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COPYRIGHT 2007 Harvard Society for Law and Public Policy, Inc.
INTRODUCTION
I. THE ARBITRATION PROBLEM A. Arbitration Is Not (Necessarily) Faster than Litigation B. Arbitration Is Not Cheaper than Litigation C. Arbitration Is More Confidential than Litigation D. Arbitration Is Riskier and Less Predictable than Litigation E. Courts Are Refusing to Enforce Arbitration Agreements F. Contractually-Modified Litigation Offers a Superior Alternative to Arbitration II. THE "NEW" FREEDOM OF CONTRACT: EX ANTE CONTRACTS TO MODIFY THE RULES OF LITIGATION ARE PRESUMPTIVELY ENFORCEABLE III. COURTS HAVE ENFORCED EX ANTE CONTRACTS THAT MODIFY A BROAD ARRAY OF LITIGATION RIGHTS AND RULES A. Constitutional "Due Process" Rights B. Seventh Amendment Right to Trial by Jury C. Rules of Evidence D. Rules of Civil Procedure E. Other Public Dispute Resolution Rights F. Lessons from Arbitration IV. THE RELATIONSHIP BETWEEN THE LITIGATION PROCESS AND THE POWER TO MODIFY IT A. Litigation Rules Are Commodities that Are Subject to Negotiation and Exchange Like Other Contractual Provisions B. The Parties Own Their Dispute, and the "Rules" of Litigation Are Default Rules V. LIMITS ON THE POWER TO MODIFY THE RULES OF LITIGATION A. Overriding Procedural Considerations B. Courts' Inherent Power to Control the Litigation Process C. The Parties May Waive Only Their Own Litigation Rights D. Waiver of Constitutional Rights May Be Subject to Stricter Scrutiny: The "Knowing, Voluntary, and Intelligent Waiver" Standard E. Conclusions VI. MODIFIED LITIGATION UNDER THE NEW FREEDOM OF CONTRACT A. Maximizing the Chances for Specific Enforcement B. What Might Modified Litigation Look Like? CONCLUSION
INTRODUCTION
The Seventh Amendment to the U.S. Constitution provides 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...." (1) Rule 38 of the Federal Rules of Civil Procedure provides that "[t]he right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by a statute of the United States shall be preserved to the parties inviolate." (2) The Supreme Court has described the right to trial by jury in a civil action as a "basic and fundamental" right that is "sacred to the citizen" and therefore "should be jealously guarded by the court." (3) But parties to a contract may agree that, in the event a dispute arises, they waive their right to a jury. If this dispute resolution right--which is fundamental, constitutional, and set forth in the Federal Rules of Civil Procedure--may be used as a bargaining chip, are there any limits on parties' ability to modify the rules of public dispute resolution in their ex ante contract?
