In an October 7, 2024 decision, the California Court of Appeal declined to enforce a forum selection clause in a motorhome warranty that purported to require warranty litigation to take place in Indiana. The case will be of interest to out of state companies selling products in California, and especially litigants seeking to stay California litigation to enforce a contractual agreement to litigate in a different forum.
The case was commenced by Kenneth and Janet Lathrop, California residents who bought a motorhome manufactured by Thor Motor Coach, Inc. (“Thor”) from a California dealer. Lathrop v. Thor Motor Coach, Inc., No. B331970, 2024 WL 4430659, at *1 (Cal. App. Oct. 7, 2024). The Lathrops signed a Warranty Registration Form and were issued a Limited Warranty on their motorhome. Id. Subsequently, the Lathrops experienced difficulties with the motorhome that they allege Thor did not adequately correct. Id. at *2. The Lathrops filed a lawsuit in California against Thor and other defendants. Id. The lawsuit alleged that Thor violated the Song-Beverly Act (California’s lemon law) and the California Consumer Legal Remedies Act (“CLRA”).
The Warranty Registration Form at issue was a two-page document, which contained, among others, the following provisions:
- I understand and agree to the forum selection clause and choice of law clause set forth in the Thor Motor Coach Limited Warranty and the Thor Motor Coach Structural Limited Warranty.
- I AGREE THAT ANY AND ALL ACTIONS OF ANY KIND RELATED TO OUR MOTORHOME SHALL BE DECIDED BY A JUDGE RATHER THAN BY A JURY.
- I UNDERSTAND THAT EXCLUSIVE JURISDICTION FOR DECIDING LEGAL DISPUTES RELATING TO ALLEGED BREACH OF EXPRESS WARRANTY AND IMPLIED WARRANTIES THAT ARISE BY OPERATION OF LAW AS WELL AS THOSE RELATING TO REPRESENTATIONS OF ANY NATURE RESTS IN THE COURTS WITHIN THE STATE OF MANUFACTURE, WHICH IS INDIANA.
Id. at *1-2. In addition, the Limited Warranty contained a choice-of-law provision indicating that all disputes arising out of the Limited Warranty would be governed by the laws of Indiana. Id. at *2.
In the trial court, Thor and the other defendants moved to stay the action on the grounds that the forum selection clause required any suit concerning the motorhome’s warranty to be brought in Indiana. Thor conceded that the Indiana choice of law clause and the jury waiver were not enforceable and agreed to stipulate that the Song-Beverly Act, the CLRA and all other unwaivable California substantive rights would apply in any litigation in Indiana, but maintained that the forum selection clause should be enforced. Id. at *2. The trial court granted the stay, finding that the parties had agreed that Indiana courts would have exclusive jurisdiction over litigation concerning the warranty, that the forum selection clause had appeared in large, bold type just above the signature line, and that it was not unreasonable. 2024 WL 4430659, at * 3.
On appeal, the court began by discussing the framework for determining whether to enforce a forum selection clause, explaining that California courts enforce such clauses “so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable.’” 2024 WL 4430659, at * 3 (quoting Verdugo v. Alliantgroup, L.P. (2015) 237 Cal.App.4th 141, 146). The Court of Appeal noted, however, that California courts will not enforce forum selection clauses that “substantially diminish the rights of California residents in a way that violates our state’s public policy.” Id. (quoting Verdugo, 237 Cal. App. 4th at 147). Although the burden is ordinarily on a party opposing enforcement of a forum selection clause to demonstrate why it should not be enforced, when litigation claims are based on unwaivable rights created by California statute, it is the party seeking to enforce the clause who bears the burden. Id.
Because the Lathrops’ claims were based on the Song-Beverly Act, implicating unwaivable statutory rights, the Court of Appeal explained that the trial court had erred in requiring the Lathrops to bear the burden of demonstrating that it would be unreasonable to enforce the forum selection clause.
The Court of Appeal then considered the forum selection clause from the perspective of Thor’s burden to demonstrate that litigating the claims in Indiana would not diminish the Lathrops’ substantive rights under California law. In so doing, the Court of Appeal found that Thor had not demonstrated that an Indiana court would provide the same or greater rights as a California court would, meaning that that litigating in Indiana would “substantially diminish” the Lathrops’ rights, contrary to California’s public policy. 2024 WL 4430659, at *5. The Court of Appeal noted as examples that the Limited Warranty offered less protection than the Song-Beverly Act and that the Lathrops could be denied their right to a jury trial.
In reaching its holding, the Court of Appeal rejected Thor’s argument that it had offered to stipulate to the Indiana court applying California law, including the Song-Beverly Act, the CLRA, and “all other unwaivable California substantive rights,” which it argued included the right to a jury trial. Thor had argued that the unenforceable clauses should be severed from the warranty and the enforceable forum selection clause should remain and be enforced, relying on California Civil Code § 1599 (“Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest.”). In rejecting this argument, the Court of Appeal placed substantial emphasis on its stated aim of deterring parties from drafting unenforceable clauses and then relying on courts to sever them. The Court of Appeal found that the “interests of justice” would not be furthered by severance, because it would “create an incentive for Thor to continue to include admittedly unenforceable provisions in its warranties and would deter Thor from revising its warranty to comply with California law.” Id. at *7.
Finally, the Court found that even if Thor’s proposed stipulation did not violate public policy, it was insufficient because Thor only agreed to stipulate that “the substantive provisions” of the Song-Beverly Act and the CLRA, together with “all other unwaivable California substantive rights” would apply to the claims when pursued in Indiana. The Court of Appeal observed that the proposed stipulation could create potential disputes in the Indiana forum over which rights are “substantive” and which are procedural. It also observed that the stipulation would allow an Indiana court to interpret a provision in the warranty in a way that “might diminish or eliminate one of the Lathrops’ unwaivable statutory rights under California law” such as by restricting the Lathrops from pursuing incidental and consequential damages. Id. at *10.
Practice Tips
First, it should be acknowledged that the reach of the Court of Appeals’ decision in Lathrop is likely limited to claims involving unwaivable rights created by California statute. If applied more broadly, the Court of Appeals’ reluctance to sever the unenforceable clauses would be difficult to square with California Civil Code §1599, which expressly directs Courts to sever unlawful clauses from a contract and enforce the rest.
While as a commercial matter, it is undoubtedly more practical for entities operating in multiple states to use standardized contractual forms, given the Court of Appeals’ dim view of allowing a party to assume that unenforceable clauses will be severed and the contract reformed, business entities that wish to enforce forum selection clauses in California may wish to consider creating California-specific contracts in cases where standard forms would conflict with California consumer protection statutes.
The Court of Appeal opinion also—at least implicitly—suggested some degree of lack of trust in the courts of other jurisdictions to correctly apply California law. While in this case a broader stipulation may not have saved the day for Thor, litigants seeking to enforce forum selection clauses in California in the future would be well served to be explicit about any contractual clauses they agree not to enforce; for example, by expressly conceding the right to a jury trial or the plaintiff’s right to seek consequential damages if those rights are afforded by California law.
For further questions or comments on the content of this post, please email Michael Kibler ([email protected]), John Fowler ([email protected]), Matthew Cave ([email protected]) or Tracy Rane ([email protected]).
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