MCLE Article and Self-Assessment Test A Funny Thing Happened on the Way to the Forum
Richards v. Lloyd's of London could signal a reversal of the two-decades-long inviolability of contractual clauses governing law and forum
By Michael L. Novicoff
Michael L. Novicoff is a partner in the Beverly Hills firm of Reuben & Novicoff whose practice emphasizes international commercial disputes and entertainment law matters.
On August 25, 1997, just as this article went to press, the United States Court of Appeals for the Ninth Circuit announced an en banc hearing in Richards v. Lloyd's of London, No. 95-55747, and scheduled the hearing for October 23, 1997.
Almost nothing inspires so much confidence-and so much fear-among lawyers as well-drafted clauses specifying choice of law or forum selection. International transactional lawyers who include such clauses in the contracts they prepare traditionally have been able to assure their clients that the law of their home jurisdictions will govern their commercial activities, rather than the law of some distant or alien judicial system. Similarly, and equally important, clients have used choice-of-law and forum-selection clauses to protect themselves against some unwelcome feature of domestic law, such as tort or punitive damages for claims arising from commercial activity. Litigators generally agree with these assessments and often reject more favorable jurisdictions or claims in deference to these clauses, because they assume that no court will contravene the parties' express stipulation-made before any troubles arose-about the way in which their affairs should be judged.
Contrary to common understanding, however, judicial acceptance of clauses in private contracts specifying choice of law and forum selection is a relatively recent development. In fact, before 1977, California courts were clearly hostile to contractual specifications of forum or governing law. Now a recent Ninth Circuit decision, Richards v. Lloyd's of London,1 may make it possible for creative litigators to once again defeat choice-of-law and forum-selection clauses and assure a local forum, and the application of local law, in many international contractual disputes-unless the contract at issue also contains an arbitration clause.
The rules that governed choice of law and forum selection in California for most of this century had their roots in General Motors Acceptance Corporation v. Codiga,2 a 1923 debt collection case brought in cosmopolitan San Francisco by the General Motors Acceptance Corporation. The less affluent defendant had preferred to litigate in his home county of San Joaquin, where ordinarily the case would have been filed under California's venue statutes and rules of personal jurisdiction. GMAC, however, had included in its form note a provision allowing suit to be brought in any U.S. court of its choosing-and it generally chose big cities.
The defendant nonetheless was granted a change of venue by a sympathetic court of appeal, which constructed a somewhat tortured analysis under which the parties' agreement to litigate in alternative forums was seen as a stipulation to divest the San Joaquin courts of jurisdiction. Seeing the forum selection in that light, the court of appeal struck it down and held flatly that "in California, parties to litigation may not stipulate away the jurisdiction of any court."3
That analytic framework haunted California's jurisprudence for many years. As the state's economy grew and its political independence developed, the principles of GMAC were often invoked by courts mindful of the state's geographic distance from other centers of national and international commerce. California judges generally did what they could to deny enforcement of choice-of-law and forum-selection clauses that might force parties into expensive litigation in faraway places such as New York or London, or require California litigants to proceed under some alien, and perhaps more parochial, governing law. Indeed, the California Supreme Court held as late as 1967 that the "state is concerned with the welfare of California residents and has a decided interest in assuring that its citizens are not denied damages because of the inconvenience or expense of bringing suit in a distant jurisdiction."4 That unambiguous declaration of public policy allowed judges across the state to deny enforcement to forum selections in otherwise lawful contracts, and they generally accepted the invitation of any California resident to do so.
