Businesses seek to include provisions in contracts that provide for jury trial waiver to avoid the uncertainty which comes with jury trial, while retaining the right to appeal. Prior to 1994, courts routinely enforced such pre-dispute provisions.1 Then in a seminal case, Bank South, N.A. v. Howard, the Georgia Supreme Court held that pre-litigation contractual waivers of the right to a jury trial are not provided for by the Constitution or Code and, thus, are not enforceable in Georgia (264 Ga. 339 (1994)). On August 4, 2005, California joined Georgia in banning the use of pre-dispute jury trial waivers.
The Grafton Decision
In Grafton Partners, L.P. v. Superior Court, the Supreme Court of California held that pre-dispute waivers of the right to a jury trial are unenforceable under California law (36 Cal. 4th 944 (2005)). The court reasoned that Section 631(d) (2) of the California Code of Civil Procedure does not provide for pre-litigation jury trial waivers. Nor does the California Constitution permit the right to a jury trial to be waived absent explicit statutory authorization.
The Grafton decision is expansive.2 It applies even when both parties to a contract are sophisticated commercial entities represented by counsel. Grafton also applies retroactively to contracts entered into before the decision was rendered.
Grafton , however, does not prevent parties from waiving their right to trial in a judicial forum altogether. Thus, pre-dispute agreements to arbitrate are still enforceable in California. Nor does the decision explicitly prohibit California parties to commercial transactions from contracting to avoid jury trials by agreeing to have their contracts governed by the laws, and disputes decided in the forum, of a state or foreign country that recognizes pre-dispute jury waivers provided the other jurisdiction has a genuine nexus to the underlying transaction.3
While awaiting the legislative fix recommended by one of the California Supreme Court Justices who "reluctantly" concurred in the Grafton decision, what, if any, options are available to entities that conduct business in California?
The Court in Grafton noted that the California Legislature had explicitly authorized certain methods of pre-dispute jury trial waiver, for example arbitration agreements. Thus, a properly drafted arbitration clause is generally enforceable post- Grafton as a matter of California law.4 Arbitration clauses need to be tailored carefully to meet California's specific requirements for enforcement. What would constitute a "properly drafted arbitration clause" in a majority of jurisdictions might not survive review by a California court. For example, claims for injunctive relief under California's Consumer Legal Remedies Act and Business and Professions Code Sections 17500, 17200 and 1755 are inarbitrable ( See Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003)). No other state prohibits arbitration of public claims.5
Jury trials in civil matters can also be avoided by means of judicial reference.6 California Code of Civil Procedure Section 638 authorizes courts to refer disputes to a referee, who may hear and determine any question of law or fact, based upon the pre-dispute agreement of the parties.7 Specifically, Section 638 provides in relevant part that the referee may be appointed "upon the motion of a party to a written contract or lease that provides that any controversy arising therefrom shall be heard by a referee."8
Arbitration Or Judicial Reference
So which process does a business seeking to avoid jury trials in California need to specify in their contracts? Before making that decision, a drafter must understand how the two processes compare.
First, the similarities:
Both processes offer the opportunity to choose a decision maker with expertise in the subject matter.
Both processes tend to be speedier and less expensive than litigation.
Unlike judges, arbitrators and referees are paid by the parties.
The underlying pre-dispute provision must be voluntary and may be challenged as unenforceable if the agreement is found to be unconscionable or otherwise defective.
Neither process can be used to defeat class actions unless the class action waiver falls within the very limited exception laid out in Discover Bank v. Superior Court (Boehr) , WL 1500866 (June 27, 2005).
If the original consumer agreement provides for the addition of new terms, it may be possible to add an arbitration or judicial reference provision through that device ( See Badie v. Bank of America , 67 Cal. App. 4th 779 (1998)).
Now, the differences:
Unlike arbitration, as a quasi-judicial proceeding, a hearing before a referee is open to the public; as a practical matter, however, hearings are frequently held in private offices
Unlike arbitration, judicial reference is largely untested in California. In 2004, the California Judicial Council issued a report on judicial reference. In a sample study conducted over a two-year period, the Council found that reference had been invoked in only .1% of civil cases - overwhelmingly, as special references under CCP Section 639 with the referee's scope generally limited to an advisory opinion concerning discovery or settlement matters.9
Unlike arbitration, there are relatively few cases in which California courts have considered the enforceability of pre-dispute agreements providing for judicial reference.10 Of the four most recent cases, the reference clause was deemed to be unenforceable in one - Pardee Construction Company v. Superior Court , 100 Cal. App. 4th 1081 (2002).
