September 21, 2023 (Modified October 10, 2023)
By: Thomas O’Connell
Citation:
EpicentRx, Inc. v. Superior Court, 95 Cal. App. 5th 890 (Cal. Ct. App. 2023)
Executive Summary:
In this published decision, the California Court of Appeal for the Fourth District, Division 1, addressed the enforceability of forum selection clauses in corporate documents under California law. The court denied a petition for a writ of mandate filed by EpicentRx, Inc. (defendant), challenging a lower court’s refusal to dismiss a lawsuit brought by EpiRx, L.P. (plaintiff), a minority shareholder on forum non conveniens grounds. The appellate court affirmed the lower court’s ruling, holding that enforcing the clauses would violate California’s public policy by depriving the plaintiff of its right to a jury trial as protected under Article I, Section 16 of the California Constitution.
Relevant Background:
EpicentRx, Inc., a Delaware-incorporated biotechnology company with headquarters in California, was sued by EpiRx, L.P., a minority shareholder, in the Superior Court of San Diego County. The lawsuit alleged fraudulent concealment, promissory fraud, breach of contract, breach of fiduciary duty, and violations of California’s Unfair Competition Law (UCL) under Business and Professions Code § 17200.
The plaintiff claimed that certain defendants solicited investments in exchange for shares in EpicentRx, misappropriated funds for personal use, and failed to deliver the promised shares. The plaintiff also alleged that EpicentRx obstructed its access to corporate records, contrary to shareholder rights. A jury trial was demanded for all claims where such a right applied under California law.
EpicentRx moved to dismiss the complaint under California Code of Civil Procedure § 418.10(a)(2), relying on forum selection clauses in its certificate of incorporation and bylaws, which designated the Delaware Court of Chancery as the exclusive forum for shareholder disputes. The trial court denied the motion, finding that enforcing the clauses would contravene California’s prohibition on pre-dispute jury waivers.
Decision:
The California Court of Appeal affirmed the trial court’s ruling, focusing on the following points:
- The court found that the Delaware Court of Chancery, a court of equity, does not provide jury trials. Thus, enforcing the forum selection clauses would effectively waive the plaintiff’s constitutional right to a jury trial. Such predispute waivers are prohibited under Article I, Section 16 of the California Constitution and Code of Civil Procedure § 631.
- The court clarified that when a claim involves unwaivable statutory or constitutional rights, the party seeking to enforce forum selection clauses must demonstrate that enforcement would not undermine those rights. EpicentRx failed to meet this burden.
- Although the internal affairs doctrine generally applies to matters of corporate governance governed by the law of the state of incorporation, the court held that California law governs the enforceability of forum selection clauses when the claims are filed in California and implicate state statutory rights, such as those under the UCL.
- EpicentRx argued that the forum selection clauses did not constitute pre-dispute jury waivers. The court rejected this argument, emphasizing that the practical effect of enforcing the clauses would deprive the plaintiff of its right to a jury trial, violating California public policy.
Looking Forward:
This case reinforces several important considerations for franchisors:
- This decision reinforces California’s strong public policy protections for the constitutional right to a jury trial. Franchisors and other entities operating in California should carefully evaluate the enforceability of forum selection clauses, particularly when disputes involve statutory claims or public policy concerns.
- Entities should ensure compliance with California laws when structuring corporate governance provisions and dispute resolution mechanisms. While the internal affairs doctrine remains significant, its application may not shield forum selection clauses from scrutiny under California’s stringent public policy framework.
- As courts continue to navigate these issues, franchisors must remain vigilant and adapt their corporate practices to mitigate potential legal challenges.