Statewide Class Action Lawsuit
a. The complaint
On December 26, 2002 Firchow filed this putative statewide class action lawsuit
on behalf of himself and “all California residents similarly situated” alleging three
statutory claims arising from the premature cancellation of the rebate program:
3
The provision states: “If you do not wish to accept the binding arbitration
provision contained in this change in terms notice, you must notify us in writing within
26 days after the Statement/Closing date indicated on your November 2001 billing
statement stating your non-acceptance. . . . If you notify us by that time that you do not
accept the binding arbitration provisions contained in this change in terms notice, you can
continue to use your card(s) under your existing terms until the end of your current
membership year or the expiration date on your card(s), whichever is later. At that time
your account will be closed and you will be able to pay off your remaining balance under
your existing terms.”

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(1) unfair competition (Bus. & Prof. Code, § 17200), (2) false and misleading advertising
(Bus. & Prof. Code, § 17500) and (3) violations of the CLRA (Civ. Code, § 1750). The
complaint also asserts claims for breach of contract and unjust enrichment.
b. Citibank’s motion to compel arbitration
On July 18, 2003 Citibank filed a motion to compel Firchow to arbitrate his action
on an individual rather than class action basis, citing the arbitration clause and class
action waiver provision in the October 2001 change-of-terms document. Firchow
opposed the motion, arguing the class action waiver was unconscionable under both
South Dakota and California law and could not be severed from the arbitration clause.
On October 12, 2005 the trial court found the waiver provision was
unconscionable and contrary to California’s public policy as articulated in Discover Bank
v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank).
4
The trial court refused to
apply South Dakota law, explaining, even if the class action waiver provision were
enforceable under South Dakota law, California would not apply the foreign law when to
do so would materially offend a fundamental public policy in California. The trial court
denied the motion to compel arbitration, concluding the waiver provision could not be
severed from the agreement to arbitrate.
CONTENTIONS
Citibank contends the trial court erred in denying its motion to compel arbitration
because: (1) South Dakota law governs the interpretation of the arbitration clause
containing the class action waiver, and the waiver provision is enforceable under South
Dakota law; (2) the FAA preempts application of California law to interpret the class
action waiver provision; and (3) even if California law applies, the inclusion of an opt-out
4
Initially, and at the parties’ request, on October 24, 2003 the trial court stayed the
motion to compel arbitration pending the outcome of the Supreme Court’s decision in
Discover Bank, supra, 36 Cal.4th 148. The stay was lifted and the motion renewed in
July 2005, immediately following the Supreme Court’s decision in Discover Bank.

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provision distinguishes this agreement from the unconscionable agreements identified by
the Supreme Court in Discover Bank.5
DISCUSSION
1. Standard of Review
When, as here, there are no material facts in dispute, we review the trial court’s
unconscionability and choice-of-law determinations de novo. (Szetela v. Discover Bank
(2002) 97 Cal.App.4th 1094, 1099 [unconscionability determination]; NORCAL Mutual
Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 71 [unconscionability determination];
Hughes Electronics Corp. v. Citibank Delaware (2004) 120 Cal.App.4th 251, 257 [choice
of law]; Hambrecht & Quist Venture Partners v. American Medical Internat., Inc. (1995)
38 Cal.App.4th 1532, 1539, fn. 4 [choice of law].)
2. Governing Law: Unconscionability and Discover Bank
a. Unconscionability
Under both California law and the FAA an agreement to arbitrate must be
enforced unless it is unconscionable or other grounds exist for the agreement’s
revocation. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24
Cal.4th 83, 98 (Armendariz); Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681,
686-687 [116 S.Ct. 1652, 134 L.Ed.2d 902] (Doctor’s Associates); see also First Options
of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944 [115 S.Ct. 1920, 131 L.Ed.2d 985]
[FAA mandates that,“[w]hen deciding whether the parties agreed to arbitrate a certain
matter (including arbitrability), courts generally . . . should apply ordinary state-law
principles that govern the formation of contracts”].)
Unconscionability has both procedural and substantive elements. (Armendariz,
supra, 24 Cal.4th at p. 99.) Procedural unconscionability focuses on the elements of
5
The enforceability of a class action waiver provision in an arbitration clause
contained in a credit card agreement that includes a purported “opt-out provision”
identical to the one in this case is an issue currently pending before the Supreme Court in
Jones v. Citigroup, Inc. (2006) 135 Cal.App.4th 1491, review granted April 26, 2006,
S141753.

