Ninth Circuit Holds Jury Waiver in Agreement Governed by California Law Unenforceable in Federal Court Where Federal Jurisdiction Is Based on Diversity of Citizenship

May 19, 2015

By Cynthia M. Cohen, John F. Hilson & Calista Wu

On April 16, 2015, the U.S. Court of Appeals for the Ninth Circuit granted the County of Orange’s petition for writ of mandamus in In re County of Orange, __ F.3d __, No. 14-72343, 2015 WL 1727240 (9th Cir. Apr. 16, 2015).[1] In doing so, it held that “district courts sitting in diversity must apply California’s rule on pre-dispute jury trial waivers to contracts governed by California law” and that the district court had erroneously applied the federal “knowing and voluntary” standard to uphold the parties’ jury waiver.[2] Under California law, pre-dispute jury trial waivers are unenforceable as a matter of public policy, unless expressly authorized by statute.[3] On the other hand, federal law permits such jury waivers in civil cases if the waiver is made knowingly and voluntarily.[4] The County of Orange ruling makes clear that, within the Ninth Circuit, parties to an agreement governed by California law containing a pre-dispute jury trial waiver cannot expect a more favorable result from a federal court sitting in diversity jurisdiction than from a state court. Both courts would apply California law and deny the enforceability of the waiver.

Pre-Dispute Jury Trial Waivers

The Seventh Amendment to the U.S. Constitution guarantees the right to a jury trial “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars.”[5] Just as with other constitutional rights, the right to a jury trial in a civil suit can be waived.[6]

Pre-dispute jury trial waivers typically provide that the parties to an agreement waive their right to a jury trial for any disputes arising out of or relating to the agreement or transaction.[7] For a host of reasons—expense, perceived bias, etc.—these waivers have become quite common in commercial contracts and other types of agreements.[8]

Background of the Case

In County of Orange, the underlying dispute was a simple breach of contract action. The County of Orange (the “County”) had hired Tata America International Corporation and its international affiliate (collectively, “Tata America”) to develop a property tax management system. The parties entered into an agreement that contained the following jury waiver:

Waiver of Jury Trial. Each party acknowledges that it is aware of and has had the opportunity to seek advice of counsel of its choice with respect to its rights to trial by jury, and each party, for itself and its successors, creditors, and assigns, does hereby expressly and knowingly waive and release all such rights to trial by jury in any action, proceeding or counterclaim brought by any party hereto against the other (and/or against its officers, directors, employees, agents, or subsidiary or affiliated entities) on or with regard to any matters whatsoever arising out of or in any way connected with this Contract and/or any other claim of injury or damage.[9]

The agreement also provided that it was to be governed by the laws of California.

When a dispute arose, the County filed an action in the U.S. District Court for the Central District of California and asserted claims of “promissory fraud, fraudulent misrepresentation, fraudulent concealment, negligent misrepresentation, and breach of contract” under California law.[10] Because the Complaint included a jury trial demand, Tata America filed a motion to strike the County’s jury trial demand based upon the waiver. The parties disputed whether federal or California law applied to the determination of whether the jury demand should be stricken. The district court granted Tata America’s motion to strike and held that the right to a jury trial and any waiver of that right are federal procedural issues controlled in federal court by federal law. In support of its ruling, it cited to a bedrock principle of diversity jurisprudence first announced in a U.S. Supreme Court decision from the 1930s.[11] Applying federal law, the district court held that the County had knowingly and voluntarily waived its right to a jury trial. The County filed a petition for writ of mandamus.

The Ninth Circuit’s Analysis

The court noted that the grant or denial of a writ of mandamus depended on whether the district court had erred in striking the jury trial demand. This required the court to determine, under Erie and its progeny, whether federal district courts sitting in diversity are to apply federal or state law to evaluate the validity of a pre-dispute jury trial waiver. Generally, under Erie, “federal courts sitting in diversity apply state substantive law and federal procedural law.”[12]

The court noted that “courts (including ours) generally recognize that a party’s right to a jury trial in federal court is a federal issue controlled by federal law.”[13] However, describing the issue as one of first impression in the Ninth Circuit, the court proceeded to more specifically frame the issue in the case as follows: “What law should federal courts sitting in diversity apply to determine the validity of a jury trial waiver clause when state law is more protective than federal law of the right to a jury trial?”[14]

