U.S. Supreme Court Resolves Enforcement of Forum Selection Provisions

The federal courts have been divided regarding how to handle motions to enforce contractual forum selection provisions. Some courts have held that the plaintiff’s choice of a forum other than the one provided by contract makes venue improper in the chosen district, and thus the defendant should move to dismiss or transfer the action pursuant to 28 U.S.C. § 1406(a) and Federal Rule of Civil Procedure 12(b)(3). Other courts have held that the appropriate mechanism to enforce a forum selection provision is the discretionary transfer procedure under 28 U.S.C. § 1404(a). If the discretionary transfer statute is used, a further question arises: Is the forum selection provision entitled to determinative weight, or is it just one of the numerous public and private factors the court may consider in making a discretionary transfer decision?

The Supreme Court went a long way toward resolving these questions in Atlantic Marine Construction Co. Inc. v. U.S. District Court for the Western District of Texas.(PDF) The court held that the choice of a district other than that selected in the parties’ contract does not make venue “wrong” or “improper” under the federal venue statutes. Accordingly, if the forum chosen by the parties’ contract is another federal court, the appropriate enforcement mechanism is a discretionary transfer motion under 28 U.S.C. § 1404(a). Since that statute governs only transfers among federal courts, a defendant seeking to enforce the selection of a state or foreign forum must move to dismiss the case on grounds of forum non conveniens.

The Supreme Court made it clear that in determining whether to transfer the case, the district court must ordinarily enforce a valid forum selection provision. The court need not weigh the private convenience factors that usually govern the determination of a transfer motion because the parties presumably addressed these issues in negotiating the forum provision.  Moreover, the plaintiff’s choice of forum, normally a heavy factor in transfer motions, is not entitled to special weight when the plaintiff has defied the forum selection provision. Finally, the Supreme Court clarified that, unlike the case of the usual discretionary transfer, the transferor court’s choice-of-law rules do not control the case after it is transferred to the contractually selected forum.

The unanimous opinion of the Supreme Court goes far in dispelling confusion, protecting freedom of contract and discouraging forum shopping. It brings welcome clarity into what had been a needlessly murky field.

A Tale of Three Cases: California's Split Over Concepcion Continues

In state and Federal courts throughout the country, the defense and plaintiffs’ bars are debating the application of the United States Supreme Court’s landmark 2011 decision in AT&T Mobility v. Concepcion, in which the Court made it significantly easier to enforce waivers of class arbitration in most consumer contracts. My post about Parisi, a new decision from the Second Circuit, is below.

Perhaps nowhere has this battle been more active than in California, the home of the Discover Bank rule overturned by the Supreme Court in Concepcion. As my colleague Michael Walsh reported here, the California Supreme Court heard argument in a case involving an arbitration clause yesterday. Today, I address three cases which illustrate the ongoing debate in California. All three were decided in the final two weeks of March, two in the Second District and one in San Francisco’s First District. The Second District twice refused to enforce arbitration clauses while the First found the clause before it fully enforceable.

Compton v. Superior Court (American Management Services LLC) was the first of the trio, decided by Division Eight of the Second District on March 19. Compton is a putative class action for alleged Labor Code violations in connection with wages.

The plaintiff had signed an arbitration agreement with the defendant when she began work as a property manager. The agreement contained a waiver of class arbitration. After she left her job, she filed her putative class complaint, alleging violations regarding the payment of minimum and overtime wages, rest and meal breaks and reimbursement of expenses. Although the defendant litigated the matter for a time, it immediately filed a petition to compel arbitration after Concepcion was handed down, pointing out that Concepcion had directly overturned Discover Bank and implicitly overruled Gentry v. Superior Court, the two decisions which would have made any earlier petition futile.  The trial court granted the petition, finding the agreement neither procedurally nor substantively unconscionable. The court labeled the plaintiff’s arguments about the purported one-sidedness of the agreement “largely hypothetical.”

