Outsourcing the Judicial System After Grafton

Author(s): Micheal Shah
Synopsis: You Didn't Really Need That Constitutional Right, Did You? A recent California Supreme Court case, Grafton v. Superior Court, raises serious questions about the purposes of alternative dispute resolution. How did we get to a point where arbitration clauses are enforceable when jury waivers are not? Rick Levine considers the constitutional issues at stake.

Among other constitutional rights lately under attack (like freedom from unwarranted searches of our electronic communications and freedom to speak and broadcast without censorship from religious interests) is one you only think about when you need it: our fundamental right to trial by jury:

“Trial by jury is an inviolate right and shall be secured to all . . . . In a civil case a jury may be waived by the consent of the parties expressed as prescribed by statute.” (California Constitution, Article I, sec. 16)

Within the past year, the California Supreme Court reaffirmed the fundamental nature of the right to jury trial in Grafton Partners v. Superior Court (2005) 36 Cal.4th 944. Grafton had filed suit against its former auditor, PriceWaterhouseCoopers LLP, alleging negligence and misrepresentation among other claims. PWC’s engagement letter provided that both parties “agree not to demand a trial by jury in any action or proceeding . . . arising out of or relating to . . . this engagement.” Once the litigation started, of course, Grafton regretted its waiver of the right to a jury trial and sought to avoid it. The trial court granted PWC’s motion to strike Grafton’s jury demand, holding Grafton to the waiver in the engagement letter. On appeal, the trial court was reversed and Grafton’s right to jury trial reinstated. PWC elevated the issue to the California Supreme Court, which – citing precedents going back to 1855 – affirmed that “the right of trial by jury shall be secured to all, and remain inviolate for ever . . .” The Court recognized (as the Constitution provides) that the parties to a civil dispute may “waive” this right “in a manner . . . prescribed by law,” but stressed that “only the Legislature” could establish rules for jury waivers because the right to a jury “is too sacred in its character to be frittered away or committed to the uncontrolled caprice of every judge or magistrate in the State.”

Hold on, argued PWC. What about pre-dispute arbitration agreements? All sorts of folks – employees, hospital patients, HMO members, consumers, even clients of attorneys, are “waiving” their rights to jury trials every day in pre-dispute arbitration clauses. If the right to trial by jury is “inviolable” and “sacred,” why are these pre-dispute arbitration clauses okay? Simple, the Court responded. There is a clear legislative provision authorizing parties to agree – pre-dispute – to waive juries by entering into arbitration agreements: the California Arbitration Act. But there is no comparable statute clearly permitting parties – pre-dispute – to waive a jury and choose to have their disputes resolved in a judicial forum by a judge. I.e., parties can opt for a private non-judge who they have to pay, but not for a public real judge who presides for free.

The Court’s decision in Grafton – though technically unassailable – exacerbates the dilemma confronting employees (or hospital patients, or consumers) struggling to preserve some part of their “inviolate,” “sacred” right to a trial – any trial. It effectively removes a less noxious alternative to the current compelled arbitration system.

The focus of our practice is the employment relationship. In the employment context, the keystone of California arbitration law is Armendariz v. Foundation Health etc. (2000) 24 Cal.4th 83. In Armendariz, the Supreme Court held that a pre-dispute arbitration agreement that limited the employee’s remedies, denied the employee adequate discovery, provided for mandatory arbitration of the employee’s likely claims while permitting the employer to bring its likely claims to court, and imposed potentially unbearable expenses and fees upon the employee, was not enforceable. The Armendariz Court essentially wrote a manual on how to construct a pre-dispute employment arbitration agreement that would pass judicial muster. Why did it bother? Because the Court concluded that pre-dispute arbitration agreements in the employment context are inherently unfair:

“[T]he economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of the arbitration requirement.”

The Court further recognized that the arbitration process disadvantaged employees by reducing the size of the potential award, “particularly if the employer is a ‘repeat player’ in the arbitration system.” Rather than seriously engaging on the question of whether a waiver can be effective where there is no opportunity to negotiate and the weaker party is compelled to agree by economic circumstances, however, the Court decided to act like a legislature, formulating rules intended to mitigate the worst aspects of the inherent unfairness of a process in which the employee’s job depends upon giving up his or her “inviolate” right to a jury trial.

