The Court of Appeal of the State of California, First Appellate District, recently held that a forum selection clause in favor of a New York forum was unenforceable where the clause included a predispute jury trial waiver, which is unenforceable under California law but which would have been enforceable under New York law.
Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court.
A copy of the opinion in Handoush v. Lease Finance Group, LLC is available at: Link to Opinion.
The plaintiff storeowner filed a lawsuit against the defendant company alleging that the defendant supposedly defrauded the plaintiff regarding a lease agreement for credit card processing equipment.
The complaint alleged causes of action for fraud, rescission, injunctive relief, and violation of the California Business and Professions Code section 17200. The complaint also attached a lease agreement, which provided that New York law would apply to all disputes between the parties, and that all disputes “shall be instituted and prosecuted exclusively in the federal or state court located in the State and County of New York.” Further, the agreement provided that “YOU AND WE WAIVE, INSOFAR AS PERMITTED BY LAW, TRIAL BY JURY IN ANY DISPUTE.”
The defendant moved to dismiss the complaint based on the forum selection clause of the lease agreement. The trial court granted the dismissal, and the matter was appealed.
On appeal, the Appellate Court first observed that “California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable,” but “California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state’s public policy.”
The Appellate Court also noted that a party opposing enforcement of a forum selection clause ordinarily bears the burden of proving why it should not be enforced, but the burden is “reversed when the claims at issue are based on unwaivable rights created by California statutes [in which case] the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum” will not diminish the substantive rights afforded under California law.
The plaintiff argued that the forum selection clause impacted his substantive rights under California law because it includes a predispute waiver of the right to a jury trial and such right is unwaivable, even voluntarily, under California law. Thus, the plaintiff argued that the trial court erred in failing to place the burden on the defendant to prove litigating in New York would not result in a diminution of his substantive rights under California law.
The defendant argued that the plaintiff’s lawsuit did not involve claims based on unwaivable rights under a statutory scheme and therefore the burden should not shift to the defendant.
In siding with the plaintiff, the Appellate Court held that “enforcing the forum selection claim here would be contrary to California’s fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute jury trial waivers.”
Although the plaintiff’s claims were not based on a statutory scheme which includes an antiwaiver provision, the “complaint includes a demand for a jury trial, which [the plaintiff] correctly argues is unwaivable in predispute contracts under California law.” The right to a jury trial “is inviolate under the California Constitution, and which may only be waived by the methods enumerated by the Legislature.”
However, “[w]hile California law holds predispute jury trial waivers are unenforceable, it is undisputed that under New York law there is no similar prohibition.”
The Appellate Court next considered whether the right to jury trial was a substantive or procedural right, which it noted “is an open question.”
After analyzing the issue, the Appellate Court determined that “even if the rule is considered procedural, it is intimately bound up with the state’s substantive decision making” and “serves substantive state policies” of preserving the right to jury trial, which is “an interest the California Constitution zealously guards.”
Thus, the Appellate Court held that “because enforcement of the forum selection clause here has the potential to contravene a fundamental California policy of zealously guarding the inviolate right to a jury trial, which is unwaivable by predispute agreements, [the defendant] bears the burden of showing that litigation in New York” will not diminish the plaintiff’s substantive rights under California law.
The defendant argued that the only issue to be decided was the enforcement of the forum selection clause, and that the issue of whether to enforce the jury trial waiver should be decided by a New York court.
The Appellate Court disagreed, ruling that “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 the New York court,” and “[b]ecause New York permits predispute jury trial waivers, and California 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.”
The Appellate Court therefore held that “the trial court erred in enforcing the forum selection clause in favor of a New York forum where the clause includes a predispute jury trial waiver, which . . . is unenforceable under California law.”
Accordingly, the Appellate Court reversed the order of dismissal entered by the trial court, and remanded the matter for entry of a new order denying the motion to dismiss.