Such blatant protectionism may have been alive in California in 1967, but it was already dead or dying almost everywhere else. By 1972, even the U.S. Supreme Court had recognized that the form of strained analysis applied in California-that forum-selection clauses somehow constituted an unconstitutional private divestiture of judicial jurisdiction-was "hardly more than a vestigial legal fiction…[that] reflects something of a provincial attitude regarding the fairness of other tribunals."5
California finally caught up with the national trend in 1977, when the California Supreme Court issued its landmark decision in Smith, Valentino & Smith, Inc. v. Superior Court (Life Assurance Company of Pennsylvania).6 Smith, Valentino overruled GMAC and announced an absolute rejection of California's "common law view disfavoring forum-selection clauses." Breaking completely with the past, the state supreme court followed the lead established by the federal Supreme Court and threw California's jurisprudence into the modern age, holding expressly that "mere inconvenience and additional expense do not make a negotiated and voluntary choice of forum unreasonable."7
In the 20 years since Smith, Valentino, California courts have gone out of their way to recognize their state's place in an increasingly interdependent international economy and now acknowledge proudly that "[f]orum- selection clauses are important in facilitating national and international commerce, and as a general rule should be welcomed."8 Choice-of-law clauses have been routinely drafted (by transactional lawyers) and interpreted (by litigators) with the expectation that they will govern not only claims for breach of contract but also tort and perhaps even criminal claims related to the contract's commercial purpose. Those expectations hardly seem misplaced, since in California and in most other U.S. jurisdictions the courts have been careful to balance the growth of commercial tort law with a recognition that "tort, criminal law, and antitrust law claims often intertwine with commercial contractual issues" and so should all be subject to the parties' previous selections of law and forum.9
Opposition to these developments, however, has been steady, and some critics-perhaps believing that the boilerplate included in most contracts is drafted to favor the more powerful economic actor-have always disagreed with any doctrine that permits a party to bargain away the protection or application of domestic law. Justice Mosk is the only sitting member of the California Supreme Court to have participated in the Smith, Valentino decision, and he wrote a blistering dissent. Condemning what he called "forum shopping by prearrangement,"10 Justice Mosk warned that "a plaintiff denied the opportunity to be heard in the courts of his home state" would find "dubious comfort" in the "gossamer thin [legal] distinction[s]" responsible for the modern trend embracing forum-selection clauses.11
It has long been a maxim of jurisprudence that "dissents have gradually become majority opinions,"12 and Justice Mosk's dissent may yet carry the day. The rule of Smith, Valentino is in peril, and this time the federal courts-albeit the ones sitting in California-are leading the retreat.
Richards v. Lloyd's of London13 was one of a series of cases heard in various courts throughout the United States following the restructuring of Lloyd's of London. The suits were brought by U.S. citizens who had signed contracts agreeing to become Names of Lloyd's-individual members of insurance syndicates who pledge unlimited personal liability for syndicate losses in exchange for the opportunity to realize a profit from passive participation in the generally lucrative insurance industry. The Names of Lloyd's traditionally have been members of the European gentry, but between 1970 and 1993 Lloyd's apparently sought to increase its underwriting capacity by recruiting several thousand new Names from among the most wealthy U.S. citizens. The New World Names signed the appropriate contracts with Lloyd's and waited for the money to roll in.
In fact, the American Names' money rolled the other way, right back to London to cover the mounting losses of the syndicates they had joined. Eventually, a few hundred of the American Names filed suit against Lloyd's in the U. S. District Court for the Southern District of California, alleging, among other claims, that they had been defrauded by being improperly assigned to losing syndicates right from the start as part of a scheme to rescue Lloyd's mostly British insiders from their own financial exposure.14 The lawsuit was not confined to a single claim for common law fraud and included causes of action under the federal RICO statute15 and the federal securities laws.16
The American Names' U.S. lawsuit would have been unexceptional except for the terms of the contracts at issue, which contained clauses expressly providing that disputes would be governed by English law and that English courts would have exclusive jurisdiction over any suit or controversy related to the Names' relationship with Lloyd's. Relying upon those clauses, Lloyd's appeared in San Diego and moved to dismiss the plaintiffs' complaint. The motion seemed well taken, since the Names were affluent and sophisticated international investors who could be presumed to possess the capacity to understand their contracts and the means to select alternative investments. Certainly the Names knew at the time of their extraordinary investment that all of Lloyd's management, underwriting, claims work, and other economic activity took place in London under English law.
The district court agreed, finding the contractual choice of forum and governing law to be "presumptively valid."17 No one was especially surprised by that decision, particularly in light of the similar lawsuits by similarly disgruntled American Names that had already met with a similar fate in five other circuit courts of appeal (with petitions for certiorari already considered and denied in three cases).18 No Name had ever managed to defeat Lloyd's forum-selection and choice-of-law clauses in favor of a U.S. forum for any applicable dispute.
