Are Forum Selection Clauses Enforceable in California?
In the recent unanimous decision by the California Supreme Court, Epicentrix v. Superior Court, a corporation, its controlling stockholder, and various associated individuals (collectively, defendants) were sued by the corporation’s minority stockholder (plaintiff) for breach of contract, fraudulent concealment, and other claims.
Defendants moved to dismiss the lawsuit on the ground of forum non conveniens.
They relied on the corporation’s certificate of incorporation and bylaws, which contain mandatory forum selection clauses requiring most stockholder lawsuits against the corporation and related individuals to be brought in the Delaware Court of Chancery.
The trial court denied defendants’ motion, and the Court of Appeal denied a petition for writ of mandate challenging the trial court’s order.
Both lower courts held that the forum selection clauses were unenforceable.
The lower courts reasoned that, if plaintiff’s claims were litigated in California, plaintiff would have a right to a jury trial, but the Delaware Court of Chancery does not recognize a similar right.
In their view, because the forum selection clauses would effectively deprive plaintiff of its right to a jury trial, similar to a predispute jury trial waiver, enforcement of the clauses would be contrary to California public policy.
The Supreme Court granted review to consider whether the lower courts were correct to decline enforcement of the forum selection clauses on this basis, and concluded they were not.
Forum selection clauses serve vital commercial purposes and should generally be enforced.
At the same time, courts may properly consider whether enforcement of a forum selection clause would violate public policy.
California has a strong public policy, based on the California Constitution, in favor of the right to trial by jury.
But California’s strong public policy protects the jury trial right in California courts, not elsewhere.
It does not speak to the availability of the jury trial right in other forums.
A forum selection clause is not unenforceable simply because it requires the parties to litigate in a jurisdiction that does not afford civil litigants the same right to trial by jury as litigants in California courts enjoy.
Indeed, arms-length commercial transactions between sophisticated parties may depend on the selection of a forum for dispute resolution, such as the courts of a foreign country, that does not offer a jury trial right.
For example, a California business may wish to contract with a foreign business, but the foreign business will agree to the transaction only if any dispute is heard in the home forum of the foreign business.
The California business may find this arrangement beneficial, notwithstanding the lack of a civil jury trial right in the foreign forum.
However, under the framework adopted by the courts below, any forum selection clause designating the foreign forum would essentially be unenforceable.
A foreign business may be reluctant to enter into a transaction with a California business without an enforceable forum selection clause, and the California business would be deprived of the benefit of the transaction, even though it would be willing to agree.
Nonetheless, public policy is not the only ground on which a forum selection clause may be avoided, and we do not foreclose the possibility that the extent of a civil jury trial right in the selected forum may otherwise be relevant to the enforceability of a forum selection clause.
Respect for a party’s right to a jury trial is a fundamental feature of the California courts, and it is well-settled that California has a “policy favoring access to California courts by resident plaintiffs.”
But the impact on a party’s jury trial right does not, itself, provide grounds to decline to enforce a forum selection clause
Here, because the Court of Appeal found the lack of a right to a jury trial in the Delaware Court of Chancery dispositive, it did not consider plaintiff’s other arguments against enforcement of the forum selection clause, such as the manner of its adoption as part of the corporation’s certificate of incorporation and bylaws.
The underlying lawsuit was filed by plaintiff EpiRx, L.P. against the corporation EpicentRx, Inc. (the Corporation or the Company); its controlling stockholder, Interwest Partners, L.P.; and various individuals.
In its operative complaint, plaintiff alleged that the Corporation was a biotechnology company engaged in advanced clinical trials of cancer treatment medications, incorporated in Delaware, and with its principal place of business in California.
Plaintiff further alleged (1) the Corporation’s controlling stockholder was a California partnership with its principal place of business in California, (2) nine of the 10 individual defendants were California residents, and (3) “[t]he events described . . . and the conduct of the parties giving rise to liability occurred primarily in the State of California, County of San Diego.”
Plaintiff asserted claims for breach of contract, fraudulent concealment, promissory fraud, breach of fiduciary duty, and unfair business practices.
It sought rescission and repayment of its $5,000,000 investment in the Corporation, compensatory damages in an amount to be determined at trial, punitive damages, and costs and attorney fees Defendants moved to dismiss plaintiff’s complaint on the ground of forum non conveniens.
They relied on a mandatory forum selection clause in the Corporation’s certificate of incorporation, which designated the Delaware Court of Chancery as “the sole and exclusive forum for any stockholder to bring various types of actions.
Plaintiff opposed the motion. It disagreed that the forum selection clause applied to its claims, and to the extent its claim for breach of fiduciary duty was impacted, plaintiff offered to dismiss it.
