In a decision issued on October 31, 2019, the California Court of Appeal held that a lower court erred in enforcing a forum selection clause where it included a pre-dispute waiver of the right to a jury trial, which is unenforceable under California law. The court held that enforcement of the clause selecting a New York forum would “substantially diminish the rights of California residents in a way that violates our state’s public policy.”
In Handdoush v. Lease Finance Group, LLC (2019), Handdoush sued Lease Finance Group (LFG) alleging fraud, rescission, and violation of California Business and Professions Code § 17200. Handdoush had leased credit card processing equipment from LFG.
The lease agreement contained a provision stating the following:
- the lease shall be governed by the laws of the State of New York,
- any disputes shall be litigated in New York, and
- the parties waived their rights to a jury trial.
The forum selection clause was mandatory in that it required the parties to litigate exclusively in the designated forum, New York. While California law prohibits pre-dispute jury trial waivers under Grafton Partners v. Superior Court, 36 Cal. 4th 944 (2005) (“Grafton”), New York law allows such waivers and typically enforces them.
The trial court dismissed Handdoush’s claims based on the reasoning that he did not meet his “heavy” burden of demonstrating that the forum selection clause was unreasonable. Further, the trial court stated that “the right to trial by jury is not unwaivable” under California Code of Civil Procedure § 631.
The trial court also rejected Handoush’s argument that the burden shifted to LFG to demonstrate that the forum selection clause would not diminish Handdoush’s substantive rights because “such burden only applies where a plaintiff’s claim involves unwaivable rights created by California statutes.” Thus, the trial court granted LFG’s motion to dismiss Handdoush’s claims.
However, the Appellate Court reasoned that because the California Constitution contained a provision that “the right to jury trial shall be preserved by the parties inviolate,” the right to a jury trial is a “constitutional” right. The right to a jury trial is both “fundamental” and “sacred” pursuant to the holding in Grafton.
The Appellate Court concluded that because Handdoush raised a constitutional right – the right to a jury trial – inviolate under the California Constitution, it is unwaivable at the predispute stage under California law.
Thus, it was the burden of the defendant, LFG, to prove that enforcement of the forum selection clause would not diminish Handdoush’s substantive rights. Further, LFG failed to show that it would not substantially diminish the rights of California residents in a way that violates California’s public policy.
In conclusion, the Appeals Court held that the trial court erred in enforcing the forum selection clause in favor of a New York forum. The case was remanded for the superior court to enter an order denying LFG’s motion to dismiss.
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