UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA
February 6, 2012
THOR RONLAKE, AND PAULA RONLAKE
US-REPORTS, INC., A COLORADO CORPORATION, AND
GROUP MANAGEMENT 0002 LLC, A NEW YORK LIMITED LIABILITY COMPANY, AND DOES 1 THROUGH 20, EXCLUSIVE, DEFENDANT.
The opinion of the court was delivered by: Lawrence J. O'Neill United States District Judge
ORDER RE DEFENDANT'S MOTION TO DISMISS COMPLAINT
Defendant Group Management 0002 LLC ("GM2") filed this motion to dismiss Thor and Paula Ronlake's ("Plaintiffs") Complaint asserting that a forum selection clause contained in the parties' operating agreement mandates that this action be heard by the state or federal courts of Erie County, New York. Plaintiffs contend that the forum selection clause cannot be enforced because it does not apply to Plaintiffs claims; Plaintiffs had no notice of the clause; enforcement will deprive them of their day in court; and enforcement would be contrary to public policy. 5
In approximately 1999, Thor Ronklae was hired as an inspector by US-Reports, Inc. Compl. ¶3. Paula Ronlake was hire approximately two years later. Id.
In approximately July of 2007, Plaintiffs were advised that their business relationship with US-Reporter would change. Id at ¶ 4. Plaintiffs allege that only the outward appearance of the relationship changed, in that they were now referred to as "partners" and/or "members" of the entity GM2. Id.; Declaration of Thor Ronlake ¶ 3.However, they assert their relationship with US-Reports did not substantially change. Id. US-Reports continued to supervise and control the manner in which Plaintiffs performed their services, while GM2 acted as a payroll company, dispersing money received form US-Reports to Plaintiffs. Id.
Defendant states that as a result of the change, an operating agreement ("Operating Agreement") was created which governed the parties' new relationship. Declaration of John Schober, Exs. 1, 2. Defendant asserts that Plaintiffs are subject to the Operating Agreement and all its clauses. The Operating Agreement contains a forum selection clause which states in relevant part:
11.5 Governing Law and Consent to Jurisdiction
This Agreement and all issues regarding the rights and obligations of the Members, the construction, enforcement and interpretation hereof, and the formation, administration and termination of the Company shall be governed by the provisions of the law in New York, without reference to conflict of laws principles. The Company and each Member irrevocably submit to the exclusive jurisdiction of the Federal and state courts located in Erie County, New York, for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby.
Id. (emphasis added). Defendant also provides signed, written notes from a meeting ("Meeting Notes") in which Plaintiffs agreed to become partners in GM2 as well as signed amendments to the Operating Agreement. Id., Exs. 3-6.
Plaintiffs allege they were never provided with nor signed any operating agreement.
Further, while Plaintiffs admit to signing the Meeting Notes and being sent a "Member Declaration and Acknowledgment" document, neither of these documents contained or mentioned the Operating Agreement or a forum selection clause.
III. LEGAL STANDARD.
A motion to enforce a forum selection clause is treated as a motion to dismiss for improper venue pursuant to Federal Rule of Civil Procedure 12(b)(3). Kukje Hwajae Ins. Co., Ltd. v. M/V Hyundai Liberty, 294 F.3d 1171, 1174 (9th Cir.2002), vacated on other grounds, 543 U.S. 985 (2004). Consequently, the pleadings need not be accepted as true, and facts outside the pleadings properly may be considered. Id. Nonetheless, the trial court must draw all reasonable inferences and resolve all factual conflicts in favor of the non-moving party. Murphy v. Schneider Nat'l, Inc. 362 F.3d 1133, 1138 (9th Cir. 2004). The enforceability of the forum selection clause is determined according to federal law. Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996).
A. Is the Forum Selection Clause Enforceable? "A forum selection clause is presumptively valid; the party seeking to avoid a forum selection clause bears a 'heavy burden' to establish a ground" on which a forum selection clause should not be enforced. Doe 1 v. AOL LLC, 552 F.3d 1077, 1083 (9th Cir. 2009).