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oppression and surprise. (Discover Bank, supra, 36 Cal.4th at p. 160.) “‘“Oppression
arises from an inequality of bargaining power which results in no real negotiation and an
absence of meaningful choice . . . . Surprise involves the extent to which the terms of the
bargain are hidden in a ‘prolix printed form’ drafted by a party in a superior bargaining
position.”’” (Crippen v. Central Valley RV Outlet (2004) 124 Cal.App.4th 1159, 1165;
Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174 [“[p]rocedural
unconscionability focuses on the oppressiveness of the stronger party’s conduct”].)
Procedural unconscionability is often found in contracts of adhesion, which are drafted
and imposed by the party with superior bargaining power and offered to the subscribing
party on a take-it-or-leave-it basis. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064,
1071.) Substantive unconscionability, on the other hand, focuses on the actual terms of
the agreement and evaluates whether they create “‘“overly harsh”’” or “‘“one-
sided”’results.” (Armendariz, at p. 114; Little, at p. 1071.)
Both procedural and substantive unconscionability must appear for a court to
invalidate a contract or one of its individual terms (Armendariz, supra, 24 Cal.4th at
p. 114; Mercuro v. Superior Court, supra, 96 Cal.App.4th at p. 174), but need not be
present in the same degree: “[T]he more substantively oppressive the contract term, the
less evidence of procedural unconscionability is required to come to the conclusion that
the term is unenforceable, and vice versa.” (Armendariz, at p. 114.)
The party opposing arbitration on grounds of unconscionability has the burden of
proving the arbitration provision is unconscionable. (Engalla v. Permanente Medical
Group, Inc. (1997) 15 Cal.4th 951, 972.)
6
6
Firchow claimed below he was a “member of the plaintiff class” in a federal
multidistrict litigation (MDL) proceeding challenging the cancellation of the rebate
program, which was pending at the time Citibank added the arbitration provisions to its
credit card agreements. Although the MDL action was ultimately dismissed, Firchow
argued the arbitration agreement should not be applied retroactively to govern this
dispute. Citibank insisted Firchow was not a plaintiff in the MDL action. In this appeal
Firchow argues only the issue of unconscionability.

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b. Discover Bank
In Discover Bank, supra, 36 Cal.4th 148, the Supreme Court addressed the
question whether a class action waiver contained in an arbitration provision that had been
added to an existing credit card agreement was unconscionable under California law. As
in the instant case, the initial credit card agreement between the plaintiff (Christopher
Boehr) and Discover Bank contained neither an arbitration provision nor a class action
waiver. In 1999, after Boehr had been a Discover Bank credit card holder for several
years, Discover Bank added an arbitration clause and class action waiver to its credit card
agreement pursuant to a change-of-terms document that it mailed to Boehr (and other
Discover Bank cardholders) in the same envelope with Boehr’s monthly billing
statement. Boehr was advised in the change-of-terms document if he did not wish to
accept the new arbitration clause, he would have to notify Discover Bank of his
objections and cease using his account at the end of a designated grace period. Boehr’s
continued use of the account after the stated ending date would be deemed by Discover
Bank to constitute acceptance of the new terms. Boehr did not notify Discover Bank of
any objection to the arbitration and continued to use his account after the stated deadline.
(Id. at pp. 153-154.)
In 2001 Boehr filed a putative nationwide class action complaint alleging Discover
Bank had unlawfully imposed a late fee on payments it received on the payment due date
but after an arbitrarily imposed 1:00 p.m. “cut-off time,” in violation of several Delaware
consumer protections statutes. (Discover Bank, supra, 36 Cal.4th at p. 154.) Discover
Bank promptly moved to compel Boehr to individually arbitrate his claims pursuant to
the arbitration and class action waiver provisions contained in the 1999 change-of-terms
document. Boehr opposed the motion, contending the class action waiver was
unconscionable and unenforceable under California law. (Ibid.)
The Court found the class action waiver provision in Discover Bank’s cardholder
agreement unconscionable under California law. The Court began its analysis by
observing both the adhesive and substantively unconscionable aspects of the agreement:
“[W]hen a consumer is given an amendment to its cardholder agreement in the form of a