The court explained that the Ninth Circuit and several sister circuits, including the First, Second, Third, Fourth, Sixth, and Tenth Circuits, have held that federal courts sitting in diversity must use federal law to determine the enforceability of a jury waiver. It also noted that the Seventh Circuit, however, has held that “even if federal law governs whether a litigant waived its right to a jury trial in federal court, federal courts should import the state rule of decision to determine the validity of a pre-dispute waiver because ‘there is no general federal law of contracts after Erie.’”[15] The court declared, however, that the issue in the instant case was distinguishable from prior decisions by the Ninth Circuit and these sister circuits due to “the way California law deals with the validity of pre-dispute waivers.”[16] The court explained that “[u]nder California (and Georgia) law, parties to a contract cannot waive their right to a jury trial before a dispute commences, and any contractual provision seeking to effect such a waiver is unenforceable unless expressly authorized by statute.”[17]

After noting that classifying a law as either substantive or procedural for Erie purposes is “‘sometimes a challenging endeavor,’” the court held that “rules dictating when a party waives its right to a jury trial are procedural” under Erie, but that “California’s rule is substantive.”[18] The court also held that “federal procedural law governs the validity of a pre-dispute jury trial waiver in federal court.”[19] This could and should have ended the inquiry, but it did not.

The court explained that federal courts could “‘give effect to the substantive thrust of [California’s rule] without untoward alteration of the federal scheme for the trial and decision of civil cases.’”[20] The court declared that the federal “knowing and voluntary” standard is in fact “not a generally applicable federal rule, but rather a federal constitutional minimum” for protecting the Seventh Amendment right to a jury trial.[21] The court further declared that “a federal constitutional minimum is inapplicable where, as here, state law is more protective than federal law of federal constitutions rights” and that “[t]here is, thus, no federal rule that governs the validity of a pre-dispute jury trial waiver when state law is more protective than federal law of the jury trial right.”[22]

Focusing on the situation that exists when state law is more protective than federal law, the court noted that in the absence of a countervailing federal rule or interest, federal courts should adjudicate state-created rights in a manner that closely resembles the way in which a state court would adjudicate that same right. It highlighted that “[t]his goal is particularly important where, as here, the state rule has a ‘substantive thrust.’”[23] The court explained that by adopting as the federally prescribed rule of decision the law that would be applied by state courts in the state whose law governs the agreement, “federal courts can ensure uniform protection of Seventh Amendment rights by permitting parties to waive those rights—at minimum—knowingly and voluntarily . . . while still adhering to California’s Grafton rule.”[24]

The Result

The Ninth Circuit held that, where the state law is more protective of the Seventh Amendment right to a jury trial than federal law, federal courts in diversity cases must adopt the state law as the federal rule. Because the parties’ agreement was governed by California law, which is more protective of the right to a jury trial than the federal “knowing and voluntary” standard, the court held that the district court erred by applying the federal standard. Accordingly, although the County had knowingly and voluntarily waived its right to a jury trial, California law governed the validity of the waiver, and under California law, the waiver was unenforceable.

What the Decision Means

The Ninth Circuit’s opinion in County of Orange expands the effect of Grafton with respect to pre-dispute jury trial waivers. The court adopted a result that it could have avoided had it simply ruled that whether the parties were entitled to a jury trial was a procedural question and, therefore, governed by federal, not state, law. The court declined to do this. Instead, it reached for a broader principle, holding that in the Ninth Circuit, jury trial waivers in agreements governed by California law will be unenforceable, unless expressly authorized by California statute. Thus, any possibility that might previously have existed if an action were filed in, or removed to, federal court in the Ninth Circuit in an effort to obtain a more favorable result as to the enforceability of such a jury waiver has been eliminated. The opinion does not reach the issue of whether a federal court sitting in diversity jurisdiction in California would also strike the jury waiver even if the agreement were governed by substantive law (e.g., New York law) that enforces knowing jury waivers. That issue should be decided not based on policy grounds, but on a traditional choice-of-law analysis. Nonetheless, the manner in which the Ninth Circuit reached for the broader holding reflects an antagonism to jury trial waivers in the Ninth Circuit. Consequently, including an enforceable choice-of-venue provision, as well as a complementary choice-of-law provision, should be considered and may well prove determinative.