In this Article, I examine the limits on parties' ability to design and implement through contractual agreements their own set of public dispute resolution rules. I do not, however, focus on the usual method--opting-out of the public courts in favor of private arbitration. Instead, I consider parties' ability to "opt-in" and choose the public courts as the forum for dispute resolution, yet waive, modify, and displace the "normal" litigation rules. (4)
Others have written about the general concept of agreements that modify certain litigation rules. These commentators criticize the growing body of law that recognizes the ability of private parties to modify the rules of public dispute resolution. For example, Professor David Taylor and Sara Cliffe argue that courts have improperly elevated ex ante contracts to "a status of 'super contract,' a status that transcends traditional rules of contract law and results in near-automatic enforcement by means of specific performance." (5) Professor Jean Sternlight argues that waiver of litigation rights, both constitutional and other rights, should require voluntary and knowing consent to such waiver. (6) Professor Linda Mullenix argues that "[t]he central problem is that substantial litigation rights are sacrificed to enhance purely prudential considerations. Contract principles now effectively usurp long-standing jurisdictional and conflict-of-laws rules." (7)
These commentators argue that the judiciary should rein in the use of ex ante contracts to modify litigation rules founded primarily on the Constitution. The commentators do not, however, explore the outer boundaries of private parties" ability to modify litigation rules by contracts made before disputes arise. (8) In this Article, I seek to identify and examine those limits. To anchor this inquiry in something more than academic interest, I compare the limits and benefits of modified litigation with the limits and benefits of arbitration--generally considered a reasonable and often better alternative to litigation. (9)
I conclude that there is a presumption that litigation rules may be modified by an ex ante contract and that such a contract is subject to specific performance. The contract will not be enforceable, however, in the following circumstances: (A) where it gives a court subject matter jurisdiction (either expressly or impliedly) that the court would not otherwise have; (B) where the agreement is not enforceable under the traditional standards of contract law (that is, if the contract itself is not enforceable); (C) where the contract waives certain constitutional rights, it may be unenforceable if it was not made knowingly, voluntarily, and intelligently; (D) where Congress has acted to affirmatively prohibit modification of a specific litigation rule; (E) where the agreement seeks to waive litigation rights of a person who is not a party to the contract, including the public's litigation rights; and (F) where there is an overriding procedural consideration that prevents enforcement of the contract because it would irreparably discredit the courts.
If the contract was entered into by two sophisticated, commercial entities that are both represented by lawyers, we can eliminate most concern with limits (B) and (C). If the litigation right that is modified by ex ante contract is a right that courts have held can be waived during litigation, then we can eliminate most concern with limits (A), (E), and (F). Likewise, if the parties can waive the litigation right by agreeing to arbitration, they should be able to waive the same right in modified litigation without encroaching upon limits (A), (E), and (F). Thus, if Congress has not expressly precluded contractual modification of a litigation rule, parties may modify any litigation rule that they may waive either during litigation or by electing arbitration. If such a contract satisfies standard contract law requirements and, if required, was made knowingly, voluntarily, and intelligently, the contract to modify litigation rules will be subject to specific enforcement.
Given these conclusions, it follows that there is tremendous opportunity for parties to use the free and available public dispute resolution system to better accomplish the aims of arbitration. With one exception, modified litigation has all of the benefits of arbitration: it will be significantly faster than standard litigation; it will be significantly cheaper than standard litigation; and it will allow the parties to define and control the dispute resolution rules. Additionally, modified litigation has significant advantages over arbitration: it is cheaper than arbitration; it includes a meaningful right to appellate review; it guarantees the appointment of a neutral, independent decision-maker; and it avoids problems with handling certain types of disputes, like consumer class actions, that may not be easily amenable to arbitration. Even the one notable exception--that arbitration is beneficial because it is more confidential than litigation--is counterbalanced by the benefits of public dispute resolution. Public dispute resolution produces precedent that helps parties value their disputes and plan to avoid disputes in the future. Modified litigation retains this same advantage. The largest "consumers" of litigation--businesses that frequently resort to a dispute resolution system--therefore stand to benefit the most from this transparency and public development of law. Of course, they also stand to benefit the most from modified litigation rules that provide a disincentive to litigate, such as a more demanding burden of proof, and that also provide "protection" against the risks inherent in a jury trial.
