When a client wants to sue, your initial strategy decision (assuming the case has merit) is relatively simple: Should the case be filed in state or in federal court?
But what appears to be a simple choice may soon become complicated. Picking the right venue isn't always as straightforward as it seems. A host of civil procedure rules, not to mention facts, need to be considered: Where did the dispute arise? Where are the witnesses located? Which court has personal jurisdiction over the parties and the subject matter? And that's not all. Is there an arbitration clause? What about a forum-selection or contractual attorneys-fees clause?
Picking the wrong forum can have major consequences. Though the opposing party may overlook (or waive) the right to challenge personal jurisdiction or venue, don't count on it. Most defendants take venue and jurisdiction seriously, and if their challenge is successful, the case could wind up in your opponent's backyard.
To add insult to injury, recent court decisions teach that a sloppy forum choice can result in liability, particularly if the dispute triggers contractual or statutory "fee shifting" provisions. The client of a careless lawyer could wind up paying the opposing party's attorneys fees and costs in addition to having the case transferred or dismissed.
To avoid such pitfalls you should carefully assess the case at the outset and pay heed to developing case law. Here are several factors to consider in deciding which venue to choose.
In one case, the plaintiff ran off to court, ignoring an arbitration clause in the parties' contract. (See Acosta v. Kerrigan, 150 Cal. App. 4th 1124 (2007).) In response, the defendants filed a petition to compel arbitration. The trial court denied the petition but was reversed on appeal. Upon remand, the trial court ordered the matter to arbitration and stayed further judicial proceedings. The trial court reserved jurisdiction to allow the defendant to bring a motion for contractual attorneys fees as the prevailing party.
The dispute hadn't even gotten to the arbitrator yet. Doesn't the court decide attorneys fees at the end of the case? Not necessarily.
The plaintiff in Acosta argued that the court had no authority to permit an interim fee award before the "prevailing party" had been determined. The plaintiff also argued that the request for fees should itself be arbitrated along with the substantive claims (150 Cal. App. 4th at 1126–1127).
The trial court disagreed and granted the defendant's motion for fees. The court interpreted the relevant contractual provision as allowing a fee award before completion of the arbitration and before a prevailing party is identified by the arbitrator.
The court of appeal affirmed, reasoning that the defendant was not attempting to recover fees as a prevailing party on the merits, but rather was seeking fees incurred to enforce an independent provision of the contract—fees to which the defendant was entitled even if it ultimately lost the case on the merits in the subsequent arbitration (150 Cal. App. 4th at 1132–1133).
In another case, the procedural posture of the parties was reversed. (See Otay River Constructors v. San Diego Expressway, 158 Cal. App. 4th 796 (2008).) The party who was awarded attorneys fees had successfully opposed a petition to compel arbitration. The trial court denied fees on the ground that there was no prevailing party; the ruling denying arbitration was merely an initial procedural victory, with additional litigation to follow.
The court of appeal disagreed, holding that a party who obtains an order denying a petition to compel arbitration is a prevailing party in the action "on the contract," even though the substantive merits of the claims have not yet been decided. The order denying arbitration itself was a "final and appealable order," even though more litigation was contemplated (158 Cal. App. 4th at 805–808; see also Cal. Civ. Code § 1717). Accordingly, the party defeating the motion to compel obtained an unqualified "win" on the only contract claim at issue—whether to compel arbitration.
Five months later the Fourth Appellate District weighed in. This time the procedural motion was not one to compel arbitration but rather a motion to quash service for lack of personal jurisdiction. A California-based company had sued its former employee, an Oklahoma resident, for breach of contract and misappropriation of trade secrets, and sought a preliminary injunction (Profit Concepts Management, Inc. v. Griffith, 162 Cal. App. 4th 950, 952–953 (2008)). The contract at issue contained an attorneys-fee provision. The former employee won a motion to quash service for lack of personal jurisdiction, and then won a motion for contractual attorneys fees as the prevailing party.
In affirming the award, the court held that the former employee was the prevailing party "on the contract." The court explained that because of amendments to Civil Code section 1717 (which now provides that a "final judgment" on the merits is not required), a party can recover its attorneys fees by prevailing solely on the jurisdictional question (162 Cal. App. 4th at 956).
