Protecting Its “Unwaivable Right to a Jury Trial,” California Waves Goodbye to a Delaware Forum Selection Clause
I. Overview of Enforceability of Forum Selection Clauses
The Delaware Court of Chancery has promoted the use of forum selection clauses in corporate charters since its 2010 opinion In re Revlon Inc. Shareholders Litigation. Three years later, in Boilermakers v. Chevron, the Delaware Court of Chancery ruled that forum selection clauses in corporate bylaws are facially valid for types of shareholder litigation, including derivative claims, fiduciary claims, statutory claims under the Delaware General Corporation Law, and claims regarding internal affairs. In light of these decisions, Delaware forum selection clauses contained in corporate charters or bylaws of the type found facially valid in Boilermakers have been enforced by state courts in many states. But a recent decision from a California appellate court suggests that some California courts may be resistant to such provisions based on California public policy in favor of the right to a jury trial.
II. Summary of California’s Recent Refusal to Enforce a Delaware Forum Selection Clause
In EpicentRX v. Superior Court, the California Fourth District Court of Appeal declined to enforce a forum selection clause in the defendant corporation’s certificate of incorporation and bylaws that designated the Delaware Court of Chancery as the mandatory forum. EpicentRX, a corporation, and its directors, officers, and employees, sought dismissal of the case on the basis of forum non conveniens, pointing to the mandatory forum selection clause. Plaintiff asserted fraudulent concealment, promissory fraud, and breach of contract causes of action, for which it demanded a jury trial, and additionally asserted breach of fiduciary duty and California Unfair Competition Law claims. On a petition for mandamus, the appellate court affirmed the trial court’s ruling that the forum selection clause operated as an implied waiver of the right to a jury trial. Because such right is constitutionally protected, the court reasoned it cannot be waived via contract prior to dispute.
In California, forum selection clauses are typically enforced unless doing so would be unfair or unreasonable. But California courts will refuse enforcement if litigating in the selected forum would violate public policy. Normally the burden of proof to prove why the clause should not be enforced falls on the party opposing enforcement. Under California statutes, however, the burden is reversed when the issue bears on unwaivable rights. The right to a jury trial has been deemed “fundamental,” “inviolate,” and “sacred.” The Delaware Court of Chancery, as a court of equity, does not conduct jury trials. Therefore, the defendants must demonstrate that litigating in the Delaware Court of Chancery would not substantially diminish rights under California law.
The appellate court found that defendants failed to satisfy their burden of proof. It recognized that defendants did not intend to infringe upon unwaivable rights and that the clause only created an implicit waiver. The court nonetheless concluded that the right to a jury trial would ultimately be diminished by enforcing a forum selection clause that would effectively transfer the case to a court of equity. The court then rejected the defendants’ attempt to analogize the clause to arbitration agreements, finding that the two are distinct because forum selection clauses are not an attempt to avoid the judicial system altogether, as is the case with arbitration clauses. Lastly, defendants argued that the forum selection clause should be enforced with respect to the causes of action that would not be entitled to a jury trial in California, namely breach of fiduciary duty and violation of California’s Unfair Competition Law. The court declined to do so, asserting that partial dismissal would require parties to litigate in multiple fora and risk inconsistent findings by multiple courts.
III. Other States
California is an outlier in rejecting the enforcement of a Delaware Court of Chancery forum selection clause that is included in corporate documents. Most other state courts enforce Delaware forum selection clauses. Like California, nearly all state constitutions recognize the right to a jury trial. Yet California and Georgia appear to have the only courts that have expressly prohibited pre-dispute jury waivers. California courts point to the state’s constitution and Code of Civil Procedure that outlines only six actions that may waive the right to a jury trial, which do not include pre-dispute waivers, to demonstrate that forum selection clauses may not be enforced when they infringe upon such rights.
Takeaways
- This case will be subject to further litigation on appeal in California.
- Assuming this decision remains, the enforcement of forum selection clauses may become a state-specific question. Parties may be inclined to assert state-specific causes of action in which there is a right to a jury trial.
- It is possible that other state courts could follow California’s approach.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
