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.