Coming to a contract near you: the predispute jury waiver.

For years, the mandatory arbitration clause has been the darling of big business. Companies have lauded the clauses--slipped into myriad consumer contracts, from credit card and employment agreements to home mortgage loans--as a way to protect profits from "runaway" jury verdicts and the negative publicity associated with defending a defective product or discriminatory practice in a public forum.

But increasing judicial hostility toward forced arbitration--especially in the employment context--and the high costs of using a private forum to resolve legal disputes have led a growing number of corporate executives to rethink their dispute-resolution options. The latest corporate strategy, legal experts say, is to replace arbitration clauses in consumer and employee contracts with predispute jury waivers, which send disputes to the courtroom but keep the jury out.

"It's an emerging and pernicious trend," said Paul Bland, a staff attorney with Trial Lawyers for Public Justice (TLPJ) in Washington, D.C. "Quite a few companies are using jury waivers to require consumers to give up important constitutional rights as a condition of doing business with them."

Stuart Rossman, litigation director at the National Consumer Law Center in Boston, agreed, saying jury waiver clauses are gaining favor among businesses. Waivers "are not the prevailing mode. They certainly don't appear as frequently as predispute mandatory arbitration agreements," Rossman said. "But it's something that we're seeing more and more of."

"I think there is a sense that arbitration agreements are not saving the people who are using them that much money," said Stephen Fink, a Dallas lawyer who represents employers and advises his clients to consider including waivers in their employment contracts. He said arbitration can sometimes cost defendants more than a jury trial.

With arbitrators typically charging several hundred dollars an hour, the administrative costs of arbitrating a complex dispute can be substantial.

"It can range in California anywhere from $300 an hour up to $10,000 a day," said James Sturdevant, president of the Consumer Attorneys of California. "If you're in an employment case, those cases are complex. They require lots of witnesses and they go on for weeks. So if you're talking about $10,000 a day for two weeks, you're talking about $100,000."

Companies often pick up the tab, especially in jurisdictions that have struck down fee-splitting provisions. (Armindariz v. Found. Health Psychcare Serv., Inc., 6 P.3d 669 (Cal. 2000).)

And those are just the transaction costs. "One unfavorable decision by an arbitrator can wipe out a year or two of the employer's savings from using arbitration," Fink said. Unlike court awards, which are a matter of public record, arbitration outcomes are usually secret. But Fink said the arbitrator in a well-publicized employment dispute in California ordered a construction company to pay $2.4 million to two employees who had alleged age discrimination. (Bob Egelko, Home Builder Loses Age Discrimination Suit, SAN FRANCISCO CHRON., Nov. 29, 2000, at B2.)

"A lot of companies are finding they got a pig in a poke when they thought they were saving money through arbitration," Bland said.

And arbitration decisions are "essentially unappealable," Fink said, "so if there is an outcome that the employer thinks is bad or even inconsistent or flawed, there's nothing the employer can do about it."

Limiting arbitration

In recent years, consumer advocacy groups have been waging war in the courts and legislatures against predispute mandatory arbitration, claiming these contracts of adhesion strip unwitting consumers and employees of their fundamental right to have disputes heard before an inexpensive, impartial, and public forum.

Many agreements also prohibit class actions, limit the evidence a consumer can offer, shorten statutes of limitations, and impose secrecy on the proceeding and its result. Worst of all, critics say, the provisions are often one-sided, unfairly imposing these restrictions only on the consumer or employee.

For the most part, courts--including the U.S. Supreme Court--have rejected efforts to ban mandatory arbitration agreements outright, citing the pro-arbitration doctrine of the Federal Arbitration Act of 1925, which governs them. But some jurisdictions have struck down unilateral agreements as unconscionable--even presumptively unconscionable. (Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003).)

And laws that would limit arbitration's reach are pending in Congress and several state legislatures, Fink said. These anti-arbitration developments are another reason he is urging clients to go the jury-waiver route.

"I'm trying to think ahead," Fink said. "There's a good chance that some of those legislative efforts are going to succeed, and employers need to be thinking about an alternative that does not present what I understand to be the principal objection that people have to mandatory arbitration, which is that it does not allow access to the courts."

The typical jury-waiver provision includes a brief sentence or two that requires contracting parties to forgo the right to have a jury decide the outcome of a dispute arising from the agreement. By ensuring that a judge hears the case, jury waivers allay companies' fears that disputes will end up in the hands of a consumer's sympathetic peers. And the waivers allow disputes to go to court, so they are not open to many of the criticisms leveled at arbitration agreements, Fink said.

"We're not asking you to give up your right to go to court if you have a dispute. You can go to court and have a judge paid by public funds [hear your case] and have all the protections that a court proceeding can give you," he said.

