Client Alert

Arbitration Report

9/12/2005

Does California have a thing against contracts?  Two decisions handed down by the California Supreme Court just six weeks apart give one pause.

Arbitrations and Class Actions

In June, the California Supreme Court weighed two competing goals:  Fostering class actions versus enforcing contractual bargains. Class actions won. Discover Bankv.Superior Court (Boehr), 36 Cal. 4th 148 (2005), may mark the end of arbitration as a way for companies to resolve consumer disputes, at least in California. After Boehr, a company that uses consumer arbitration in California runs the risk that it may be forced to undergo classwide arbitration.

Boehr addresses the "no class action" clause, which is common to many consumer agreements. These vary, but their effect is to prohibit classwide arbitration or prohibit a consumer from serving as a class representative. According to Boehr, such a clause may not be per se unconscionable, but it comes close. It will be unenforceable if: (1) the waiver is found in a consumer contract of adhesion, (2) the dispute involves small amounts of damages, and (3) it is alleged that the party with superior bargaining power deliberately sought to cheat large numbers of consumers out of individually small sums of money. If these conditions are met—few plaintiffs’ attorneys would be shy about alleging it anyway—the clause amounts to an illegal exculpatory contract (i.e., you can’t contract away your own intentional conduct).

There is an exception of sorts, for out-of-state companies whose agreements contain a "choice-of-law" clause calling for the application of the law of some other state. As it happened, the credit card account agreement in Boehr called for Delaware law, so the case was remanded to determine whether Delaware law (which enforces class action waivers) would apply. Unfortunately, Boehr never answers whether a defendant that has expressly rejected classwide arbitration can be nevertheless forced to undergo exactly that.

Practice Tip:  Why is Boehr important?  First, a company doing business with California consumers that values arbitration as a means of resolving disputes may now run the risk of classwide arbitration. Second, Boehr potentially exposes companies with "class action waiver" clauses to suits brought under California’s unfair competition law (Bus. & Prof. Code § 17200) because the mere inclusion of an unenforceable clause can be an unfair business practice. Third, because no other state (except West Virginia) follows this arbitration-hostile rule, Boehr will make California even more of a magnet for class action litigation.

For more information, contact James McGuire (jmcguire@mofo.com).

Does Your Contract Have A Jury Trial Waiver?

Six weeks after Boehr, the California Supreme Court struck again, this time addressing jury trial waivers. Until now, these clauses were enforceable everywhere except Georgia. We can now add California to that list.

Millions of contracts throughout the United States contain clauses through which the contracting parties agree to waive their right to jury trial in the event of a dispute. In Grafton Partners L.P.v.Superior Court, 36 Cal. 4th 944 (2005), however, a unanimous Supreme Court held that a party to litigation may waive its right to jury trial only in one of the ways enumerated in Code of Civil Procedure § 631. Not on that list is waiver by a predispute contractual agreement. So, these clauses are prohibited in California, which means that even if a clause is not unconscionable, and is between sophisticated businesses acting on advice of silk-stockinged lawyers, it will fail nonetheless.

In contracts in which a jury trial waiver is coupled with an arbitration or judicial reference clause, Grafton only abrogates the jury trial waiver. Finally, Grafton’s abrogation of jury trial waivers applies retroactively, including to contracts entered into prior to the date of the decision.

A legislative fix may be on the way, but not this year. Even then, unless the fix is limited to restoring jury trial waivers in commercial cases, it will have little chance of passing.

Practice Tip:  Grafton can’t be fixed by drafting but there may be two work-arounds. First, there is arbitration, which has the same effect as a jury trial waiver. But arbitration has its own problems with enforcement. Second, a jury-trial waiver might be enforced (at least in commercial transactions) provided the agreement has a choice-of-law clause calling for another state’s laws and the other state has a genuine nexus to the transaction. Also, you might consider a judicial reference provision. (See next item.)

"Judicial Reference" Revisited

If you do business with California consumers and rely on alternative dispute resolution, you may have to rethink your options. Recent decisions by the California Supreme Court limit the utility of arbitration and "jury trial waivers."  (See this issue, "Arbitrations and Class Actions" and "Does Your Contract Have a Jury Trial Waiver?")  Given that, it may be time to consider "judicial reference." 

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