State Supreme Court wraps up a busy year of significant rulings

By J. Clark Kelso

ANALYSIS

The California Supreme Court’s 2004-05 term was unusual in the subject matter breadth and the number of significant rulings. Among other topics, the rulings touched on voter initiatives, workplace sexual harassment, the rights of domestic partners, arbitration and the right to a jury, punitive damages and separation of powers.

In last month’s Bar Journal I addressed the first three topics; what follows is an analysis of the final three.

Right to juries

The right to jury is jealously guarded in California. We saw more evidence of that during the court’s term. In Grafton Partners v. Superior Court (Aug. 4, 2005) 2005 Westlaw 1831995, the court held unenforceable a contractual provision in an audit engagement that purported to waive trial by jury in any dispute between the parties that might arise out of the contract and its performance. When one party to the contract filed an action for negligence and misrepresentation against the auditor, they demanded a jury trial. The trial court granted a motion to strike the jury demand, relying in part upon the waiver contained in the engagement letter, and the court of appeal reversed.

The Supreme Court agreed with the court of appeal that a predispute waiver of a jury trial is not statutorily authorized and that only statutorily authorized waivers are recognized by the jury trial provision of the California Constitution. Section 16 of Article I of the California Constitution guarantees the right to trial by jury. It provides, in pertinent part, that “in a civil cause a jury may be waived by the consent of the parties expressed as prescribed by statute.” The relevant statute is Section 631 of the Code of Civil Procedure, and Section 631 does not authorize a predispute waiver.

In reaching its conclusion, the court overruled the decision in Trizec Properties Inc. v. Superior Court (1991) 229 Cal.App.3d 1616, where the court had upheld a predispute waiver, relying in part upon what the court of appeal considered to be an analogy to arbitration clauses. The Supreme Court rejected this reasoning, noting that arbitration clauses are statutorily recognized (although not by Section 631) and that arbitration clauses actually avoid the judicial forum altogether.

For those who wish to avoid trial by jury, the result in Grafton Partners puts the focus back on arbitration clauses. Even here, however, the court has taken steps over the years to protect weaker contracting parties from losing the right to trial by jury. This year, the Supreme Court continued its pro-consumer approach to arbitration clauses.

The most significant decision was Discover Bank v. Superior Court (2005) 36 Cal.4th 148, where the court held that a waiver of class arbitration in a consumer adhesion contract was unconscionable and unenforceable in certain circumstances.

Discover Bank included in its contract with its credit cardholders an arbitration clause that precluded both parties from participating in classwide arbitration, consolidating claims, or arbitrating claims as a representative or in a private attorney general capacity. Discover Bank’s clear intention was to force individual consumers into arbitrating only individual claims.

The plaintiff brought suit against Discover Bank alleging that Discover Bank misrepresented to cardholders when late payment fees would be assessed. According to the plaintiff, Discover Bank told cardholders that late fees would not be assessed if payment was received by a certain date, yet Discover Bank actually charged late fees if payment was received after 1 p.m. on that date.

This is the classic sort of consumer dispute where individual damages are too small to justify individual litigation, and class actions where aggregated damages can be awarded are the only practical approach to securing meaningful relief. The clause waiving class arbitration had the practical consequence of denying the consumers any meaningful opportunity for securing relief.

Reinforcing prior decisions that had authorized classwide arbitration in California (see Keating v. Superior Court (1982) 31 Cal.3d 584), the court held that a clause purporting to waive classwide arbitration in a consumer adhesion contract was unconscionable and unenforceable, at least where it was foreseeable that small-dollar-amount disputes were likely and the party asserting the waiver was accused of deliberately defrauding large numbers of consumers out of small sums of money. Score another victory for consumers in resisting overbroad arbitration clauses.

Punitive damages

After almost 15 years of litigation around the country, including several cases at the U.S. Supreme Court, the business community finally won its much-sought-after punitive damage victory in State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, where the court found in the due process clause of the Fourteenth Amendment fairly stringent limits on the award by state courts of punitive damages, particularly in economic harm cases.

Technically, State Farm eschewed formulas and established a three-part framework for analyzing punitive awards. But the reality is quite a bit more concrete and quite a bit more favorable to the business community.

A perfect example is Simon v. San Paolo U.S. Holding Co. (2005) 35 Cal.4th 1159, where the plaintiff, a prospective buyer of an office building, had secured a jury award for fraud with compensatory damages of $5,000 and punitive damages of $1.7 million. The court dutifully worked through the three-part framework and concluded that the $1.7 million punitive award violated due process.

