(January 20, 2010) Despite the urging of the California Chamber of Commerce, the U.S. Court of Appeals for the Ninth Circuit has declined to rehear a case that rewards litigants who sue in areas most favorable to their lawsuit (forum shopping) and puts California-based businesses at a disadvantage.
The ruling in the case of Greg Masters and John Murphy v. Directv will encourage consumers from all over the country to bring similar lawsuits in California against California-based businesses.
The ruling allows the plaintiffs from Montana and Georgia to disregard their agreements to individually arbitrate disputes in their home states — agreements that would be upheld under either Montana of Georgia law — and instead to file nationwide class action lawsuits in California.
The federal court panel refused to honor the employer’s consumer-friendly contractual choice-of-law agreements providing that the laws in the consumer’s home state govern in a dispute. The panel then applied California law to nullify contractual provisions requiring the parties to individually arbitrate their disputes.
The decision distorts an established choice of law analysis into one that treats California-based businesses differently from businesses based in other states, even though they are engaged in the same transactions with customers in other states. As such, it places California-based businesses at a competitive disadvantage.
The CalChamber asked the Ninth Circuit to either rehear the case or for all judges in the court to rehear the case en banc because the decision of the court panel creates an inequitable rule that applies only to California-based businesses and is in direct conflict with another decision of the same court.
By rejecting the enforceability of a contractual choice-of-law provision, the decision could subject California-based businesses to more costly litigation than businesses based in other states. The increased likelihood of being sued would create a serious disincentive for businesses to base their operations in California and would adversely affect California’s economy and employment, CalChamber argued in its brief.
Ironically, the choice of law agreements struck down are consumer-friendly provisions. The provisions do not seek to require that any particular state’s law be used in a dispute because it is favorable to business. Instead, the provisions apply the law of the consumer’s home state, providing the consumer certainty and placing the risks and burdens of differing state laws entirely on the business.
The decision also creates a conflict within the Ninth Circuit, leading to uncertainty and confusion for both businesses and consumers. The home-state choice-of-law provision at issue here gives consumers certainty that the law of their own home state will apply, rather than that of the home state of the corporation. The decision invalidates these consumer-friendly provisions and creates nothing but uncertainty about which state’s law — or even which decision of the Ninth Circuit — will apply.
Staff Contact: Erika Frank