The Ninth Circuit, however, charted its own course, explicitly rejecting the decisions reached by five other circuits in reliance, at least in part, on a recent law review article19 that had argued essentially for a return to pre-Smith, Valentino principles in federal litigation. In analyzing British securities law, the Ninth Circuit found it not only defective but fundamentally unfair, especially when applied "against Lloyd's of London, a business corporation so powerful that it has obtained from the British legislature substantial immunities."20 Proudly parochial, the Ninth Circuit reasserted American independence and held that "[t]he available English remedies are not adequate substitutes for the firm shields and finely honed swords provided by American securities law."21 The district court was ordered to try the plaintiffs' securities claims in San Diego under U.S. law and to consider the possibility of trying their RICO claims there as well.22
Interestingly, the Ninth Circuit also held that the forum-selection and choice-of-law clauses did bar the plaintiffs' common law tort claims. The difference, according to the majority, was that "Congress has…directly spoken to the issue"23 in the case of securities law by including in the governing statutes the following language: "Any condition, stipulation or provision binding any person acquiring any security to waive compliance with [the statute] shall be void."24 Even though the lawsuit brought by the American Names was still at the pleading stage and no court had ever found that Lloyd's recruitment of American Names constituted the sale of a security, the Ninth Circuit held that the mere allegation of securities fraud was enough to defeat the parties' contractual selections of forum and governing law and support full-blown American litigation under American law:
We turn to the validity of [the forum-selection and choice-of-law] clauses under the controlling [securities] statutes. Doing so, we take the plaintiffs' allegations as to their causes of action to be true. We look not at evidence-for the plaintiffs do not have to prove their case at the pleading stage-but at what the plaintiffs say their case is.25
The Ninth Circuit's ruling can only be described as dramatic. Simply because the plaintiffs alleged they had been the victims of RICO and securities fraud, the court held they were entitled to litigate those claims in a U.S. forum, with lengthy discovery under American rules, summary judgment motions decided under American law, and ultimately a trial before an American jury-unless the plaintiffs managed to get an American-style settlement somewhere along the way.
These conclusions sparked a powerful dissent from Judge Goodwin, who realized that with enough incentive most clever litigators could federalize virtually any international contractual dispute with claims under RICO or the securities laws-at least at the pleading stage, when all of the plaintiff's factual allegations were irrebutably presumed to be true. Judge Goodwin rejected the "strange and troubling"26 new rules that allowed mere allegations in a complaint to defeat negotiated selections of law and forums, and in harsh language he warned that the majority had essentially ended the enforcement of those contractual provisions within the Ninth Circuit. For the majority "even to suggest that a plaintiff need only plead a cause of action under RICO to invalidate [c]hoice [c]lauses in freely negotiated contracts defies reason,"27 Judge Goodwin observed, adding that the majority's "reasoning would bring protections under our securities laws to anyone who loses his or her savings betting on chicken fights in Zamboanga."28
If Zamboangan chicken fighting ever becomes lucrative enough, that proposition will surely be tested in the courts of the Ninth Circuit. In the meantime, it seems likely that the strength of the Richards decision will soon be tested in dozens of other industries, as foreign and domestic plaintiffs alike try to undo their previous promises to litigate in particular places, under particular law, in order to seek large awards or settlements from U.S. judges and juries.
Can international lawyers still preserve the integrity of their clients' selections of law and forum and prevent the new Richards rule from rewriting contractual agreements? The answer is a tentative yes, because Richards left open at least two alternatives for lawyers with that goal in mind. One option serves transactional lawyers working at the drafting stage of an international contract, and the other serves litigators left to manage a dispute already in progress.
In Richards, the Ninth Circuit recognized, albeit reluctantly, that the drafter of an international contract may be able to ensure application of the parties' selected law and forum by also including an arbitration clause removing all disputes from the judicial system entirely. The very presence of such a clause implicates another federal statute-the Arbitration Act29-as well as a new set of legislatively defined federal policies designed to compete with the securities and RICO laws. The majority in Richards had no choice but to recognize that choice-of-law and forum-selection clauses might survive even a securities or RICO challenge, if coupled with an arbitration clause, since Lloyd's had also relied heavily upon the seemingly apposite Supreme Court decision in Scherk v. Alberto-Culver Co.30 In that case, decided pre-Smith, Valentino, the Supreme Court upheld an agreement to arbitrate in Paris before the International Chamber of Commerce despite the plaintiff's demand for an American forum in which to litigate claims under U.S. securities laws. Although the plaintiff in Scherk had made the same allegations of securities fraud that were made by Lloyd's American Names, the Supreme Court had found that those allegations were not enough to trump the parties' contractual forum selection.