Is there a problem with the Court’s approach? After all, the constitution itself provides that the right can be “waived” if there is a statute expressly authorizing the form of waiver (as there is for arbitration, but not for a jury waiver outside of an agreement to arbitrate). But what does waiver usually mean? “Waiver is the voluntary relinquishment of a known right.” Outboard Marine Corp. v. Superior Court (1975) 52 Cal.App.3d 30 (my emphasis). It is “essential” that the person doing the waiving understand the right and have an actual intention to waive it. Id. And, of course, the waiver must be “voluntary” — i.e., not coerced.

Had the Armendariz Court taken the voluntariness requirement seriously, one would have expected it to hold – particularly with respect to an “inviolable” constitutional right – that a coerced agreement to forego one’s right to jury trial if one wishes to pay the rent and feed one’s family isn’t really “voluntary.” But the Court chose to avoid considering the meaning of “waiver,” contenting itself with mitigating some of the more obvious inequities in the system.

Grafton afforded the Court another opportunity to move modestly in the right direction. The Grafton pre-dispute jury waiver is considerably less destructive of a prospective plaintiff’s rights than a pre-dispute arbitration clause. With a jury waiver, one still gets to proceed in a court of law. One gets full discovery rights. One gets the full panoply of remedies available under the law. One gets a public airing of the dispute. One gets a free and presumably impartial judge with no economic ax to grind. One gets – at least in California – considerable pressure to engage in alternative dispute resolution proceedings, such as mediation and early neutral evaluation, which tend to produce settlements. One gets the benefit of a full record and a right to appeal errors.

By contrast, in arbitration, one typically gets extremely limited discovery. Available remedies, while theoretically unlimited, virtually never include punitive damages and rarely include significant emotional distress damages. The proceeding is out of the public eye (eliminating any negative publicity pressure on the defendant). There is no right to appeal nor any other way to address errors of law. Nothing beyond minimal lip service acts to encourage the parties to settle. (Arbitrations are good business for the providers. Arbitrators who are former judges often get $600 per hour or more. Why chase away good business by pushing the parties to settle?)

Most significantly, as noted by the Court in Armendariz, the arbitrator is a paid (well paid) service provider, and the inclination to lean toward “repeat” business (while not often discussed out of courtesy toward the former judicial officers who make up the greater part of the arbitrator corps) is obvious to advocates whose practices include much arbitration. “Repeat business,” of course, comprises large institutions which get sued a lot, and the large law firms that represent them. Arbitrators may not care much what an individual employee (or patient, or insurance policy holder) says about them; but they sure don’t want partners in major firms who represent “frequent defendants” distributing emails to their colleagues warning them away from Judge so-and-so because he or she just awarded big money to a sexual harassment plaintiff (or HMO subscriber).

With Grafton, while bowing toward our supposed “inviolate” rights, the Supreme Court in fact exacerbated the dilemma of the powerless employee-patient-consumer confronted with a denial of jobs-health care-goods or services unless he or she “waives” that “inviolate” right to a jury trial. And by so doing the Court has insulated the incomes of professional arbitrators (so many of them former judicial colleagues) from competition by still active judges sitting (at no cost to the litigants) without juries.

Of course, Grafton invites the legislature to address this problem, should the legislature have a mind to — but don’t count on that happening in your lifetime. For all the reasons discussed above, institutional defendants and their counsel like things just the way they are. And the anti-arbitration advocates are no friends of pre-dispute jury waivers because, like arbitration, such waivers eliminate the threat of significant emotional distress or punitive damages verdicts by angry or sympathetic juries. Quite simply, there is no constituency whatsoever for a statutory response to Grafton.

So do we care about the not-so-slow erosion of our inviolate right to jury trials? Some of us do; most of us probably don’t think about it. It is worth taking note of, however, and perhaps waving (waiving?) good-bye as the once sacrosanct constitutional right rides off into the sunset.

© 2006 Levine & Baker LLP., all rights reserved.