Plaintiff also argued the forum selection clause was unfair and unreasonable because the Corporation added the clause after the misconduct alleged in plaintiff’s complaint came to light, plaintiff did not agree to the clause, and some defendants were not subject to suit in Delaware.
Plaintiff contended that the litigation should remain in California because other litigation involving the Corporation was pending in state and federal courts there.
Under the internal affairs doctrine, California courts recognize that the law of the state of incorporation applies to an action that concerns the internal affairs of corporations.
Forum non conveniens is an equitable doctrine invoking the discretionary power of a court to decline to exercise the jurisdiction it has over a transitory cause of action when it believes that the action may be more appropriately and justly tried elsewhere.
Thus, as the relevant statutes provide, “When a court upon motion of a party or its own motion finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just.”
In determining whether to grant a motion based on forum non conveniens, a court must first determine whether the alternate forum is a ‘suitable’ place for trial. If it is, the next step is to consider the private interests of the litigants and the interests of the public in retaining the action for trial in California.
That the law is less favorable to the plaintiffs in the alternative forum, or that recovery would be more difficult if not impossible, is irrelevant to the determination whether the forum is suitable unless the alternative forum provides no remedy at all.
The no remedy at all exception applies only in rare circumstances, such as where the alternative forum is a foreign country whose courts are ruled by a dictatorship, so that there is no independent judiciary or due process of law.
Consistent with this approach, the Supreme Court has held that the fact that “the law of the forum state is more favorable to the plaintiff than that of the alternate jurisdiction” — including the availability of a jury trial — should not be accorded any weight in the traditional forum non conveniens balance of interests, as long as some remedy is afforded in the alternate jurisdiction.
More important, generally, is whether the plaintiff is a California resident. In this context, a California resident’s choice of a California forum “should rarely be disturbed unless the balance is strongly in favor of the defendant.
A California resident’s choice of a California forum is presumed to be convenient, and California has a strong interest in assuring its own residents an adequate forum for the redress of grievances.
Nonetheless, the trial court retains a flexible power to consider and weigh all factors relevant to determining which forum is the more convenient, and to stay actions by true California residents when it finds that the foreign forum is preferable.
This approach changes significantly if the parties have agreed to resolve their disputes in a non-California forum.
No satisfying reason of public policy has been suggested why enforcement should be denied a forum selection clause appearing in a contract entered into freely and voluntarily by parties who have negotiated at arm’s length.
While still a matter of trial court discretion under the doctrine of forum non conveniens, “forum selection clauses are valid and may be given effect, in the court’s discretion and in the absence of a showing that enforcement of such a clause would be unreasonable.
A party resisting enforcement of a forum selection clause cannot carry its burden of demonstrating unreasonableness by relying on the factors of inconvenience and expense of the selected forum.
Mere inconvenience or additional expense is not the test of unreasonableness since it may be assumed that the plaintiff received under the contract consideration for these things.
Even a California resident will normally be bound by a forum selection clause.
In general, courts are reluctant to decline enforcement of contractual provisions on public policy grounds, especially where no statute or constitutional provision directly speaks to the issue.
Freedom of contract is an important principle, and courts should not blithely apply public policy reasons to void contract provisions.
Plaintiff does not contend that any statute or constitutional provision expressly prohibits enforcement of the forum selection clause at issue here.
Instead, plaintiff points to California’s strong public policy in favor of the right to trial by jury, and it argues that this public policy requires courts to decline to enforce a forum selection clause that would impair a party’s right to trial by jury that it would otherwise enjoy in California.
In other words, plaintiff maintains that a court cannot enforce a forum selection clause that would require a party to litigate in a forum, like the Delaware Court of Chancery, that does not afford the party the same right to a jury trial as in California.
The Supreme Court disagreed.
Even where enforcement of a forum selection clause may effectively deprive a plaintiff of the
right to trial by jury, this circumstance alone does not provide a basis to avoid its enforcement.
The California Constitution and related statutory provisions do not reflect any public policy regarding the right to a civil jury trial in other forums.
Although the practical effect of the forum selection clause may be that plaintiff’s claims are not heard by a jury, California public policy does not require invalidation of the forum selection clause in all circumstances for that reason alone.
LESSONS:
1. When reviewing a contract, determine the provisions for forum/venue for any legal disputes, attorney’s fees, waiver of jury trial, and arbitration to understand those elements if a dispute has to be litigated.
2. Forum non conveniens is an equitable doctrine invoking the discretionary power of a court to decline to exercise the jurisdiction it has over a transitory cause of action when it believes that the action may be more appropriately and justly tried elsewhere.
3. Forum selection clauses serve vital commercial purposes and should generally be enforced.
4. A forum selection clause is not unenforceable simply because it requires the parties to litigate in a jurisdiction that does not afford civil litigants the same right to trial by jury as litigants in California courts enjoy.