Business Law

California Appellate Court Determines that a Forum Selection Clause with a Pre-Dispute Jury Trial Waiver is Unenforceable under California Law

On October 31, 2019, the California Court of Appeal, First Appellate District, in the case of  Handoush v. Lease Finance Group, LLC, 2019 Cal. App. LEXIS 1078, Cal. Ct. Appeal Case No. A150863 (Oct. 31, 2019), reversed the decision of the trial court and held that a New York forum selection clause and choice of law clause in the parties’ lease agreement for equipment deprived plaintiff of his substantive right to a jury trial and was thus unenforceable under California law.

Article I, section 16 of the California Constitution provides that the right to a jury trial is “an inviolate right” and that in civil cases may only be waived by the parties as prescribed by statute. In Grafton Partners v. Superior Court, 36 Cal.4th 944 (2005), the California Supreme Court held that the statutory waiver provisions were exclusive and only applied once a lawsuit had been filed, thus invalidating pre-dispute jury trial waivers.

In Handoush, the appellate court indicated that although mandatory forum selection clauses are generally enforceable and the party challenging such enforcement typically bears the burden of showing the clause to be unreasonable or unfair, the burden shifts to the party attempting to enforce the clause if substantive rights under California law are at stake. Here, since the court was of the view that New York law does not prohibit pre-dispute jury trial waivers, Lease Finance Group “failed to show that enforcement of the [New York] forum selection clause would not substantially diminish the rights of California residents in a way that violates our state’s public policy.”

Although not discussed in Handoush, in 2013 a federal district court judge in California, in the case of AJZN, Inc. v Yu, 2013 U.S. Dist. LEXIS 2943, rejected a similar challenge to a Delaware forum selection clause in a warrant agreement: “Nor has AJZN suggested that a Delaware court would be likely to enforce the jury trial waiver. A mere unspecified ‘risk’ that a court could, in theory, enforce the waiver, without any citation to authority suggesting that this is a likely outcome, cannot carry AJZN’s heavy burden to establish that ‘enforcement of the clause would contravene a strong public policy’ of California. [citation omitted, emphasis in original]. Thus, AJZN has not established that enforcing the forum selection clause would contravene a strong California public policy against jury trial waivers. AJZN has not argued that the forum selection clause in the Warrant Agreement was the result of fraud or would entirely deprive AJZN of its day in court. Accordingly, AJZN has not established that forum selection clause is unenforceable here.”

The use of forum selection clauses in bylaws has risen in recent years. It is conceivable that the holding in Handoush could be extended to bylaws with non-California forum selection provisions, at least to the extent that such clauses purport to apply to shareholder claims that give rise to a right to jury trial under California law.

This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.

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