Forced to make a distinction, the Ninth Circuit held in Richards that Scherk was different because it presented a conflict not only between the parties' stipulation and a federal statute but also between two separate federal statutes. As the Ninth Circuit saw it, a court forced to choose between the public policies embodied in the securities laws or RICO, on the one hand, and the federal Arbitration Act, on the other, could properly find that "the considerations of international commerce tipped the balance."31 Thus the court could enforce even a contractual forum selection that took a transaction outside the U.S. statutes normally regulating commercial behavior.32
That distinction, however tenuous, may give the drafter of an international contract the best weapon against derogation of the parties' selections of law and forum. The presence of an arbitration clause in an international contract is no certain guarantee, however, since the majority in Richards also held that a district court in the Ninth Circuit could find, if it wished, that a plaintiff's presumptively true allegations33 about a particular transaction's extensive contacts with the United States justified allowing the plaintiff's claims to proceed in a U.S. court under the securities, antitrust, or RICO statutes-even in defiance of the Arbitration Act.34
What is a litigator to do with an international contract containing forum selections and governing clauses but no arbitration clause, when a plaintiff is determined to ignore those clauses and litigate federal claims in the Ninth Circuit? As the dissent in Richards recognized and advised,35 many foreign judicial systems, including those of England and most other Western nations, will, upon request, issue a blocking injunction enjoining foreign parties from litigating anywhere else in the world.36 If Lloyd's had obtained such an injunction in England against the American Names before responding to the lawsuit in San Diego, considerations of comity might have led the U.S. courts to abstain from the matter entirely. If the American Names had been permitted by the U.S. courts to continue litigating in the United States in defiance of an English injunction, they might well have subjected themselves to punishment for contempt37 by the English courts and would certainly be denied any recovery against Lloyd's assets in England. In addition, the English courts would in certain cases have had jurisdiction under English law to enter an offsetting clawback judgment in favor of Lloyd's in an amount precisely equal to any award of punitive or multiple damages granted in the United States.38 Litigators charged with defending contractual selections of law and forums in nonarbitrable disputes in the United States therefore should immediately consider the possibility of commencing defensive litigation in the appropriate foreign forum.
1 Richards v. Lloyd's of London, 107 F. 3d 1422 (9th Cir. 1997), rehearing ordered en banc (9th Cir. Aug. 25, 1997).
2 Gen. Motors Acceptance Corp. v. Codiga, 62 Cal. App. 117, 216 P. 383 (1923).
3 Id., 62 Cal. App. at 119, 216 P. at 384.
4 Thomson v. Continental Insurance Co., 66 Cal. 2d 738, 742, 59 Cal. Rptr. 101, 104 (1967).
5 The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 92 S. Ct. 1907, 1914, 32 L. Ed. 2d 513 (1972).
6 Smith, Valentino & Smith, Inc. v. Superior Court (Life Assurance Co. of Pennsylvania), 17 Cal. 3d 491, 131 Cal. Rptr. 374 (1976).
7 Hall v. Superior Court, 150 Cal. App. 3d 411, 415, 197 Cal. Rptr. 757, 760 (1983).
8 Wimsatt v. Beverly Hills Weight Loss Clinics Int'l, Inc., 32 Cal. App. 4th 1511, 1523, 38 Cal. Rptr. 2d 612, 619 (1995).
9 Cal-State Business Products & Services, Inc. v. Ricoh, 12 Cal. App. 4th 1666, 1677, 16 Cal. Rptr. 2d 417, 423 (1993) (citing Stewart Org., Inc. v. Ricoh Corp., 810 F. 2d 1066, 1070-1071 (11th Cir. 1987), aff'd on diff. grounds, 487 U.S. 22, 108 S. Ct. 2239, 101 L. Ed. 2d 22 (1988)) (the Stewart court held that the choice-of-law provision in Ricoh's standard contract embraced "all causes of action arising directly or indirectly from the business relationship evidenced by the contract"). See also Bancomer, S.A. v. Superior Court, 44 Cal. App. 4th 1450, 1461, 52 Cal. Rptr. 2d 435, 442 (1996) ("forum-selection clauses can be equally applicable to contractual and tort causes of action [so long as] resolution of the [tort] claims relates to interpretation of the contract").
10 Smith, Valentino, 17 Cal. 3d at 498, 131 Cal. Rptr. at 378 (Mosk, J., dissenting).
12 Graves v. New York ex rel O'Keefe, 306 U.S. 466, 491 (1939) (Frankfurter, J.). As one former chief justice of the United States has observed: "A dissent in a court of last resort is an appeal to the brooding spirit of the law, to the intelligence of a future day, when a later decision may possibly correct the error into which the dissenting judge believes the court to have been betrayed." Charles Evans Hughes, The Supreme Court of the United States 68 (1928).
13 Richards, 107 F. 3d 1422.
15 18 U.S.C. §§1961 et seq.
