In a reported decision, Judge Wick of the California Court of Appeal, First District, Division 3, found that the forum selection clause in a contract between plaintiff and defendant was invalid based on a predispute jury waiver.
Citation:
Handoush v. Lease Finance Group, LLC, 41 Cal.App.5th 729 (2019)
Executive Summary:
In a reported decision, Judge Wick of the California Court of Appeal, First District, Division 3, found that the forum selection clause in a contract between plaintiff and defendant was invalid based on a predispute jury waiver.
Relevant Background:
On January 21, 2016, Zeaad Handoush (“Plaintiff”) filed suit against Lease Finance Group, LLC (“Defendant”) in the State of California alleging Defendant defrauded Plaintiff regarding a lease agreement for credit card processing equipment (“Lease”) among other causes of action. The Lease states in relevant part:
GOVERNING LAW; CHOICE OF FORUM; WAIVER OF JURY TRIAL; LIMITATION OF ACTION. You and we agree that our acceptance and execution of the Lease at our executive office in the City and State of New York shall be the final act necessary for the formation of this Lease. Thai Lease, and any and all actions, proceedings, and matters in dispute between you and us, whether arising from or relating to the Lease itself, or arising from alleged extra-contractual facts prior to, during, or subsequent to the Lease (all collectively referred to hereafter as a “Dispute”), shall be governed by the State of New York, without regard to the conflict of law, rules or principles thereof. All Disputes shall be instituted and prosecuted exclusively in the federal or state courts located in the State and County of New York notwithstanding that other courts may have jurisdiction over the parties and the subject matter. YOU AND WE WAIVE, INSOFAR AS PERMITTED BY LAW, TRIAL BY JURY IN ANY DISPUTE …
On November 11, 2016, Defendant moved to dismiss the complaint under Code of Civil Procedure section 410.30, subdivision (a), based upon the forum selection clause in the Lease. The Superior Court granted Defendant’s motion. Plaintiff appealed.
Decision:
The Court of Appeal reversed the Superior Court’s decision to enforce the Lease’s forum selection clause. The relevant findings in the Court’s analysis were as follows:
- “A mandatory forum selection clause such as the one at issue here is generally given effect unless enforcement would be unreasonable or unfair, and the party opposing enforcement of the clause ordinarily bears the burden of providing why it should not be enforced.” Verdugo v. Alliantgroup, L.P., 237 Cal.App.4th 141, 147 (2015).
- 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 in any way the substantive rights afforded … under California law.’”
- “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.” America Online, Inc. v. Superior Court, 90 Cal.App.4th 1 (2001).
- Section 631 of the Code of Civil Procedure states, “The right to a trial by jury as declared by Section 16 of Article I of the California Constitution shall be preserved to the parties inviolate…”
- While California law holds predispute jury trial waivers are unenforceable, it is undisputed that under New York law there is no similar prohibition.
- Citing Wimsatt v. Beverly HIlls Weight etc. Internat., Inc., 32 Cal.App.4th 1511 (1995), the Court analogized this predispute jury trial waiver to forum selection clauses in franchise agreements and the manner in which courts analyze this issue under California Franchise Investment Law and California Business and Professions Code section 20040.5. Specifically, the Court stated: “Given California’s inability to guarantee application of its Franchise Investment Law in the contract forum, its courts must necessarily do the next best thing [and invalidate the forum selection clause and allow litigation to proceed in California].”
- “Although Handoush’s claims are not based on a statutory scheme, we find that enforcing the forum selection clause here would be contrary to California’s fundamental public policy protecting the jury trial right and prohibiting courts from enforcing predispute trial waivers.”
Looking Forward:
While this matter only references California franchise law in passing, the matter reinforces an important point that was discussed in the matter of Fleming v. Matco Tools Corporation, et al. 384 F.Supp.3d 1124 (Cal.N.D. 2019) earlier this year. Specifically, in Fleming, the Court invalidated the forum selection clause based on a predispute waiver of PAGA claims. Here, the Court invalidated a forum selection clause based on a predispute jury waiver. Consequently, for those franchisors who seek to take advantage of the Federal Arbitration Act’s preemption of Section 20040.5 or utilize some other avenue for litigating a dispute with a California franchisee outside of the State of California, it is critical that the franchise agreement’s litigation related sections do not run afoul of California law.
This article was originally published on the California Franchise Network.
