Discover Can Skirt State Law

A Los Angeles appeals court said Thursday that Morgan Stanley’s Discover Bank unit could require customers to arbitrate disputes, bypassing a California law that prohibits credit card contracts that bar some customer lawsuits.

The 2nd District Court of Appeal ruling came in a nationwide class-action lawsuit on behalf of as many as 25 million customers who say they were charged late fees when they paid their bills on time. The court said that although California banned class-action waivers, the laws of Discover’s home state of Delaware applied.

The court said the cardholders in the case must resolve their disputes with Discover “on an individual basis” through arbitration as specified in Discover’s credit card holder agreement. The ruling means that the cardholders can’t sue as a group, which would have given them leverage for a settlement.

“Delaware’s interest is demonstrably greater than California’s,” the court said. “Delaware is home to the sole defendant, not just home to some portion of the putative class.”