I. THE ARBITRATION PROBLEM
With the enactment of the U.S. Arbitration Act of 1925, (10) now known as the Federal Arbitration Act (FAA), (11) Congress provided an approved alternative to litigation. The parties define the scope of the dispute, define the dispute resolution procedures, and determine the legal standards to be applied. (12) It is generally assumed that arbitration is faster, cheaper, and more private than litigation. (13)
Although arbitration has become commonplace (some would say ubiquitous), it has been met with great criticism. Critics charge that the Supreme Court, in its zeal to support arbitration, has gone beyond Congress's original intent in enacting the FAA. The Court is so enamored with the siren song of "cost-savings" and "efficiency," as well as the indisputable savings in court time, that its decisions in this area are no longer anchored in the Act itself. (14)
A. Arbitration Is Not (Necessarily) Faster than Litigation
Is arbitration faster than litigation? Not necessarily. (15) According to one recent study, the average time to resolve an arbitration--the time from the date of filing the demand to the date of the award--is 16.5 months. (16) The median time from filing to disposition of a case filed in a federal district court in 2005 was 9.5 months. (17) The median time to get to trial in a case filed in a federal district court in 2005 was 22.5 months. (18)
Even where arbitration is faster than litigation, however, this efficiency is likely the result of the system that the parties have designed. Arbitration is faster because the party-selected procedures dictate a speedy resolution by waiving a jury, streamlining discovery, and otherwise ensuring that the dispute resolution procedures guarantee a quick decision. (19) If these same parties may waive a jury, streamline the discovery process, and alter other procedures to guarantee a quick decision while remaining in the public court system, they may obtain the same efficiency.
B. Arbitration Is Not Cheaper than Litigation
Is arbitration cheaper than litigation? Probably not. (20) In litigation, the plaintiff incurs a minimal initial filing fee and the parties each incur the costs of their own attorneys. In arbitration, the claimant incurs an initial filing fee to initiate the dispute, and the parties each incur the costs of their own attorneys plus (a) administrative fees to pay the overhead of the dispute resolution service (hearing space and operating expenses) and (b) the arbitrators' fees and administrative costs. (21) These additional expenses, "which are never incurred in the judicial forum," (22) can be substantial and significant. (23) For example, a two-party arbitration that involved three days of hearings in San Francisco before a single arbitrator, two days of pre-hearing preparation, and two days of post-hearing research and award preparation might cost each party $450 in case management fees and $11,200 in arbitrators' fees. (24) Depending upon the arbitrators selected, the same dispute might cost as much as $96,000 per party in arbitrators' fees if held before a three arbitrator panel. (25) The math is simple to do. The costs increase accordingly if one anticipates an arbitration that will require weeks or months of motion practice, testimony, argument, and deliberation.
The high cost of arbitration can be a significant deterrent that precludes consumers, employees, and those with fewer resources from pursuing claims in arbitration. (26) The total amount of arbitration fees may be unbearable for the injured party, as well as for the party's contingent fee-based lawyer. Where the value of a claim is small, the amount of the arbitration fee may be unconscionable because it is excessive relative to the value of the underlying claim. (27) In these cases, the existence of such high costs provides a basis for challenge to the arbitration agreement itself. (28)
In addition to direct expenses, the "judge for hire" aspect of arbitration creates incentives for the arbitrator to delay resolution of the action, which also may increase expenses. Some have argued that arbitrators are less likely to terminate a dispute as a result of a pre-trial motion, such as a motion to dismiss or motion for summary judgment. (29) This inclination may arise from a desire to hear the parties out, but it also might be influenced by the arbitrators' self-interest in extending their ability to bill the parties for their services. Arbitrators may also be more likely to issue Solomonic "split the baby" decisions to make their employers, the parties, equally happy and increase the likelihood the arbitrator will be selected by these parties in the future. (30) Furthermore, arbitration often is preceded by litigation over enforcement of the arbitration agreement. This litigation can be "messy, complicated and expensive." (31) Finally, the cost and delay involved in this arbitration enforcement litigation is often overlooked when a party thinks that the decision to choose arbitration means avoiding the litigation process altogether.