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‘bill stuffer’ that he would be deemed to accept if he did not close his account, an element
of procedural unconscionability is present. [Citation.] Moreover, although adhesive
contracts are generally enforced [citation], class action waivers found in such contracts
may also be substantively unconscionable inasmuch as they may operate effectively as
exculpatory contract clauses that are contrary to public policy,” particularly in cases by
consumers involving individually small amounts of damages. (Discover Bank, supra, 36
Cal.4th at pp. 160-161.) In those cases, the class action is the “‘only effective way to halt
and redress such exploitation.’” The Court also observed class action waivers are
“indisputably one-sided” as “‘credit card companies typically do not sue their customers
in class action lawsuits.’” (Id. at p. 161.)
The consumer’s potential ability to obtain a different credit card without the class
action waiver provision, although often a significant factor in an analysis of
unconscionability (see, e.g., Wayne v. Staples, Inc. (2006) 135 Cal.App.4th 466, 482
[oppression establishing unconscionability is minimized or nonexistent when the
customer has meaningful choices]; Dean Witter Reynolds, Inc. v. Superior Court (1989)
211 Cal.App.3d 758, 768 [“[A]ny claim of ‘oppression’ may be defeated if the
complaining party has reasonably available alternative sources of supply from which to
obtain desired goods or services free of the terms claimed to be unconscionable.”]; Marin
Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89
Cal.App.4th 1042, 1056 [alternative sources rendered procedural unfairness of adhesive
contract minimal]), was not addressed by the Court, presumably because in Discover
Bank the arbitration and class action waiver provisions were added to an existing
cardholder’s account, forcing the cardholder to change credit card companies midstream.
Under those circumstances the Court concluded the class action waiver was both
procedurally and substantively unconscionable. (See Discover Bank, supra, 36 Cal.4th at
pp. 160-163; see also Szetela v. Discover Bank, supra, 97 Cal.App.4th at p. 1100
[whether plaintiff “could have found another credit card issuer who would not have
required his acceptance of a similar clause is not a deciding factor” as to whether new
terms were unconscionable].)

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The Court also rejected the argument (made by Citibank in the instant case) that
the class action device is merely a procedural right, the waiver of which cannot be
unconscionable. The Court explained, “class actions and arbitrations are, particularly in
the consumer context, often inextricably linked to the vindication of substantive rights.
Affixing the ‘procedural’ label on such devices understates their importance and is not
helpful to resolving the unconscionability issue.” (Discover Bank, supra, 36 Cal.4th at
p. 161.)
In concluding the class action waiver in Discover Bank’s cardholder agreement
was unconscionable, the Court was careful to qualify its holding, explaining that not all
class action waivers are necessarily unconscionable. (Discover Bank, supra, 36 Cal.4th
at p. 162.) However, “when the waiver is found in a consumer contract of adhesion in a
setting in which disputes between the contracting parties predictably involve small
amounts of damages, and when it is alleged that the party with the superior bargaining
power has carried out a scheme to deliberately cheat large numbers of consumers out of
individually small sums of money, then, at least to the extent the obligation at issue is
governed by California law, the waiver becomes in practice the exemption of the party
‘from responsibility for [its] own fraud, or willful injury to the person or property of
another.’ (Civ. Code, § 1668.) Under these circumstances, such waivers are
unconscionable under California law and should not be enforced.” (Discover Bank, at
pp. 162-163.)
Because the cardholder agreement in Discover Bank contained a choice-of-law
provision mandating application of Delaware law, the Court remanded the matter for a
determination under Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459
(Nedlloyd) whether the law of California or Delaware (which enforced class action
waivers in credit card agreements) governs the agreement’s interpretation. (Discover
Bank, supra, 36 Cal.4th at pp. 174-175.) On remand, the Court of Appeal upheld the
Delaware choice-of-law provision in the credit card agreement, concluding California did
not have a materially greater interest than Delaware in a lawsuit alleging violations of

