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California Federal Court Ships Fiduciary Duty and Unfair Competition Suit to Delaware Based Upon Forum Selection Clause

Posted in Breach of Fiduciary Duty, Non-Compete Enforceability, Practice & Procedure

By Robert Milligan and Grace Chuchla

Using a forum selection clause to transfer a case out of California federal court may have become easier thanks to a recent order from Judge Koh of the United States District Court for the Northern District of California.  In her order, Judge Koh granted defendants’ motion to transfer plaintiff’s complaint to Delaware federal court, finding that the forum selection clauses contained in two agreements were both broadly applicable to tort and statutory claims and enforceable despite allegations that enforcing them would violate California public policy, e.g. the inclusion of an alleged unenforceable jury trial waiver. AJZN, Inc. v. Donald Yu, et al., Case No. 5:12-cv-03348-LHK, (N.D. Cal.)

The agreements and forum selection clauses in question came to be when plaintiff sold all of its assets to one of the defendants in exchange for a warrant giving plaintiff the option to purchase a stake in one of the defendants and that defendant’s assumption of plaintiff’s debt.  This transaction was accomplished via an Asset Purchase Agreement and a Warrant Agreement, both of which contained jury trial waivers and forum selection clauses stating that suits arising under the agreements must be filed in Delaware.    

Following the transaction, the relationship between the parties took a turn for the worse, and on July 3, 2012, the plaintiff filed suit alleging eight causes of action under both federal and California law related to misrepresentations in the Warrant Agreement and in the defendants’ actions, including claims for breach of fiduciary duty and unfair competition.

Defendants responded with a motion to dismiss or transfer based on the forum selection clauses in both the Asset Purchase Agreement and the Warrant Agreement.  In its opposition, plaintiff argued that the claims it brought were not covered by the forum selection clauses and that the clauses were unenforceable due to their inclusion of a jury trial waiver.  Judge Koh disagreed with plaintiff and struck down each of its arguments in turn. The Court found that federal law, not California law, controlled the question of the enforceability of the forum selection clauses and that the plaintiff had the burden of establishing the lawful basis to set aside the clauses.

First and foremost, Judge Koh refuted plaintiff’s assertion of inapplicability by approving of the broad wording of the forum selection clauses.  The text of these clauses reads:

“The parties agree that all actions or proceedings relating to this Agreement (whether to enforce a right or obligation or obtain a remedy or otherwise) will be brought solely in the state or federal courts located in or for Wilmington, Delaware.” (emphasis added)

As Judge Koh saw it, these clauses “do not require that claims seek to enforce the agreements, or seek remedies under the agreements.”  Rather, they “require only that claims relate to, or are based on matter in connection with, the agreements.”  Using this broad interpretation of the forum selection clause, Judge Koh easily held that plaintiff’s claims fall within the scope of the clause.

Plaintiff’s second argument — that the forum selection clauses should be struck down because of their inclusion of a jury trial waiver — met with a similar fate.  Although Judge Koh recognized that jury trial waivers may be unenforceable in California, she did not view the forum selection clause as a contravention of California public policy.  In its briefings, plaintiff did “not presen[t] any reason why a Delaware federal court could not protect [its] interests as well as a California court could.”  Based on this lack of a concrete threat, Judge Koh was not ready to speculate about how a Delaware court would handle this case.  Perhaps it would apply California law.  Perhaps it would apply “some other law that would be equally protective of the interests of California citizens.”  The answer was unclear, and therefore plaintiff did not meet its burden of proving that enforcing the forum selection clauses would contravene California public policy.

Coming on the heels of cases such as Hartstein v. Rembrandt and Hegwer v. American Hearing and Associates — both of which also came from the Northern District and enforced forum selection clauses despite claims of violation of California public policy, i.e. Business and Professions Code section 16600 – AJZN v. Yu is yet another example of how California federal courts are generally willing to enforce forum selection clauses, absent a strong showing that enforcement would be unreasonable or unjust. Notable here is Judge Koh’s insistence that plaintiff  concretely demonstrate that transferring this case to a Delaware court would contravene California public policy.  As Judge Koh stated at the end of her analysis:

“A mere unspecified ‘risk’ that a court could, in theory, enforce the waiver…cannot carry AJZN’s heavy burden to establish that ‘enforcement of the clause would contravene a strong public policy’ of California.” (citing to Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996), emphasis in original).

Although it remains to be seen how concrete of a “risk” California federal judges will demand from plaintiffs in the future,  Judge Koh has provided further authority for courts to demand that plaintiffs all but predict the future if they want to have a forum selection clause declared unenforceable because it contravenes California public policy.  Because we cannot predict the future (try as we might!), only time will tell how this dispute over the enforceability and applicability of forum selection clauses will play out in California. Expect the continued use of aggressive use of forum selection and choice of law provisions to attempt to secure a more favorable forum for future disputes.

Delaware is typically viewed as business friendly as sophisticated parties attempt to avail themselves of Delaware courts through mandatory forum selection, choice of law, and consent to jurisdiction provisions. Delaware also has a  favorable choice of law/venue statute, 6 Del. C. § 2708, which provides that parties to certain contracts over $100,000  may use Delaware choice of law provisions in their contracts and that it “shall conclusively be presumed to be a significant, material and reasonable relationship with this State and [the agreement] shall be enforced whether or not there are other relationships with this State.”