What are Forum Selection Clauses in California Contracts?

In the California Supreme Court unanimous decision in Epicentrix, Inc. v. Epirx, L.P., 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’scertificate of incorporation and bylaws, which contain mandatory forum selection clauses requiring most stockholderlawsuits 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 held that the lower courts were not correct to decline enforcement of the forum selection clauses on this basis.

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.

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’s complaint included the following substantive allegations: Between 2016 and 2018, plaintiff invested $5,000,000 in the Corporation. Around this time, and unbeknownst to plaintiff, various individuals associated with the Corporation and its controlling stockholder solicited and obtained money from other investors, but they did not provide those investors with any shares or other ownership interests in the Corporation.

Instead, these individuals diverted the money for their own personal benefit. The misconduct of these individuals rendered the Corporation financially unfit for an initial public offering (IPO) and revealed the Corporation’s promises of a “ ‘big exit’ ” for plaintiff to be false and misleading.

When plaintiff discovered the misconduct, the Corporation removed plaintiff’s representative from its board of directors and refused plaintiff’s requests for financial and operational information.

Based on these allegations, 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 (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company, its directors, officers or employees arising pursuant to any provision of the [Delaware General Corporation Law] or the Company’s certificate of incorporation or bylaws or (iv) any action asserting a claim against the Company, its directors, officers or employees governed by the internal affairs

doctrine . . . .”

They also cited a similar mandatory forum selection clause in the Corporation’s bylaws.

After hearings, the court denied defendants’ motion to dismiss. It determined that at least some of plaintiff’s claims were legal, not equitable, and therefore would be tried before a jury in California. Because the forum selection clause would effectively deprive plaintiff of that jury trial right, the court found that the clause ran afoul of California’s public policy against predispute jury trial waivers and was unenforceable.

The Court of Appeal assumed that the forum selection clauses were valid under Delaware law, and it noted that plaintiff did not argue otherwise.

It held, however, that California law should apply to the enforceability of the clauses.

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.

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.

Plaintiff did not contend that any statute or constitutional provision expressly prohibits enforcement of the forum selection clause at issue here. Instead, plaintiff pointed to California’s strong public policy in favor of the right to trial by jury, and it argued 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 maintained 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.

LESSONS: 

1.         When reviewing a contract, important terms to consider are provisions for recovery of attorney’s fees, mediation and arbitration, waiver of jury trial, and the forum selection clause for dispute resolution.

2.         California has a strong public policy, based on the California Constitution, in favor of the right to trial by jury.

3.        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.