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Delaware’s own consumer protection statutes. (Discover Bank v. Superior Court (2005)
134 Cal.App.4th 886, 894 (Discover Bank II).)
Here, Citibank’s credit card agreement provides it is to be governed by South
Dakota and federal law. Echoing the reasoning of Discover Bank II, supra, 134
Cal.App.4th 886, Citibank urges that we apply the parties’ choice-of-law provision and
find the class action waiver enforceable under South Dakota law. Because enforcement
of the class action waiver provision conflicts with a fundamental California public policy
and California has a materially greater interest than South Dakota in this putative class
action by California residents seeking redress under California’s consumer protection
statutes, however, whatever the result might be under South Dakota law, the waiver
provision is unenforceable in this case.
3. California, Not South Dakota Law, Governs the Unconscionability
Determination in This Case
In Nedlloyd, supra, 3 Cal.4th at pages 464-465, the Supreme Court held, when a
contract designates the law of another state to govern its interpretation, California applies
the analysis under the Restatement Second of Conflict of Laws section 187 to determine
whether the choice-of-law provision should be enforced. (See also Washington Mutual
Bank v. Superior Court (2001) 24 Cal.4th 906, 916 (Washington Mutual).) This
approach requires the court to determine whether the chosen state has a substantial
relationship to the parties or their transaction or whether there is any other reasonable
basis for the parties’ choice of law. “If neither of these tests is met, that is the end of the
inquiry, and the court need not enforce the parties’ choice of law. If, however, either test
is met, the court must next determine whether the chosen state’s law is contrary to a
fundamental policy of California. If there is no such conflict, the court shall enforce the
parties’ choice of law. If, however, there is a fundamental conflict with California law,
the court must then determine whether California has a ‘materially greater interest than
the chosen state in the determination of the particular issue . . . .’ (Rest[.2d Conf. of
Laws,] § 187, subd. (2).) If California has a materially greater interest than the chosen
state, the choice of law shall not be enforced, for the obvious reason that in such

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circumstance we will decline to enforce a law contrary to this state’s fundamental
policy.” (Nedlloyd, at p. 466, fns. omitted.)
The first prong of the Nedlloyd test is unquestionably satisfied. As Citibank’s
principal place of business, South Dakota has a substantial relationship to the parties or
their transaction. Likewise, as to the second prong of the Nedlloyd analysis, as a general
matter there would appear to be no conflict between South Dakota and California law:
South Dakota, like California, recognizes the doctrine of unconscionability. (See
Rozeboom v. Northwestern Bell Tel. Co. (S.D. 1984) 358 N.W.2d 241, 242-243 [refusing
to enforce limited liability clause in consumer contract under principles of both
substantive and procedural unconscionability; the contract was both adhesive and unfairly
one-sided]; see also S.D. Codified Laws § 57A-2-302 [“if the court as a matter of law
finds the contract or any clause of the contract to have been unconscionable as the time it
was made” the contract is not enforceable].)
According to Citibank, this is the end of the analysis. If there is “no conflict”
between California and South Dakota law, South Dakota law must apply. And, it argues,
under South Dakota law arbitration provisions in consumer agreements have been
rigorously enforced. (See, e.g., Rossi Fine Jewelers, Inc. (S.D. 2002) 648 N.W.2d 812,
814; see also Ops. S.D. Attorney Gen. (May 7, 2002) [South Dakota “encourages the use
of arbitration to resolve disputes, and it permits credit card issuers to add arbitration
clauses to their contracts by sending written notices to their cardholders”].)
The question of unconscionability, however, is directed not to the arbitration
provision per se but to the legality of the class action waiver portion of the arbitration
agreement. South Dakota has not addressed that issue, in either its statutory or case law.
And, while South Dakota’s recognition of general principles of substantive and
procedural unconscionability suggests that, in fact, there is no conflict between California
and South Dakota law and South Dakota would likely find the class action waiver
provision unconscionable for the reasons identified in Discover Bank, supra, 36 Cal.4th
148, we need not decide that issue. The California Supreme Court has stated that under
the circumstances presented in this case -- a consumer contract of adhesion involving

