Opinion ID: 2585839
Heading Depth: 3
Heading Rank: 1

Heading: Choice-of-law agreements

Text: To date, most of the California decisions that have considered nationwide class action certification have not involved a contractual choice-of-law clause. Those decisions, however, perceive that a reasoned analysis regarding the applicable law is critical in actions seeking to assert claims on behalf of nonresidents. (E.g., Clothesrigger, Inc. v. GTE Corp. (1987) 191 Cal.App.3d 605, 615, 236 Cal.Rptr. 605 (Clothesrigger) ; see Norwest Mortgage, Inc. v. Superior Court (1999) 72 Cal. App.4th 214, 229, 85 Cal.Rptr.2d 18 [although contractual clauses involved, certification reversed on alternative ground].) Discerning the applicable law is an important task in class actions, for if the claims of nonresident class members will require adjudication under the laws of the members' home states, the trial court must ascertain the degree of complexity arising from the need to apply those laws in order to make an informed decision on certification. ( Clothesrigger, supra, 191 Cal. App.3d at p. 619, 236 Cal.Rptr. 605.) The trial court should deny certification if it determines that such complexity results in common legal questions not predominating or makes nationwide class litigation unmanageable. (Ibid.; see Canon U.S.A., Inc. v. Superior Court (1998) 68 Cal.App.4th 1, 7, 79 Cal.Rptr.2d 897 (Canon U.S.A .) [permitting resolution of such issues at the pleading stage]; Osborne v. Subaru of America, Inc. (1988) 198 Cal. App.3d 646, 655-658, 243 Cal.Rptr. 815; Rose v. Medtronics, Inc. (1980) 107 Cal. App.3d 150, 157, 166 Cal.Rptr. 16.) Conversely, the court may certify the nationwide class despite such complexity if it determines the legal questions are sufficiently similar to be manageable and all other requirements for certification are satisfied. ( Clothesrigger, supra, 191 Cal. App.3d at p. 619, 236 Cal.Rptr. 605.) We agree that the choice-of-law determination is of central importance to issues of predominance and manageability where certification of a nationwide class is sought. Accordingly, we conclude trial courts considering such certification generally must apply the analysis set forth in Nedlloyd, supra, 3 Cal.4th 459, 11 Cal. Rptr.2d 330, 834 P.2d 1148, to evaluate disputed claims that class causes of action are subject to enforceable choice-of-law agreements. Pursuant to Nedlloyd, the trial court should first examine the choice-of-law clause and ascertain whether the advocate of the clause has met its burden of establishing that the various claims of putative class members fall within its scope. (See Nedlloyd, supra, 3 Cal.4th at pp. 468-470, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) In Nedlloyd we found, as a matter of California law, that a clause negotiated by sophisticated business entities was phrased broadly enough to encompass the plaintiffs fiduciary duty claim, in addition to its claims for breach of contract and breach of the implied covenant of good faith and fair dealing. [3] (Id. at pp. 468-470, 11 Cal. Rptr.2d 330, 834 P.2d 1148.) As we explained, [w]hen a rational businessperson enters into an agreement establishing a transaction or relationship and provides that disputes arising from the agreement shall be governed by the law of an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. (Id. at p. 469, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) If the trial court finds that the class claims fall within the scope of a choice-of-law clause, it must next evaluate the clause's enforceability pursuant to the analytical approach reflected in section 187, subdivision (2) of the Restatement Second of Conflict of Laws (Restatement). [4] Under that approach, the court must first determine: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a `materially greater interest than the chosen state in the determination of the particular issue....' (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy. [5] ( Nedlloyd, supra, 3 Cal.4th at p. 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148, fns. omitted.) As Nedlloyd, recognizes, the foregoing approach reflect[s] strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses. ( Nedlloyd, supra, 3 Cal.4th at p. 462, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) Accordingly, if the proponent of the clause (here, the party opposing nationwide class certification) demonstrates that the chosen state has a substantial relationship to the parties or their transaction, or that a reasonable basis otherwise exists for the choice of law, the parties' choice generally will be enforced unless the other side can establish both that the chosen law is contrary to a fundamental policy of California and that California has a materially greater interest in the determination of the particular issue. (See id. at pp. 468, 471, 11 Cal. Rptr.2d 330, 834 P.2d 1148 [upholding application of chosen law where party opposing the clause failed to make such showings].) Amici curiae in support of Briseno argue that Nedlloyd 's analysis should not apply to choice-of-law provisions in consumer adhesion contracts. In their view, Nedlloyd 's test was designed to apply only to freely and voluntarily bargained-for choice-of-law agreements between equally powerful and sophisticated commercial entities. Even though Nedlloyd was decided in the context of a negotiated arm's length transaction between sophisticated business entities, its analysis appears suitable for a broader range of contract transactions. California, we observe, has no public policy against the enforcement of choice-of-law provisions contained in contracts of adhesion where they are otherwise appropriate. (See Bos Material Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal.App.3d 99, 108, 186 Cal. Rptr. 740; Gamer v. duPont Glore Forgan, Inc. (1976) 65 Cal.App.3d 280, 286-287, 135 Cal.Rptr. 230; Windsor Mills, Inc. v. Collins & Aikman Corp. (1972) 25 Cal.App.3d 987, 995, fn. 6, 101 Cal.Rptr. 347.) More importantly, Nedlloyd 's analysis contains safeguards to protect contracting parties, including consumers, against choice-of-law agreements that are unreasonable or in contravention of a fundamental California policy. ( Nedlloyd, supra, 3 Cal.4th at p. 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148.) Under Nedlloyd, which adopted the Restatement approach and found the enforceability of choice-of-law clauses closely related to that of forumselection clauses ( Nedlloyd, supra, 3 Cal.4th at p. 464, 11 Cal.Rptr.2d 330, 834 P.2d 1148), the weaker party to an adhesion contract may seek to avoid enforcement of a choice-of-law provision therein by establishing that substantial injustice would result from its enforcement (Rest., § 187, com. (b), p. 562) [6] or that superior power was unfairly used in imposing the contract (see Cal-State Business Products & Services, Inc. v. Ricoh (1993) 12 Cal. App.4th 1666, 1679-1680, 16 Cal.Rptr.2d 417 [indicating that evidence of unfair use of bargaining power may defeat enforcement of a forum-selection clause contained in an adhesion contract]). In light of these protections, we conclude Nedlloyd 's analysis is properly applied in the context of consumer adhesion contracts. Finally, we address the Court of Appeal's suggestion that California businesses dealing with mass groups of consumers should not be permitted to rely on choice-of-law clauses as a means of avoiding involvement in a nationwide class action. The point is not well taken. Class actions are provided only as a means to enforce substantive law. Altering the substantive law to accommodate procedure would be to confuse the means with the endsto sacrifice the goal for the going. ( City of San Jose v. Superior Court, supra, 12 Cal.3d at p. 462, 115 Cal.Rptr. 797, 525 P.2d 701, fn. omitted; see Granberry v. May Investments (1995) 9 Cal.4th 738, 749, 38 Cal.Rptr.2d 650, 889 P.2d 970.) Consequently, an otherwise enforceable choice-of-law agreement may not be disregarded merely because it may hinder the prosecution of a multistate or nationwide class action or result in the exclusion of nonresident consumers from a California-based class action. Of course, choice-of-law agreements have no effect in a class action if the trial court determines that they are unenforceable or that class claims fall outside their scope. Nonetheless, if the class action opponent continues to invoke the application of foreign law to the claims of out-of-state class members, the trial court remains obligated to analyze the governmental interests of the various jurisdictions involved to determine whose law is more properly applied.