There are three circumstances under which enforcement of a forum selection clause would be unreasonable: "(1) if the inclusion of the clause in the agreement was the product of fraud or overreaching; (2) if the party wishing to repudiate the clause would effectively be deprived of his day in court were the clause enforced; and (3) if enforcement would contravene a strong public policy of the forum in which suit is brought." Murphy v. Schneider Nat'l, Inc., 362 F.3d 113, 1140 (9th Cir. 2004) (internal citations and quotation marks omitted). Forum selection clauses are also scrutinized for "fundamental fairness," and may be deemed unfair if inclusion of the clause was motivated by bad faith, or if the party had no notice of the forum provision. Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595 (1991). "The party challenging the clause bears a 'heavy burden of proof'" Murphy, 362 F.3d at 1140 (quoting The Bremen v. Zapata Off-Shore Co., 47 U.S. 1, 17 (1972)).
Plaintiffs advance an argument regarding each factor. *fn3
1. Notice of the Forum Selection Clause.
Plaintiffs claim that the first notice they received of the forum selection clause's existence was Defendant's filing of this motion. Since notice of a forum selection clause is a factor in assessing its fundamental fairness, Carnival Cruise Lines, 499 U.S. at 595, Plaintiffs contend that the lack of notice renders this clause unfair and unenforceable.
Here the Operating Agreements provided by Defendant which contain the forum selection clause show only the signature of "John C. Schober." The Agreements are not signed by Plaintiffs. Schober Decl., Exs. 1, 2. Defendant further offers the Summary of Specific Amendments and Restatements of the Operating Agreement ("Amendments") and notes from a meeting stating that the Ronlake's had become members of GM2. Id. at Exs. 3-6. Both documents are signed by Plaintiffs, but neither the Amendments nor the meeting notes make mention of a forum selection clause. Id. Accordingly, it is unclear by these documents whether Plaintiffs had actual notice of the forum selection clause. With no evidence to the contrary, the Court must believe Plaintiffs allegations at this stage and resolve all questions of fact in their favor. As such, Plaintiffs' allegations weigh in favor of non-enforcement due to unfairness because they were not given notice of the clause.
2. Plaintiffs Effectively Deprived of Their Day in Court.
Plaintiffs argue that enforcement of the clause would deprive them of their day in court.
Plaintiffs are retired people on a fixed income. Opp'n at 15:27-28. They also have a $200,000 debt as a result of Ms. Ronlake's suffering congestive heart failure in October 2010 which left her in a coma for six weeks and the hospital for nine weeks. Id. at 15:28-2. Plaintiffs assert they currently have no net assets. Id. at 16:2.
Financial hardship, alone, is insufficient to deprive an individual of his day in court. See Murphy, 362 F.3d at 1142; Paster v. Putney Student Travel, Inc., 1999 WL 1074120 at *3 (C.D. Cal. June 9, 1999). However, here, Plaintiffs demonstrate financial hardship along with lack of notice which further weighs in favor of non-enforcement.
3. Public Policy.
This action is brought primarily pursuant to the California Labor Code. To force parties to litigate in a distant forum, which may deprive them of the opportunity to litigate at all and potentially allow Defendant to avoid the California Labor Code, is contrary to the policies sought to be advanced by the Code. Enforcing the forum selection clause in the context of this case would therefore "contravene a strong public policy of the forum in which suit is brought."