The Court of Appeal reversed. According to the two-Justice majority, the agreement was substantively unconscionable because, in several respects, it was one-sided: the agreement required arbitration of the claims the employee was most likely to bring, but not those the employer would bring; it significantly shortened the time limit for the employee to seek arbitration in comparison to the relevant statutory limitations, but imposed no similar limits on the employer; and it suggested that the arbitrator could decline to award attorneys fees in situations where statutes made such an award mandatory. The majority rejected the employer’s argument that cases providing that one-sidedness amounted to substantive unconscionability had not survived Concepcion, writing that “the judicial forum affords plaintiffs” certain advantages which cannot fairly be retained for only one side’s claims. The agreement was also procedurally unconscionable, in the majority’s view, because it failed to disclose the “disadvantages” of arbitration as provided for by the contract over litigation. Presiding Justice Tricia A. Bigelow filed a compelling dissent, arguing that California’s law of unconscionability must be viewed through the lens of Concepcion. She pointed out that the agreement was bilateral with respect to arbitration of wage-and-hour claims, and that the parties hadn’t even raised the issues of attorneys fees and time limitations which the majority had relied upon. “I am compelled to follow the law which incorporates a strong public policy in favor of arbitration,” Presiding Justice Bigelow wrote.

A week after Compton, Division One of the Second District decided Fowler v. Carmax. Fowler was another wage-and-hour case involving an employment agreement expressly waiving class arbitration. After Concepcion, the employer moved to compel arbitration. The trial court granted the petition, finding that Gentry had not survived Concepcion and that plaintiff’s claim under the Private Attorneys General Act was arbitrable on an individual basis. (This PAGA argument is central to Iskanian v. CLS Transportation Los Angeles, an arbitration case from Division Two of the Second District currently before the Supreme Court).

Division One reversed. The Court found “only some evidence” of procedural unconscionability, noting that although the contract had been presented on a take-it-or-leave-it basis, plaintiff made no claim of surprise. Nor did the employer’s reserved right to terminate or modify the agreement on thirty days notice render it substantively unconscionable, according to the Court. The problem was, according to the Court, Gentry was still good law after Concepcion. Therefore, any class action waiver in an arbitration clause of an employment agreement was per se unconscionable if it interfered with employees’ ability to vindicate “unwaivable rights and to enforce the overtime laws.” The Court accordingly remanded the case back to the trial court to determine whether the Gentry rule required that the class action waiver be thrown out.

The day after Fowler was decided, Division One of the First District decided Vasquez v. Greene Motors, and this time, the arbitration clause fared better. Vasquez involved an installment sales contract for a used car. The plaintiff sued under various state statutes, alleging that the financing terms in the contract were inaccurate. The defendant filed a petition to compel arbitration, but the trial court denied the petition, finding the clause unconscionable by reason of “adhesion, oppression and surprise.”

The Court of Appeal unanimously reversed. The mere fact that the arbitration clause was presented in a preprinted form on a take-it-or-leave-it basis made it procedurally unconscionable, the Court conceded, but the degree of unconscionability was relatively minor. Such non-negotiable forms are ubiquitous, and given how highly regulated such transactions are, they may well be the only way for merchants to ensure compliance with the law. Although the plaintiff complained about the densely printed double-sided single sheet contract, the Court pointed out that the use of a single sheet was arguably required by state law, and a multiple-sheet contract would have made it easier to bury the arbitration clause.

The Court’s discussion of substantive unconscionability makes an interesting contrast to the majority in Compton. The Court found that mere one-sidedness was not enough to make an arbitration clause substantively unconscionable. After the Supreme Court’s decision in Pinnacle Museum Tower Ass’n v. Pinnacle Market Development, the agreement must be so seriously one-sided as to shock the conscience in order to be unconscionable. Unconscionability turned not only on one-sidedness, the Court found, but on the absence of any justification for it. The Court carefully reviewed the few grounds raised by plaintiff for finding the arbitration clause one-sided, and concluded that none shocked the conscience, and all were arguably justified. Because the agreement was only minimally procedurally unconscionable, and not substantively unconscionable at all, it was necessarily enforceable.