Usually at this point, supreme courts remand for further consideration, leaving the final dirty work to be accomplished by lower courts. This time, however, the California Supreme Court stepped up to the plate and gave us a final number. According to the court, the maximum that could be awarded for punitive damages was $50,000, 10 times the compensatory award (which is probably at the outer limit of what the United States Supreme Court would find acceptable under State Farm). Now that is a big victory for the defense, and the court’s reliance on the 10-1 ratio is likely to have an immediate impact on all punitive awards in California.

In a companion case, Johnson v. Ford Motor Co. (2005) 35 Cal.4th 1191, the court took the easier road. The jury had awarded the plaintiff $17,811 in compensatory damages and $10 million in punitive damages arising out of plaintiff’s claim that Ford had engaged in a practice of concealing the history of transmission repairs and replacements when reselling cars. The court of appeal reduced the punitive damages to $53,435, which was three times the compensatory damages.

A majority of the court was not convinced that the court of appeal had thoroughly examined the punitive award in light of the three-part framework established by State Farm, and the court remanded for further consideration. A good guess is that the court of appeal will reach a result somewhere between three times and 10 times the compensatory award. Clear boundaries for punitive awards are now being set.

Separation of powers

The year’s most important separation of powers decision came in Marine Forests Society v. California Coastal Commission (2005) 36 Cal.4th 1, where the court lifted the cloud that had been hanging over the legitimacy and authority of the California Coastal Commission. A majority of the members of the commission are appointed by members of the legislature.

In particular, one-third of the commission’s members are appointed by the governor, one-third are appointed by the Senate Rules Committee, and the remaining one-third are appointed by the Speaker of the Assembly. Pursuant to recent legislation, all members appointed by Senate Rules or the Speaker serve a four-year term and are not removable at will. The governor’s appointees serve two-year terms and may be removed at the pleasure of the governor.

For those not familiar with California’s early constitutional history, the constitutional challenge appeared to have substantial merit. The commission appears to perform typical executive functions, and a majority of its members are appointed by legislative leadership. On its face, this sounds like a clear violation of separation of powers, depriving the governor of his authority to execute the laws.

The court unanimously disagreed and upheld the commission’s authority. Chief Justice Ronald George’s opinion for the majority does a great job of establishing the differences between California’s separation of powers doctrine and the separation of powers doctrine under the United States Constitution.

Most significantly, the United States Constitution contains an appointments clause that expressly empowers the president to appoint officers subject to Senate confirmation. The California Constitution does not contain a similar provision vesting the appointments power in the executive, and some of the earliest separation of powers cases in California confirmed that the appointments power was not reserved to the governor, including one case where all of the members of a board were appointed by the legislature.

The decision’s significance extends far beyond the Coastal Commission. There are hundreds of other boards and commissions in state government where the appointment authority has been split between the governor, the Speaker and the Senate Rules Committee. The court’s opinion conclusively settles any doubts about whether legislative appointments are consistent with separation of powers.

New justice on the way

Justice Janice Rogers Brown was finally confirmed as a judge of the D.C. Circuit Court of Appeals after Democrats in the Senate agreed not to exercise their power to filibuster her nomination. This gives Governor Schwarzenegger a vacancy on the court to fill.

Justice Brown’s tenure will be remembered for her distinctive writing style — a combination of evocative imagery and blunt prose that reminds me of a velvet-covered sledgehammer — and her occasional journeys into a Scaliaesque criticism of colleagues’ opinions that sorely tested collegiality on the court.

We don’t know very much about Governor Schwarzenegger’s judicial philosophy. He has of course appointed quite a few lower court judges, and they appear to be high quality appointments, although there has been some criticism about his commitment to diversity in judicial appointments. But there is a big difference between a lower court appointment and a supreme court appointment, and that makes it difficult to forecast who the Governor might appoint. Perhaps all that can be said with certainty is that whoever the Governor appoints, it is likely the nominee will be more centrist than Justice Brown, who on many, but not all issues, was a solidly conservative vote. So we probably can expect the next term to include an additional voice in the center of the court. In other words, don’t anticipate any big change in direction.

• J. Clark Kelso is a professor of law and director of the Capital Center for Government Law & Policy at the University of the Pacific, McGeorge School of Law. He also serves as the state’s chief information officer. All views expressed are the views of the author and do not represent the views of the Schwarzenegger administration.