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Forum-Selection Clause Properly Is Unenforceable—C.A.
Opinion Says Provisions in Corporate Documents Requiring That Disputes Be Resolved in Delaware Court That Does Not Permit Jury Trials Offends California’s Policy That Right of Jury Is ‘Inviolate’
By a MetNews Staff Writer
Div. One of the Fourth District Court of Appeal has declined to order a trial court to dismiss a shareholder’s action against a corporation despite a provision in the certificate of incorporation and bylaws specifying that any disputes would be tried in the Delaware Court of Chancery, declaring that California must retain jurisdiction because the designated forum does not permit jury trials in civil cases.
San Diego Superior Court Judge Timothy B. Taylor declined to enforce the forum selection clauses and EpicentRx, Inc., defendant in the shareholder’s action brought by EpiRx, L.P., sought a writ in the Court of Appeal. Presiding Justice Judith McConnell said in Thursday’s opinion:
“We agree with the trial court that enforcement of the forum selection clauses in EpicentRx’s corporate documents would operate as an implied waiver of EpiRx’s right to a jury trial—a constitutionally-protected right that cannot be waived by contract prior to the commencement of a dispute.”
Internal Affairs Doctrine
She went on to say:
“We accept the defendants’ contention that the internal affairs doctrine dictates that the law of the chartering state—here, Delaware law—governs the validity of the forum selection clauses…. Further, we assume for purposes of this appeal that the forum selection clauses in EpicentRx’s corporate documents are valid under Delaware law….
“However, regardless of whether the forum selection clauses are valid, we must also decide whether the clauses are enforceable under the facts of the case before us….The forum court applies its own law to decide the question of enforceability.”
California Constitution
The clauses are not enforceable in California, the presiding justice said, unless the party seeking to litigate elsewhere can show that relinquishment of jurisdiction would not violate the state’s public policy.
California’s policy, McConnell said, is set forth in Art. I, §16 of the state Constitution which declares:
“Trial by jury is an inviolate right and shall be secured to all….”
She also cited Code of Civil Procedure §631. Subd. (a) which says:
The right to a trial by jury as declared by Section 16 of Article I of the California Constitution shall be preserved to the parties inviolate. In civil cases, a jury may only be waived pursuant to subdivision (f).”
Subd. (f) provides that a party waives a jury only in these six circumstances:
“(1) By failing to appear at the trial. [¶] (2) By written consent filed with the clerk or judge. [¶] (3) By oral consent, in open court, entered in the minutes. [¶] (4) By failing to announce that a jury is required, at the time the cause is first set for trial, if it is set upon notice or stipulation, or within five days after notice of setting if it is set without notice or stipulation. [¶] (5) By failing to timely pay the fee described in subdivision (b), unless another party on the same side of the case has paid that fee. [¶] (6) By failing to deposit with the clerk or judge, at the beginning of the second and each succeeding day’s session, the sum provided in subdivision (e).”
None of those circumstances relates to a pre-dispute waiver which, McConnell noted, has been disapproved by case law.
Three Claims
McConnell observed that three of the plaintiff’s causes of action— fraudulent concealment, promissory fraud, and breach of contract—would be triable by a jury in a California court and none would be triable by a jury in Delaware’s Court of Chancery, a court of equity.
“The defendants do not even try to satisfy their burden of showing that litigation in the Delaware Court of Chancery would not diminish EpiRx’s rights under California law,” McConnell wrote. “Having failed to satisfy their burden, the defendants have not established that the trial court erred when it declined to enforce EpicentRx’s forum selection clauses.”
“[T]the defendants bore the burden of proving that enforcement of the forum selection clauses would not substantially diminish EpiRx’s unwaivable rights under California law,” she wrote. “They did not meet that burden.”
EpicentEx’s Arguments
Rejecting EpicentRx’s arguments, McConnell said it makes no difference that the parties’ pre-dispute waiver is an implied rather than an express one or that Delaware corporations, such as EpicentRx, opt to have disputes tried in the Court of Chancery for legitimate reasons which have nothing to do with seeking to deprive a party with a right to a jury. She also found unpersuasive its contention that the right to a jury is waivable where the parties have agreed to have any dispute that arose resolved outside of the California courts, like parties agreeing to binding arbitration of any dispute, explaining:
“[A] forum selection clause is not an agreement to avoid the judicial forum altogether. Rather, it is agreement to submit disputes to a designated judicial forum—in the present case, a judicial forum in Delaware. Because the parties to a forum selection clause agree to have their disputes resolved in a judicial forum, rather than withdrawing the dispute from the judicial forum altogether, the rule against predispute jury waivers applies.”
The case is EpicentRx, Inc. v. Superior Court (EpiRx, L.P.), 2023 S.O.S. 3501.
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