It seems likely that only clear guidance from the California Supreme Court will bring to a close the distinctions among the Court of Appeal districts in the enforceability of arbitration clauses. With several arbitration clauses on the high court’s docket, that guidance may well come soon.

Don't Panic - The Fall of Pendergrass and Restoring the Full Fraud Exception to the Parol Evidence Rule May Not Be as Bad as You Think.

In Riverisland Cold Storage, Inc., v. Fresno-Madera Prod. Credit Ass., S190581, the unanimous California Supreme Court recently overturned the widely criticized Pendergrass rule, thus restoring the full breadth of the fraud exception to the parol evidence rule. In 1935, the Court limited the fraud exception to the parole evidence rule - holding that evidence of a promise that was “directly at variance with the promise of the writing” was inadmissible.  (See, Pendergrass (1935) 4 Cal.2d 258, 263.)  This allowed defendants to demur to promissory fraud claims by citing the contract terms, or at least obtain summary judgment. This rule had put California in a minority of one, as it departed from the majority rule, the Restatement, and most treatises. Indeed, Riverisland concluded that Pendergrass is unsupported by the controlling statute (C.C.P. §1856), was contrary to then existing California law, has been widely criticized ever since (resulting in convoluted attempts to distinguish it), and can be used to shelter fraud (begging the question of how the Pendergrass rule managed to survive for nearly 80 years).

While there has been some hand wringing by potential defendants over losing the Pendergrass rule, and it will certainly be more difficult to resolve promissory fraud claims by demurrer or summary judgment, all is not lost. Consider:

  1. California now follows the majority rule, so most of the country has already adapted to this holding.
  2. Plaintiffs still have to meet the more demanding pleadings requirements for any fraud claim, and Riverisland confirms that the intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance.
  3. In Rosenthal, 14 Cal.4th 394, the Court held that the negligent failure to read a contract precludes a finding that it is void for fraud, although the threshold for this showing might be lower for equitable relief.
  4. Promissory fraud requires justifiable reliance on the defendant’s oral misrepresentation, which ties back into plaintiff’s negligent failure to read the contract.

The Supreme Court in Riverisland refused to decide whether the borrowers justifiably relied on the lender’s oral promises not to execute on the promissory notes for at least a year, notwithstanding the contract terms allowing prompt execution, given the borrowers’ failure to read the contract. So, how to balance these considerations remains an open question. While procedures to fend off such claims are often already in place, California businesses should proactively tighten up their practices and procedures to lessen the potential exposure that Riverisland represents, rather than wait for the courts to address these issues. In particular, the parties should customarily document that no oral promises were relied on in entering into the agreement.  In addition to fending off claims based on an oral promise, such documentation will presumably support an argument that the plaintiff was negligent in failing to read the contract. 
 

A Busy Month For the Economic Loss Rule

In the first three weeks of November, we've already seen two major decisions on the economic loss rule from two state Supreme Courts. The economic loss rule provides in most states that a plaintiff cannot sue in tort for disappointed commercial expectations, regardless of whether he had a contractual agreement with the defendants.

On November 4, a badly fractured Washington Supreme Court filed three separate opinions in Eastwood v. Horse Harbor Foundation, Inc. [pdf]

Eastwood arose from a lease on a horse farm. The owner accepted rent below the market rate in return for a promise to maintain, a covenant the lessee allegedly failed to keep. The owner sued for breach of the lease, negligence and waste. Nobody raised the economic loss rule before the trial court, and plaintiffs won. On appeal, nobody argued the economic loss rule. Nevertheless, the Court of Appeals held that the economic loss rule barred the negligence and waste claims.