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allegations the party in the superior bargaining position cheated large numbers of
consumers out of small sums of money -- the class action waiver in the credit card
agreement violates a fundamental California public policy. (Discover Bank, at p. 162;
see also Klussman v. Cross Country Bank (2005) 134 Cal.App.4th 1283, 1298 [the
“reasoning of the Discover Bank court leave[s] no doubt that Delaware’s approval of
class action waivers, especially in the context of a ‘take it or leave it’ arbitration clause is
contrary to a fundamental policy in California”].) Accordingly, we must decide, pursuant
to the third prong of the Nedlloyd analysis, whether California has a materially greater
interest than South Dakota in the litigation.
7
Plainly, it does.
Unlike the situation in Discover Bank II, supra, 134 Cal.App.4th at page 894 in
which the plaintiff asserted substantive claims under Delaware law, the jurisdiction
specified in the choice-of-law provision of the parties’ agreement, Firchow, a California
resident, seeks redress for violations of California’s consumer protection statutes. In
similar circumstances, several courts of appeal, relying on Discover Bank, supra, 36
Cal.4th 148, have held California has a materially greater interest in the litigation
involving alleged violations of its own consumer protection statutes than the chosen
foreign state. (See, e.g., Aral v. Earthlink, Inc. (2005) 134 Cal.App.4th 544, 563, 564
[“There is a significant distinction between the present case and the situation in Discover
Bank [II]. Plaintiff there was ‘not seeking to enforce an obligation imposed by the CLRA
7
Because the credit card agreement has an express choice-of-law provision, the trial
court erred in applying the “governmental interest approach” to traditional conflict-of-
laws analysis to determine whether California or South Dakota law governed
interpretation and enforcement of the arbitration clause and the class action waiver
provision. (See Washington Mutual, supra, 24 Cal.4th at pp. 914-915 [“California has
two different analyses for selecting which law should be applied in an action. When the
parties have an agreement that another jurisdiction’s law will govern their disputes, the
appropriate analysis for the trial court to undertake is set forth in Nedlloyd, supra, 3
Cal.4th 459, which addresses the enforceability of contractual choice-of-law provisions.
Alternatively, when there is no advance agreement on applicable law, but the action
involves the claims of residents from outside California, the trial court may analyze the
governmental interests of the various jurisdictions involved to select the most appropriate
law.”].)

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or any other California statute.” “Here . . . Aral resides in California, seeks to represent
only California consumers, and relies solely on California’s [unfair competition law] to
support his claim. The fundamental policy at issue is not simply the right to pursue a
class action remedy, but the right of California to ensure that its citizens have a viable
forum in which to recover minor amounts of money allegedly obtained in violation of the
[unfair competition law]. . . . There is no doubt that California has a ‘materially greater
interest’ than [Georgia] in the determination of [this] particular issue . . . .”]; Klussman v.
Cross Country Bank, supra, 134 Cal.App.4th at pp. 1299-1300 [in putative statewide
class action against Delaware bank and its servicing company alleging bank cheated large
numbers of consumers out of individually small amounts of money and asserting
California statutory claims, class action waiver in credit card agreement violated
California public policy and California had a materially greater interest than Delaware in
the action]; America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, 17 [despite
the parties’ choice of Virginia law, the unavailability of class action relief in Virginia
contravenes a fundamental public policy in California, which has a materially greater
interest than Virginia in a litigation involving a putative statewide class action asserting
internet service provider violated California’s consumer protection statutes].) We agree
with those decisions and apply California law to the question of the enforceability of the
class action waiver provision.
4. Under California Law the Class Action Waiver Is Unconscionable
Even if California law applies, Citibank argues, because the arbitration agreement
contains what it describes as an opt-out provision, it was not offered on a “take it or leave
it” basis and therefore is distinguishable from the type of agreements found to be
unconscionable in Discover Bank, supra, 36 Cal.4th 148. (Cf. Aral v. Earthlink, Inc.,
supra, 134 Cal.App.4th at p. 557 [finding “quintessential procedural unconscionability”
where the “terms of a [software] agreement were presented on a ‘take or leave it’ basis
. . . with no opportunity to opt out”].)
Citibank is correct that the method by which it added the arbitration provision to
agreements with existing cardholders is less oppressive than that used by Discover Bank:

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The Citibank agreement allows a card member who objects to the proposed new terms to
decline to be bound by the arbitration agreement while continuing to use the card under
the existing terms until the card’s current expiration date. Nonetheless, because in the
circumstances of this case the waiver provision, like the waiver provision at issue in
Discover Bank, is in practice an attempt by Citibank to exempt itself from responsibility
for its own fraud or willful injury to another in violation of Civil Code section 1668 (see
Discover Bank, supra, 36 Cal.4th at pp. 162-163) -- that is, because the degree of
substantive unconscionability is so high under governing California law -- this lessening
of the level of procedural oppression is not sufficient to validate the class action waiver
provision. (See Armendariz, supra, 24 Cal.4th at p. 114.)
8
While the cardholder who
elects to accept the new provisions may continue to use his or her card indefinitely
(because, as a practical matter, the card will be renewed automatically and a new
8
It is at least arguable, even without any additional finding of procedural
unconscionability, enforcement of a class action waiver provision in a consumer contract
of adhesion would violate Civil Code section 1668, which prohibits all contracts that
directly or indirectly exempt anyone from responsibility for his or her own fraud or
willful injury to another, and California public policy in the context of a lawsuit in which
it is alleged the party with superior bargaining power has defrauded a large number of
consumers with small individual claims. (See, e.g., Gavin W. v. YMCA of Metropolitan
Los Angeles (2003) 106 Cal.App.4th 662, 674 [“the cases cited in Tunkl [v. Regents of
University of California (1963) 60 Cal.2d 92] established that an exculpatory provision
is void as against public policy when it either concerns a matter of great importance to
the public or is the result of unequal bargaining power.”].) As discussed, in Discover
Bank, supra, 36 Cal.4th at page 161, the Supreme Court concluded in circumstances
substantively identical to those in the case at bar, class action waiver provisions “may
operate effectively as exculpatory contracts that are contrary to public policy.” (See also
Szetela v. Discover Bank, supra, 97 Cal.App.4th at p. 1101 [one-sided, substantively
unconscionable nature of class action waiver provision “violates public policy by
granting Discover a ‘get out of jail free’ card while compromising important consumer
rights”].) In view of our conclusions the class action waiver provision in this case
contains significant elements of procedural unconscionability and (using the Armendariz
“sliding scale” analysis) the combined elements of procedural and substantive
unconscionability preclude enforcement of the provision, resolution of the question
whether the class action waiver provision violates Civil Code section 1668 properly
awaits another case and another day.

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expiration date imposed), the cardholder who objects to the new terms loses the
opportunity to use the card once the specified period expires. At that point, the objector’s
credit card privileges are revoked, forcing the cardholder to switch credit card companies
midstream notwithstanding his or her good credit history with Citibank. Phrased more
colloquially, there is no right to “opt out”; the cardholder still must take-it-or-leave it; he
or she simply has a somewhat more extended period in which to make that decision.
Thus, the so-called opt-out opportunity is largely illusory. (Cf. Circuit City Stores, Inc. v.
Mantor (9th Cir. 2003) 335 F.3d 1101, 1107 [in light of “Circuit City’s insistence that
Mantor sign the arbitration agreement -- under pain of forfeiting his future with the
company -- the fact that in 1995 Mantor was presented with an opt-out form does not
save the agreement from being oppressive, for Mantor had no meaningful choice nor any
legitimate opportunity, to negotiate or reject the terms of the arbitration agreement”].)
In sum, enforcement of the class action waiver provision in the arbitration
agreement would offend this state’s fundamental public policy in a matter over which
California has a materially greater interest than South Dakota, the jurisdiction identified
in the parties’ agreement. Accordingly, applying California law as mandated by Discover
Bank, supra, 36 Cal.4th 148, the class action waiver provision in Citibank’s credit card
agreement is unconscionable and may not be enforced.
5. Application of California Law Does Not Violate the FAA
Citibank also argues, because the agreement to arbitrate provides it is governed by
the FAA, application of California law on this matter is preempted. Both the United
States and California Supreme Courts have rejected similar preemption arguments,
holding an arbitration agreement governed by the FAA may be invalidated on the same
state law grounds that justify invalidation of any contract. (Doctor’s Associates, supra,
517 U.S. at pp. 686-687; Discover Bank, supra, 36 Cal.4th at p. 173 [“FAA does not
prohibit a California court from refusing to enforce a class action waiver that is
unconscionable”]; see also 9 U.S.C. § 2 [states may invalidate an arbitration clause “upon
such grounds as exist at law or in equity for the revocation of any contract,” including
unconscionability].)