Again, any cost-savings from arbitration are likely a product of the streamlined procedures employed in arbitration. If the parties can modify the litigation rules to make litigation look like arbitration, they can realize cost-savings equally as well through modified litigation. (32)
C. Arbitration Is More Confidential than Litigation
The Seventh Circuit has stated plainly that "[p]eople who want secrecy should opt for arbitration. When they call on the courts, they must accept the openness that goes with subsidized dispute resolution by public (and publicly accountable) officials." (33) I concede that arbitration is more confidential than litigation. (34) The First Amendment, the Due Process Clauses, and common law rights of access all guarantee public access to court-based hearings. (35) Documents that are filed with the court are presumptively available for public access. (36) Although any party may move for a protective order to limit public access to the court records, (37) there is no guarantee that the motion will be granted. To rebut the presumption of public access to court records, the moving party has the burden of establishing good cause, which must be based on a "a particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements." (38) If the parties stipulate to the need for a protective order and make a joint motion, the court still may refuse to grant the order and, if granted, it must be narrowly tailored. (39)
Even if a protective order is issued, documents that are used for a dispositive summary judgment motion are subject to higher scrutiny. (40) Because entry of summary judgment serves as a substitute for trial, a higher showing is required to deny public access to the court's summary judgment records than the "good cause" standard for issuance of a protective order. (41) In such cases, the moving party bears the burden of establishing "compelling reasons" to seal the record. (42) Furthermore, sealed settlements are increasingly limited or prohibited by legislative action based on public outcry over cases involving toxic tort claims, design defects, sexual harassment, and the Catholic Church's sexual abuse scandal. (43) Thus, modified litigation cannot provide the same confidentiality protections as arbitration. (44) But litigation is a public process that has its own benefit: It produces precedent that helps other parties value their disputes and plan to avoid the costs of, and need for, dispute resolution altogether. (45)
D. Arbitration Is Riskier and Less Predictable than Litigation
Arbitration is riskier than litigation because the FAA severely limits parties' ability to seek judicial review of an arbitration award. (46) As a practical matter, there is no appellate "check" on the arbitrator's work. Once the arbitrators issue an award, the prevailing party will seek to enforce the award by submitting it to a court and requesting entry of a judgment.
The FAA provides that arbitration agreements are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (47) An arbitration award will not be vacated when the arbitrator misinterprets the governing law or applies it incorrectly. Thus, the party opposing entry of judgment based on an arbitration award will prevail only when the award is "completely irrational" or exhibits a "manifest disregard of law." (48)
This situation, however, is a double-edged sword. On the positive side, limited appellate review encourages finality and discourages parties from pursuing dubious, costly appeals. On the negative side, limited judicial review creates an opportunity for great mischief by the arbitrator and heightens skepticism regarding the value, fairness, and predictability of arbitration decisions. (49) This concern is compounded because arbitrators do not have to issue written awards, which increases the difficulty of judicial review and further reduces the likelihood of a court vacating an arbitration award. (50) "To offer protection against such unpredictable or biased decision-making, without sacrificing all the benefits of arbitration, parties have begun to include clauses in their arbitration agreements seeking to expand the scope of judicial review." (51) There is a circuit split on the issue of whether parties may contractually alter the standard of review applicable to an arbitration award. (52) Regardless of the resolution of that split, however, the possibility for mischief by arbitrators is a serious concern for potential parties to arbitration.
E. Courts Are Refusing to Enforce Arbitration Agreements.
Another problem for parties who rely on arbitration agreements is the possibility that their agreement will be held to be unenforceable. Increasingly, courts are limiting or eliminating parties' ability to force consumers into arbitration through boilerplate contracts, finding that such contracts are unconscionable and therefore unenforceable. (53) One recent survey of cases in the California Courts of Appeal found that those courts were over five times more likely to hold that a contractual provision is unconscionable if the contractual provision is contained in an arbitration agreement rather than in an ordinary contract. (54) Similarly, some courts have held that class arbitration waiver clauses contained in arbitration agreements are almost always unconscionable. (55) Thus, uncertainty regarding the enforceability of the arbitration agreement, or the waiver of classwide arbitration, is itself sufficient incentive to consider a modified litigation model. If the arbitration agreement is not enforceable, the parties immediately lose all of the benefits of arbitration and are subject to the "default" rules of litigation. A better alternative is opting into litigation from the outset and devising their own rules.
