Forum Selection Bylaws And The California Constitution

by Allen Matkins
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Last December, I briefly discussed whether a forum selection bylaw with respect to officers and directors would pass muster as a contractual choice of law. See A Forum Selection Clause Issue That You May Not Have Heard About Until Now. It also occurs to me that forum selection bylaws might run afoul of the California Constitution.

What does the California Constitution have to say about corporate bylaws. Actually, nothing in particular. However, Article 1, Section 16 of the California Constitution provides in relevant part:

Trial by jury is an inviolate right and shall be secured to all, but in a civil cause three-fourths of the jury may render a verdict. A jury may be waived in a criminal cause by the consent of both parties expressed in open court by the defendant and the defendant’s counsel. In a civil cause a jury may be waived by the consent of the parties expressed as prescribed by statute.” (Emphasis added.)

In Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005), the California Supreme Court interpreted this provision as rendering unenforceable predispute contractual jury trial waivers.

Most of the discussion of bylaw forum selection clauses has explicitly or implicitly assumed that the chosen forum will be Delaware. See, e.g., Joseph A. Grundfest & Kristen Amy Savelle, The Brouhaha Over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis (Nov. 20, 2012) (“The overwhelming majority of these entities are Delaware chartered corporations seeking to resolve intra-corporate litigation in Delaware courts.”) available at: http://ssrn.com/abstract=2164324. As a court of equity, however, the Delaware Court of Chancery does not have jury trials. See Donald F. Parsons Jr. and Joseph R. Slights III, The History of Delaware’s Business Courts: Their Rise to Preeminence, 17 Business Law Today (March/April 2008). Thus, it remains to be seen whether Delaware forum selection bylaw provisions will be attacked as unconstitutional waivers of the right to a jury trial.

In a recent decision issued last week, however, U.S. District Court Judge Lucy H. Koh declined to strike down Delaware forum selection provisions in two agreements as unconstitutional, pre-dispute jury trial waivers:

Regarding the jury trial waiver, AJZN has explained that California does not enforce presuit jury trial waivers, and has argued that “there is a risk that Delaware courts would enforce” the jury trial waiver in the Warrant Agreement, which would be in contravention of California’s strong public policy. Opp’n at 17. AJZN, however, has cited no case in which a federal court, or even a California court, has declined to enforce a forum selection clause on this basis. 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. Argueta [v. Banco Mexico], 87 F.3d [320] at 325 [9th Cir. 1996] (emphasis added). Thus, AJZN has not established that enforcing the forum selection clause would contravene a strong California public policy against jury trial waivers.

AJZN, Inc. v. Yu, 2013 U.S. Dist. LEXIS 2943 (Jan. 7, 2013). This ruling, however, does not answer the question of whether a forum selection bylaw specifying the Delaware Court of Chancery would survive a constitutional challenge because Judge Koh transferred the case to the U.S. District Court in Delaware, which does have jury trials.

 

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Allen Matkins
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