September 03, 2020

Choice of Law/Forum and Waiving the Right to a Jury Trial: California Courts Holds That the Former Cannot Do the Latter

Thomas E. Rutledge

IN BRIEF

  • A recent decision out of California further muddies the waters relating to the application of the internal affairs doctrine and basic conflicts-of-law analysis between Delaware and California.
  • What should practitioners make of it?

A recent decision from a California trial court held that a Delaware choice-of-law/forum provision could not be enforced against a California resident because doing so would deprive him of his right to a jury trial as embodied in the California Constitution. This decision brings into question all manner of agreements, including operating agreements for LLCs organized outside of California, and the choice-of-law/forum provisions thereof.

West, resident in California, entered into a series of agreements relating to Access Control Related Enterprises, LLC (ACRE), an LLC in which he was a member and its CFO and COO. One of those agreements was a Securityholders’ Agreement that contained Delaware choice-of-law and choice-of-forum (the Court of Chancery or the Federal District Court) provisions; no other provisions of the Securityholders’ Agreement are detailed in the opinion. Some two-and-a-half years after entering into the Securityholders’ Agreement and the other agreements, West was terminated by ACRE. In response, he brought suit in California and then in Delaware. The California action was stayed on the basis of the Delaware choice-of-forum provision in the Securityholders’ Agreement. An action was then filed in the Delaware federal court, but it was dismissed for lack of subject matter jurisdiction. Another action was then filed by West in the Superior Court of Delaware. In the Superior Court, the defendants moved for summary judgment, moved to transfer the action to the Chancery Court, and moved to strike West’s demand for a jury trial on the basis of a jury trial waiver in the Securityholder’s Agreement. The Securityholders’ Agreement upon which the West court focuses its attention is not even mentioned in this Delaware decision. Subsequently, the motion to transfer to the Chancery Court was granted, and in so doing the demand for a jury trial was functionally denied in that the Chancery Court (being expressly a court of equity) does not conduct jury trials.

This gave rise to the motions that led to this opinion. Recall that previously the action filed in California had been stayed based upon the choice-of-forum provision in the Securityholder Agreement. His Delaware suit now moved to the Court of Chancery, West returned to the California action and asked that the stay on its proceeding be lifted on the basis that (1) in Chancery Court there is no jury, and (2) under California law, a predispute waiver of a jury trial (other than by means of an agreement to arbitrate enforceable under either the federal or California arbitration acts) is unenforceable. Needless to say, the defendants, who otherwise finally have the dispute in a forum agreed to in the Securityholder Agreement, disagreed.

Article I, section 16 of the California Constitution provides that “any waiver of the inviolate right to a jury determination must occur by the consent of the parties to the cause as provided by statute.” Under the related statute, as interpreted in Grafton Partners v. Superior Court, “a jury may be waived in civil cases only as provided in subdivision (d)” of section 631 of the California Code of Civil Procedure. That provision, since redesignated subsection (f), provides:

A party waives trial by jury in any of the following ways:

(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).

These limitations upon the capacity to waive a jury trial are exclusive; “unless the Legislature prescribes a jury waiver method, we cannot enforce it.” Further, it has been held that a written consent under subsection (2) may be given only after the action is pending; “both the agreement to waive jury trial and the filing of any such agreement must occur subsequent to the commencement of the lawsuit.” West would argue that the provision of the Securityholder Agreement requiring that his dispute with ACRE and the other defendants be resolved in the Delaware Chancery Court and without a jury violated his California constitutional right to a jury trial.

Certain earlier California decisions have indicated that choice of forum and choice of law that in application waived a right to a jury would not be enforced by a California court. As cited in the West decision, Handoush v. Lease Fin. Grp., LLC involved an agreement containing a New York choice-of-law/forum provision and a waiver of a jury trial. New York has no policy against predispute jury waivers, and it seems questionable that a New York court would give appropriate deference to California’s policy against predispute jury waivers:

Here, enforcing the forum selection clause in favor of New York will put the issue of enforceability of the jury trial waiver contained in the same agreement before a New York court. Because New York permits predispute jury trial waivers, and California law does not, enforcing the forum selection clause has the potential to operate as a waiver of a right the Legislature and our high court have declared unwaivable.

Finding the question presented to be analogous to those in Handoush, the West court determined that “refusing to lift the stay on the grounds the Securityholders’ Agreement forum selection clause is enforceable would result in a pre-dispute waiver of West’s ‘inviolate’ right to a jury trial.” Further, as the action has been transferred to the Delaware Chancery Court, and as the Chancery Court does not utilize juries (except on an advisory basis), “continued enforcement of the forum selection clause in the Securityholders’ Agreement would prevent West from having a jury trial. The pre-dispute forum selection clause is effectively and impermissibly used as a pre-dispute waiver of jury trial.”

On that basis the stay on the California litigation initiated by West has been lifted. How the Delaware Chancery Court will react remains to be seen.

