Federal Courts Will Not Uphold Jury-Trial Waivers in Contracts Signed Under California Law

Federal Courts Will Not Uphold Jury-Trial Waivers in Contracts Signed Under California Law

In April, the United States Court of Appeals for the Ninth Circuit ruled that federal courts sitting in diversity will not uphold jury-trial waivers in contracts signed under California law, even where each party waived its rights “knowingly and voluntarily.”  The court held that federal courts sitting in diversity must apply the underlying state law to determine the validity of jury-trial waivers.  The decision in In re County of Orange narrows the contractual rights of companies doing business in California and forces them to consider other forms of dispute resolution.

In re County of Orange

The plaintiff, the County of Orange, hired Tata America International Corporation to develop a property tax management system in 2007.  The parties entered into a contract for that purpose, which included a jury-trial waiver.  The County eventually sued Tata America in federal court for breach of contract after the company failed to perform to the County’s satisfaction.  The county demanded a jury trial.

Tata America moved to strike the County’s jury demand pursuant to the jury-trial waiver in the parties’ agreement.  Turning to the merits, the court first had to determine whether federal district courts, with diversity jurisdiction, apply federal or state law to evaluate a pre-dispute jury-trial waiver’s validity.  The court noted the sharp divergence on this issue between federal and California law.  In 2005, the California Supreme Court in Grafton Partners v. Superior Court held that pre-dispute jury-trial waivers were invalid unless specifically permitted by a California statute.  Federal law, on the other hand, permits such waivers provided that each party waived its rights “knowingly and voluntarily.”

The district court granted the motion to strike, concluding that the right to a jury trial was a federal procedural issue controlled in federal court by federal law.  Applying the federal law, the court reasoned that the County had “knowingly and voluntarily” waived its right to a jury trial when it drafted and signed the waiver.  The County then filed a petition for writ of mandamus to the Ninth Circuit.

The Ninth Circuit granted the County’s writ, directing the district court to deny Tata America’s motion to strike.  First, the court found the federal “knowingly and voluntary” standard “is not a generally applicable federal rule, but rather a federal constitutional minimum.”  Second, the court found that California’s rule regarding jury-trial waivers is substantive, rather than procedural.  Thus, the court held that application of a federal constitutional minimum is not required where, as here, state law is more protective than federal law.

Following Grafton, the Ninth Circuit held that the district court erred in granting the motion under the federal standard where the more protective California law rendered the contractual jury-trial waiver unenforceable.  Federal courts sitting in diversity must therefore apply the relevant state law to evaluate the validity of a pre-dispute jury-trial waiver if it is more protective than federal law.  Thus, pre-dispute jury-trial waivers will be unenforceable in California state and federal courts sitting in diversity.

Implications for Business Owners

It is important for California businesses to remove jury-trial waivers from their commercial contracts as soon as possible.  California employers need to consider alternatives to the jury-trial waiver, such as incorporating an arbitration provision under California Code of Civil Procedure §1281 or a broad stipulation for an order of general reference for issues under California Code of Civil Procedure §638(a), both of which are valid in California under Grafton.  If you have any questions related to jury-trial waivers, arbitration agreements, or any other legal inquiries, please contact the attorneys at Carlson & Jayakumar at (949) 222-2008 or visit us at www.cjattorneys.com.

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