Anya J. Freedman

Partner Bernstein Litowitz Berger & Grossman LLP

EpicentRx, Inc. v. Superior Court, now pending before the California Supreme Court (S282521), may empower shareholders to hold corporate insiders accountable for corporate misconduct by allowing civil claims to be tried before a California jury.

In EpicentRx, the 4^th District Court of Appeal ruled that forum selection clauses in corporate bylaws designating the Delaware Court of Chancery function as pre-dispute jury trial waivers and therefore are unenforceable. 95 Cal. App. 5^th 890 (2023). The decision reasoned that enforcing such clauses violates parties' California constitutional right to a jury trial. If the California Supreme Court affirms, corporate defendants will lose their ability to dismiss shareholder lawsuits from California courts using forum-selection clauses designating the Delaware Court of Chancery as the exclusive forum to resolve corporate misconduct claims.

Judicial enforcement of Delaware forum-selection clauses in corporate bylaws

Delaware's Court of Chancery sits in equity. Delaware's constitution does not establish the right to a jury trial for cases in equity. In contrast, Article I, Section 16 of California's constitution guarantees an "inviolate right" to a jury trial. Parties can only waive this right by taking actions prescribed by Code of Civil Procedure Section 631 after a case is pending. See Grafton Partners v. Super. Ct., 36 Cal. 4^th 944 (2002).

Boards of directors of many companies headquartered in California adopt bylaws designating Delaware as the exclusive forum for disputes regarding companies' "internal affairs," which includes self-dealing and other corporate misconduct that occurs in California. Under Delaware law, even if corporate boards unilaterally adopt forum-selection clauses in corporate bylaws, such clauses are presumptively valid and enforceable. See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).

When shareholders file corporate misconduct claims in courts outside Delaware, enforcement of forum-selection clauses falls to those courts. When those courts enforce Delaware forum-selection clauses, the claims are dismissed, and shareholders are deprived of a jury of the wrongdoers' peers. 

In EpicentRx, the California courts are taking a fresh look at the enforceability of Delaware forum-selection clauses in the corporate bylaws of California-based companies, considering California's constitutional right to a civil jury trial. The outcome could prioritize the California constitution and allow investors to protect their rights against corporate defendants where the disloyalty or bad faith occurred.

Overview of the EpicentRx case

EpicentRx, a biotechnology company incorporated in Delaware but headquartered in California, faces shareholder allegations that it misappropriated investors' funds and made misleading statements while obstructing access to corporate records, which shareholders have a statutory right to inspect. The shareholder sued in San Diego County Superior Court for fraudulent concealment, promissory fraud, breach of contract, and violations of California's Unfair Competition Law, demanding a jury trial.

The company moved to dismiss citing its forum-selection clause mandating litigation in the Delaware Court of Chancery. The trial court denied this motion, holding that California law entitles parties to a jury trial, a right that cannot be waived through pre-dispute agreements in corporate documents.

Court of Appeal ruling for shareholders

In its published ruling, the Court of Appeal agreed. The court noted that although prior cases had been dismissed based on Delaware forum-selection clauses, those cases did not analyze whether enforcing those clauses would undermine parties' California constitutional right to a jury trial. Typically, California courts enforce forum-selection clauses unless plaintiffs opposing their enforcement show they are unfair or unreasonable. The EpicentRx court flipped this burden: defendants must now prove that enforcing these clauses would not diminish plaintiff-shareholders' constitutional rights.

The court emphasized that the right to a jury trial is fundamental and can be waived only through specific statutory methods after a case is pending in California court, making pre-dispute jury waivers unenforceable.

The court also distinguished Delaware forum-selection clauses from arbitration agreements. Arbitration agreements are contracts to avoid submitting a dispute to any judicial forum, whereas forum-selection clauses are contracts to select a specific judicial forum--and if that preselected judicial forum is Delaware, which lacks jury trials, those clauses are unenforceable.

Institutional investors and their general counsel should prepare for the Supreme Court decision

The appeal before the California Supreme Court has been fully briefed since March 4, 2024, and is ready to be set for argument. The outcome will impact shareholders' rights beyond this small company. Friend of the court briefs have been filed by the U.S. Chamber of Commerce, a business association advocate group, supporting enforcement of forum-selection clauses and by the Berkeley Center for Consumer Law and Economic Justice, among others, supporting shareholders' jury trial rights.

General counsel should take steps now:

1. Monitor the case: Stay informed and seek guidance from shareholder rights and governance law experts on litigation strategies in California versus Delaware. 

2. Review policies: Assess responsible investment policies to reflect California as a potential new forum to seek redress for shareholder rights violations. If current policies presume that litigation alleging corporate wrongdoing must be pursued in Delaware--including misconduct in California by California defendants--the EpicentRx decision may change fiduciary investors' analyses for initiating shareholder rights litigation, when warranted.

3. Begin with a confidential investigation: Before publicly filing litigation anywhere, expert counsel can assist shareholders in investigating the facts confidentially. This type of investigation can inform the decision of whether litigation is the best strategy to resolve governance challenges and enhance long-term value. If litigation is the right strategy, many outside counsel firms prosecute corporate misconduct on behalf of shareholders at no out-of-pocket cost to their clients and are only compensated based on a favorable resolution that benefits the company--and all its shareholders.

Conclusion

A Supreme Court ruling affirming the Court of Appeal in EpicentRx would empower investors to ensure corporate integrity and redress misconduct through California's constitutional right to a jury trial. For general counsel representing institutional investors, understanding the impact of this case and preparing for the final decision is essential to support fiduciary clients' vital role in promoting an equal playing field for all investors in the U.S. public equities market.