October 28, 2020 Practice Points

Beware of Delaware Forum-Selection Provisions When Litigating in the Golden State

A recent California Superior Court decision has potential ramifications for practitioners nationwide.

By Jeremy K. Beecher

Business law attorneys have long admired Delaware courts’ expertise in corporate law. The Court of Chancery, in particular, has become the country’s leading corporate law tribunal due to its well-developed body of case law and reputation for resolving corporate law disputes quickly and fairly. In re Ivan F. Boesky Securities. Litigation, 129 F.R.D. 89, 97 (S.D.N.Y. 1990) (“Delaware has long been recognized as the fountainhead of American corporations and that its Courts of Chancery are known for their expert exposition of corporate law”). The Court of Chancery is also notable in that it does not permit trial by jury or punitive damages awards, traits that many business law attorneys find attractive.

For all these reasons, practitioners often include in clients’ contracts forum-selection provisions requiring disputes to be resolved in Delaware courts, at least where one or more signatories is incorporated in, or has other ties to, Delaware. A recent California Superior Court decision, however, raises questions about the enforceability of such provisions in courts throughout the Golden State, with potential ramifications for practitioners nationwide.

Some Background

In 2005, the California Supreme Court held in Grafton Partners v. Superior Court that pre-dispute jury trial waivers are unenforceable under the California Constitution. 36 Cal. 4th 944 (2005). This is true even where the relevant contracts involve sophisticated entities represented by counsel in arm’s-length negotiations. With this decision—which the Ninth Circuit has since extended to federal courts sitting in diversity—California joined Georgia as one of only two states to prohibit pre-dispute jury trial waivers. In re Cty. of Orange, 784 F.3d 520, 532 (9th Cir. 2015).

Until recently, however, California courts had not applied Grafton to invalidate Delaware forum-selection provisions even where a provision, if enforced, could have the effect of eliminating a jury by requiring litigation in the Court of Chancery. That changed with the Los Angeles Superior Court’s recent decision in West v. Access Control Related Enterprise LLC. Case No. BC642062, filed November 28, 2016. There, the court held that a Delaware forum-selection provision that in effect required litigation in the Court of Chancery was “effectively and impermissibly used as a pre-dispute waiver of jury trial” and declined to enforce it. July 29, 2020 Op. at 5. The court found California’s public policy in favor of enforcing forum-selection provisions was outweighed by the public policy interest of vindicating the plaintiff’s “unwaivable right” to trial by jury.

It is too soon to predict whether West, which is a non-binding trial court decision and has not yet been reviewed by an appellate court, represents the beginning of a trend or an aberration. (The court in West relied heavily on the California Court of Appeal’s 2019 decision in Handoush v. Lease Financial Group, LLC. 41 Cal. App. 5th 729 (2019). In Handoush, the court declined to enforce a New York forum-selection provision where the contract also contained a jury-trial waiver, finding that 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 [jury trial] right the Legislature and our high court have declared unwaivable.” Id. at 739.) Regardless, for now it injects significant uncertainty into parties’ previously settled contractual expectations: Any person or entity doing business with California counterparts may now find itself facing lengthy litigation in California courts, culminating in a jury trial with the possibility of punitive damages, rather than enjoying the speedy bench trial in the Court of Chancery for which it bargained.

How to Help Clients Avoid that Outcome

Pending further development of the law in this area, business law attorneys should consider advising clients doing business with California parties to utilize arbitration provisions in lieu of Delaware forum-selection provisions. Unlike pre-dispute jury trial waivers, arbitration provisions are enforceable under both California and federal law, and a well-crafted arbitration provision can allow parties to enjoy the same streamlined resolution and corporate law expertise they had hoped to obtain through their agreement to resolve disputes in Delaware courts.

Jeremy K. Beecher is a litigator in the Los Angeles, California, office of Munger, Tolles & Olson.

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