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Equally unavailing is Citibank’s argument the doctrine of FAA preemption
prohibits utilization of California law to invalidate one portion of the agreement, while
enforcing other terms of the agreement under South Dakota law, as suggested by the trial
court. According to Citibank, such a holding places the arbitration clause on an “unequal
footing” with the rest of the agreement, an outcome prohibited by the United States
Supreme Court in Allied-Bruce Terminix Cos., Inc. v. Dobson (1995) 513 U.S. 265, 281
[115 S.Ct. 834, 130 L.Ed.2d 753] (Allied-Bruce) (“States may regulate contracts,
including arbitration clauses, under general contract law principles and they may
invalidate an arbitration clause” under state unconscionability laws, but “[w]hat States
may not do is decide that a contract is fair enough to enforce all its basic terms (price,
service, credit), but not fair enough to enforce its arbitration clause. The Act makes any
such state policy unlawful, for that kind of policy would place arbitration clauses on an
unequal ‘footing,’ directly contrary to the Act’s language and Congress’ intent.”).
The language quoted by Citibank from Allied-Bruce, supra, 513 U.S. at page 281
does not support its position. Rather the Supreme Court simply recognized, as it has in
many other cases, under the FAA states may not treat arbitration clauses differently from
other provisions in the contract. (See, e.g., Perry v. Thomas (1987) 482 U.S. 483, 492-
493, fn. 9 [107 S.Ct. 2520, 96 L.Ed.2d 426] [state court may not construe arbitration
agreements “in a manner different from that in which it otherwise construes
nonarbitration agreements under state law”]; Doctor’s Associates, supra, 517 U.S. at
p. 687 [state laws that apply to contracts generally can be applied to arbitration
agreements, but “[c]ourts may not . . . invalidate arbitration agreements under state laws
applicable only to arbitration provisions”].) In applying Nedlloyd, supra, 3 Cal.4th 459,
as directed by the Supreme Court in Discover Bank, supra, 36 Cal.4th at pages 173 to
174, to determine whether and to what extent South Dakota law applies to the Citibank
arbitration agreement, we are construing the parties’ agreement under rules generally
applicable to contracts in California. (See Discover Bank, at p. 174 [on remand the Court
of Appeal must “resolve whether and to what extent Delaware law should apply”].) Our
conclusion California’s general laws of unconscionability apply and require invalidation

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of the class action waiver, accordingly, is not preempted by the FAA. (See Discover
Bank, at pp. 169-172; see also Doctor’s Associates, supra, 517 U.S. at pp. 686-687.)
6. The Trial Court Did Not Err in Concluding the Class Action Waiver Cannot Be
Severed From the Agreement to Arbitrate
The determination the class action waiver is unconscionable does not necessarily
mean the entire arbitration agreement is void and the motion to compel arbitration
properly denied. Civil Code section 1670.5, subdivision (a), provides, “If the court as a
matter of law finds the contract or any clause of the contract to have been unconscionable
at the time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable result.”
“Comment 2 of the Legislative Committee comment on section 1670.5, incorporating the
comments from the Uniform Commercial Code, states: ‘Under this section the court, in
its discretion, may refuse to enforce the contract as a whole if it is permeated by the
unconscionability, or it may strike any single clause or group of clauses which are so
tainted or which are contrary to the essential purpose of the agreement, or it may simply
limit unconscionable clauses so as to avoid unconscionable results.’” (Armendariz,
supra, 24 Cal.4th at p. 122; see also Civ. Code, § 1599 [when a contract has “several
distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or
in part, the contract is void as to the latter and valid as to the rest”].)
Similarly, under South Dakota law a finding that one portion of an agreement is
unconscionable or otherwise void does not necessarily preclude enforcement of the
balance of the agreement. (Compare S.D. Codified Laws § 53-5-4 [“Where a contract
has several distinct objects, one or more of which are lawful and one or more of which
are unlawful in whole or in part, the contract is void as to the latter and valid as to the
rest.”] with S.D. Codified Laws § 53-5-3 [“Where a contract has but a single object and
such object is unlawful in whole or in part, or wholly impossible of performance, or so
vaguely expressed as to be wholly unascertainable, the entire contract is void.”].)
Although the question of severability depends in the first instance on the intent of the

