The United State Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) published its opinion of Sun v. Advanced China Healthcare, Inc., a case interpreting the enforceability of a contract’s forum-selection clause, on August 22, 2018. Please find a brief review of the facts of the case, as well as an overview of the Ninth Circuit’s findings below.
Yei Sun, Liping Sun and Haiming Sun (collectively, “Plaintiffs”) brought this action against Advanced China Healthcare, Inc. (“Defendant”), under Washington securities law in a Washington district court. The Plaintiffs alleged that Defendant engaged in various fraudulent practices to induce them to invest in Advanced China Healthcare. However, the district court ruled, that the dispute would be bound by the forum-selection clause contained in the Share Purchase Agreements, executed by the Plaintiffs, and dismissed the action. The Share Purchase Agreement, specified that any dispute “arising out of or related to this Agreement,” would be subject to exclusive jurisdiction of, and venue in, the state courts in Santa Clara County in the State of California. The Ninth Circuit reviewed the matter on appeal and was tasked with determining whether or not the forum-selection clause in the Share Purchase Agreements controlled.
The Ninth Circuit based its review on decided case law, which directed the court to first determine whether the forum-selection clause was applicable to this dispute and second, if it was applicable, was the forum-selection clause enforceable.
In order to determine the applicability of the forum-selection clause to the dispute, the Ninth Circuit began its analysis by looking at the language contained in the Share Purchase Agreement. By the terms of the contract, the forum-selection clause here applied to “any disputes arising out of or related to” the Share Purchase Agreement. In prior case law, disputes “arising out of” applied only to disputes “relating to the interpretation and performance of the contract itself.” (Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 922 (9th Cir. 2011)). However, the court further noted that, forum-selection clauses covering disputes “relating to” a particular agreement apply to any disputes that reference the agreement or have some “logical or causal connection” to the agreement. (See John Wyeth & Bro. Ltd. v. CIGNA Int’l Corp., 119 F.3d 1070, 1074 (3d Cir. 1997)).
With consideration of and deference to prior case law, the Ninth Circuit ruled that the forum-selection clause was applicable to this dispute, as it applied to any dispute that had some logical or causal connection to the parties’ agreement. Not only did the Share Purchase Agreement serve as formal documentation of the investment, the court also reasoned that the Plaintiff brought this action alleging that the defendant was liable under Washington securities law as a seller of securities, which occurred when the Plaintiffs executed the Share Purchase Agreements.
In order to determine the enforceability of the forum-selection clause to this dispute the Ninth Circuit relied on the interpretations of the Supreme Court in Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Tex., 571 U.S. 49, 60 (2013). The Court found as a general rule in Atlantic Marine, “when the parties have agreed to a valid forum-selection clause, a district court should ordinarily transfer the case to the forum specified in that clause.” The Court further provided that “only under extraordinary circumstances unrelated to the convenience of the parties” should a motion to enforce a forum-selection clause be denied. Unfortunately, the Court in Atlantic Marine did not elaborate on what constituted “extraordinary circumstances,” forcing the Ninth Circuit to turn to the guidance in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).
M/S Bremen held that a forum-selection clause was controlling unless the plaintiff made a strong showing that: (1) the clause is invalid due to “fraud or overreaching,” (2) “enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by stature or by judicial decision,” or (3) “trial in the contractual forum will be so gravely difficult and inconvenient that [the litigant] will for all practical purposes be deprived of his day in court.” (407 U.S. at 15). The Plaintiff’s did not allege the forum-selection clause was the product of fraud or overreach, thus only the second and third exceptions were evaluated by the Ninth Circuit.
Regarding the second exception, the Plaintiffs argued that the Washington securities laws provided an antiwaiver provision per se precluding enforcement of the forum-selection clause. Relying on the ruling in Richards v. Lloyd’s of London, 135 F.3d 1289 (9th Cir. 1998), the Ninth Circuit found that an antiwaiver provision, without more, did not supersede the strong federal policy of enforcing forum-selection clauses.
Regarding the third exceptions, the Plaintiffs argued that bringing the action in California would bar relief under Washington securities law and further, the alleged fraudulent activity transpired in Washington, thus limiting the applicability of California laws. The Ninth Circuit did not find these arguments convincing. First, the Plaintiffs would have an opportunity to pursue both their Washington and California securities claims without opposition from the Defendant. At oral argument in this case, the Defendant committed to refraining from raising any argument that the Washington securities law was inapplicable in California state court. Moreover, the district court ordered the Defendant not to contest the applicability of California securities laws to the transaction at issue, and that the Plaintiffs would be allowed to pursue a remedy in district court if the Defendant violated that condition of dismissal. (See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 396 (1990)).
The Ninth Circuit ruled that the district court did not abuse its discretion in dismissing the complaint, as the Plaintiff was unable to demonstrate that the forum-selection clause was unenforceable. The forum-selection clauses in contracts are often overlooked, however, the Sun v. Advanced China Healthcare, Inc. case reminds us that this is done at the parties peril.
T: (925) 944-9700
CIRCULAR 230 DISCLOSURE – Pursuant to rules and regulations imposed by the Internal Revenue Service, any tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another person any transaction or matter addressed herein.
The summary which appears above is reprinted for information purposes only. It is not intended to be and should not be considered legal advice nor substitute for obtaining legal advice from competent, independent, legal counsel. If you would like to discuss these matters in more detail, please feel free to contact us so that we can provide the clarification and resources you need to make effective decisions.