The same rules of procedure and discovery apply in a judicial reference as in litigation.
A judicial reference affords the parties full appellate rights - which can dramatically increase the costs incurred by the parties and extend the time to final resolution if this right is exercised.
A referee will probably have the power to decide claims involving injunctive relief.11
California Rule of Court 244.1 (b) prohibits the court from appointing a referee to conduct mediation.
A referee does not need to make the stringent and exceedingly detailed statutory disclosures required of arbitrators.
Nondisclosure by a referee may provide grounds for a motion for a new trial if the nondisclosure prevented a party from receiving a fair trial; in contrast, nondisclosure by an arbitrator requires vacatur of the award, even if no one was prejudiced (Code of Civil Procedure Section 1286.2 (a) (6)).12
Regardless of which process is selected, the agreement should not include one-sided provisions that limit consumers' rights.13 Examples of provisions to avoid in consumer contracts include limitations on damages, exclusion of punitive damages, shortening the statute of limitations, excessive limits on discovery, unequal cost-sharing provisions, and provisions that designate venue in a distant forum.
Further, factors that tend to mitigate against enforcement of a judicial reference clause include the following: burying the provision in the text of the agreement; using a smaller font than the rest of the agreement; failing to explain the process; that judicial reference is in lieu of litigation and that the parties will incur referee fees; limiting the relief; failing to provide an "opt out" provision and using misleading captions.14
Perhaps the safest course is to reference use of a set of arbitration rules or judicial reference procedures that have already passed the scrutiny of court review, such as those offered by the American Arbitration Association.15 In addition to court tested rules and procedures, the AAA maintains rosters of arbitrators and referees with expertise in a wide range of complex subject areas, such as intellectual property, technology, energy and healthcare.16
Businesses may respond to Grafton in several ways: (1) Combine a jury waiver clause with an appropriate choice-of-law provision in commercial contracts; (2) Incorporate either an enforceable arbitration or a judicial reference clause in lieu of a jury waiver provision in all types of contracts; or (3) Conclude that the risks imposed by a potential jury trial in California state court are not significant enough to warrant inclusion of any type of jury trial waiver. 1 Pre-Litigation Contractual Waivers of the Right to a Jury Trial Are Unenforceable Under Georgia Law, E. Michelle Robinson, 46 Mercer L. Rev. 1565 (1994).
2 Grafton Partners, L.P. v. Superior Court, 36 Cal. 4th 944 (2005), p. 26
3 Arbitration Report, Morrison Foerster Legal Updates (September 2005).
4 Grafton supra, p. 22.
5 Consumer Arbitration Update, William L. Stern & James R. McGuire, Morrison Foerster Legal Updates (July 2005). See also Discover Bank v. Superior Court (Boehr), WL 1500866 (June 27, 2005)(California joins West Virginia in refusing per se to enforce class action waivers).
6 California state courts appoint two categories of referees; those appointed with the agreement of all parties (CCP Section 638; CRC 244.1) - a general reference; and those appointed without agreement of all parties (CCP Section 639; CRC 244.2) - a special reference. See Rules on Referees: MCLE Self Study by Martin Quinn, The Daily Journal Corporation (Updated January 2004).
7 Supreme Court Holds Predispute Contractual Waivers of Right to Jury Trial Unenforceable, Howard Rice Alert (August 16, 2005).
9 Use and Cost of References in General Civil Cases , Judicial Council of California (2004).
10 Using Judicial Reference , Michael P. Carbone, Co-chair of the ADR Committee of the Business Law Section of the State Bar of California .
11 Should Your California Agreements Contain a "Judicial Reference" Clause? , William L. Stern, Morrison Foerster Legal Updates (August 23, 2005).
12 Using Judicial Reference, supra.
13 See AAA's Consumer Due Process Protocol at www.adr.org.
14 Should Your California Agreements Contain a "Judicial Reference" Clause?, supra .
15 Copies of the rules and procedures are available on the AAA website at www.adr.org.
16 Founded in 1926, the not-for-profit American Arbitration Association is the world's leading provider of conflict management and dispute resolution services.