Murphy, 362 F.3d at 1140; see also Jones v. GNC Franchising, Inc., 211 F.3d 495 (9th Cir. 2000). "[T]he California Supreme Court has held clearly and unequivocally that it is against the strong public policy of California to enforce a forum selection clause where the practical effect of enforcement will be to deprive a plaintiff or class of plaintiffs of their unwaivable statutory entitlement to the minimum wage and overtime payments." Perry V. AT&T Mobility LLC, No. C 11--01488 SI, 2011 WL 4080625, *5 (N.D. Cal. Sept. 12, 2011) (citing Gentry v. Superior Court, 42 Cal. 4th 443 (2007); see also, Quinonez Empire Today, LLC, No. C 10-02049, 2010 WL 4569873 at *2 (N.D. Cal. Nov. 4, 2010) ("The Ninth Circuit sent a strong message that contractual schemes to avoid the California Labor Code will not be tolerated." ).
A determination that New York rather than California law governs Plaintiffs' claims could well have the serious practical effect of depriving Plaintiffs of their unwaivable statutory entitlement to minimum wage and overtime payments. For example, Cal. Labor Code § 2802 entitles an employee to reimbursement of expenses incurred on behalf of the employer. Id. § 2802(a)("An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties") (emphasis added). New York's Labor Law § 198-c, in contrast, entitles an employee to reimbursement of expenses only if there is an agreement providing for such reimbursement. Id. § 198-c.1 ("any employer who is party to an agreement to pay or provide benefits [including reimbursement for expenses]. . . to employees. . . and who fails. . . to provide such benefits. . .").*fn4
Accordingly, if enforced the forum selection clause may deprive Plaintiffs of their unwaivable statutory entitlement under the Cal. Labor Code in violation on California public policy.
B. Applicability of the Forum Selection Clause.
In any case, it appears that the forum selection clause does not apply to Plaintiffs' claims because they do not "arise from" the contract; rather, they arise from the alleged wrongful classification of Plaintiffs as non- employees.
The scope of the claims governed by a forum selection clause depends the language used in the clause. Most recently, in Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914, 2011 WL 3076859 (9th Cir.2011), the Ninth Circuit explained that forum selection clauses using the phrases "arising under" "arising out of" and "arising hereunder" should be "narrowly construed" to encompass disputes "relating to the interpretation and performance of the contract itself," but that the inclusion of the phrase "relating to" should lead to a "broad[er]" interpretation. Id. at * 7; accord, Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1463--64 (9th Cir. 1983) (discussing how omission of "relating to" language in an arbitration clause results in a narrower scope of covered disputes). Here, the forum selection clause uses the term "arising out of." Decl. Schober, Ex. 1, 2. Accordingly, it will be given narrow construction.
As the court explained in Quinonez, the question in this case is: whether in classifying Plaintiffs as non-employees/partners, Defendant has violated the law. 2010 WL 4569873 at * 3.
Like in Quinonez, that question does not fall within the scope of the forum selection clause because it does not "arise out of" the contracts allegedly entered into by Plaintiffs and Defendant.
The claims brought by plaintiff do not arise under the contract between the parties but from the California Labor Code. Specifically, plaintiff argues that defendant illegally classified plaintiff, and other installers and helpers like him, as independent contractors to deny meal and overtime benefits provided by the California Labor Code. Neither party contests that plaintiff is classified as an independent contractor in the contract between the parties, so the interpretation of the contract is not at issue. Rather, the question is whether in classifying plaintiff, and others like him, as an independent contractor defendant has violated the law. Thus, the proper analytical exercise in resolving this action does not turn on the Subcontractor Installation Agreement. The forum-selection clause does not apply to this action.
2010 WL 4569873 at *2-3 (citing Narayan v. EGL, Inc., 616 F.3d 895, 899, 904 (9th Cir. 2010)).*fn5
The same is true here, neither party contests that Plaintiffs are classified as non-employees/partners in the contract between the parties; the interpretation of the contract is not at issue. The question is whether in classifying Plaintiffs as non-employees, Defendant has violated the law.
V. CONCLUSION AND ORDER.
For the reasons set forth above:
Defendant's motion to dismiss for improper venue is DENIED. Defendant must file an answer by February 21, 2012.
IT IS SO ORDERED.