The Supreme Court reversed.  According to the plurality, the economic loss rule -- which the Court renamed the "independent duty rule" -- isn't a rule at all. It simply means that a court decides on a case by case basis whether there is an independent tort duty involved under the facts presented:

An injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract. The court determines whether there is an independent duty of care, and 'the existence of a duty is a question of law and depends on mixed considerations of logic, common sense, justice, policy, and precedent.'

The plurality acknowledged that some courts have established a bright-line rule dividing economic losses from personal injury and property damage, but at least according to the plurality -- despite having apparently received the negotiated rent payments -- Eastwood hadn't received the benefit of its economic bargain. The plurality concluded that waste was a duty independent of the contract, so the "independent duty rule" didn't bar the claim.

Both concurrences argued that the plurality's analysis was largely unnecessary. According to Chief Justice Barbara Madsen and Justice Gerry Alexander [pdf], the case should have been easy: first, separation of powers barred the court from using the economic loss rule to wipe out a statutory cause of action for waste, and second, since Eastwood had received the benefit of the bargain -- rent payments -- the suit didn't seek economic loss anyway. In a concurrence signed by four members of the Court, Justice Tom Chambers wrote that a lot of the confusion surrounding the economic loss rule could be traced to the definition of "economic loss" in the Washington Product Liability Act, which encompassed virtually anything that could be expressed in dollars and cents. Justice Chambers wrote that Washington had never applied the rule outside the context of products liability, real property construction and property sales.

On November 15, the New Jersey Supreme Court weighed in with Dean v. Barrett Homes, Inc. [pdf] The homeowners bought a house fitted with synthetic stucco walls. A year after buying the house, the owners noticed damage to the walls; they hired an industrial hygienist, who found toxic mold. Plaintiffs sued, arguing that the synthetic stucco was defective. The trial court granted summary judgment, holding that plaintiffs' claims were barred by the economic loss rule, and the Appellate Court affirmed.

The Supreme Court reversed in part. Although the economic loss rule applied to plaintiffs' claims, the Court held that the doctrine did not fully bar the claim. The Court held that the integrated product doctrine -- which provides that the economic loss rule bars a claim for damage to a product where a component has been fully integrated into the whole -- did not apply to the synthetic stucco and home. Nevertheless, the Court held that the economic loss rule limited plaintiff's claim to damages caused to elements of the home outside of the synthetic stucco system itself.

Justice Roberto Rivera-Soto filed a spirited dissent. Quoting from a lengthy explanation of how a synthetic stucco system is installed on a house, Rivera-Soto concluded that the product "can only be removed by extensive demolition work." He labeled the majority's refusal to apply the integrated product rule as:

. . . so fanciful, so nonsensical, that it beggars the imagination. It is a conclusion that can germinate only in the minds of lawyers and can find root only in the rarified environment of this Court's decisions; it cannot, however, long survive in the atmosphere of the real world.

California Supreme Court Grants Review in Another Preemption Case

The Supreme Court has granted review to again address preemption, this time in the timely area of consumer protection and banking. In Parks v. MBNA American Bank, the Court of Appeal reversed a judgment on the pleadings, finding that Civil Code § 1748.9, a state consumer protection law which mandates specific notice requirements regarding the use of preprinted checks (aka convenience checks) as an advance on credit card accounts, was not preempted by the National Bank Act (12 U.S.C. § 21 et seq.) on its face. For more details about Parks, see the B & P 17200/Class Actions/Commercial update page.

Indiana Supreme Court Reaffirms Economic Loss Rule

In late March, I blogged on an important new case from the Tenth Circuit reaffirming the economic loss rule.  Last week, the Indiana Supreme Court handed down a major decision in a construction case, reaffirming this important principle of business law.