F. Contractually-Modified Litigation Offers a Superior Alternative to Arbitration
If ex ante contracts to modify the rules of litigation are enforceable, then contractually-modified litigation offers a superior alternative to arbitration. As noted above, arbitration is not necessarily faster or cheaper than litigation, and it is often riskier than litigation. Even assuming that arbitration might be faster and cheaper than litigation under the "default" public dispute resolution rules, it should not be faster and cheaper than litigation modified to mimic arbitration. Modified litigation also eliminates several commonly expressed concerns about arbitration. Modified litigation is cheaper than arbitration because the public pays the decision-maker, the parties get an Article III judge or a duly vetted or elected state court judge, and the parties get a meaningful right to judicial review of the decision. In arbitration, the parties pay the decision-maker on a daily or hourly basis, one party might have a greater (or the only) voice in the selection of the arbitrator, the arbitrator might not be neutral, the arbitrator might not be sufficiently trained or versed in the law, and there is no meaningful judicial review. (56)
This Article assesses the current state of the law and concludes that, with very few limits, the parties may modify the public dispute resolution rules by ex ante contract. This Article identifies the few potential limits to, and explores the outer boundaries of, this freedom of contract. The underlying question is: If modified procedures are good enough for arbitration-which leads to an award that becomes a federal court judgment--how can they be repugnant to modified litigation? The conclusion is, of course, that they are not. Modified litigation is an available, superior alternative to arbitration.
II. THE "NEW" FREEDOM OF CONTRACT: EX ANTE CONTRACTS TO MODIFY THE RULES OF LITIGATION ARE PRESUMPTIVELY ENFORCEABLE
It is a long-established principle that "[a] party may waive any provision, either of a contract or of a statute, intended for his benefit." (57) Despite this long-standing principle, U.S. courts initially resisted enforcement of ex ante contracts to waive dispute resolution rights. For example, in its 1874 decision in Home Insurance Co. v. Morse, (58) the Supreme Court noted in dicta that a contract that waived the right to a jury trial in the event of future dispute was unenforceable. (59) The Court refused to enforce a contractual agreement not to seek removal to federal court of an action filed in state court and wrote:
Every citizen is entitled to resort to all the courts of the country, and to invoke the protection which all the laws or all those courts may afford him. A man may not barter away his life or his freedom, or his substantial rights.... [A potential litigant] cannot ... bind himself in advance by an agreement, which may be specifically enforced, thus to forfeit his rights at all times and on all occasions, whenever the case may be presented.... [A]greements in advance to oust the courts of the jurisdiction conferred by law are illegal and void. (60)
The Court's reasoning led to a series of decisions that assumed public dispute resolution rules could not be modified by contract made in advance of litigation. For example, U.S. courts refused to enforce arbitration agreements (61) and forum selection clauses. (62)
The first significant step in changing the Court's dubious view of contracts to modify litigation rules was the enactment of the FAA in 1925. (63) With enactment of the FAA, arbitration agreements went from unenforceable to specifically enforceable and strongly favored by the Court. (64) In 1964, the Supreme Court held that private parties, by ex ante contract, may waive their constitutional due process rights to object to lack of personal jurisdiction by appointing an agent for service of process in a particular forum. In National Equipment Rental, Ltd. v. Szukhent, (65) the Supreme Court reviewed a contract between a New York-based equipment company and several farmers from Michigan. The Court held that a clause designating the wife of one of the owners of the plaintiff company as the agent for service of process in New York resulted in defendants' submission to personal jurisdiction in New York. (66)
In its 1972 decision in The Bremen v. Zapata Off-Shore Company, (67) the Supreme Court continued this trend, holding that a freely-negotiated forum selection clause should be specifically enforced by the courts in the absence of some compelling and countervailing reason making enforcement unreasonable. (68) The Court noted that "[f]orum-selection clauses have historically not been favored by American courts," (69) but it rejected the presumption against enforcement and stated that enforcement of the agreement "accords with ancient concepts of freedom of contract." (70) The Supreme Court quoted its decision in Szukhent for the proposition that "'[i]t is settled ... that parties to a contract may agree in advance to submit to the jurisdiction of a given court, to permit notice to be served by the opposing party, or even to waive notice altogether.'" (71) In other words, the Court found the parties free to make whatever bargains they will, subject only to the usual law of contracts. (72) The Supreme Court elevated the concept of freedom of contract and established a presumption that the parties may bargain away their dispute resolution rights. (73)