IMPLICATIONS OF WEST V. ACCESS CONTROL

To a certain degree, it is too soon to fully assess the implications of the West v. Access Control decision. It is a decision of a trial court that but for commentary such as this article, could be lost in the background. However, with the continual strides being made in electronic searching of court dockets, seldom can we expect anything to remain lost and therefore uncited. At minimum, even if the decision cannot be cited as anything more than persuasive authority, it addresses a common fact pattern and will be cited under the argument of avoiding conflicts among decisions.

There is as well the possibility of reversal on appeal, which is dependent upon the defendants not only bringing an appeal, but also achieving a reversal. In light of the wealth of earlier California appellate decision relied upon in the West decision, that appeal may be swimming upstream.

What the Delaware court will do is an open question. There are examples of decisions in which the Delaware courts have applied California law notwithstanding a Delaware choice-of-law provision. For example, in Ascension Ins. Holdings, LLC v. Underwood, an injunction was denied to enforce a noncompete agreement entered into in California but electing to be governed by Delaware law that would be enforceable in Delaware but nonenforceable in California. However, there the Delaware court applied California law to the parties before it. That cannot be the resolution here—namely, the suit proceeding but with California’s insistence upon jury trials respected—because the matter is before the Chancery Court, and Chancery is a court of equity that does not use juries.

Setting those points aside, this decision is a wake-up call to anyone engaged in contracts with persons resident in California, but the problem is not restricted to California. Rather, many state constitutions have provisions describing the right to a trial by jury as inviolate. A contracting party in any state with a similar provision may argue that if in a particular forum they would not be entitled to a jury, then the choice of law/forum is unenforceable against them. At that juncture, the party seeking enforcement likely must show that the law of that state (unlike California) permits predispute jury waivers. There may be other states utilizing the same rule, and it is always possible that a state determines that reversal of its prior policy allowing waiver should be changed.

Most legal opinions either exclude or heavily qualify an opinion as to the enforcement of choice-of-law/venue provisions. Are those now delivering those opinions going to either do further investigation into the state constitutions and statutes to determine whether the agreement as written is enforceable, or will those opinions go by the wayside to be replaced with exclusions from the opinion?

Another significant issue is the balkanization of the law, particularly the law of business organizations. West was a member in ACRE, a Delaware-organized LLC. In becoming a member, he agreed that the controlling operating agreement, and in the absence thereof (entirely or as to a particular matter) the Delaware LLC Act, which itself incorporates Delaware’s contract law, would determine his rights and obligations. The West court made the point several times that its decision was based upon the terms of the Securityholders’ Agreement; the terms of that agreement were not discussed beyond the jury waiver and choice-of-law/forum provisions, so we are left in the dark as to whether the Securityholders’ Agreement would, under Delaware law, be treated as a limited liability company (operating) agreement. Even so, the California action that may now proceed contains a count for breach of fiduciary duty, and the only credible source for a duty that could have been breached is the ACRE operating agreement. According to the West decision, the Second Amended and Restated Limited Liability Company Agreement contained the same choice-of-forum provision as the Securityholders’ Agreement. Bear in mind that West was a manager of ACRE (CFO and COO), and under the Delaware LLC Act he consented to jurisdiction in Delaware for matters connected with the LLC. Under this decision, West enjoys the benefits of being a member/manager of ACRE and avoids the burdens imposed upon members and managers; he asserted, and the West court agreed, that what is good for the goose is in fact not good for the gander.

Consider a Delaware LLC in which our California resident is a member (and perhaps as well a manager). The LLC has no other connection with California, and neither it nor its constituents are subject to the specific or general jurisdiction of the California courts. Although our hypothetical actor may want to avoid the jury waiver and choice-of-law/venue provisions of the controlling operating agreement, in order to gain personal jurisdiction, he or she may be required to bring suit in a foreign jurisdiction that will enforce those contractual obligations. He or she should not be heard to then object to being deprived of a right guaranteed by California law. Assume our plaintiff does not prevail, however. Will he or she have an after-the-fact ability to challenge the judgment when it is to be enforced in California? Although not listed as an affirmative defense, perhaps chutzpah should be.

West was (or so it would appear) a California resident at the time he signed the Securityholders’ and other agreements. What would be the outcome if at that time he had been a resident of another state that would enforce the jury waiver and choice-of-law/forum provisions, but then moved to California? Can he (or should he be able to) alter his contractual obligations simply by moving across a state border? If he may, how can parties to an agreement containing a jury trial waiver ever know that the obligation will be enforceable?

This decision is another cog in the jammed-up machine that is the application of the internal affairs doctrine and basic conflicts-of-law analysis between Delaware on the one hand (it being as well a proxy for some 48 other states) and California on the other hand. Another recent decision on the point, Juul Labs, Inc. v. Grove, 2020 WL 4691916 (Del. Ch. Aug. 13, 2020), will be reviewed in a forthcoming article.

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    Thomas E. Rutledge

    Member, Stoll Keenon Ogden

    Tom is a Member in Stoll Keenon Ogden’s Louisville office and has been with the firm since 1990. He is a member of the Business Services practice with a focus on Mergers & Acquisitions and Securities & Corporate Governance. Tom is also a member of the Banking Litigation Practice.