Forum Selection clause and Choice of law clauses held invalid

Verdugo v. Alliantgroup (CA4/3 G049139 5/28/15) 

 I am sure there are plenty of you who draft your own contracts and when able slip in a choice of law clause (usually  to enforce the law where the Project sits or where your business is located) and a forum selection clause( typically where the project is located or where your home office is located).  A recent California decision makes the enforcement of these provisions questionable. 

In a case decided in May 2015, entitled Verdugo v. Alliantgroup, both types of clauses were held to be unenforceable in the context of a wage and hour claim.

Plaintiff and appellant Rachel Verdugo appealed from an order granting a motion to stay her wage and hour lawsuit based on a forum selection clause in her employment agreement with defendant and respondent Alliantgroup, L.P. (Alliantgroup).  The clause designates Harris County, Texas, as the exclusive forum for any disputes arising out of Verdugo’s employment, and also includes a provision designating Texas law as governing all disputes.  Verdugo contended the trial court erred because enforcing the forum selection clause and related choice-of-law clause violates California’s public policy on employee compensation.  The Court of Appeal agreed and reversed the trial court’s order.

Although a party opposing enforcement of a forum selection clause ordinarily bears the burden to show enforcement would be unreasonable or unfair, the burden is reversed when the underlying claims are based on statutory rights the Legislature has declared to be unwaivable.  In that instance, the party seeking to enforce the forum selection clause has the burden to show enforcement would not diminish unwaivable California statutory rights, otherwise a forum selection clause could be used to force a plaintiff to litigate in another forum that may not apply California law.

 The Court found that Verdugo based all her claims on California Labor Code provisions that not only establish when and how employers must pay overtime and other forms of compensation, provide meal and rest breaks, and provide accurate wage statements to all California employees, but also establish specific remedies for an employer’s violation of these provisions, including recovery of unpaid wages, interest, civil penalties, and attorney fees.  California's Labor Code, in order to protect these important rights and remedies, declares they cannot be waived by agreement. 

The Court found that Alliantgroup failed to show enforcing the forum selection clause and related choice-of-law clause in Verdugo’s employment agreement would not diminish her statutory rights by requiring her to litigate her claims in Texas under Texas law.  Alliantgroup contended Verdugo’s statutory rights would not be affected by enforcing the forum selection clause because a Texas court “most likely” would reject the parties’ choice-of-law clause and apply California law.  Alliantgroup’s supposition about what a Texas court is likely to do is not sufficient to meet its burden because Alliantgroup’s arguments on appeal suggest it will argue against applying California law if this case is litigated in Texas, and Alliantgroup has not cited any authority that convinces us a Texas court necessarily will apply California law.

The Court noted that the few cases Alliantgroup cited did not address how a Texas court will view a choice-of-law clause in the context of a wage and hour dispute between a Texas employer and a California employee, and Alliantgroup failed to address the competing policies of these two states.  The Court found that Alliantgroup could have eliminated any doubt about which law would apply to Verdugo’s claims by stipulating to have the Texas courts apply California law, but failed to do so.  Instead, Alliantgroup carefully phrased its arguments in terms of vague possibilities while simultaneously seeking to minimize the significance of the California statutory rights on which Verdugo bases her claims.  Alliantgroup therefore failed to establish Verdugo’s unwaivable California's statutory rights would not be diminished.

The message of this case is clear.  Employers will not be able to use either of these clauses to try and minimize rights that California has deemed unwaivable.  Rather than try and avoid claims based upon legal grounds not recognized by California for a claim arising under California law, it is better to have your employee documents code compliant and properly maintained.  This will allow you a much better chance of prevailing than using choice of law or forum selection clauses.

If you need assistance in making sure your employee manuals, employment agreements etc. are California code complaint or simply wish to update them, please contact us and we can arrange to have that service performed for you by one of our labor and employment attorneys.