Critics roundly dismiss the Court's decision in The Bremen as a violation of separation of powers and as neglecting due process concerns. (74) Despite this criticism, the Court's rejection of the presumption against enforcement of agreements that alter public dispute resolution rules has ushered in the "current doctrine of consensual adjudicatory procedure" in which contractual agreements to modify public dispute resolution rules are presumptively valid. (75) Instead of a presumption against enforcement, the Supreme Court now states that there is a "background presumption that legal rights generally, and evidentiary provisions specifically, are subject to waiver by voluntary agreement of the parties...." (76) This presumption applies even when the party making the waiver subsequently objects, "absent some affirmative indication of Congress' intent to preclude waiver." (77) Under this new "freedom of contract," it is generally accepted that contracts modifying the rules of litigation are specifically enforceable. (78)
There are, however, certain clear limits on the ability of private parties to modify the rules of public dispute resolution. The first and most fundamental limit is that private parties cannot give a court subject matter jurisdiction it does not otherwise have. (79) Second, private parties cannot modify the rules of public dispute resolution if Congress (80) affirmatively precludes such agreements. (81) Third, private parties' ability to modify the rules of public dispute resolution is limited by the traditional standards of "contract law" that determine whether a contract is enforceable. (82) That is, a clause of a contract that purports to modify the rules of public dispute resolution is not enforceable if the contract itself is not enforceable. In Part V, I examine what additional limits, if any, restrict private parties' ability to modify the rules of litigation and to craft their own dispute resolution procedures. Before that, however, it is helpful to look at the scope of contracts to modify litigation rules that courts have held to be enforceable.
III. COURTS HAVE ENFORCED EX ANTE CONTRACTS THAT MODIFY A BROAD ARRAY OF LITIGATION RIGHTS AND RULES.
Courts have enforced ex ante contracts that modify a broad array of litigation rights and rules. These include constitutional rights, statutory rights, rights set forth in the Federal Rules of Civil Procedure, and rights set forth in the Federal Rules of Evidence.
A. Constitutional "Due Process" Rights
1. Waiver of Objection to Exercise of Jurisdiction.
The constitutional requirement of due process limits a court's ability to exercise jurisdiction over a defendant that is not a citizen of the state in which the court sits. The defendant must have certain minimum contacts with the forum state such that the court's exercise of jurisdiction will not offend traditional notions of fair play and substantial justice. (83) But the Supreme Court has held that it will enforce a contractual agreement in which a party waives objection to personal jurisdiction despite the absence of minimum contacts with the forum. The parties may waive their due process rights by appointing an agent for service of process in that forum. (84) The parties may also include a forum selection clause in their contract and thereby "stipulate in advance to submit their controversies for resolution within a particular jurisdiction." (85) The right to choose a forum has been described as "perhaps the most fundamental and essential litigation right, since it carries with it choice-of-law determinants." (86) In addition to waiving objection to the selected forum, a party who agrees to a forum selection clause also waives objection to personal jurisdiction in that forum. (87)
Once the Supreme Court determined that forum selection clauses are not per se invalid, it could have recognized either of two methods of enforcing such clauses. Courts could recognize a cause of action for breach of contract against the party who filed its lawsuit in a forum other than the one the parties had stipulated, and award damages to the injured party--that is, the party who did not get the benefit of the agreed upon forum. (88) Alternatively, courts could order "specific performance" of the forum selection clause. The Supreme Court opted for the latter approach. (89)
In choosing to specifically enforce forum selection clauses, the Supreme Court rejected the argument that such clauses are improper because...
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