According to the economic loss rule, where a plaintiff has suffered merely economic loss – frustrated commercial expectations – the plaintiff is limited to suing in contract. Tort suits are barred. Once a plaintiff is restricted to contract remedies, limitations on liability provided in the contract will generally be enforced, and punitive damages are unlikely to be available. The economic loss rule is an important (and controversial) tool in business litigation, particularly in the construction industry -- so much so that, as I reported in May, the American Law Institute will shortly be resuming its work on the Restatement (Third) of Torts: Economic Torts and Related Wrongs, collecting the law of the economic loss rule from across the country.

Indianapolis-Marion County Public Library v. Charlier Clark & Linard[pdf] arose from the construction of a new library and parking garage in downtown Indianapolis. The Library contracted with an architectural firm, which, in turn, subcontracted with various architectural and engineering firms.   The Library also contracted directly with the general contractor for the project. A number of construction and design defects were found in the parking garage, and the Library sued the architects, the general contractor, and the subcontractors in tort. The defendants successfully moved to dismiss, arguing that the economic loss rule barred the Library's tort claims.

The Supreme Court affirmed. The Court noted several policy justifications for the economic loss rule. 

First, liability for purely economic loss is more appropriately determined by commercial rather than tort law.

Second, tort law should not be permitted to impose liability on commercial actors which is so uncertain in time, class or amount that the defendant has no way of allocating risk before acting.

The Library argued that a range of exceptions to the economic loss rule applied. The Library claimed that because it purchased discrete products from each defendant -- blueprints, materials, inspection services, and so on -- it had suffered damage to property other than the subject of its contracts, making the economic loss rule inapplicable. The Court disagreed, holding that each of the defendants' products was integral to a whole: the "product" for purposes of applying the "damage to property other than the product" exception to the economic loss rule was a renovated and expanded library facility, not any individual defendant's contribution to the project.

The Library also claimed that the Court should not apply the economic loss rule where the alleged flaws in the product or service created an imminent danger of physical harm to members of the public. The Court declined to carve out such an exception to the rule.

The Library next argued that the economic loss rule should not be applied to design professionals, but the Court followed a decision from the Arizona Supreme Court earlier this year, holding that the economic loss rule applied equally in construction defect cases to contractors and design professionals. The Court emphasized the importance, as a matter of policy, of applying the economic loss rule to all participants in a major construction project:

When parties are connected through a chain of contracts, as in the construction context, courts should defer to the language of the contracts governing their relationship . . . Such a rule promotes private ordering by respecting a commonly understood allocation of risk even though the relevant term may or may not be in the contract.

Finally, the Library argued that the economic loss rule should not apply where the defendants allegedly provided false information to the plaintiff, or where the defendants provided a service, rather than a product.   The Supreme Court refused to create a new exception to the economic loss rule to govern either case.

Every few years, articles appear predicting the death of the economic loss rule. But with new decisions from two state Supreme Courts in only four months, reports of its death are once again exaggerated.

Taxpayer Action Draws Significant Amicus Interest

Demonstrating the potential significance and broad implications of the California Supreme Court's deliberations in Loeffler v. Target Corporation, so far a total of nine amicus briefs have been filed on behalf of sixteen entities addressing the issue of whether a taxpayer can directly bring suit against a retailer who allegedly charged a sales tax on transactions that were not taxable. The concerned entities unwilling to wait on the sidelines range from consumer groups and taxpayer advocates to statewide and national retailers, as well as the California Attorney General and the California State Board of Equalization. Some of these had also filed briefs with the Court of Appeal, which barred the taxpayer claim.

Texas Supreme Court Civil Issues Pending: Commercial Law

[UPDATED THROUGH APRIL 1, 2010]

Commercially Reasonable Sales Upon Repossession.
Did the evidence establish that the sale of repossessed vehicles were commercially reasonable under the Uniform Commercial Code § 9.610. Regal Finance v. Tex Star Motors, No. 08 0148, formerly 246 S.W.3d 745 (Tex. App.—Houston [14th Dist.] 2008), review granted 03/27/09.