Perez v. Discover Bank

Background

Perez and Guzman Magaña are participants in Deferred Action for Childhood Arrivals. The lawsuit arose from Discover Bank’s denial of Perez’s loan application and its requirement that Guzman Magaña apply for a loan with a cosigner.

Perez had previously received a private student loan from Citibank. Discover Bank later acquired the relevant student-loan business and became the current holder of Perez’s Citibank agreement. In 2018, Perez electronically signed a Discover private consolidation-loan application and promissory note containing an arbitration provision. That provision allowed either party to require binding arbitration of claims, including claims relating to other loans or agreements with Discover Bank.

Guzman Magaña electronically signed a Discover graduate-student-loan application in 2016. That application contained an arbitration provision using the same language as the provision in Perez’s Discover agreement.

Legal standard

Under Section 4 of the Federal Arbitration Act, a court may order arbitration when a party claims another party has failed or refused to arbitrate under a written agreement. Courts generally determine whether an arbitration agreement exists and whether it covers the dispute. They also determine whether the agreement delegates questions about arbitrability—the question of whether a dispute must be arbitrated—to an arbitrator.

Perez’s claims

The parties disputed whether California or Delaware law governed the Discover agreement. The agreement selected federal law and, where state law applied, Delaware law. Applying California’s choice-of-law rules, the court held that Delaware had a substantial relationship to the agreement because Discover Bank was incorporated there.

The plaintiffs argued that applying Delaware law would violate California’s fundamental public policy under the California Supreme Court’s McGill rule. That rule generally prohibits waiving the right to seek certain public injunctive relief. The court held that the McGill rule did not make the agreement unenforceable because the plaintiffs sought relief for themselves and a defined group of similarly situated people, rather than relief benefiting the general public. The court therefore evaluated the agreement under Delaware law.

The plaintiffs argued that the agreement lacked mutual assent and was unconscionable. The court rejected both arguments. It held that Perez’s electronic signature showed assent, that the agreement’s terms were sufficiently definite, and that the parties exchanged consideration. The court also held that the agreement was not unconscionable because the plaintiffs could reject the arbitration provision or walk away from the Discover agreement.

The court further held that the plaintiffs’ claims fell within the arbitration provision’s broad language covering claims arising between the parties and claims concerning other loans or agreements with Discover Bank. The court therefore granted Discover Bank’s motion to compel arbitration of Perez’s claims.

Guzman Magaña’s claims

The parties did not dispute that Guzman Magaña signed the same arbitration provision. For the same reasons applied to Perez’s claims, the court granted Discover Bank’s motion to compel arbitration of Guzman Magaña’s claims.

Disposition

The court granted Discover Bank’s motion to compel arbitration and stayed the action as to Perez’s and Guzman Magaña’s claims pending the outcome of arbitration.

The court did not decide whether Perez’s earlier Citibank arbitration agreement also required arbitration. It described that issue as unclear and found it unnecessary to resolve because the Discover arbitration agreement applied.