Forum selection clauses have long been a feature of commercial contracting. Since then-Chancellor Strine’s decision in Boilermakers Local 154 Ret. Fund v. Chevron Corp., Delaware corporations have routinely included such clauses in their articles of incorporation and bylaws, requiring that stockholders assert breach of fiduciary and other claims against the company and its directors and officers in the Delaware courts. These clauses minimize litigation costs and provide parties with certainty that any future disputes will be heard by a court with extensive business expertise.
In EpicentRx, Inc. v. Superior Court of San Diego (EpiRx, LP), the California Supreme Court considered the enforceability of a mandatory Delaware Court of Chancery forum selection clause in a corporate charter. The court overturned the lower courts (whose decisions are reported on here), holding that California’s public policy favoring jury trials in civil actions cannot alone render such clauses unenforceable.
Case background
EpiRx, LP, a minority stockholder in biotechnology corporation EpicentRx, Inc., sued EpicentRx, its controlling shareholder, and several individuals in California state court for breach of contract, fraudulent concealment, breach of fiduciary duty, promissory fraud and unfair business practices.
Defendants moved to dismiss on forum non conveniens grounds, arguing that the forum selection clause in EpicentRx’s articles of incorporation required the action to be brought in the Delaware Court of Chancery. The trial and appellate courts concluded that the forum selection clause operated as an implied, predispute waiver of the plaintiff’s right to a jury trial because the Delaware Court of Chancery, as an equitable court, does not provide jury trials. They found the clause unenforceable because it contravened California’s public policy in favor of juries in civil cases.
The court’s reasoning
The California Supreme Court reversed. It first noted two general forum non conveniens principles guiding its decision. Courts may dismiss if the alternate forum is “suitable,” meaning it has jurisdiction and an unexpired statute of limitations, regardless of whether the law of the alternate forum is as favorable or the recovery as easy as that in the plaintiff’s chosen venue. Second, under Bremen v. Zapata Off-Shore Co., forum selection clauses should be enforced unless the party resisting enforcement can show that enforcement would be unreasonable and might “contravene an important public policy of the forum” as “declared by statute or judicial decision.” While this provides trial courts some discretion to reject forum clauses based on their state’s public policy, EpicentRx exemplifies how limited this leeway can be.
As a threshold matter, the California Supreme Court disagreed with the plaintiff-respondent’s characterization of the forum selection clause as a predispute jury trial waiver. It explained that the two provisions have different purposes: A forum selection clause “reflects where a dispute will be litigated, while [a predispute jury trial waiver] reflects how it will be litigated” (emphasis in original).
This distinction dovetails with the court’s determination that jury rights are procedural, not substantive, rights. The lower court had concluded that the right was sufficiently intertwined with substantive rights such that burden shifting was required. That is, instead of requiring the plaintiff to show that enforcement would be unreasonable, the lower courts burdened the defendants with showing that enforcement would not diminish the plaintiff’s jury right. The California Supreme Court held that this approach was not warranted for a procedural right.
Further, the state’s public policy must be clearly stated in statute or the state constitution to serve as grounds to disregard a forum clause. Here, the respondent’s public policy argument was too attenuated. The respondent argued that California’s public policy against jury trial waivers was evident from a statute specifying the limited ways in which one may validly waive their right to a jury. The California Supreme Court read the statute more narrowly. It concluded that the statute does not “void jury trial waivers that do not conform [to its terms] . . . or prohibit parties from agreeing to them” writ large. Instead, it merely prohibits enforcement of nonconforming waivers in California. Thus, strict statutory interpretation may help litigants enforce forum clauses despite state public policy.
The court’s reading of its own state’s policy reflects its recognition of the geographical limits of state power. Throughout the EpicentRx decision, the California Supreme Court emphasized that the jury waiver statute the plaintiffs cited concerned “the right to a jury trial in California courts, not elsewhere.” If all a litigant had to do to avoid a previously agreed upon forum was to establish jurisdiction and venue in a California court and request a jury there, then the Golden State would have become a “magnet” for forum disputes — giving short shrift to parties’ freedom to contract.
Conclusion
The decision reaffirms the general enforceability of Delaware mandatory forum clauses. As noted, such clauses provide issuers with substantial benefits including certainty of forum and procedure and an informed judiciary with a long history of dealing expeditiously with corporate disputes. However, the respondent may still raise certain specific, as applied, defenses to the clause on remand. For example, EpiRx had argued that because EpicentRx had amended its articles of incorporation to include the forum clause after the alleged fraud was discovered, EpiRx had not “freely and voluntarily negotiate[d]” the clause.
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