By Robert Milligan and Grace Chuchla
California federal courts have again said it loud and clear — when analyzing whether or not the enforcement of a forum selection clause within a non-competition agreement is contrary to California public policy, the court will not consider the substantive effects of enforcing the clause. In a recent case out of the Northern District, Meras Engineering v. CH20, Inc., Case No. C-11-0389 EMC, Judge Chen articulated this concept by ruling that the enforcement of the forum selection clause was in no way determinative of which state’s law would ultimately be applied. As he reasoned, forum selection and choice of law analyses are not one in the same, or in other words, “the selection of a forum does not always dictate the choice of law.”
Clear as Judge Chen’s ultimate ruling might have been, the background leading up to this order is a muddled one, involving multiple parties, states, suits, motions, and stays. Events were set in motion on January 26, 2011, when Rich Bernier and Jay Sughroue left their employment with CH2O and went to work for Meras Engineering. Both CH2O and Meras are industrial water purification companies, with their principle places of business in Washington and California, respectively. Bernier and Sughroue signed non-competition agreements with CH2O that contained choice of law and forum selection provisions stating that all suits arising under the agreement would be heard in Thurston County, Washington. Both Bernier and Sughroe worked and lived in California and visited CH2O’s Washington office only twice.
On the same day that Bernier and Sughroue left CH2O, they filed suit along with Meras in the Northern District of California seeking declaratory judgment against CH2O to void their non-competes. Six days later, on February 2, 2011, Meras filed suit against Bernier and Sughroue in Washington state court seeking enforcement of the same non-competition agreements. Bernier and Sughroue then successfully removed the Washington case to federal court and moved to dismiss, stay, or transfer the Washington case to the Northern District of California under the first-to-file rule. The Washington federal court denied this motion because of the forum selection clause in the agreements. Following Bernier’s and Sughroe’s unsuccessful attempts to transfer the Washington case, the Washington court granted two separate stipulated stays, the first of which was lifted on May 23, 2012. The second stay, which was granted because Bernier filed for bankruptcy, was lifted on September 6, 2012, but only with respect to CH2O’s claims for injunctive relief.
With the proceedings in Washington stayed until the resolution of Bernier’s bankruptcy case, CH2O brought a motion to stay the California case pending the outcome of the Washington case. CH2O based its argument on the fact that Washington courts had already ruled that the choice of law clause in Bernier’s and Sughroue’s non-competes was enforceable and therefore Washington law should decide this case. Plaintiffs objected, stating that the California case was more advanced than the Washington case, which meant that the “gravitational pull” of the litigation was toward California, not Washington.
Using the test laid out in Landis v. North American Company, 299 U.S. 248, (9th Cir. 1962), Judge Chen pointed out that the simple fact that Meras was not a party to the Washington case was sufficient to show that plaintiffs would suffer “a fair possibility of harm” if the stay in California were granted, as a resolution of the Washington case would directly impact Meras’s rights without allowing it to participate in the litigation. This, in conjunction with the fact that CH2O did not successfully show how it would be harmed if the case were to proceed, led Judge Chen to deny CH2O’s request for a stay in California.
Judge Chen then moved on to the forum selection clause in Bernier’s and Sughroue’s non-competition agreements. Nowhere in its motion to stay did CH2O raise this issue; however, it was an element of Plaintiffs’ motion for summary judgment, which Judge Chen also ruled on in this order. After resolving the question of whether or not CH2O had waived the issue of venue through its conduct, Judge Chen rejected Plaintiffs’ claim that the enforcement of the forum selection would violate California public policy. The basis of Plaintiffs’ argument was that the enforcement of the forum selection clause would lead to the application of Washington law, which, because Washington allows for certain non-competition agreements, would create a result that is contrary to California public policy. Judge Chen took issue with this three-part chain of events and Plaintiffs’ conflation of enforcing a forum selection clause and deciding what law applies. Forum selection and choice of law are two very distinct questions. There is nothing in the forum selection clause that “dictate[s] a priori” that Washington law would apply, and simply having a case heard in a different forum is not contrary to California public policy. Therefore, by severing the tie between where the case is heard and what law will apply, Judge Chen reasoned that the forum selection clause in Bernier’s and Sughroue’s non-competes was enforceable and valid and that their case should be dismissed.
This order reaffirms the recent trend out of California federal courts when it comes to forum selection clauses in non-competition agreements. Just as Northern District judges did in Hartstein v. Rembrandt (2012 WL 3075084, N.D. Cal., July 30, 2012) and AJZN v. Yu (2013 WL 97916, N.D. Cal., January 07, 2013), Judge Chen refused to look beyond the procedural effects of the forum selection clause and into its substantive ramifications. As this string of cases has made clear, the “contrary to California public policy” element of the Bremen test extends only as far as ensuring that all parties have their procedural rights protected at the same level that they would California (M/S Bremen v. Zapata Off–Shore Co., 407 US 1). Anything that delves into the substance of the transferee court’s handling of a California case — such as that court’s choice of what substantive law should apply — is beyond the scope of what California federal courts will consider when ruling on the enforceability of a forum selection clause.
That said, this order is by no means carte blanche for defendants looking to enforce forum selection clauses and other courts may disagree with the analysis. As Judge Chen is careful to point out, there are “some situations where a forum selection clause may have the effect of selecting the substantive law to be applied.” In these scenarios, forum selection clauses are not enforceable, but this of course leaves the door open for interpretation as to how exactly a court will define these “situations.” Judge Chen does provide some clarification when he explains that forum selection is appropriate as long as it does not “preordain” the choice of law, but again, at what point can one say that the result of a suit are preordained? The answers to these questions are uncertain, but one can be sure that this recent string of cases out of the Northern District of California has bolstered the power of forum selection clauses while also defined a standard to be used when deciding whether or not to enforce such provisions when non-competition agreements are at issue in the suit.