Finally, we come to Shisler v. Sanfer Sportscars, Inc. (167 Cal. App. 4th 1 (2008)), which also involved a motion to quash. Unlike Profit Concepts, no contractual attorneys-fees clause was at issue. Instead, the plaintiff had filed suit in California alleging two separate statutory violations. It was the statutes, and not a contract, that contained the fee-shifting provisions (167 Cal. App. 4th at 9–10).
In Shisler the California plaintiffs saw a car they liked offered on a website maintained by the defendant, a Florida corporation. The plaintiffs bought the car, but when it arrived in California they found that it was not as advertised. The complaint contained causes of action for fraud, violation of the California Consumers Legal Remedies Act (CLRA) (Cal. Civ. Code §§ 1750–1784), and violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) (Fla. Stat. § 501.201), both of which contain fee-shifting provisions.
The defendant successfully defeated service of process for lack of personal jurisdiction and then won a motion for statutory attorneys fees.
The plaintiffs appealed and advanced two arguments. First, they asserted that the trial court lacked jurisdiction to make the fee award. Second, they claimed the defendant was not entitled to fees under either the CLRA or the FDUTPA. As to the first ground, the court, relying on the earlier decision in Profit Concepts, held that it indeed had jurisdiction to decide the fee motion (167 Cal. App. 4th at 7–9).
As to the statutory question, the trial court had found that the plaintiffs, in filing the action, had not exhibited "subjective bad faith." This finding was critical, because the attorneys-fee provision in the CLRA expressly provides that attorney fees may be awarded to a prevailing defendant only if the action was "not [prosecuted] in good faith." (See Cal. Civ. Code § 1780(e).) However, the Shisler court did not have to address the bad-faith issue, because it affirmed the fee award under the Florida statute, which contains a neutral and reciprocal "prevailing party" standard (168 Cal. App. 4th at 9–10).
These cases teach a basic lesson: Be sure to review pertinent contracts and statutes before filing suit. Applicable language may mandate a particular forum, and the contract or a statute may trigger liability for attorneys fees if the case is transferred.
Fees and Clauses
A contract may include a clause that requires arbitration. The recovery of interim fees associated with invoking this clause depends on several factors.
As in any contract case, the scope of the governing clause is crucial. For example, if the arbitration provision is narrowly drafted to encompass only contract-based claims (but the case also includes tort and statutory claims), the party losing a motion to compel arbitration may successfully argue that the other side did not completely prevail "on the contract" but rather won because of tort or statutory issues, and therefore no interim fee award is warranted.
In a statutory case, the question is whether the controlling statutes contain fee-shifting provisions. If so, what standard is set forth in the statutory text, and is it unilateral or reciprocal?
Regardless of the genesis of the substantive claims, pay close attention to the court's order. It's one thing if the trial court dismisses the entire case upon granting a motion to compel arbitration, but it's another situation entirely if the court retains jurisdiction to decide nonarbitrable claims, or stays the court case until the arbitration is over. In the first scenario (dismissal) a fee award may be more likely; in the second scenario it may be possible to persuade the court to "wait and see" how the whole case turns out before considering a fee award.
A successful motion to dismiss for lack of personal jurisdiction also may result in an interim fee award. Generally, a motion to quash a suit for lack of personal jurisdiction will result in a dismissal (as opposed to a stay). Yet case law shows that trial courts can retain jurisdiction in order to impose attorneys fees against the plaintiff for improperly attempting to sue an out-of-state defendant.
Attorneys also should keep in mind that if a statutory-fee provision is in play, it may not automatically apply in favor of a prevailing defendant on a motion to quash, particularly if the fee clause is unilateral or requires the additional showing that the losing party acted in bad faith or is a "vexatious" litigant. (See California Fair Employment and Housing Act (FEHA), Cal. Gov't Code § 12965(b)); Title VII (42 U.S.C. § 2000e-5(k)); or the Uniform Trade Secrets Act (Cal. Civ. Code § 3426.4).) Conversely, other statutes containing neutral and reciprocal fee-shifting provisions—such as a claim for wages and benefits (Labor Code §§ 218.5 and 1194) or alleging discrimination under the Unruh Act (Cal. Civ. Code § 52)—should make it easier for a prevailing defendant to recover fees because no showing of bad faith or vexatiousness is required.