16 The Securities Exchange Act of 1933, 15 U.S.C. §77a, and the Securities Exchange Act of 1934, 15 U.S.C. §78a.
17 Richards, 107 F. 3d at 1425.
18 See Allen v. Lloyd's of London, 94 F. 3d 923 (4th Cir. 1996); Shell v. R.W. Sturge, Ltd., 55 F. 3d 1227 (6th Cir. 1995); Bonny v. Society of Lloyd's, 3 F. 3d 156 (7th Cir. 1993), cert. denied, 510 U.S. 1113, 114 S. Ct. 1057, 127 L. Ed. 2d 378 (1994); Roby v. Corp. of Lloyd's, 996 F. 2d 1353 (2d Cir.), cert. denied, 510 U.S. 945, 114 S. Ct. 385, 126 L. Ed. 2d 333 (1993); Riley v. Kingsley Underwriting Agencies, Ltd., 969 F. 2d 953 (10th Cir.), cert. denied, 506 U.S. 1021, 113 S. Ct. 658, 121 L. Ed. 2d 584 (1992).
19 Darrell Hall, Note, No Way Out: An Argument against Permitting Parties to Opt Out of U.S. Securities Law in International Transactions, 97 Colum. L. Rev. 57 (1997).
20 Richards, 103 F. 3d at 1429.
22 Id. at 1430.
23 Id. at 1429.
24 15 U.S.C. §77n. See also the similar language set forth in the Securities Exchange Act of 1934 at 15 U.S.C. §78cc(a); see generally Richards, 103 F. 3d at 1426.
25 Richards, 103 F. 3d at 1426.
26 Id. at 1431 (Goodwin, J., dissenting).
27 Id. at 1435.
29 See 9 U.S.C. §§1 et seq. (federal statutes and policies) and Code Civ. Proc. §§1281 et seq. (the analogous California statutes and policies).
30 Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S. Ct. 2449, 41 L. Ed. 2d 270 (1974).
31 Richards, 107 F. 3d at 1427.
32 The Ninth Circuit expressly noted that the Tenth Circuit's contrary resolution of analogous claims by American Names against Lloyd's had been "clouded by the presence of a clause requiring arbitration." Richards, 107 F. 3d at 1428. Cf. Riley, 969 F. 2d 953, and see generally supra note 17 and accompanying text.
33 In addition to holding that a plaintiff's allegations of securities, RICO, or antitrust violations must be irrebutably presumed true against a motion to enforce contractual forum selections and choices of law (see generally supra note 24 and accompanying text), the Ninth Circuit also held that the plaintiff's factual allegations about the extent of a transaction's relationship with the United States must be given the same deference. See Richards, 107 F. 3d at 1427.
34 Richards, 107 F. 3d at 1427.
35 Judge Goodwin's dissent noted that "[i]f Lloyd's had anticipated that appellants would be able in this country to enjoin enforcement of the forum-selection clause, Lloyd's might have sought an order in England enjoining appellants from proceeding with their litigation in the United States." Richards, 107 F. 3d at 1433 (Goodwin, J., dissenting) (citing Scherk, 417 U.S. at 516-17, 94 S. Ct. at 2455-56). Judge Goodwin speculated that Lloyd's seemingly reasonable expectation that the Ninth Circuit would follow the five other circuits and enforce the contractual selections of law and forum had led it to abstain from such "unseemly and mutually destructive jockeying…to secure tactical litigation advantages." Id.
36 Such injunctions will be granted by the courts of England and Wales when foreign proceedings threaten to produce a result "unconscionable in the eye of English law." See generally the House of Lords decision in British Airways Board v. Laker Airways Ltd., 1985 App. Cas. 58, 81 (1984).
37 The possibility of such punishment in the United Kingdom might have been a considerable deterrent to the American Names, since they seemed just the sort of people who might value their freedom to travel and invest freely throughout the world. British legislative history makes plain that such dramatic and hostile remedies are authorized and are "really the culmination of bitterness about the policy of the United States-often referred to as the 'judicial imperialism of the United States of America.'" 404 Parl. Deb., H.L. (5th ser.) 554, 569-570 (Lord Lloyd of Kilgerran). One British legislator has observed that blocking injunctions and clawback statutes are "further evidence of our refusal as a country to be clobbered by friend or foe, great or small." Id. at 576 (Lord Renton).
38 See, e.g., United Kingdom, Protection of Trading Interests Act §6(1), reprinted in Antitrust & Trade Reg. Rep. (BNA) No. 959, at F-2 (Apr. 10, 1980) and in Note, The Protection of Trading Interests Act of 1980-Britain's Latest Weapon in the Fight against United States Antitrust Laws, 4 Fordham Int'l L.J. 341, 384 (1981).
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