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parties entering the contract (see Commercial Trust and Sav. Bank v. Christensen (S.D.
1995) 535 N.W.2d 853, 857-858), a court may not treat portions of an agreement as
severable if part of it is void and the agreement as a whole constitutes “an integrated
scheme to contravene public policy.” (Id. at p. 858, fn. 2; Pauley v. Simonson (S.D.
2006) 720 N.W.2d 665, 668.)
In determining whether an unconscionable provision permeates the entire
agreement, courts look to the various purposes of the contract. If the central purpose of
the contract is tainted with unconscionability, then the contract as a whole cannot be
enforced. If the unconscionable provision is collateral to the main purpose of the contract
and can be excised from the contract, however, then severance is appropriate.
(Armendariz, supra, 24 Cal.4th at p. 124.)
Classwide arbitration has become a well-established alternative to class action
litigation. (See Discover Bank, supra, 36 Cal.4th at pp. 172-173; see also id. at p. 167
[“there is nothing to indicate class action and arbitration are inherently incompatible”].)
Accordingly, based on the language in the parties’ arbitration agreement, as well as
general principles governing arbitration, in an appropriate case it would be proper to
conclude the class action waiver is collateral to the central purpose of the agreement and
to sever the offending provision while enforcing the essential agreement to arbitrate.
(Compare Cohen v. DirectTV, Inc. (2006) 142 Cal.App.4th 1442, 1446, 1448 [severance
not an option when customer agreement expressly prohibits severance of class action
waiver provision from remainder of arbitration clause].)
In the case at bar, however, the trial court found -- and both parties agree -- the
waiver provision permeates the entire purpose of the agreement to arbitrate and cannot be
severed.
9
Indeed, there is no single class action waiver provision in the agreement.
Rather, the entire agreement contemplates that either party can elect binding arbitration
only on an individual basis: The requirement that a claimant proceed on an individual
9
The trial court succinctly ruled, “Consistent with the position of the parties and the
express language of the agreement, the [c]ourt finds the class waiver cannot be severed
under these circumstances.”

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basis defines not only who can be a party to a dispute under the credit card agreement, 10
but also the scope of relief that may be afforded. 11
Under these circumstances the
unconscionable aspects of the agreement “cannot be cured by merely extirpating the
offending provisions -- we would have to rewrite the contract which we lack the power to
do.” (Mercuro v. Superior Court, supra, 96 Cal.App.4th at p. 185; see Culhane v.
Western Nat. Mut. Ins. Co. (S.D. 2005) 704 N.W.2d 287, 297 [court may “neither rewrite
the parties’ contract nor add to its language”].) Accordingly, the trial court properly
exercised its discretion in refusing to enforce the arbitration agreement in its entirety.
DISPOSITION
The order denying the motion to compel arbitration is affirmed. Firchow is to
recover his costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
PERLUSS, P. J.
We concur:
JOHNSON, J. ZELON, J.
10
In the section of the arbitration agreement entitled “Who can be a party?,” the
agreement provides, “Claims must be brought in the name of the individual person or
entity and must proceed on an individual (non-class, non-representative basis). The
arbitrator will not award relief for or against anyone who is not a party. If you or we
require arbitration of a Claim, neither you, we, nor any other person may pursue the
Claim in arbitration as a class action, private attorney general action or other
representative action . . . .”
11
Under the heading “Claims Covered,” the arbitration agreement provides, “Claims
and remedies sought as part of a class action, private attorney general or other
representative action are subject to arbitration on an individual (non-class, non-
representative) basis, and the arbitrator may award relief only on an individual (non-class,
non-representative) basis.” Under the subheading “What procedures and law are
applicable in arbitration?,” the agreement states, “An award in arbitration shall determine
the rights and obligations between the named parties only, and only in respect of the
Claims in arbitration, and shall not have any bearing on the rights and obligations of any
other person, or on the resolution of any other dispute.”

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