Personal jurisdiction is not the only concern. Indeed, a court may have power over the defendant but nevertheless still be the wrong court, especially if a mandatory forum-selection clause is in play. How do you know if the clause is mandatory? Look for words like sole, shall, exclusive, or only when a forum is mentioned. In such cases, the court is required to enforce the parties' agreement unless a forum opponent meets its "heavy burden" to show that the contractual provision is "unreasonable" or contravenes public policy. (See Intershop Communications AG v. Superior Court, 104 Cal. App. 4th 191, 199–201 (2002); and Doe 1 v. AOL LLC, 552 F.3d 1077, 1082–1084 (9th Cir. 2009).) In contrast, a permissive forum-selection clause will contain words such as may or either. If that language is present, the court will approach the matter differently, as the plaintiff has some discretion as to where to file.
Parties often enforce mandatory forum-selection clauses through a motion for forum nonconveniens. (See Intershop, 104 Cal. App. 4th at 199–201; and Argueta Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996).) Additionally, in federal court a motion to remand will be granted if a narrowly drafted mandatory forum-selection clause provides that a state court is the stipulated forum despite complete diversity between the parties. (See Calisher & Assocs., Inc. v. RGMC, LLC, 2008 WL 4949041 (C.D. Cal. 2008).) Under either motion, the court is required to enforce the clause and transfer, remand, or dismiss the case.
As noted above, if a contract also has an attorneys-fees clause (as in Profit Recovery) or statutory fee-shifting provision (as in Shisler), the court may impose an interim fee award at the time the case is transferred to another forum. (See Miller-Leigh LLC v. Henson, 152 Cal. App. 4th 1143, 1150 (2007); and Hy Cite Corp. v. Advanced Marketing Int'l., 2006 WL 6020945 at *3 (W. D. Wis. 2006).) In cases remanded from federal to state court, there may be fee liability under the federal remand statute (28 U.S.C. § 1447(c)). (See Excell, Inc. v. Sterling Boiler & Mechanical, Inc., 106 F. 3d 318, 321–322 (10th Cir. 1997); and Calisher & Assocs., 2008 WL 4949041 at *6.)
Although not directly affected by the recent case law discussed above, the question of improper venue also is of concern. Attorneys must consider a host of California venue statutes before choosing the county where they will initiate a state court action. (See Cal. Civ. Code §§ 392-402.) The downside of filing in the wrong county is that counsel for the plaintiff (but not the actual plaintiff) may be liable for fees associated with the transfer if the original venue selection was not made in good faith. (See Cal. Civ. Code § 396(b); and Metzger v. Silverman, 62 Cal. App. 3d Supp. 30, 38–39 (1976).)
In determining whether to award fees and costs, a court must examine both the law and the facts. (See Cacciaguidi v. Superior Court, 226 Cal. App. 3d 181, 184–187 (1990); and Mission Imports, Inc. v. Superior Court, 31 Cal. 3d 921, 931–932 (1982).)
Reducing the Risk
Losing motions to compel, to dismiss, or to change venue can be difficult. Not only is it a blow to the ego but it can make client relations frosty, to say the least. After all, how does a lawyer explain to a client that not only was the case filed in the wrong court or forum but that the client now owes money to the other side before the matter has even gotten off the ground?
Smart lawyers can minimize the risk of such ignominy by taking a few simple precautions.
- Realistically assess venue and jurisdiction before you file. Carefully consider whether the client's claims could trigger contractual or statutory fee-shifting clauses.
- If an opponent raises issues of improper venue or forum, or lack of personal jurisdiction, think about offering the opponent a voluntary dismissal without prejudice in exchange for a stipulation to waive fees and costs. Then the case can be refiled in the proper court later on (assuming the statute of limitations has not expired).
- If it looks like the court will grant the motion challenging venue or jurisdiction, attempt to persuade the court to stay, rather than dismiss, the case. Determine if there are any claims over which the court will still have jurisdiction, and look for issues raised in the pending motions that may be outside the scope of the governing attorney-fees provision. By all means, request that the court defer making any ruling on attorneys fees until the merits of the underlying dispute have been fully and finally resolved.
- If all else fails, convince the court that your initial selection of a forum or the assertion of jurisdiction—although judged to have been wrong in hindsight—in fact was a justifiable decision that was made in good faith. If the court appreciates the dilemma, it may exercise its discretion to deny fees.
At the end of the day, initiating a lawsuit is like jumping into a lake. Look before you leap.
Sean A. O'Brien, a partner in the Irvine office of Payne & Fears, specializes in business and employment litigation.