Forum Selection Bylaws – Why A California Court May Not Follow Delaware

Forum selection bylaws are likely to become even more popular after this week’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013).  In that case, Chancellor Leo E. Strine, Jr. found that forum selection bylaws are (i) statutorily valid under 8 Del. C. § 109(b); and (ii) contractually valid and enforceable.  Even assuming that the Delaware Supreme Court agrees with Chancellor Strine, the decision is far from the last word and is not even the most important word.  Ultimately, it will be for the courts in 49 other states to decide whether they agree.

Here in California, I expect that plaintiffs will try to set aside forum selection clauses on the basis of Article 1, Section 16 of the California Constitution which 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.”

In Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944 (2005), the California Supreme Court interpreted this provision as rendering unenforceable pre-dispute contractual jury trial waivers.  The Delaware Court of Chancery is a court of equity and doesn’t generally have jury trials.  These plaintiffs will likely have to contend with AJZN, Inc. v. Yu, 2013 U.S. Dist. LEXIS 2943 (Jan. 7, 2013), in which Judge Lucy H. Koh rejected a challenge to forum selection clauses on this basis.  However, that case involved transferring the case to the U.S. District Court in Delaware, a court that does hold jury trials.

The Chancellor Strine’s opinion also makes it clear that the plaintiffs had made a facial challenge to the bylaws. Because Delaware presumes bylaws to be valid, the plaintiffs had assumed an almost impossible burden of showing that “the bylaws cannot operate lawfully or equitably under any circumstances” (emphasis in the original).  This approach is eerily reminiscent of the judicial deference to agency rulemaking before the enactment of the Administrative Procedure Act:

When legislative action “is called into question, if any state of facts reasonably can be conceived that would sustain it, there is a presumption of the existence of that state of facts, and one who assails the classification must carry the burden of showing . . . that the action is arbitrary”.

Pacific States Box & Basket Co. v. White, 296 U.S. 176 (1935).  I expect that many challenges to forum selection bylaw provisions in California will not be facial challenges but directed at specific factual circumstances.  Thus, the plaintiffs may not face the well-nigh insurmountable hurdle invoked by Chancellor Strine.

Finally, California has enacted numerous statutory provisions that apply to foreign corporations.  For example, California imposes its shareholder and director inspection statutes on many foreign corporations.  Section 1603 of the Corporations Code, provides that the Superior Court may enforce these rights.  Thus, the question may arise as to whether a forum selection clause can trump a California statute.

 

Topics:  Bylaws, Contract Interpretation, Forum Selection Clause

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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