It is clear that in order to increase the likelihood that a pre-dispute jury trial waiver in an agreement will be enforced, the parties should strongly consider selecting law other than the law of California[25] as the governing law for disputes arising out of or relating to a proposed agreement.

Additionally, the parties should consider selecting alternative forms of dispute resolution, such as arbitration or judicial reference proceedings.[26] Arbitration and judicial reference proceedings each provide a forum for disputes to be heard before a neutral third party instead of a jury. In arbitration proceedings, the parties submit their dispute to an arbitrator or panel of arbitrators to receive a binding decision. Absent very limited circumstances, arbitration decisions are not appealable. In judicial reference proceedings, the parties submit their dispute before a chosen judicial referee who will hear the dispute and issue a decision that will become the judgment of the court.[27] Judgments entered after a judicial reference proceeding are appealable like any other judgment. Although arbitration and judicial reference agreements also effectively result in a waiver of the right to a jury trial, these agreements are explicitly authorized by California statute.[28] Therefore, parties to agreements governed by California law who wish to avoid jury trials should thoroughly consider these alternative forms of dispute resolution and carefully evaluate the respective benefits and drawbacks of each.

In light of the Ninth Circuit’s holding in County of Orange, parties to agreements must now exercise additional caution if they wish to avoid a jury trial, but strategic alternatives still remain.

***

[1] Id. at *10.

[2] Id. at *9.

[3] Grafton Partners L.P. v. Superior Court, 116 P.3d 479, 484, 488 (Cal. 2005); see also Cal. Const. art I, § 16; Cal. Civ. Proc. Code § 631.

[4] See Palmer v. Valdez, 560 F.3d 965, 968 (9th Cir. 2009).

[5] U.S. Const. amend VII.

[6] See, e.g., United States v. Moore, 340 U.S. 616, 621 (1951).

[7] See General Contract Clauses: Waiver of Jury Trial, Practical Law, http://us.practicallaw.com/9-523-4508?q=jury+waiver (last visited May 16, 2015).

[8] See Jane Spencer, Companies Ask People to Waive Right to Jury Trial, Wall St. J., Aug. 17, 2004, http://www.wsj.com/articles/SB109269232752592826 (“So-called jury waivers, which require people to give up the right to have cases heard by their peers, are now appearing in a wide range of routine contracts.”).

[9] In re County of Orange, 2015 WL 1727240, at *2.

[10] Id.

[11] See Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).

[12] Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 426 (1996).

[13] In re County of Orange, 2015 WL 1727240, at *4.

[14] Id. (emphasis added).

[15] Id. at *6 (quoting IFC Credit Corp. v. United Bus. & Indus. Fed. Credit Union, 512 F.3d 989, 991–92 (7th Cir. 2008)).

[16] Id.

[17] Id. (citing Grafton Partners L.P., 116 P.3d at 484).

[18] Id. at *7.

[19] Id. at *8.

[20] Id.

[21] Id.

[22] Id.

[23] Id. at *9.

[24] Id.

[25] Because Georgia law also prohibits pre-dispute jury trial waiver provisions, see Bank S., N.A. v. Howard, 444 S.E.2d 799, 800 (Ga. 1994) (“We conclude, therefore, that pre-litigation contractual waivers of jury trial are not provided for by our Constitution or Code and are not to be enforced in cases tried under the laws of Georgia.”), and because North Carolina has a statutory provision prohibiting the pre-dispute waiver of jury trials, see N.C. Gen. Stat. § 22B-10 (“Any provision in a contract requiring a party to the contract to waive his right to a jury trial is unconscionable as a matter of law and the provision shall be unenforceable. This section does not prohibit parties from entering into agreements to arbitrate or engage in other forms of alternative dispute resolution.”), the drafter would want to avoid the law of those states as well.

[26] If an agreement involves real property located in California as collateral, the parties should take additional precautions with respect to drafting any arbitration or judicial reference provisions to avoid violating California’s One Form of Action and Security First rules. See Cal. Civ. Proc. Code § 726(a).

[27] Id. § 644.

[28] Id. §§ 638, 1281; Grafton Partners L.P., 116 P.3d at 487–90.

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