Executive Summary: In Verdugo v. Alliantgroup, a California case decided on May 28, 2015, employer Alliantgroup sought to enforce a forum-selection clause located in an Employment Agreement it had signed with one of its California employees. The employee had brought a class action lawsuit alleging, on behalf of all similarly situated past and present employees of the employer, violations under the California Labor Code. The employer moved to dismiss or stay the action based on the forum selection clause in the Employment Agreement, which designated Texas as the proper forum. The trial court granted the motion, but a California Court of Appeal, upon review of the case, reversed, holding that forum-selection clause cannot be enforced where the employee's claims were based on unwaivable rights under the California Labor Code and where the employer could not prove that: (1) the court in the forum designated in the Employment Agreement would provide the same or greater rights than California, or that (2) a court in the designated forum would apply California law to claims at issue.

Plaintiff employee, Rachel Verdugo, was an Associate Director at Alliantgroup, a company providing tax consulting services. Alliantgroup's corporate headquarters were located in Harris County, Texas, and Alliantgroup has regional offices in 11 states, including California. In October 2007, Verdugo was hired as an Associate Director at Alliantgroup's California office. When Verdugo was hired, she signed an "Employment Agreement" with Alliantgroup that included a forum-selection and choice-of-law clause that stated that the Agreement would be governed "in all respects, including, but not limited to validity, interpretation, effect and performance by the laws of the State of Texas."

According to the Agreement, proper subject matter and personal jurisdiction "shall be had solely" in the State of Texas. The sole venue would be Harris County, Texas. Verdugo only had minimal contact with the Texas office.

In April 2013, Verdugo brought a class action lawsuit against Alliantgroup in California, alleging, amongst other things, that Alliantgroup had violated the California Labor Code in the following ways: (1) unpaid overtime wages; (2) failure to provide accurate itemized wage statements; (3) failure to provide meal breaks; (4) failure to pay all wages due at the time of termination; (5) failure to pay commissions; (6) failure to pay vacation pay; (7) unfair and unlawful business practices. Alliantgroup moved to dismiss or stay the action based on the forum-selection clause in the Employment Agreement. The trial court granted Alliantgroup's motion, and Verdugo appealed. On review, the California Court of Appeal reversed the trial court's decision.

Pursuant to the U.S. Supreme Court's decision in Atlantic Marine Construction Co. Inc. v. U.S. District Court for the W. District of Texas, forum selection clauses are enforceable except in exceptional circumstances, such as fraud. Additionally, pursuant to Atlantic Marine, the party moving to defy a forum-selection clause has the burden of establishing that the transfer to the forum for which the parties have bargained is unwarranted. Unless the party resisting the forum-selection clause can establish that the clause is invalid, which may be difficult to do in light of Atlantic Marine, a forum-selection clause allows the transfer of a case to the selected forum. Consequently, in California, courts generally enforce forum-selection clauses unless enforcement would be "unreasonable or unfair." Inconvenience or additional expense, by itself, does not establish the unreasonableness of a forum-selection clause. A clause is considered to be reasonable if "it is has a logical connection with at least one of the parties or their transaction."

However, California's enforcement of forum-selection clauses is not without limits. InVerdugo v. Alliantgroup, the Court of Appeal held that a forum-selection clause will not be enforced if doing so would "substantially diminish the rights of California residents in a way that violates [the] state's public policy." Further, where the claims at issue are based on unwaivable rights created by California states, the party seeking to enforce the forum-selection clause carries the burden of showing that the enforcement of the forum-selection clause will not diminish "in any way the substantive rights accorded under California law." Because the California Labor Code, on which Verdugo's claims were based, contained explicit language prohibiting the setting aside/contravention of the Labor Code rights by private agreement, the Court stated that Alliantgroup was faced with proving that Texas, the forum designated in its forum-selection clause, would provide the same or greater rights than California, or that the Texas courts would apply California law to Verdugo's claims.

Accordingly, Alliantgroup argued that Verdugo's rights would not be diminished if its Texas forum-selection clause were enforced. There would be no diminishment of Verdugo's rights, Alliantgroup argued, because a Texas court "would most likely apply California law," and, further, that, if a Texas court did not apply California law, Texas law provided for "adequate" wage and hour rights. Alliantgroup, however, refused to stipulate that California law would apply if the case were transferred to a Texas court.

The Court was unconvinced. The Court held that the "likelihood" that California law would be applied to the instant case was insufficient to meet Alliantgroup's burden of proof because the burden required Alliantgroup to show that the enforcement of the Texas forum-selection clause, in fact, "will not diminish in any way" Verdugo's rights. Further, the Court observed that Alliantgroup's refusal to stipulate to the application of California law demonstrated that Alliantgroup later argue to a Texas court that Texas law should be applied to the case at bar. The Court found that Alliantgroup's forum-selection clause to be unenforceable.

Considering the above, employers planning to include a forum-selection clause in their employment agreements should be aware of the risk that the forum-selection clause may not be enforceable in California in situations involving unwaivable rights. Employers seeking to enforce a forum-selection clause should note that Verdugo v. Alliantgroup suggests that a forum-selection clause may be enforced in a case involving unwaivable rights in the following circumstances:

  1. Where the employer stipulates to have the court in the designated forum apply California law.
  2. Where the case law in the designated forum state requires that California law be applied.
  3. Where the employer successfully shows that the laws of the designated forum state will provide equal or greater protection to the plaintiff employee.