Battleground state

Parties have been litigating the enforceability of predispute jury waivers in commercial contracts for 30 years. Almost every state and federal jurisdiction to consider the issue has ruled that contracting parties can give up their constitutional right to a jury even before a dispute arises. Georgia and California are the exceptions.

Ten years ago, in Bank South v. Howard, the Georgia Supreme Court held that its state constitution prohibits waiver of the right unless litigation is pending. (444 S.E.2d 799 (Ga. 1994).)

This year, in Grafton Partners v. Superior Court, a California appeals court invalidated all predispute jury waivers in civil actions in that state, finding the state constitution guarantees the right to a jury trial, except where "prescribed by law." The only law that allows waiver is the state's Code of Civil Procedure [section] 631, and predispute clauses meet none of its requirements, the court found. (9 Cal. Rptr. 3d 511 (Ct. App. 2004).) The state supreme court has agreed to review the decision.

Even the vast majority of jurisdictions that have ruled that jury waivers pass constitutional muster say they must satisfy basic rules of contract law: To be valid, a predispute jury waiver must be given voluntarily, knowingly, and intelligently.

Applying this test, courts sometimes have struck down contracts containing waivers that were buried deep in the document or written in fine print, or contracts signed by a party who was not represented by counsel and who therefore might not have fully appreciated the importance of the right being waived.

So far, cases that have reached the appellate level have involved businesses tussling over commercial contracts. Some scholars and advocates say courts may be more willing to nullify a jury waiver when the objecting party is an unsophisticated consumer or employee and the party seeking enforcement is a well-financed company with expert legal advice.

"Cases I found [on this topic] were mostly in the franchise context or the banking context, with commercial borrowers," said Jean Sternlight, a professor at the William S. Boyd School of Law in Las Vegas. "In that context, I found a number of courts struck down the waivers, using the 'voluntary, knowing, and intelligent' argument. I would think that when they apply [this test] to consumers, courts would often say [the waiver] wasn't voluntary knowing, and intelligent."

Amici in Grafton Partners are pressing that argument in the California Supreme Court, even though the contract at issue is a commercial one.

"While the parties to the current dispute are both sophisticated business entities, the ramifications of the issue before this court extend to consumers and employees with little or no bargaining power who must simply sign on the dotted line to engage in a consumer transaction or begin employment," states an amici brief filed by ATLA, the Consumer Attorneys of California, TLPJ, and the National Association of Consumer Advocates. "The lack of bilaterality, which is certain to exist when consumers are faced with waiving their right to a jury trial, renders such predispute jury waivers unconscionable and thus unenforceable."

"If you hold that predispute jury waivers are in some context OK," said Sturdevant, "then we're right back where we started out in the late 1980s and early 1990s with mandatory predispute arbitration--the illusion that it is just a matter of agreement between equal parties. [In our brief] we said that whatever you allow strong parties who deal with each other in arm's-length transactions to agree to, you may never allow predispute jury waivers to be used against consumers or employees."

That argument failed to persuade the Texas Supreme Court this year in a case involving a commercial contract. (In "re Prudential Ins. Co. of Am., No. 02-0690, 2004WL 1966015 (Tex. Sept. 3, 2004).)

"Many of the arguments that the plaintiffs made in that case as to why jury waivers should not be enforceable are similar to ones that might be made in the employment setting," Fink said. "They said [the waiver] was hidden in the contract, [that the party opposing it] was not very sophisticated and they did not understand what they were agreeing to, that [the jury trial] was a fundamental constitutional right, and so on. And the court did uphold the waiver, so I expect to see them being used more commonly now by employers."

Except in Georgia and California, which have tossed jury waivers out on constitutional grounds, the enforceability of these clauses, like arbitration agreements, will be decided case by case, Sternlight said: "They'll look at things like who's the borrower or who's the person who is trying to get out of the waiver--in this case, the consumer. How knowledgeable are they? How informed are they? How clear was the notice? Was there duress? Was there an actual negotiation? Was there the possibility of a negotiation?"

Rossman said the bar for an acceptable waiver will probably be raised when consumer contracts start coming before the courts.

"I believe that when you move from a commercial to a private setting, the standard or level of comprehension would have to be higher," he said. "And I believe it would be fair under those circumstances to shift the burden to the business to show that, in fact, the consumer knew what they were doing, were informed of what their rights were, and freely and openly consented under those circumstances."

"There is no judicial policy or statutory policy or constitutional policy that favors predispute jury waivers," Stur devant said. "In fact, if you look at the Declaration of Independence, you'll see that the bulk of the document lists concrete examples where King George denied the right to jury trial to British citizens. That is the reason the framers declared their independence from Great Britain--it was because of the right to jury trial. They felt it was that important."