Contractual Waiver of Seventh Amendment Rights: Using the Public Rights Doctrine to Justify a Higher Standard of Waiver for Jury-Waiver Clauses than for Arbitration Clauses

• Author: Andrew M. Kepper
• Position: Candidate for J.D., University of Iowa College of Law
• Pages: 05

Andrew M. Kepper: Candidate for J.D., University of Iowa College of Law, 2006; B.A., University of Wisconsin-Madison, 2001. This Note is dedicated to my parents, Heinz and Lynn Kepper, for all of their support and encouragement over the years

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I Introduction

The Seventh Amendment of the United States Constitution was adopted as part of the Bill of Rights in 1791.¹ It states that "[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved."² The Seventh Amendment right to a jury trial is not absolute. It merely "preserves" the jury trial right in civil cases where it existed prior to adoption of the Seventh Amendment.³ In cases where the Seventh Amendment applies, however, it is a "fundamental guarantee of the rights and liberties of the people."⁴

As with many other constitutional protections, the Seventh Amendment right to a jury trial can be waived.⁵ One of the ways this right can be waived is through contract.⁶ Since both jury-waiver clauses⁷ and arbitration clauses⁸ prevent claims from being decided by a jury, the question arises as Page 1348 to whether these clauses implicate the Seventh Amendment. Furthermore, if these types of clauses do raise Seventh Amendment concerns, what level of consent is required to waive the jury trial right?

Federal courts have given puzzling answers to these questions.⁹ While both types of clauses operate to remove cases from a jury, most federal courts require greater proof of waiver for jury-waiver clauses than for arbitration clauses.¹⁰ Thus, when a party signs a contract containing a jury- waiver clause, federal courts require that a party's waiver of the right to a jury trial be given "knowingly and voluntarily."¹¹ Waivers of constitutional rights are generally held to a "knowing and voluntary" standard.¹² When a party signs a contract containing an arbitration clause, however, the same courts will find waiver of the right to a jury trial so long as the less protective contract-law standard of mutual assent is met.¹³

In light of this unequal treatment, several commentators have urged courts to harmonize the waiver standard governing both jury-waiver clauses and arbitration clauses under either the knowing and voluntary standard or the contract-law standard.¹⁴ This Note argues, however, that holding arbitration clauses to a lesser standard of waiver than jury-waiver does not raise Seventh Amendment concerns. In particular, jury-waiver clauses and arbitration clauses are held to different standards of waiver due to the interplay between the Federal Arbitration Act ("FAA") and the Seventh Page 1349 Amendment public rights doctrine.¹⁵ This interplay makes the Seventh Amendment inapplicable in disputes over arbitration clauses governed by the FAA. As a result, holding arbitration clauses to the lesser contract-law standard of waiver is justified.

Part II of this Note presents a general background of the standards of waiver governing jury-waiver clauses and arbitration clauses. Part III introduces the FAA and discusses how courts should interpret arbitration clauses after the FAA's passage. In effect, the FAA mandates a contract-law standard of waiver for arbitration clauses. This standard of waiver, however, is valid only if the FAA does not violate the Seventh Amendment. Part IV discusses Seventh Amendment jurisprudence, focusing on the public rights doctrine. In Part v. the public rights doctrine is applied to arbitration clauses and jury-waiver clauses. Finally, Part v. discusses and attempts to dispel some of the concerns that commentators have raised about the differing waiver standards and the public rights doctrine.

II Jury-Waiver Clause And Arbitration Clause Waiver Standards

In order to understand the Seventh Amendment issues that jury-waiver clauses and arbitration clauses raise, it is important first to discuss how these clauses are treated differently under federal law.¹⁶

A Jury-Waiver Clauses: Knowing And Voluntary Waiver Of The Jury Trial Right

Federal courts generally apply a knowing and voluntary waiver standard when interpreting jury-waiver clauses under the Seventh Amendment.¹⁷Proof that waiver was made knowingly requires a showing of either actual or Page 1350 constructive knowledge of waiver.¹⁸ Actual knowledge of waiver exists if the parties read and understood the jury-waiver clause or discussed the clause during negotiations.¹⁹ A court may also find constructive knowledge of waiver through a textual analysis of the jury-waiver clause, focusing on content and clarity.²⁰ Courts find that constructive knowledge is not present when the jury-waiver clause is ambiguous or written in small hidden print.²¹

To determine whether waiver of a jury trial was voluntary, courts look at the circumstances surrounding formation of the contract. Courts give specific attention to disparities in bargaining power and the relative sophistication of the parties.²² Consequently, courts are less likely to enforce jury-waiver clauses against parties who are poor, uneducated, or financially unstable.²³ Similarly, courts are likely to find that waiver was not voluntary Page 1351 when the contract was presented on a "take-it-or-leave-it basis," without an opportunity for negotiation.²⁴

Thus, under the knowing and voluntary standard, a party to a contract cannot waive certain constitutional rights through signature alone. In order to ensure that constitutional rights are not inadvertently waived, courts look beyond the signature on the agreement to the conspicuousness of the waiver provision, the relationship between the parties, and the circumstances surrounding formation of the contract.

B Arbitration Clauses: The Contract-Law Standard Of Mutual Assent

In contrast to jury-waiver clauses, federal courts generally do not employ a knowing and voluntary standard when determining the validity of arbitration clauses. Instead, courts interpret arbitration clauses using a contract-law standard of waiver.²⁵

In accordance with contract-law principles, courts enforce arbitration clauses when the parties have manifested mutual assent.²⁶ To determine whether mutual assent is present, courts apply an objective test.²⁷ Thus, courts find consent to arbitration, not through the actual intentions or understandings of the parties, but by looking at whether a reasonable person would believe that an agreement to arbitrate had been reached.²⁸ Page 1352 Under this contract-law standard, a signature on the contract, by itself, often constitutes consent to the terms of the agreement, including consent to arbitration when an arbitration clause is present.²⁹

The practical result of applying a contract-law standard to arbitration clauses and a knowing and voluntary standard to jury-waiver clauses is that courts are more likely to find waiver of the right to a jury trial under an arbitration clause than under a jury-waiver clause. The following section suggests a possible rationale for this seemingly inconsistent result.

III The Federal Arbitration Act And Arbitration Clauses

The Federal Arbitration Act of 1925 provides an explanation for the differing standards of waiver governing arbitration clauses and jury-waiver clauses.³⁰ Section 2 of the FAA provides that any contract involving commerce that contains an agreement to settle a controversy by arbitration shall be "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."³¹ The FAA was enacted "to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate" and to place arbitration agreements "upon the same footing as other contracts."³² To reach this end, the FAA authorizes Page 1353 courts to enter orders compelling arbitration,³³ stay judicial proceedings brought by parties opposing arbitration,³⁴ and enforce arbitration awards subject to limited review.³⁵

The mandate of the FAA has a significant effect on the analysis of Seventh Amendment waiver issues. Since the FAA requires federal courts to place arbitration agreements on the same footing as other contract provisions, it should follow that arbitration clauses are to be held to the same standard of waiver that governs contract provisions generally-mutual assent. On the other hand, Congress has not singled out jury-waiver clauses for similar treatment.

In effect, the FAA directs courts to apply a different standard of waiver to contracts containing arbitration clauses than is normally required for waiver of the right to a jury trial. Yet, because an act of Congress cannot preempt the Constitution,³⁶ the question remains whether the FAA's mandate is consistent with the Seventh Amendment.

If the FAA does not violate the Seventh Amendment, then the contract- law standard of waiver that the FAA mandates for arbitration clauses is valid. Moreover, because Congress has not enacted a similar statute changing the standard of waiver required for jury-waiver clauses, the knowing and voluntary standard generally reserved for waivers of constitutional rights should apply. Therefore, the distinction between arbitration clauses and jury-waiver clauses would be justified.

In the following sections, the Seventh...